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Net Metering Backed Securities

Promoting Solar Power, Green Jobs & Energy Efficiency

Homeowners, mortgage bankers, lenders, secondary investor institutions, utilities and investors could benefit from an energy program that would provide two innovative approaches:

1) Net Metering Backed Securities (NMBS), and

2) Energy savings credit trading market.

They would work the same way Fannie Mae and Freddie Mac promote homeownership and make money. They make money on the difference between loans they buy and their borrowing costs, guarantee fees charged to lenders on mortgage-backed securities sold to investors and returns on the sale of mortgage-backed securities. Put another way: as wholesalers for the mortgage industry, Fannie and Freddie borrow money from investors to buy mortgages from lenders. They also repackage mortgages into securities for sale to investors, adding their own guarantee that investors will receive the promised principal and interest. They charge lenders a fee for that service.

Secondary Net Metering Market

An innovative financing program is needed to assist homeowners and businesses with their energy management and the installation of solar power and energy efficiency retrofits. Special lenders, brokers, and exchanges could purchase homeowners’ energy bills or just the net metering surplus (NMS) and bundle the energy bills or NMS as futures. Just as it is reasonably assured that the vast majority of homeowners will pay their mortgages, they will pay their utility bills. The energy savings component could be leveraged as the equivalent of a monthly interest rate in a separate NMBS. If consumption or reverse meter savings are treated as energy futures and folded into the NMBS, energy savings from the projected amount financed would reduce the monthly utility bill for the homeowner or renter and provide an investment opportunity as an EBS. Special lenders, brokers, and exchanges would help reduce monthly electricity bills for homeowners, purchase larger loans from lenders, and achieve a return on investment through the issuance of NMBS.

The incentive for lenders to participate will be the inclusion of the total estimated energy usage during an agreed upon amount of time.  For example, a lending or other financial institution assuming a $2,000 per year energy bill over a 30-year period or some other agreed-upon time period.   Energy savings would be quantified through the lenders and utility companies.  Compliance would be assured through remote monitoring, random on-site inspections and consumption analyses. 

Credit Trading Market

America should also establish a credit trading market for energy savings from home solar power and energy efficiency retrofits. Residential units alone account for approximately one-third of energy consumption and 19% of greenhouse gas emissions.  Building more efficient homes, or retrofitting existing ones, can dramatically decrease the amount of energy used.  This also reduces utility costs for homeowners.  While energy savings from one home alone are small, the results are substantial when the energy reductions from many homes are aggregated. Of course, individual homeowners could still decide to manage their own solar power and energy efficiency credit asset.

Creation of Credits

Solar power and energy efficiency improvements to homes can be accelerated if utilities, in partnership with lenders and utilities, implement aggressive demand-side management programs, consumer upgrades, and builder incentives.  On a per house basis, these energy savings are too small to generate significant levels of energy offsets from electricity generation.  However, if the individual energy savings are aggregated in sufficient levels, they could represent a tradable commodity in existing and future energy trading markets.  Lenders, utilities and other entities could also aggregate these savings to market as emission allowances in U.S. and foreign trading markets under a future U.S. carbon dioxide reduciton program or the Kyoto Protocol if it is ever implemented. A private, voluntary market could is already operating in the U.S.

Criteria for Calculating Energy Credits

To participate in the program, homes and apartments would have to meet minimum solar energy and energy efficiency criteria.  Improvements beyond this baseline would be measured using the Department of Energy Home Energy Rating System (HERS) or another comparable rating.  These minimum energy efficiency criteria will assure the quantity of energy reductions and improve the “quality” of the energy credits created.  Participating lenders and homeowners may qualify to earn energy “credits” based on the energy reductions achieved.   

Validating the Credits

A monitoring and verification protocol will have to be developed to establish a credit-trading program. They will register the energy credits under the EIA 1605(b) program and any other credible firm to best validate the energy savings and promote their marketability.  To date, the energy reductions from residential energy efficiency programs are not “creditable” and have no market value, primarily because no one entity has been able to amass them in sufficient quantity.   Investors, lenders and others can aggregate a tradable number of credits by working in partnership with builders, utilities, and other partners.

Trading Energy Credits

Large investors, lenders, utilities, entrepreneurs and exchange brokers will ensure a sufficient level of monitoring and verification, register the emission credits under the relevant regulatory or voluntary programs, and amass them in sufficient quantity to offer them for sale to the market.  An energy brokerage service will negotiate the sale.  Those under some calculated cap could sell credits and those over the cap would purchase credits. Caps could be established locally, by State, regionally and nationally. Other innovative trading systems could also be created. AAEA also offers an exchange service through its Carbon Mercantile Exchange (CMX)

Benefits to Home Buyers

Solar powered and energy efficient homes are more comfortable to live in and significantly less expensive to maintain than inefficient homes.  These retrofitted homes and newly constructed homes with solar and efficiency features also have greater value, as they are more durable and perform better than the standard-built house.  However, while energy efficient appliances and construction techniques are common, many individuals cannot afford the up front costs.  The goal of this initiative is to promote the development of solar powered and energy efficient homes by capturing the value of the energy savings and reinvesting the proceeds of the sale of energy credits back into the utilities’ energy efficiency programs.       

Green Jobs

Solar power and energy efficiency retrofit programs are excellent technologies for providing green jobs thoroughout American society. This is the exciting aspect solar power and energy efficiency retrofits bring to the table that is not readily available among the other technologies. There are opportunities in the solar sector and energy efficiency sector from manufacturing to sales to training, installation and remote monitoring. Electricity is such an exciting and practical product that training to become an electrician can provide a lifelong skill. At-risk youth should be targeted for more special programs, such as those included in The Green Jobs Act of 2007, but large-scale retrofit programs can serve the entire economy.