HECO Customers Keep Paying Vig On Unused $144 Million in GEMS Fund
by Patricia Tummons, Environment Hawaii, Volume 26, Number 12 June 2016
For a short while earlier this year, it looked as though the $144 million in the state’s bond-financed Green Energy Market Securitization (GEMS) account might actually get used. Among the bills in the legislative package of Governor David Ige was a proposal to lend $100 million of that to the Department of Education. The money, he said, was to achieve his goal of cooling 1,000 classrooms by the end of the year.
To many, this seemed to fly in the face of the very rationale behind the GEMS program. When the Legislature established it in 2013, it was intended to reduce energy use, not support the purchase of equipment, such as air conditioners, that would in all likelihood increase demand. Also, the fund was supposed to make energy-saving systems, such as photovoltaic installations, affordable to people who otherwise would not be able to purchase them. Diverting such a large chunk of GEMS funds to public schools could have left this class of consumers without the ability to take advantage of the program in the way the Legislature had anticipated.
But by the time this year’s legislative session wrapped up, any concerns over a disconnect between Ige’s proposal and GEMS goals were moot. The Legislature opted to give the Department of Education $100 million in general funds to mitigate high temperatures in classrooms while increasing the schools’ overall energy efficiency. Language in Senate Bill 3126 gave the rationale for rejecting the GEMS means of financing.
First, it says, general funds will give the DOE more flexibility: “The types of projects that the Department of Education would have been able to fund with green infrastructure loan funds were unclear and apparently limited to energy efficiency and conservation projects.” Second, with general funds, there would be no need for the DOE to pay interest on a loan, as opposed to funds obtained through GEMS. Third, the measure points out, “the green infrastructure loan funds will remain available for projects that truly promote renewable energy and energy efficiency and conservation.”
As a result, the GEMS program, administered by the Hawai`i Green Infrastructure Authority (HGIA), is right back where it was at the first of the year: with an account balance of more than $144 million, on which Hawaiian Electric utility customers are paying interest, principal, and associated fees of around $14 million a year. And while HGIA is attempting to devise new programs that might be supported with GEMS loans, for now, the class of potential GEMS beneficiaries seems to be shrinking practically by the hour.
‘Dramatically Altered Prospects’
On April 29, the HGIA filed with the Public Utilities Commission its report on activities in the first quarter of 2016. To account for its ongoing difficulties in lending out capital in the way legislators intended, HGIA executive Tara Young referred to the PUC’s decision to end the net-metering program last fall and to limit new solar grid-supply hookups to a total of 35 megawatts. “While the authority funded its first consumer photovoltaic (‘PV’) loans in January 2016, market demand for this product has declined precipitously,” she wrote.
Still, she continued, the authority was “moving aggressively to retool existing programs and develop new means of deploying capital to get ahead of trends in the market.”
But the list of accomplishments in the first quarter of 2016 suggest that HGIA is still in the rearguard when it comes to adapting its methods to the kinds of technologies that consumers have come to expect. Only in March, for example, did it finally allow loan applicants to submit forms online. “Prior to the online application,” Young writes, “applicants were required to mail in or fax applications.”
By the time the online application process was in place, however, applications for GEMS loans were all but dried up.
Not that there were ever that many in the first place. Of the 186 applications GEMS has received since the program began through March 31, which marks the end of the first quarter of 2016, credit was approved for just 20 and just four applicants had actually received loans, with a total value of $137,437. (In April, five more loans were approved having a total value of $160,673, making a total of nine loans underwritten with GEMS funds.)
New Directions
Among the initiatives described in the quarterly report and in HGIA’s annual plan for the coming fiscal year is a loan product that would finance the purchase of battery storage systems, a technology not included in the current list of products approved for GEMS financing. The plan calls for earmarking $5 million in GEMS funds for loans for this purpose.
The state consumer advocate has raised concerns that this approach would further disadvantage lower-income ratepayers. In comments on the annual plan, the Division of Consumer Advocacy noted that the most likely class of ratepayers who would want battery storage would be those who had opted for the self-supply systems: “To the extent that the customer self supply option appeals to customers who have sufficient income and assets to pay for the still very expensive battery storage and are on circuits that already have high PV penetration levels, such customers are likely to be wealthier and in higher income brackets than the average customer who cannot afford to pay for battery storage.”
Although repeating its support for distributed storage and advanced inverter technologies, the Division of Consumer Advocacy stated that it was concerned “with the use of ratepayer funds to finance investments for relatively affluent consumers, especially given the lack of evidence to date that the GEMS program has significantly benefited the truly underserved (i.e., low-income and hard-to-reach consumers).”
Young responded to this in the quarterly report. The agency’s focus, she writes, “will shift to solutions that include PV with battery storage, which will be increasingly compelling solutions for all consumers, not only the affluent or early adopters, in the evolving renewable energy market. PV systems without battery storage will not be viable in the future once grid supply has been fully subscribed, possibly year-end 2016 or early 2017.” (As discussed in a related article, the 35 megawatt ceiling on photovoltaic systems that feed into the electric grid could be reached much earlier than this.)
Commercial Products
HGIA also indicated in its annual plan that it was considering joining with local financial institutions in developing PV projects for commercial and non-profit customers. Although HGIA did have a non-profit loan product approved, the financial institution it had partnered with to handle loans in that sector dropped out last December.
This time, HGIA stated, it would work with local banks in a way that would give HGIA access to “other institutions’ pipelines for loans,” allowing it to “compete with agility in a crowded marketplace for renewable energy lending.” For this, HGIA anticipates earmarking $10 million in GEMS funds.
Once again, the consumer advocate raised concerns, asking HGIA to “clarify how the commercial PV product differs from the non-profit and small business PV product that was terminated in December 2015. … The consumer advocate reiterates that it is critical to establish how the GEMS program product is materially expanding access to financing for customers, particularly underserved customers,” especially given what HGIA acknowledges as the already “crowded marketplace for renewable energy lending.”
‘Serving Stakeholders’
No matter how nimble HGIA becomes in addressing consumer needs, it still faces numerous obstacles before its offerings are attractive and affordable enough to reach the targeted lower-income homeowner or compete with institutions that offer loans on the open market.
There’s the fact that people whose homes are held in trust are excluded from receiving GEMS loans. According to the quarterly report, “almost half of the rejected applications to date” were from homeowners whose property was placed in a trust. Young says the HGIA will work to address this in the current quarter. When asked whether she thought it likely that this obstacle would be fixed in time to allow homeowners to take advantage of the grid-supply option before the 35MW ceiling is reached, Young stated that she was hoping to “develop a trust product and processing guidelines which may be available at the end of the summer.”
Another obstacle is the high interest rates that borrowers with lower credit scores are asked to pay. “Currently the interest rate on the consumer [photovoltaic] loan is 6.5 percent to 9.875 percent, depending on the borrower’s FICO score” Young writes in the quarterly report. “This tiered interest rate structure results in the underserved being charged higher, above-market rates.” This practice, too, would be undergoing re-evaluation in the current quarter, she states.
Yet another feature of GEMS loans that makes them unattractive to homeowners of any income level is the fact that anyone wishing to write a check to pay their monthly loan balance is charged an additional $15. This is over and above the interest charge – which, at nearly 10 percent for homeowners with poor credit, can itself be challenging to meet.
Young was asked about this practice. “The policy was intended to cover the material cost and complexity of processing checks and create an incentive to use electronic payments, which significantly reduce program costs,” she replied. “We are constantly reviewing policies like these to ensure that they are fair, transparent, and serve the needs of our stakeholders. This is one that we will certainly revisit in the coming weeks.”
One of the means of financing loans issued under the GEMS program was intended to be the on-bill financing mechanism that Hawaiian Electric and other parties were developing in a separate PUC proceeding launched in 2011 and renewed in 2014. Last month, the PUC suspended the effort, citing a lack of interest among qualified parties in administering the program, among other things.
‘Disappointing Uptake’
A year and a half ago, the Department of Business, Economic Development, and Tourism put a $150 million lien on HECO customers that won’t be paid off until 2028. Since then, costs of administering the program through March 31 were $1.6 million. Ratepayers have been charged $14 million over the last year in interest, principal and fees to service the debt.
Meanwhile, the GEMS fund balance of $145 million, still sits in the Bank of New York Mellon, earning interest at less than one-tenth of one percent a year.
“On a positive note,” Young writes in the quarterly report, “the first GEMS loans were funded in January and nine consumer PV loans have been funded to date totaling approximately $300,000. In spite of this positive milestone, uptake of this program has been disappointing.”
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