Jigar Shah’s big idea for getting rooftop solar and smart appliances to low-income Americans

Can a government program created to back industrial-scale energy infrastructure help get efficient smart appliances and solar-battery systems into the hands of Americans who typically would not be able to afford them?

Jigar Shah, head of the Department of Energy’s Loan Programs Office (LPO), sees a way to make it happen by rethinking the definition of the type of infrastructure needed to achieve a decarbonized grid. On one side, there are the wind and solar farms that will supply most of the carbon-free energy in decades to come. On the other are the homes and businesses that use it and can shift when they use power to better match the variability of that wind and solar power — a form of ​“grid-responsive” demand that could play a major role in balancing an increasingly clean-powered electricity supply.

In Shah’s view, both sides are critical to a clean grid. For months, he’s been talking about an idea for how companies and financing parties could get support from LPO’s loan guarantees to lower the cost of making it happen.

“We’re thinking we can turn water heaters, refrigerators, thermostats, electric vehicles and batteries into virtual power plants” to balance the increasingly variable and weather-dependent supply of clean electricity, Shah said in a September interview.

To make sure that networks of these devices are ready to help balance out the grid, his office is interested in offering loan guarantees to companies that would make grid-responsive, energy-efficient appliances and equipment available to a broader class of customers than can access them today. And to make sure they’re available to households of all income levels, he’d like the companies that LPO supports with its federal loan guarantees to offer financing to low-income buyers at much lower interest rates than what they’re able to get today.

A new role for the decade-old Loan Programs Office

Since taking the helm at the Loan Programs Office in March, Shah has put his decades of cleantech entrepreneurial and investment experience to work in revamping the agency to help reach the Biden administration’s 2030 decarbonization targets.

Last week Canary Media covered Shah’s broad vision for the LPO to support a breadth of technologies with its $46 billion in lending authority, and potentially $40 billion more if Congress passes the Build Back Better budget reconciliation bill, as Democratic leaders hope to do after Thanksgiving. Loans and loan guarantees could go to companies working on everything from green hydrogen production hubs to advanced nuclear power plants to battery and electric vehicle manufacturing and supply chains.

But in addition to these, Shah has been talking a lot about targeting LPO support to virtual power plants, or VPPs — a catch-all term for behind-the-meter energy generation like solar panels and batteries and load flexibility like smart appliances and thermostats that can be aggregated and controlled at scales that match those of traditional power plants.

Compared to utility-scale power plants or energy storage systems, smart appliances, batteries and EV chargers can be deployed more quickly and in a modular fashion. They’re also items that a lot of homeowners and businesses are buying anyway, and they are expected to grow to a cumulative total of tens or hundreds of gigawatts of scale in the coming years, creating the potential to leverage their grid-responsive capabilities at lower cost than large-scale, centralized infrastructure.

Focusing LPO’s loan guarantees on backing companies and financing parties willing to reduce the financing costs for these devices for residents of low-income and disadvantaged communities could also boost the Biden administration’s promise to put environmental justice and equity at the center of its clean energy policies.

Shah spelled out the opportunity in a June DOE podcast, noting that approximately $10 billion worth of household appliances are sold in the U.S. every month. Most appliances are replaced when they break down. Upfront costs of purchasing new ones often exceed the limited budgets of low- and moderate-income households that make up about 40 percent of the U.S. market, forcing them to take out loans.

Borrowing costs for appliances can range from the average annual percentage rates of 14 to 18 percent for credit-card debt to as much as 30 percent interest for products aimed at customers with low credit scores.

“We can insert ourselves there and help people get 6…or 7 percent interest rates,” Shah said. ​“But in exchange, they have to opt in their air-conditioning system into a distributed energy resources project and…get paid to provide grid flexibility.”

Pushing down the cost of getting more efficient and grid-flexible appliances into homes could not only reduce customers’ power bills but also potentially reduce overall electricity rates, by replacing expensive central power system upgrades with distributed flexibility, he said.

Getting grid-responsive rooftop solar, batteries and electric vehicles into more low-income households, meanwhile, could also help them keep the lights on amid increasingly frequent grid outages from climate-change-induced extreme weather. ​“When you look at the Texas polar vortex, there were some people who actually were able to power their whole house” from their electric vehicle battery, he said.

Making solar and storage more accessible 

Shah has emphasized that his office doesn’t design or dictate the proposals that companies submit to the LPO. He can discuss the types of distributed energy projects that the office might like to support, but the specifics of actual projects depend on what companies propose and whether their applications are compelling and fully fleshed out.

Michael Huerta, co-founder and CEO at PearlX Infrastructure (and a former colleague of Shah’s at infrastructure investment firm Generate Capital), sees a massive pent-up demand for financing structures that can democratize access to these kinds of distributed energy tools.

“What Jigar has been saying for a long time, even before he was at Generate when we were working together, is that this entire segment of the market is unaddressed — that solar is becoming something for rich people and that batteries are a rich person’s toy,” he said. That’s ​“because it’s such a credit-driven product. If you don’t have good credit, you don’t have access.”

FICO scores, the standard measurement of consumer creditworthiness, play a huge role in whether customers can qualify for mainstream rooftop solar power-purchase agreements or leases, Huerta said. Research from DOE’s Lawrence Berkeley National Laboratory shows that solar adoption rates tend to be much lower for households and neighborhoods with lower-than-average incomes and that solar installers tend to seek out customers in higher-income areas.

This makes sense, given that it’s much more expensive to finance projects for customers with lower credit scores and higher debt-to-income ratios, the typical measures for the risk to lenders. A handful of solar installers such as PosiGen have been able to target lower-income customers by assessing other factors, such as a customer’s record of on-time utility bill payment, as part of their financing process.

These approaches to assessing risk for solar financing products are still in their early days, according to Suzanne Leta, head of policy and strategy for SunPower, a major rooftop solar and battery installer. That’s too bad, she said, since her company’s distributed solar and battery products could be ​“critical to serving historically marginalized communities in particular and for resiliency and bill-saving.”

SunPower has launched an equity plan that includes a goal of having residential customers living in historically marginalized communities make up a quarter of its total U.S. customer base by 2025, and it’s developing a new program to offer no-interest loans for low-income customers.

But the subprime mortgage crisis and the subsequent tightening of lending to borrowers with lower credit scores have put limits on how much financing any one company can acquire from banks to help serve lower-income customers, she said. ​“I think there’s a great potential for the DOE loan program to expand those limitations much more substantially.”

SunPower’s battery systems are already able to store solar power to discharge when power grids are stressed; they come equipped with the communications links and software that could be tapped for that purpose, she said. That’s a common feature of almost all the batteries being installed alongside solar systems or as stand-alone backup systems in homes and businesses today.

Wilson Chang, a partner at Hudson Sustainable Investments and co-founder and former board member of solar lender Sunlight Financial, agreed that Shah’s office could help low-income households access solar and other clean technologies. ​“LPO can do a lot to get the financial industry comfortable with new forms of underwriting for which there isn’t a long history of the exact asset class.”

“I think Jigar and the LPO are absolutely spot on to focus on some of these items,” he said. ​“Some sort of credit enhancement on a pool like that could actually lower the interest rate and make the value proposition of going solar for these [low- and middle-income] customers actually pan out much better.”

LPO can do this by guaranteeing to cover losses on loans that don’t end up being paid off, reducing the risk faced by other lenders, which then allows them to reduce the interest rates on the loans. That’s how the agency helped secure financing for the first five U.S. solar projects bigger than 100 megawatts back in 2011, a step that gave private financiers the confidence to build 45 more projects of a similar scale over the next five years.

As more projects are built, the companies involved become better at carrying them out more efficiently, which drives down costs along what’s known as a learning curve. 

The same process also provides the critical data that lenders need to assess risk, Chang said. In the rooftop solar sector, this has helped drive down financing costs for standard single-family home solar installations from the 8 to 10 percent range in 2010 to less than 5 percent today.

Making smart appliances and efficiency retrofits more accessible 

As for energy efficiency, it’s a tough sell for lower-income households.

Affluent households tend to use home equity lines of credit to pay for energy-efficiency upgrades, said Nate Adams, CEO of HVAC 2.0, a provider of residential energy-efficiency software. Those loans can be secured at typical interest rates of between 3 and 5 percent, but in order to access them, ​“you have to have equity and you have to have good credit,” he said.

For customers unable or unwilling to take out home equity loans, HVAC contractors tend to offer financing at interest rates in the 10 to 12 percent range, he said. But would-be customers with low FICO scores can’t usually get approved for these kinds of loans, he said.

Smart electric water heaters are particularly helpful for managing grid load because they can run at a low-demand time of day and still retain enough heat to offer hot water hours later.

The helpfulness of other technologies can vary by climate, he said. Air conditioning can be turned down to reduce grid stress on hot summer afternoons and evenings, although most customers will demand more lucrative rewards before they agree to swelter through the hottest times of the year. Heat pumps and variable-speed HVAC systems offer more flexibility than standard air-conditioning systems.

Home efficiency retrofits that improve insulation and button up the ​“shell” of a building help retain both cold and heat, so they reduce the amount of energy needed to keep temperatures within comfort range.

Adams would like to see federal loan guarantees to bring financing costs down to about 3 percent for whole-home efficiency retrofits. Ideally, these financing terms could be tied to customers’ records of prompt payment of their electric bills, as well as by more traditional means of assessing credit risk, ​“so that low-income folks could qualify for loans even if their credit [score is low].” The lower the interest rates, the more energy savings can accrue to the homeowner, he said.

Still, some people will have FICO scores so low that ​“they’re going to have a hard time qualifying for any loan,” Chang said. If that’s the case, ​“they’re probably going to be renting,” rather than owning, their residence. That brings a whole new set of challenges.

Efficiency, solar and batteries are particularly difficult to implement at rental properties, where tenants are often responsible for paying energy bills but landlords are responsible for the costs of installing and maintaining systems, as highlighted in recent research from the Smart Energy Consumer Collaborative. This opens up opportunities to secure financing via different means, such as the vacancy-based methods used in community solar projects. The core concept of vacancy-based financing is building a project’s creditworthiness not against individual borrowers’ risk of failing to pay back their loans, but across a flexible pool of subscribers to a project that can be filled in with new subscribers if existing ones can’t meet their obligations.

PearlX is using a similar financing model for broader infrastructure investments. Huerta said that PearlX has lined up $250 million in financing commitments for energy infrastructure investments in low-income multifamily housing. The underlying idea is for PearlX and its investors to create royalty structures that pay landlords and take over energy services for their properties. Those royalty structures then finance and manage the installation of solar, storage, load-control and efficiency equipment in rental properties, and earn their money back via energy savings and payments received for grid services.

Projects like these can predict payback based on the occupancy rates of a property in addition to the underlying creditworthiness of the tenants, he said. But it takes time to line up and finish projects that can provide the data to convince investors to commit to the next wave of financing.

Lining up infrastructure financing with favorable terms requires project scales in the billion-dollar range, Huerta said. Getting an LPO loan guarantee could provide the backstop that allows private investors to increase their commitments, cutting the time it will take to execute on projects already lined up, from five years down to two or three. Then, perhaps, investors ​“will say, ​‘Hey, you did that much faster than we thought — can I give you another $250 million?” 

Bringing equity to a still-developing landscape

None of the people interviewed for this story would say whether their companies plan to propose the kind of programs they described. But they did give their thoughts on how the LPO and companies seeking its backing might think about structuring a loan guarantee to balance helping low-income customers and creating a viable business model.

SunPower’s Leta suggested that proposals seeking LPO’s backing ​“will have to go to a broader set of customers and proactively change their marketing in order to serve that broader set of customers,” as well as ​“focus more on workforce and supply-chain diversity” — two aspects of SunPower’s equity plan.

“We’re actively exploring those possibilities,” she said. ​“At the same time, we’re actively working with large banks to expand our product offerings, whether or not we participate in [the LPO] program.”

PearlX’s Huerta suggested that LPO is likely to allow participants flexibility in meeting its targets. ​“To deploy the capital they’re talking about, they’re going to need large portfolios,” he said. ​“Jigar’s not going to let the perfect be the enemy of the good” when it comes to setting the criteria for reducing financing costs for low-income customers.

Any program seeking to serve customers with low credit scores will also have to police for activity that could put those borrowers at risk, said Joe Osha, Guggenheim Partners’ managing director and senior research analyst covering the energy technology and industrial technology sectors.

“You want to avoid people being victimized by below-market-rate lenders,” he said, in order to prevent the kind of predatory activity that’s plagued other policies aimed at expanding clean energy and efficiency options for homeowners, such as the well-publicized bad behavior of some contractors and lenders participating in property-assessed clean energy (PACE) financing programs.

Finally, there’s the overarching question of how the companies and customers with appliances and distributed energy assets supported by LPO loan guarantees can get paid for the grid-responsive capabilities of their equipment. Today’s opportunities are scattered across a wide variety of utility and energy market demand-response and energy-efficiency programs that differ from state to state and region to region.

The idea of using grid-services revenue to pay back the costs of new equipment requires ​“that you can monetize that with someone,” said Andy Frank, president and co-founder of New York-based residential efficiency provider Sealed. ​“These markets kind of exist and kind of don’t.”

Some states — California, New York, Massachusetts and Arizona among them — are actively seeking to expand the opportunities for allowing distributed energy resources to earn money for their value to the grid. Other states have relatively limited opportunities based on decade-old utility programs.

Meanwhile, the Federal Energy Regulatory Commission’s Order 2222, passed last year, requires regional transmission organizations and independent system operators that manage transmission grids serving about two-thirds of the country to create opportunities for distributed energy resources to participate in energy markets. That’s expected to open up significant moneymaking opportunities. But each of these organizations is working on its own plans to implement the order, a process that could take years.

“If those signals are clear, I can go to private capital to get the loans,” Frank said. But ​“all of that is predicated on having the cash flows.”

In a May podcast, Shah conceded that the LPO ​“can’t solve the market mechanisms” on its own. But it can prime the economics to get grid-responsive appliances, solar-battery systems and EV chargers into a wider swath of households, he said.

“The repayment of the virtual power plant is coming from the consumers,” he said, since they’re paying off the loans that allowed the grid-responsive devices to be deployed in the first place. ​“There are no grid revenues required to make this program work. But there are a bunch of grid revenues that could come in” as utilities and grid operators make them available — and that could help incentivize future rounds of lower-cost financing for the next wave of distributed energy investment.