Rep. Cynthia Thielen of Kailua was frank: “I think that GEMS has not been run well. A million dollars to place out three loans is pretty pathetic. I mean, that may rank at the top of the pathetic list of what the state has done.”
Thielen made her remarks at a hearing last month on a proposal to take money from an account held by the state’s Green Energy Market Securitization program – GEMS, for short – and use it to pay for programs to cool hot classrooms across the state. To achieve this, Gov. David Ige had proposed lending the Department of Education $100 million, more than two thirds of the roughly $145 million held by GEMS. To cover the interest on the loan, he was asking the Legislature to approve up to $7 million in general funds.
While testimony on House Bill 2726, the vehicle intended to carry out Ige’s plan, was favorable when it came up for a hearing on February 4 before the House Energy and Environmental Protection Committee, Thielen used the hearing as an opportunity to voice her frustration with GEMS.
“We’re working hard to keep the schools cool and I totally support that,” Thielen said. “What I do have problems with is the actual GEMS program itself. My research has shown that there’ve evidently been a total of three loans during the time the program has been in operation. Three loans, that’s it. And yet during that same time, there’s been a million spent on administrative expenses. …So, what assurance is there that if the [Department of Education] is going to be able to tap into this, to get the money to cool the schools, that we won’t run into this same inept bureaucracy that has prevented the money getting out to the consumers that needed to cool their properties?”
Despite Thielen’s misgivings, the Energy and Environmental Protection (EEP) Committee approved the intent of the bill, folding its provisions into yet another bill – House Bill 2569 – which, in addition to authorizing the $100 million loan from the GEMS fund, called for the state to issue $30 million in general obligation bonds to pay for heat-abatement, energy efficiency, and other measures intended to make for cooler classrooms.
The following week, the companion measure in the Senate was heard in a joint meeting of the committees on Transportation and Energy and on Education. Once again, those testifying were in strong support. (For the latest developments on this bill, see the article on page five of this issue.)
High Hopes
The most recent quarterly report from Hawai`i Green Infrastructure Authority (HGIA) to the Public Utilities Commission bears out Thielen’s criticisms. From the time GEMS opened for business, in late 2014, until the end of 2015, GEMS had authorized no loans at all from the $145 million in bond funds it has sitting in the bank, according to the filing, made on January 30.
Only in January 2016 were funds for the first three GEMS loans disbursed, with a total face value of $107,000, the report stated.
The administrative costs associated with GEMS, on the other hand, came to more than ten times the value of the loans: $1,199,235.75 – not including any expenditures since the close of the reporting period (December 31, 2015). Meanwhile, payments to bondholders have siphoned off around $7 million a year from electric ratepayers in three counties.
To explain the disappointing performance, the report notes that “the renewable energy landscape in Hawai`i is changing rapidly.” PUC actions including a cap on new rooftop solar capacity (35 megawatts), the end of net-metering (NEM), and interconnection issues, the report states, “have affected not just the HGIA and the GEMS program but all of the private and public sector actors in the renewables marketplace.”
PUC ended net-energy metering on October 12 and, in so doing, threw a spanner into the GEMS loan process. Instead of homeowners with PV systems being credited for energy put into the grid on a one-to-one basis with what they draw from it, anyone applying for a new system after October 12 would see that credit more or less halved.
Tara Young, hired last November as executive director of HGIA, told Environment Hawai`i, “the effect of the end of the net metering tariff was almost immediate – we received 101 applications in the period from June 30 to October 13 and only 29 applications from then until present.” Almost all those applications, she added, “have been for potential borrowers who had already obtained conditional NEM approval. While the GEMS consumer loan product is available to finance systems connecting via grid-supply or self-supply, there has been a dramatic slowdown in the sales of these systems.”
At an “informal technical conference” on the GEMS program held by the PUC on February 11, Young listed some other factors underlying the poor performance of the GEMS program over the last two years. In addition to the end of net-metering and other developments listed in the annual report to the Legislature, Young described how the GEMS program had not been nimble enough to compete for market share against private-sector solar installers. Thus, “competitive products in the commercial market” had undercut the anticipated demand for GEMS loans in both the private and non-profit sectors. In addition, GEMS loan applications had a “longer sales cycle than consumer products.” For example, she said, for customers to get pre-approval for a GEMS loan, they had to mail or fax in their applications, while private lenders allow for online submissions.
She added that the program, which currently has only three employees, is going to need more people if it’s ever going to effectively deploy loans.
Although downplayed at the conference by Young, PUC staff noted that they had received feedback that the interest rates offered under the GEMS program were too high. What’s more, on-bill financing, which many considered to be a critical component of the GEMS program, has never received PUC approval.
Leveraged Debt
One of the key elements of the program that may have also contributed to GEMS’s lack of progress was the use of private capital to augment, or leverage, the total amount of funds that could be used for loans to the groups or individuals needing GEMS help. Or, as the PUC application stated, “The Program will invest debt capital in the market in partnership with private sector entities (‘Deployment Partners’) that will use such capital to support directly or indirectly financing products serving ratepayers. … [T]he Program will deploy funds through Deployment Partners utilizing two key methods: unleveraged debt and leveraged debt.” The idea was that private investors wanting to take advantage of the investment tax credits available under state and federal laws would underwrite loans to customers in Hawai`i who might not qualify for those credits, either because they were in too low a tax bracket or because they were not subject to taxation (such as churches and non-profit organizations). This way, the investors could take the tax credits while at the same time lowering the overall cost of the loan to the ratepayer.
DBEDT went on to outline how this might work: “The GEMS Program will purchase a percentage, for example 80 percent, of a loan or lease. By leveraging GEMS funds, more capital is available to finance clean energy improvements. An additional benefit in Solar PV financing is private capital in the form of tax equity may be used to lower the system cost for end users that cannot monetize tax benefits.”
The first “loan products” were unveiled on December 31, 2014: a “non-profit loan product” and a “consumer loan product.” In the case of the non-profit loans, a minimum loan amount of $150,000 was set. At that point, it became clear that the GEMS program was going after a slice of what turned out to be a hugely competitive market for financing from individuals and institutions that were seeking to take advantage of the investment tax credit – the so-called leveraged loans.
But even though the initial conditions of these two loan products had been determined, DBEDT was still struggling to work out just who would be selling the loans, who would be installing the systems, and who would be responsible for finding underwriters for the leveraged loans, among other things – the so-called deployment partners. In addition, the fact that the PUC had not approved an on-bill financing program meant that DBEDT also had to select an agency to process payments on the loans.
In April 2015, when it submitted its second quarterly report to the PUC, the HGIA stated that it was still “focused on securing partners for both the origination and servicing of the GEMS consumer loan product.”
By last September, the program had made some progress in qualifying photo-voltaic installers. According to the report to the PUC for the quarter ending September 30, the HGIA had “approved nine companies to be installers. … Eleven companies are pending approval.” More than 100 applications had been received for consumer loans, 35 of which had been denied and 47 “pre-approved.” Twelve applications had been received for non-profit or small-business loans, but, according to the next GEMS report, filed at the end of January 2016, none was a go. In addition, by the end of 2015, the fund administrator for non-profit loans dropped out.
Young was asked whether it would have been simpler and more productive to have placed GEMS’ focus on direct loans rather than attempting to leverage loans by attracting investors wanting to take advantage of the investment tax credit. “We are not going to speculate about whether alternatives might have been more productive in retrospect,” she replied.
Can They Do That?
Whatever the reasons for the GEMS program’s slow start, plans to issue the DOA a loan for the majority of program funds were fast-tracked. The HGIA had been scheduled to vote to approve the loan on February 24. By that time, the legislators had started exploring whether using funds from a Medicaid reimbursement would be more appropriate; the HGIA met, but did not vote on the proposal to use of the GEMS funds for schools.
While the plan may eventually be consigned to the trash heap of history, it’s clear that state officials were on board with the idea.
In her testimony to the EEP Committee and the Senate committees on Education and Transportation and Energy, Young said that the program “was originally founded with a broad mandate to accelerate adoption of renewable energy technology by deploying capital to consumers, for-profit, non-profit, and public sector entities.” But actually, the legislation establishing the GEMS program (Act 211 of the 2013 session) limits loans “to private entities, whether corporations, partnerships, limited liability companies, or other persons.” No mention of “public sector” entities appears in either the law or the reports from legislative committees that heard the bill three years ago.
Act 211 also suggests that GEMS was created to assist underserved consumers, specifically those ratepayers unable to obtain green infrastructure equipment “on reasonable financing terms.” At the February 11 PUC technical conference, commission counsel Shannon Mears asked Young how loaning the DOE two thirds of the funds available through the GEMS program is “reaching an underserved market.”
Young replied, “The issue here is speed.” She explained that schools need the funds quickly and GEMS funds are available.
“They’re underserved because they’re not able to get quick cash?” Mears asked.
“Yes,” Young replied.
Whether or not the Legislature or PUC needs to amend the program to accommodate the DOE loan remains to be seen. In its September 2014 order approving the GEMS program, the PUC authorized two means of augmenting or amending it.
The first of these was through “program notifications,” which would give the PUC additional details on program components; minimum lending, credit, or investing criteria; and repayment mechanisms and processes. These notifications would be submitted 15 business days prior to any program component being implemented.
“Program modification” requests, on the other hand, can be made whenever DBEDT wants to modify the program’s structure beyond the scope of the PUC-approved program guidelines.
No “program modification requests” had been submitted as of mid-February. What’s more, Young said she did not think any would be required to expand the GEMS program to allow for loans to the schools.On February 23, the HGIA submitted to the PUC a program notification for a commercial energy efficiency loan product to address the DOE’s heat-abatement program.
As to why schools would be considered commercial, Young stated: “The utility classifies customers as either residential or commercial. The DOE is a commercial customer of HECO and its affiliates and contributes to the … Green Infrastructure Fee. As a ratepayer, the DOE is eligible to participate in the GEMS program. …” Schools on Kaua`i, however, are out of luck. “GEMS funds are only to be used by borrowers served by HECO and its affiliates,” she noted.
— Patricia Tummons
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