Latest Proposal to Use GEMS Fund Is Nixed by Public Utilities Commission

posted in: January 2017 | 0

On November 28, the Hawai`i Green Infrastructure Authority (HGIA) proposed a new method by which GEMS funds could be distributed to residential customers.

As with several other previous proposals, the Public Utilities Commission batted it down, ordering instead an “informal conference” at an unspecified date to address concerns raised by the state consumer advocate.

What the new proposal anticipated was the issuance by third parties of loans to homeowners and the sale of those pooled consumer loans to investors in the form of “securitized consumer leases or power purchase agreements.”

As explained by HGIA staff, the loans to purchase photovoltaic systems would be provided through a project sponsor – a business entity that seeks to reduce its taxes – which would then be able to offset taxes owed by the deductions allowed for investments in solar installations. The project sponsor would have been either a single business or a group of investors whose capital would cover part of the cost, with the HGIA furnishing the remainder.

According to HGIA program officer Heather Wallenstrom, “the project sponsor owns and maintains the solar equipment” and it recoups its investment through the sale of power to the homeowner by means of a power purchase agreement (PPA).

“If a project sponsor chooses to pay for the solar equipment using its cash,” Wallenstrom stated in an email, then no loan from the GEMS fund is needed. “However,” she continued, “if a project sponsor chooses to borrow to augment its cash equity, a loan would be requested.”

The program notification describes the distinguishing features of the GEMS project sponsor loan this way: It “is different from other loan products on the market because it partners with conventional lenders – in this case predominantly Hawai`i-based, traditional financial institutions – to form a ‘capital stack’ that enables private lenders to stay within their required underwriting criteria. GEMS funds are used to support the loan and extend the loan term over twenty years, which provides greater flexibility for prospective project sponsors.”

The $150 million GEMS bond fund is itself securitized, with the “security” being basically a lien against Hawaiian Electric ratepayers for the two decades following issuance of the bonds. The type of pooled consumer loans anticipated in Program Notification 10, however, is, in form, at least, more like the securitized mortgages that were pooled by large banks and sold to unwary investors in the late 1990s and early 2000s.

As to what entity would have been responsible for pooling the consumer loans into the product that eventually would be owned by the private investors, Wallenstrom replied: “The project sponsor negotiates multiple PPAs and pools them together when requesting financing.”

Wallenstrom underscored that the only secured collateral would be the PV equipment itself, not any real property on which the equipment is mounted.

Dissenting Opinion

The state Office of Consumer Advocacy filed its objections to the latest proposal on December 9.

“Greater scrutiny should be applied to any program that proposes to lend GEMS funds to a third-party investor,” the consumer advocate stated. “This is because there are no program mechanisms in place to ensure that the benefits of GEMS financing will accrue to the consumer rather than being absorbed by the third-party.”

This proposal, the consumer advocate’s filing goes on to say, “represents a significant departure from previously approved programs in which the borrowers were also the consumers of the eligible technology.”

The consumer advocate took exception to the HGIA’s calculation of savings to the end consumer, which is based on a calculation of expected utility bills with and without the photovoltaic system. Instead, it stated: “a more appropriate comparison to assess the expected benefits to consumers stemming from the third-party use of GEMS program funds is … to compare the customer’s bills: 1) with PV under a GEMS financed lease/PPA, and 2) with PV under a lease/PPA backed by an alternate source of financing. …

“As it stands, HGIA’s analysis appears to assume that, but for the use of the third party, GEMS-financed securitized consumer lease/PPA product, the consumer would be unable to install a PV system or enter into another lease/PPA arrangement. It is unclear why this would necessarily be the case given that other private sector companies appear to also offer ‘$0 down,’ 20-year solar lease arrangements.”

The consumer advocate recommended that the PUC look critically at this and any other proposal that would use “ratepayer-based GEMS program funds for third-party investment.”

Finally, in a footnote, the consumer advocate floated a suggestion to both the PUC and HGIA as to a possible way in which GEMS funds could be used to provide direct benefits to the parties who were the intended beneficiaries when the statute authorizing GEMS was approved by the Legislature in 2013:

“The commission should consider, at some point, requiring HGIA to conduct or provide a leased distributed generation system market analysis,” the consumer advocate stated. “Subsequently, if the estimated or measured demand for that market is significant enough, HGIA could then evaluate whether it might make sense to create a low-cost framework within which HGIA could directly lease PV systems to customers instead of HGIA making GEMS funds available to a third-party vendor(s).”

On December 16, the Public Utilities Commission issued an order suspending the effectiveness of Program Notification 10, pending an informal conference to address the consumer advocate’s concerns.


On the very same day the PUC issued its decision, the HIGA filed clarifications to its program notification, addressing the consumer advocate’s criticisms. With respect to the criticism that GEMS “was not intended to be a vehicle for third-party lending,” deputy attorney general Gregg J. Kinkley, representing HGIA, wrote that “this type of lending structure is exactly what the Hawai`i state Legislature had envisioned and authorized the authority to do” when it authorized GEMS.

Kinkley also disputed the consumer advocate’s suggestion that GEMS loans should be more attractive than those offered by commercial vendors. This was challenging for two reasons, he wrote. First, the HGIA “would need to constantly research difficult-to-obtain proprietary financing terms and conditions of other lease/PPAs being offered.” Second, he wrote, “existing program requirements already make the GEMS financing option less attractive to solar installers when compared to other lenders,” he wrote, seeming to acknowledge the programs constraints that have made it so far unable to meet expectations. “If the authority were required to continually change its criteria to be ‘better than market,’ … it would be extremely difficult to attract borrowers and solar installers.”

A Limited Pool

Even if the Program Notification 10 is eventually approved, the class of potential beneficiaries of the new type of securitized consumer loan may be relatively small. Under the current circumstances regarding PV connectivity, the only customers likely to apply for this type of GEMS loan would have been those Hawaiian Electric customers who applied for net-energy metering rates before last October, when the PUC halted new applications to the NEM program, but who have yet to install the PV systems on their homes.

Wallenstrom says that at the end of November, “the number of homeowners remaining in some stage of the NEM review or approval process was 7,576.”

“The amount of time these homeowners have to execute the NEM agreements depends on where they are in the process and whether an extension [of time] has or will be granted,” she continued. Hawaiian Electric was planning to send out notices last month to homeowners still in the NEM queue who were on the utilities’ most saturated circuits, she noted.

“HECO [Hawaiian Electric] anticipates that solutions will be available in September of 2017 and May of 2018 for customers in areas where more complex upgrades are necessary, so some customers will be installing PV systems with NEM approval through 2018 at least,” she stated.

A Confounding Order

But whether those several thousand NEM-approved customers continue to maintain that status over the 12 to 18 months would seem to be an open question, given a recent Public Utilities Commission decision.

On December 9, the PUC ordered Hawaiian Electric to “transfer grid capacity from the NEM program queue” to open up additional capacity for grid-supply customers, referring to the limited option opened up after new NEM applications closed last year. Under the grid-supply option, customers with PV arrays export power to the grid in the same way as NEM customers, but instead of receiving retail credit for each kilowatt hour of power exported, they would be compensated at a discounted rate.

On its website, Hawaiian Electric provides a time extension request form for NEM-approved customers awaiting financing or other issues to be resolved. The form states that such customers will be allowed no more than “a one-time, 180-day extension to finalize [their] Net Energy Metering project.”

In addition, the form requires customers to acknowledge that any failure “to finalize and submit post-installation documentation within the extension period may result in the cancellation of my NEM application and forfeiture of my place in the queue.”

In effect, Hawaiian Electric has been given a green light by the PUC to shift capacity from the NEM queue to the more lucrative (for the company) grid-supply queue.

Hawaiian Electric spokesman Peter Rosegg was asked what the company’s policy was on retaining customers in the NEM queue for protracted periods.

“If a customer is in the approved NEM queue, they have either 12 months (residential) or 18 months (commercial) to complete a project,” he stated in an email to Environment Hawai`i. “We allow for a six-month extension if justifiable. Some 5,000 customers are in the NEM queue approved to install who have not yet interconnected.”

Rosegg added: “We are cooperating with the solar industry to implement the directions from the PUC. We will work with customers to compelte their projects if they choose, making sure all customers are treated fairly and provided with safe, reliable electric service.”

— Patricia Tummons

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