Greens Want Energy Bubble Loans from CPUC

MARCH 30, 2012

By WAYNE LUSVARDI

California is getting strapped for cash to continue to pay for subsidies for economically infeasible solar power and energy efficiency projects for homeowners and small businesses.

So the Environmental Defense Fund has concocted a proposal to the California Public Utilities Commission called “On-Bill Repayment.” This program would have electricity users pay for such energy upgrades in their monthly electricity bills.  The upfront money for energy upgrades would come from loans through commercial banks instead of government subsidies.

On-Bill Repayment will not provide homeowners or businesses with significant costs savings but will provide green jobs.  The green marketing of On-Bill Repayment is so slick that even the naïve energy writer at Forbes magazine online has been duped by this proposal.

On-Bill Repayment will also provide banks with a source of loans that have no demonstrable benefit to borrowers. This is just what California does not need.  It would create yet another government financing bubble that, like subprime home purchase loans, would benefit banks and contractors but provide only inflated benefits to property owners.  On-Bill Repayment has the same markings as the housing bubble all over it.

Energy Loans Would Benefit Only Banks and Contractors

As for property owners — yippee!  They would get an expensive energy system with a useful life of maybe 20 years that produces power at maybe two to 10 times the cost of natural gas or hydropower. During the 20 years, the property owners will get no real energy cost savings. It is widely known that solar energy is not economically feasible without subsidies.  But the energy loans will run with the properties even if the properties are sold.

The only conceivable benefit would be to the property owner after 20 years when the loan is paid off.  But by then any solar panels would either be less efficient due to wear from weathering or technologically obsolescent due to newer technologies.

Once again, the only property owners they could stick with such boondoggle energy improvements and deadweight loans would be lower-income families who would likely be unknowledgeable about the touted energy benefits. Most commercial property owners would be too knowledgeable to have such loser improvements on their buildings.

And the banks wouldn’t want to hold such “loser loans” and would want to dump them into the secondary loan market.  Sound familiar?  This is what happened with “subprime mortgages.”

And once On-Line Repayment loanswere shifted to the secondary loan market, they would be prone to being “sliced and diced” as subprime loans were by Freddie Mac and Fannie Mae.  Once each loan was divided up among many secondary lenders — paradoxically called “securitization” — it would be nearly impossible to foreclose.

This is the situation we’re facing today with the secondary lenders holding billions of dollars of bad mortgages on their books that are dragging down the economy and government budgets at the same time.

Moral Hazards of Energy Bubble Loans

On-Bill Repayment programs will also create what are called “moral hazards” in economics.  It will provide a perverse incentive for energy contractors to inflate their calculations of energy savings.

And banks won’t be able to judge whether the energy savings are real or fabricated. But banks will also have a perverse incentive to make such loans, especially if government has quotas for energy loans– as it did for “anti-redlining” loans under the Community Reinvestment Act. So look for an “anti-greenlining” lending law to be floated by politicians if On-Bill Repayment programs are approved by the CPUC and California legislature.

Political Opportunism and AB 998

California State Sen. Kevin de Leon, D-Los Angeles, has already floated Assembly Bill 998 to authorize On-Bill Repayment financing for energy improvements. There will be a hearing on AB 998 on April 17 in the California Senate chambers.

De Leon is touting that AB 998 will create 20,000 jobs and save 7 million tons of C02 per year. But at whose ultimate expense when the loans go bad? It will be low-income property owners and local school districts that will ultimately suffer from such bubble financing of energy loans.

According to Wikipedia, de Leon has been a Spanish language teacher and an advocate for “more funding for low-income neighborhoods, more school construction, and health insurance for children.”  But there won’t be any cash for public schools or health care if we keep financing boondoggle real estate and green energy bubble loans.  But politicians only look at the short term of getting re-elected.

Apparently, we have learned nothing from the collapse of the national bank financing system in 2008. Opportunist legislators are still clamoring for bubble financing to create jobs and provide banks with loans that do nothing for property owners but stick them with a liability.  Green energy advocates have no conscience about proposing bubble financing for deadweight energy efficiency improvements. And banks will have to comply with probable new energy loan quotas to keep their banking charters in the state of California or face penalties for discrimination.

As we can plainly see with the proposal for On-Bill Repayment of green energy improvements, perverse incentives for “greed” start out as well intentioned and slickly marketed proposals by government and low income or green advocacy special interest groups, not with banks.  Banks will be prone to being corrupted but want to keep their bank charters. Banks will protect themselves against loss by secondary financing and slicing and dicing loans among many lenders to spread the ultimate losses.  But bubble financing for green energy will poison the banking system and ultimately state and local school district budgets.

Such is the state of civilization in California circa 2012 under the leadership of green Gov. Jerry Brown, who invented solar energy subsidies in the 1970’s.