With a piddling fraction of a $146 million Green Energy Market Securitization (GEMS) fund being loaned out over two years, it is easy to understand legislators’ frustration with the program.
But will a new measure that the Legislature is poised to pass fix the problems that have beset GEMS? Or will it make things even worse by eliminating most of what little public oversight exists for the troubled program?
Gwen Yamamoto Lau, who heads up the Hawai`i Green Infrastructure Authority (HGIA) tasked with distributing GEMS loans, has made no secret of her belief that the agency has been hobbled by the requirement that the state Public Utilities Commission (PUC) approve the various loan categories that qualify for GEMS funding.
Yamamoto Lau is the third executive director of the HGIA in two years and was appointed to her post only in January. Since last May, she had been HGIA’s managing director and since September, following the resignation of Tara Young, she had been acting executive director.
In March, she filed HGIA’s annual plan for fiscal year 2018 with the PUC, in which she stated flatly that commission oversight was “the last remaining impediment hindering the authority’s ability to react in a nimble and timely manner to market changes and demands.” The PUC’s docket process was “lengthy, expensive, and burdensome,” she said, and had “resulted in missed market opportunities for [photovoltaic] and [non-photovoltaic] related products.”
Legislation that was in conference committee at press time would free Yamamoto Lau and the HGIA from PUC oversight for the most part. In addition, it calls for an unspecified amount to be transferred from GEMS to a “clean energy savings jump start fund” that would be used to give rebates for qualified purchases of energy storage systems and support “energy education, energy demonstration projects for affordable multi-family rental projects, and credit enhancements such as loan loss reserves and interest rate buy-downs.”
The bill was introduced by Justin Woodson of Maui, Della Au Belatti, Tom Brower, Chris Lee, Scott Nishimoto, and Takashi Ono of O`ahu, and Joy San Buenaventura of the Big Island.
“The failure of the Hawai`i green infrastructure loan program to achieve its intended result has resulted in most ratepayers paying for the program without reaping the benefits,” the bill states in the initial, “findings” section. “Rather than obtaining immediate relief from high electric power rates, ratepayers are instead having to pay the debt service on a loan that is not being effectively deployed.”
Judging from the volume and sentiment of testimony submitted, most of those weighing in on the bill as it moved through the House and Senate would agree.
Among them was Yamamoto Lau.
Yamamoto Lau has told legislators the HGIA “strongly supports” the measure, House Bill 1593. Others who provided favorable testimony include manufacturers, distributors, and installers of PV and energy storage systems. With the PUC having shut off opportunities for most Hawaiian Electric customers installing PV systems now to feed excess energy into the utility grid, storage systems have become a necessary element of rooftop PV.
If the bill as it stood at press time were to become law, it would change the fundamental structure of GEMS. Under the current structure, the bond floated for the GEMS program is to be repaid over the 15-year term by the people and businesses receiving the loans. The Green Infrastructure Fee that utility customers pay each month and which now pays interest and principal on the loan is actually diverted from the pre-existing Public Benefits Fee; it was the intention when the PUC approved the GEMS program that when the GEMS fund became self-sustaining – when payments from outstanding loans were sufficient to cover most of the $13-plus million in annual bond financing fees – the surplus Green Infrastructure Fees collected would return to the Public Benefits fund.
But the rebates and other activities that would be funded by the “clean energy savings jump start fund” involve no repayment, meaning that ratepayers will be underwriting the GEMS program to an ever greater extent.
Yamamoto Lau, however, has proposed changing it even more fundamentally, by turning the GEMS fund into “a revolving fund, from which payments collected are redeployed and reinvested into new loans.” Should that happen, ratepayers alone would be responsible for paying down the principal and interest on the bonds. The language proposed by Yamamoto Lau to accomplish this was not included in the Senate rewrite of the bill.
As House-Senate conferees began negotiations, the measure contained no dollar amount that would be diverted to the new fund. Yamamoto Lau herself has proposed that this amount “be limited to a manageable level ($20.0 million),” while others have suggested transferring up to $50 million.
GEMS: Theory and Practice
Act 211 of the 2013 Legislature established the GEMS program. The measure called for the Department of Business, Economic Development, and Tourism to float a bond, secured by Hawaiian Electric ratepayers, that would be used to underwrite loans to those residents who were unable otherwise to afford rooftop solar systems and other energy-efficient technologies.
At the time, the beneficiaries were said to include renters, people with poor credit histories, and low-income homeowners.
In September 2014, the PUC approved the bond issuance, and by November of that year, the bond sale had been completed. Once the various fees associated with the bond float were paid, the state was left with around $146 million to distribute as loans.
A number of obstacles – many reported in earlier issues of Environment Hawai`i – prevented the GEMS funds from reaching the very populations that were supposed to be the beneficiaries. For one thing, the program was designed by DBEDT to “leverage” GEMS funds by drawing in institutional investors that sought to take advantage of tax credits for purchases of energy-saving equipment, such as rooftop solar. The amount of money available for loans would thereby be significantly increased, enlarging the pool of beneficiaries. Or at least that was the idea.
That leveraging process, involving as it did complicated arrangements with brokers, funding sources, and other intermediaries (“deployment partners,” in the HGIA’s terminology) bogged down. To date it is not clear that any of these efforts have panned out.
Another factor was the curtailment of the net-energy metering (NEM) option for residential rooftop solar by the PUC in late 2015. That changed the economics of solar significantly, dealing a blow to the installers from which they have yet to recover.
The first roll-out of a GEMS loan program came in early 2015. Yet it was not to benefit low-income homeowners but was instead intended to open up the loan program to large nonprofit organizations that might need – and qualify for – loans in a minimum amount of $150,000. The reason for launching the nonprofit loan package before all others was not really because there was an identified need for it, but rather because it would attract the third-party institutional investors – those whose capital would leverage the GEMS funds. (It hasn’t worked: to date, no nonprofit loan has been issued by GEMS.)
By the time a residential loan program was approved, the writing was on the wall for net-energy metering. The first residential loans were finally issued in January 2016, four months after the PUC cut the cord on NEM.
Scapegoats
In the annual plan for fiscal year 2018, Yamamoto Lau casts a wide net when attempting to explain the disappointing performance of the GEMS program.
The authorizing legislation did not require or anticipate the complicated involvement of third-party investors that proved to be so hobbling. Their role was instead recommended by the private consultants that, in 2013 and 2014, assisted DBEDT in designing the program presented to the PUC.
Yet Yamamoto Lau lists as one of the “challenges” facing GEMS “the complex and innovative nature of the financing products needed to implement and roll-out the GEMS program.”
There was also the “unanticipated” loss of the tax-equity partner for the nonprofit and small business loans, she noted. This “resulted in the termination of these programs on December 31, 2015, just nine short months after its [sic] launch.”
In addition, Yamamoto Lau points to “low consumer adoption” of GEMS loans, a result, she says of an “uncompetitive and cumbersome residential loan product.” Unlike the loan applications offered to consumers by private installers, the GEMS application could not be completed online and approvals could take weeks. On top of that, until recently, interest rates on GEMS consumer loans were tied to credit ratings, topping out at nearly 10 percent. (Now all loans have a rate capped at 5.99 percent, although proposals to the PUC for five more GEMS loan products continue to state that interest rates may be as high as 9.99 percent.)
All these problems have been overcome now, Yamamoto Lau says, with the HGIA “having made the necessary internal program corrections.” The only remaining obstacle, apparently, to the HGIA swiftly disposing of the balance in the GEMS fund is the PUC itself. “Streamlining the decision making process” – by which Yamamoto Lau means ending PUC involvement – “would enable the authority to react more quickly to market changes and deploy capital for green infrastructure investments in a timely manner to help meet the state’s clean energy goals and objectives,” Yamamoto Lau wrote in the annual plan.
In the coming fiscal year, she continued, the HGIA “plans to deploy $50 million in funds through its commercial (nonprofit and small business) PV plus storage products, residential PV plus storage products, residential and commercial energy efficiency products, and community solar products.”
Yamamoto Lau does not elaborate further on that figure, other than to say that $9.6 million has been tentatively approved as a loan for solar water heating on Moloka`i.
Solar water heating is not one of the technologies that HGIA has opted to include in its lists of products approved for GEMS loans. In fact, it was very deliberately omitted at the outset of the PUC approval process in 2014.
At that time, Henry Curtis of the group Life of the Land noted, “Solar water heaters save more dollars per dollar invested than PV panels, they have shorter payback periods, but more importantly, solar water heaters decrease peak load.” Why, then, should recipients of GEMS loans not be required to install solar water heaters before anything else?
In response, deputy attorney general Gregg Kinkley, representing DBEDT, referred back to the grand plan to have GEMS funds be augmented by investments from parties seeking tax relief: “As a public-private partnership, it is essential that [DBEDT] work with existing market players and deployment partners to have GEMS augment and expand the market to the underserved.”
Mark Glick, who at the time headed up DBEDT’s Energy Office, told Environment Hawai`i that other programs – including Hawai`i Energy, private administrator of the Public Benefits Fee – had programs that supported rebates for solar water heaters, “so we weren’t going to establish efficiency first. … It was a choice that we didn’t want to impede progress on moving forward with somebody who knows what they want to do.”
Pushback
Almost all those submitting testimony on House Bill 1593 in the four committee hearings it received were in favor of turning at least part of the GEMS funds over to a rebate program.
Few addressed the provisions that would do away with PUC oversight.
Among those who did raise this issue were Dean Nishina, executive director of the Division of Consumer Advocacy, and Ray Starling, chair of the Hawai`i Energy Policy Forum’s Energy Efficiency Working Group. (Until last year, Starling headed up Hawai`i Energy.)
As an automatic party to all PUC dockets, Nishina’s office, better known as the consumer advocate, has the responsibility to represent the public’s interest in reviewing the loan proposals brought to the PUC by the Hawai`i Green Infrastructure Authority as well as the HGIA’s proposed annual plans.
Both in legislative testimony and in comments to the PUC, Nishina has vigorously disputed Yamamoto Lau’s argument that PUC oversight is a hindrance to the smooth functioning of her agency.
“While the consumer advocate remains supportive of the idea of providing low-cost financing to underserved customers, the consumer advocate has significant concerns regarding HGIA’s characterization of the docket approval process as ‘the last remaining impediment’ hindering HGIA’s success,” Nishina wrote in his comments on Yamamoto Lau’s proposed annual plan for fiscal 2018.
“[D]espite HGIA’s description of the oversight process as ‘lengthy’ and ‘burdensome,’ the filing of Program Notifications” – the means by which additions to the loan program offerings are approved – “associated comments, and commission approvals have all occurred within a fifteen-business-day period for eight of the eleven Program Notifications filed to date,” Nishina wrote.
In testimony at the bill’s final hearing, on April 4, Nishina again argued for ongoing PUC oversight. “Given that the GEMS program is essentially insured by general ratepayer contributions to the green infrastructure fund, it is important that there is adequate oversight in place to ensure the use of the funds is in the interest of all ratepayers who have made and will continue to make contributions to GEMS and not just in the interest of direct program beneficiaries,” he stated. “As long as the GEMS program is funded or guaranteed by general ratepayers, commission oversight should be a prerequisite of the program.”
In contrast, the Blue Planet Foundation, whose executive director, Jeff Mikulina, sits on the HGIA board, offered testimony sympathetic to Yamamoto Lau’s position that PUC oversight was burdensome. “As a comparison, consider that the Public Benefits Fee Administrator (PBFA) does not file a program notification with the PUC to detail each new program offering or strategy as it becomes available. Instead, the PBFA files an annual plan for approval. This same approach may be reasonable for GEMS oversight,” it stated.
Starling, testifying for the Hawai`i Energy Policy Forum, took exception to the idea that the PBF administrator enjoyed less oversight than the GEMS program. “Given the challenges of the GEMS program with making loans to date, continuing to have independent PUC oversight is the more prudent and preferred approach,” he wrote. “In contrast, the competitively bid Energy Efficiency Rebate Program” – managed by the PBF administrator – “has three layers of third party oversight, all reporting to the PUC, not to mention performance goals with financial consequences.”
Starling also pointed out the impact that using GEMS funds for rebates will have on ratepayers and the energy efficiency programs already supported through the PBF: “Because of the complex way the GEMS program was originally set up, every rebate dollar not paid back to GEMS as a loan will automatically diminish the Public Benefits Fund by an equal amount, causing significant impact on Hawai`i’s Energy Efficiency Program, by far the most cost-effective energy resource on our grid.”
Much the same point was made by Randy Iwase, chair of the PUC. “Use of [Hawai`i Green Infrastructure Special Fund] moneys for purposes other than providing loans is inconsistent with the purpose and design of the loan program,” he wrote. He added that if moneys in the fund “are provided as a rebate with no repayment obligation, as is proposed in this measure, then the commission may be forced to replenish the reduced PBF through an additional surcharge to ensure that the statutorily mandated [energy efficiency portfolio standard] goals are achieved.”
A Breach of Contract?
Perhaps the most fundamental question raised by critics of HB 1593 was whether the use of bond proceeds for rebates, rather than loans, would constitute a breach of bond terms.
“The bond legal documents and the Public Utilities Commission’s order [allowing the bond float] clearly state the purpose of the funds to be loans,” wrote Murray Clay in testimony on behalf of the Ulupono Initiative. “A ‘bait and switch’ approach to financial markets where the state applies for funds for one reason and use[s] them for another is going to damage our state’s reputation with the investment community.”
Starling’s testimony raised a similar point: “If the GEMS bond proceeds are diverted to ‘rebates’ instead of ‘loans,’ the GEMS program will be unable to make the bond repayments without significantly increasing fee charges to all utility ratepayers – not taxpayers. And, contrary to original legislative intent, the GEMS program would cease to be self-sustaining. Moreover, the GEMS program would be subject to complex and unintended consequences, which have not been fully explored nor explained.”
— Patricia Tummons
For Further Reading
Environment Hawai`i has reported extensively on GEMS since March 2015. Here are selected articles, all available online at https://environment-hawaii.org:
- “Rollout of Green Energy Loan Program Shows Limited Pool of Beneficiaries,” March 2015;
- “Green Energy Loan Program Betrays Its Promise,” editorial, March 2015;
- “New Green Infrastructure Fee Cuts Into Public Benefits Fund,” March 2015;
- “Program to ‘Democratize Clean Energy’ Has Yet to Deliver on Promise of PV,” July 2015;
- “State Green Energy Loan Funds Yields Few Measurable Results in 2nd Year,” March 2016;
- “Solar Contractors Tell of GEMS Troubles,” March 2016;
- “HECO Customers Keep Paying Vig on Unused $144 Million in GEMS Fund,” June 2016;
- “Turmoil at GEMS,” New & Noteworthy column, December 2016;
- “Latest Proposal to Use GEMS Fund Is Nixed by Public Utilities Commission,” January 2017;
- “GEMS Costs of $13 Million a Year Borne by Hawaiian Electric Ratepayers,” January 2017.