Major home energy efficiency upgrades like this could become a common sight in Traverse City, once leaders find a very inexpensive, long-term way to finance them.

Ron Hurd is seeking angels—the financial kind, that is.

Hurd, who lives near Traverse City, is a founding member of the Northern Michigan Angels, part of a newly formed network of two-dozen groups, dubbed As Local As Possible, that are looking for opportunities to bring investment dollars back into the community and put them into local businesses.

The Angels and the rest of the network are not operating a charity; they expect a decent, if not heavenly, return on their investments.

“We are very much more on the entrepreneurial side,” he said, “and have an underlying interest in local companies that will be sustainable.”

That’s why Hurd is fascinated by an idea some Traverse City leaders are discussing: a long-term, communitywide efficiency project that retrofits most buildings to sharply cut their energy use. He sees ways that the As Local network could get involved.

“What attracts me most is that it is one of the few things where we really know what the rate of return will be,” he explained. “Trying to invest in a local business can be really, really difficult. The energy efficiency project might be a good staring point for communitywide investing, using the dollars to support businesses and residents who want to save on energy costs.”

But profiting on home and small-business efficiency investments could prove difficult, too. TCSaves, Traverse City’s highly popular, residential energy efficiency program, illustrates why.

Praise, Problems, and Partnerships

The two-year campaign has persuaded about 525 of the city’s homeowners to spend $100 for home energy assessments, programmable thermostats, compact fluorescent light bulbs and more. It also has convinced 58 participants to take out a total of $617,000 in low- or no-interest loans—with rates bought down by federal funds—to “deep retrofit” their homes with things like high-efficiency furnaces and extensive re-insulation.

TCSaves is praised by most people it touches. But the pilot program, along with several dozen similar pilots coordinated by the non-profit Michigan Saves, made a crucial discovery: People like low interest rates. In other words, people want to make their homes more comfortable and cheaper to live in, but it takes a careful combination of attractive loan rates, tax incentives, and utility rebates to persuade many of them to act.

Hurd is not sure where that leaves his Angels; he knows that turning even a modest profit on small, long-term, low-interest loans is difficult. And he, for one, doesn’t like public dollars paying down interest rates.

“I’d much rather see if we can do it ourselves locally, not with some overarching gift from the feds,” Hurd said. “My sense is that, structured correctly, energy efficiency investment could probably pay for itself over a reasonable period of time, without government funds.”

Bank and credit union officials, a Michigan Saves program manager, and the American Council for an Energy Efficient Economy note, however, that driving demand for energy efficiency is very challenging without some sort of help like the kind of public-private partnerships powering Michigan Saves and TCSaves.

So efficiency programs—at least for homes and many small businesses—likely require partnerships, whether with the feds, state agencies, municipalities, state or local bond-based revolving loan funds, or local utilities. That seems particularly true for projects aimed at entire communities.

The math is plain: While home-scale efficiency projects pay steady, predictable dividends via significantly lower energy bills, the low rates and long terms customers desire make it difficult for investors to make money.

Views from the Vault

Mark Eckhoff is market president of Traverse City’s 5/3 Bank, which co-sponsored last spring’s Traverse City Leadership Summit on Energy Efficiency. He supports a long-term, communitywide efficiency program, agrees that typical bank or credit union loans wouldn’t work, and finds it “completely understandable” that two local lenders took a pass on TCSaves, even with public dollars covering the interest.

“If you make an $8,000 loan, even at 5 or 6 percent, that’s just $400 a year,” he explained. “By the time you do all the necessary things to book the loan, it doesn’t leave much for the credit union’s members, let alone a bank with shareholders.”

People with large homes, lots of equity, and strong credit can get a standard home equity loan for an efficiency project and make the numbers work, he added. This is because the rates are lower and the terms are longer than with an unsecured loan, like the ones offered through Michigan Saves. But these loans can be time consuming and require home equity, something many borrowers don’t have.

A better solution may be finding an investor that is not concerned about investment return.

“It has to be some sort of community foundation,” Eckhoff said. “Anybody that’s a stakeholder in the community ought to be approached about creating this fund. We can’t talk about this project without knowing how we make it affordable for a lot of people.”

Karen Browne, president of the TBA Credit Union, in Traverse City, said local financing is highly desirable, even crucial, for such a project, yet she’s unsure whether her organization could chip in. It depends on more than just interest rates.

“What is more concerning is the 10-year term for such a low fixed rate,” she said, referencing the Michigan Saves Home Energy Loan term. “That is a risk, because if interest rates go back up, many institutions can’t afford to hold onto loans like that. What could help would be a guaranteed payment if the rates do rise—perhaps from the government.”

Genisys Credit Union, based in Auburn Hills, Mich., is one of eight Michigan-based credit unions that participate in the Michigan Saves Home Energy Loan Program, and is the only one that serves the Traverse City area. Lori Daniels, the firm’s development manager, said the interest buy-down and loan loss reserve Michigan Saves provides, using state and federal funds, convinced the company to get involved.

Now, with just four defaults among Genisys’ 1,200 efficiency loans totaling $10 million, Genisys wants to expand its stake.

“Our marketing manager just reached out to Michigan Saves for some help marketing the program to our membership,” Daniels said. “Depending on the size of the loan, we would loan for up to ten years, and follow Michigan Saves guidelines (including for underwriting, loan rates and terms, and certified contractors).”

Finance rates would remain at 7 percent.

“We just hope the volume continues for us,” she said.

Views from the Front Lines

Sally Talberg, who is the program design and review manager for Michigan Saves, said with its low default rate and new borrowers paying 7 percent, the program is stable, with a $18.8 million portfolio and about $1 million in new loans each month.

But her staff also thinks about new ways to meet the interest rate challenge.

“Our goal is to make it easy and affordable for people to make energy improvements, so of course we would love to offer lower rates,” she said. “They do seem like good loans, and so there’s big interest in continuing the program.

“But in residential efficiency loans,” Talberg added, “there is just a tremendous transaction cost, given the size of the loan. Even if it’s free money—‘here’s a million bucks to create this efficiency fund’—someone is still going to have to bear the cost of administration.

“But we are always talking internally about ways to improve the program,” she said, “We also meet regularly with our authorized lenders and discuss improvements, including lower rates’”

However, several experts at the nonprofit American Council for an Energy Efficient Economy, which routinely consults for governments and utility companies, emphasize that, while low interest rates are key to community efficiency programs, they are not silver bullets.

“There are so many other necessary elements that can’t be paid by the spread on the loans,” said ACEEE Senior Fellow Marty Kushler. “Somebody has to pay for things like energy assessments, marketing, publicity, quality control, incentives, rebates, management…all the pieces of a well-rounded program.”

Kushler said that “somebody” is likely the local utility—which should be investing in low-cost efficiency measures, not expensive new power plants, to meet energy demand.

“Then someone else can supply the capital for the projects,” he said. “They would be getting involved in some pretty large volume.”

ACEEE Senior Economic Analyst Casey Bell agreed that utilities—particularly publicly owned ones—need to be involved. She said partnerships are crucial.

“We often see the most success with local governments and utilities partnering,” she said. “It helps to have a municipal utility or a co-op, because they can be more flexible.”

She pointed to so-called “on-bill financing”—monthly loan repayments are attached to the customer’s monthly utility bills. This is working with a number of utilities around the country, she said. She added that in some places nonprofit “community development financial institutions”—or CDFIs—are teaming up with local credit unions and banks for local projects.

That might win Hurd’s approval. But he would like to take it one step further and involve hundreds, perhaps thousands of people investing in a community-style “bank.”

“It could be totally private, but backed by public underwriting,” he said. “That could be a good deal. I want individuals who live here to have skin in the game, and for the community to be well aware of who’s making the loans, who’s getting them, and how it benefits the community.”

But whether that approach would pay enough to attract a large host of angels remains an open question.

Jim Dulzo is the Michigan Land Use Institute’s senior energy policy specialist. Reach him at jimdulzo@mlui.org.

** Full disclosure: Mark Eckhoff is on MLUI’s board of directors.