The U.S. Department of Energy Loans Program Office (LPO), along with Sunnova Energy International, recently announced a conditional commitment to provide up to $3 billion in partial loan guarantees for distributed energy resources, such as rooftop solar, battery storage, and virtual power plant (VPP)-ready software for residential homeowners. This initiative is a combined effort to provide more renewable energy to any eligible project, focusing on projects that benefit disadvantaged communities. Government-sponsored funds working alongside private enterprise, particularly to mitigate risks and increase resource access, is nothing new. However, initiatives like this partnership often struggle to scale, lack accessibility, and are slow to respond quickly to market instability. Private enterprise, when armed with federal funding, protects tax-payers from risk and provides stability during market fluctuations.
The project, coined “Project Hestia,” provides disadvantaged communities with increased access to Sunnova’s residential services. Consumers, especially those with low credit scores, will be able to secure loans from Sunnova to purchase Sunnova’s services and equipment. The LPO loaned Sunnova that funding specifically to provide renewable energy resources to communities that would otherwise be unable to procure those services. This type of transaction is called a loan guarantee, and it is a way for a lending agency (Sunnova) to offset the risk of borrowers (consumers) who have low credit scores to an entity (LPO) that guarantees loans or bills will be paid. Loan guarantees can foster economic development and advance public policy.
Eligible projects must be equipped with Sunnova’s technology and accessible by a personal electronic device. Through this methodology, Sunnova aims to expand access to its additional offerings, including future virtual power plant activities, decrease greenhouse gas emissions, and increase the demand response impact of residential power systems. Sunnova is mainly focused on historically underserved groups to increase their access to services and tools to participate in innovative solutions for climate change, dedicating 20% of resources to homeowners in Puerto Rico.
Beyond the program’s goals, LPO’s partnership with the program highlights their strong belief in the strength of cashflows from residential solar financial traction, even if some percentage of participants in the program are below traditional FICO metrics or have no FICO score. LPO, along with the EPA’s new Greenhouse Gas Reduction Fund, is responding to market circumstances and capitalizing on the incentives introduced by the Biden administration to encourage residential real estate owners to implement clean energy solutions, including adding heat pumps, solar, and net metering to lower their utility bills.
The challenge now is how to make this kind of program more pervasive. The LPO has extensive capital resources to deploy. While the administration has made great strides to make the program faster and more accessible - there are still significant barriers to entry. Applying for such a partnership requires a lengthy application process that can extend over months and high application fees that fee organizations are prepared to pay. These barriers, while reasonable for a $3 billion transaction, leave organizations with fewer resources wanting. The Greenhouse Gas Reduction Fund’s goal of uniting government-sponsored funds private sector with grant funding (rather than requiring projects to take on additional loans) serves a much larger pool of applicants is one avenue for exploration.
Federal funding for clean energy solutions capitalizes on path incentives through tax breaks and programs. Unified, those forms of assistance provide one avenue for residential real estate owners while protecting them from incurring risks. However, these programs often leave communities lacking fast, scalable solutions that can be applied to neighborhoods, towns, and cities.
In the most mature markets in the world, Government-Sponsored Enterprises (GSEs) transfer risk in senior tranches to private sector insurers. Credit Risk Transfer (CRT) relations have been a major program over the past 15 years to shift risk from implied taxpayer support to private sector reinsurers in the U.S. Mortgage market. By transferring risk from tax-payers over to private financial institutions, tax-payers can limit their risk exposure, while private enterprise helps provide stability, liquidity, and affordability to the market. Energetic Insurance was founded to increase access to renewable energy for underserved businesses and communities. Often these entities are left behind because they are deemed risky by traditional metrics, and we provide risk mitigation to unlock the community’s access to renewable energy quickly.
The new partnerships between Sunnova and the DOE provide further evidence of how enterprise and government initiatives can lead to positive outcomes for individuals and disadvantaged communities. But given experience with large programs, underserved communities can remain as such without the resources or knowledge to apply for programming. As financial markets continue to develop better risk management tools, federal funding, and private enterprise can continue to work together to provide scalable financial solutions that work for everyone.