Definition of On-Bill Repayment
On-bill repayment (OBR) is a mechanism for financing energy efficiency improvements and distributed renewable generation that allows customers to repay the costs through their utility bills.
A utility or private lender provides cash to a customer to support energy efficiency, renewable energy, or other generation projects. The capital is returned through regular payments on an existing utility bill.
On-Bill Repayment vs. On-Bill Financing
The difference is in the source of funds. OBF programs employ public funds, ratepayer funds, or utility shareholder funds to fund projects, and this funding is often available at very cheap or even 0% interest rates.
OBR initiatives rely on private financing from third-party investors. OBR capital typically has a higher interest rate than OBF capital. However, it is frequently less expensive than the market rate for loans due to the increased security offered to investors by tying the repayment obligation to the customer's utility bill.
How OBR Works
The funds to construct the project is often supplied to the customer by the utility or investor in an OBR transaction.
On-bill schemes may require clients to choose from a list of pre-approved contractors to do the installation. They can occasionally operate in conjunction with rebate programs to decrease the overall cost that must be financed.
Once the project is completed, the borrowed funds are reimbursed on the customer's monthly electricity bill for a period ranging from 2 to 15 years.
The project's energy cost reductions are frequently sufficient to balance the on-bill payback fee, making the new utility bill equal to or less than the prior rate.
The client's responsibility to repay is often collateralized by the installed equipment and the prospect of the utility discontinuing service if the customer fails to pay.
Typical Structure
OBR loans are typically structured as either closed-end or open-end.
A closed-end loan has a set repayment schedule and a balloon payment at the end of the term. In contrast, an open-end loan allows customers to make additional draws on the credit line over time as needed for energy efficiency improvements.
In some cases, the loan agreement may also allow for voluntary prepayment without penalty.
Benefits of On-Bill Repayment
The benefits of on-bill repayment include the following:
Low-to-Zero Interest Rates
It usually offers customers low or zero interest rates, saving them money on their energy bills.
Simple Contract Structure
On-bill repayment contracts are typically straightforward, making them easy for customers to understand.
Streamlined Repayment Process
Customers can repay the cost of their energy efficiency upgrades or distributed renewable generation systems through their utility bills, making the repayment process easy and convenient.
Improved Cash Flow
On-bill repayment can improve a customer's cash flow by allowing them to spread the cost of their energy efficiency upgrades or distributed renewable generation systems over time.
Reduced Upfront Costs
It reduces the upfront cost of energy efficiency upgrades or distributed renewable generation systems, making them more affordable for customers.
Increased Access to Financing
On-bill repayment can increase access to financing for energy efficiency upgrades or distributed renewable generation systems by making it easier for customers to obtain the funding.
Improved Energy Efficiency
Improves energy efficiency by incentivizing customers to make energy efficiency upgrades or install distributed renewable generation systems.
Increased Renewable Energy Deployment
On-bill repayment can increase the deployment of renewable energy by making it easier for customers to finance distributed renewable generation systems.
Drawbacks of On-Bill Repayment
The drawbacks of on-bill repayment include the following:
Customer Default Risk
Transfers the risk of customer default to the utility, leading to higher costs for the utility.
Increased Administrative Costs
Increases the administrative costs for utilities, leading to higher rates for customers.
Limited to Specific Types of Improvements
On-bill repayment is typically only available for specific energy efficiency upgrades or distributed renewable generation systems.
Key Takeaways
An on-bill repayment is a financing option that allows customers to repay the cost of their energy efficiency upgrades or distributed renewable generation systems through their utility bills.
The programs typically offer customers low or zero interest rates, saving them money on their energy bills.
It can improve a customer's cash flow by allowing them to spread the cost of their energy efficiency upgrades or distributed renewable generation systems over time.
Moreover, the program transfers the risk of customer default to the utility, leading to higher costs for the utility.
FAQs
1. What is on-bill repayment?
An on-bill repayment is a financing option that allows customers to repay the cost of their energy efficiency upgrades or distributed renewable generation systems through their utility bills.
2. How does on-bill repayment work?
The customer and the utility enter into an agreement where the customer agrees to repay the cost of the energy efficiency upgrades or distributed renewable generation systems over time through their utility bill. The utility collects the payments from the customer and then pays back the lender.
3. What are the benefits of on-bill repayment?
Some benefits of on-bill repayment include improving a customer's cash flow, reducing the upfront cost of energy efficiency upgrades or distributed renewable generation systems, and making them more affordable.
4. What are the drawbacks of on-bill repayment?
Some drawbacks of on-bill repayment programs include customer default risk, increased administrative costs, and limited specific types of improvements.
5. Is on-bill repayment the right choice?
On-bill repayment might be a good option for those looking to finance energy efficiency upgrades or distributed renewable generation systems and want to spread the cost of the improvements over time.
