Design

Consider Whether a Revolving Loan Fund is Appropriate for Your State

When considering an RLF, a State Energy Office should begin by asking whether financing would be the most suitable option to meet the needs of the markets it intends to support. For example, what gaps in private sector financing could the program address, or would the funds supplement private financing to lower costs for state and local governments and nonprofit entities. There are specific market sectors that may respond more favorably to or require grants rather than financing.

If a State Energy Office determines that financing is the best path forward to help support energy investments in its state, it should consider and answer several questions critical to design an RLF so it is likely to succeed.

Determine the Goals and Scope of the Revolving Loan Fund

RLF Programs Scale and Scope Comparison

	Texas LoanSTAR Revolving Loan Program	Minnesota Trillion BTU Program
Program Funding	$146 million (Exxon); $9 million (stripper wells); $9.8 million (SEP annual funds); $90.5 million (SEP ARRA)	$5 million (SEP funds for Xcel territory); $10 million (legislative appropriations for rest of state)
Duration	Operational since 1989	Operational since 2014
Reach	Statewide	Initially Xcel utility service territory, but expanded statewide
State Energy Office Role	Manage funds, issue loans, oversee third-party pre-construction audits, provide construction inspections, ensure compliance with approved Utility Assessment Reports	Oversee program
Scope	Public buildings, MUSH market buildings	Privately-owned commercial and industrial buildings

What state energy goals would the RLF support?
RLFs are flexible sources of capital that can support many different energy goals. State Energy Offices should decide what the goal or goals of their RLFs would be. For example, would the RLF support investments specifically to reduce greenhouse gases, or support energy infrastructure improvements more broadly?

What would be the RLF's coverage area?
RLFs can be scaled to cover various areas of a state. Many RLFs finance projects throughout their states, while others are focused on specific geographical areas or even utility service territories.

In Texas, the RLF supports building retrofits throughout the states.
In Minnesota, a portion of the Trillion BTU RLF's capital is limited to Xcel's (the state's main investor-owned utility) territory, while another portion is eligible for statewide use.

What project costs would be eligible for RLF capital?
RLFs can provide flexible capital that State Energy Offices can leverage to finance a variety of technologies and upgrades. A State Energy Office should decide what costs would be eligible for RLF financing.

Some potential upgrades that an RLF can finance include:

Energy efficiency improvements;
Renewable energy systems;
Energy storage;
Related health/safety improvements; and
Other improvements designated by a state (e.g., water conservation projects).

For example, in Texas the LoanSTAR Revolving Loan Fund invests in specific retrofit measures as designated by statute. These include public sector indoor and outdoor lighting projects; heating, ventilation, and air conditioning equipment (HVAC); electrical distribution equipment; building shell improvements; energy management systems; energy recovery systems, including systems that generate electricity on-site; alternate/renewable energy systems; load management devices; water systems and waste water systems energy conservation measures; geothermal equipment; indoor and outdoor water conservation projects; and other cost-effective energy efficiency or water conservation enhancements, demand, or rate-based measures that the LoanSTAR Program has approved.

To review the LoanSTAR enabling statute, please click here.

In Minnesota, the Trillion BTU program includes any renovation or retrofitting of commercial real property to improve energy efficiency that results in a net reduction in energy consumption and has been identified in an energy audit as having a payback period of 20 years or less to repay the purchase and installation costs. This includes energy efficiency, lighting, and renewable energy projects.

What market segments and borrowers would be eligible to use the RLF?
The next step in designing an RLF is to determine what sectors of the market would be eligible for financing from the fund. In many cases, this would be spelled out in statute if your fund is established by the legislature, but in others the State Energy Office may retain flexibility to designate the customer segments that could receive financing.

Most RLFs focus on either commercial or industrial buildings (including multifamily residential buildings), public buildings (including MUSH market buildings), or residential single-family homes.

LoanSTAR focuses only on public buildings and the MUSH market.
The Tennessee Energy Efficiency and Renewable Energy Loan Program initially allowed private commercial and industrial buildings to access its RLF, but later amended its rules to enable public buildings to receive loans as well.
The Minnesota Trillion BTU program focuses primarily on small-to-medium sized businesses in the private sector.

To review the LoanSTAR qualifying requirements for potential borrowers, please click here.

How would a State Energy Office capitalize the RLF?
Once a State Energy Office determines the scope of its RLF, it would identify an initial source of capital to establish the fund. If the legislature has not provided funds or identified a source, the State Energy Office would obtain capital from other sources. U.S. State Energy Program funds can be a great source of capital for RLFs.

Once a State Energy Office establishes a fund, they could choose to grow it, even modestly, over time. For example, some states allocate excess annual SEP funds that result from canceled or delayed projects into existing RLFs to increase their capitalization. It is also possible, with DOE concurrence, to convert a portion of RLF funds to grants or forgivable loans if a state's goals or needs change.

SECO established LoanSTAR with $79 million in petroleum violation escrow funds from the federal government in 1989. Over time, SECO has added to the fund's capitalization with SEP funds and other federal energy appropriations. This resulted in LoanSTAR having a capitalization in 2024 of over $255 million.
Minnesota established the Trillion BTU program with an initial capitalization of $5 million in SEP funds. The legislature appropriated an additional $10 million in funding to broaden the program to be statewide.

RLF Program Design Comparison

	Texas LoanSTAR Revolving Loan Program	Minnesota Trillion BTU Program
Original funding source	Oil overcharge funds, stripper well funds	ARRA SEP funding
Additional funding sources	ARRA, State Energy Program	Legislative appropriations
Eligible borrowers	Public buildings, MUSH market buildings	Commercial and industrial building owners
Loan term length minimum/ maximum	Up to 15 years	10 years
Eligible upgrades	Lighting, HVAC, building envelope	Solar systems, heating and cooling systems, energy efficiency measures, lighting
Loan interest rate	Generally 2 percent below prevailing public independent school district (ISD) 15-year bond rates (currently 2.5 percent)	Under 6 percent (due to statutory limitations)
Maximum loan amount	$6 million	$1 million

Determine the Requirements and Terms of the Revolving Loan Fund

The requirements and terms of the RLF are the conditions agreed to by the lender and borrowers when issuing loans. The terms help structure the loans, including the underwriting criteria, loan repayment framework, and interest rates. A State Energy Office should consider the following questions as it decides the terms of its RLF:

Should there be an “application window” when interested borrowers can submit applications, or should the RLF accept applications on a continuous basis?

Each Texas LoanSTAR application period generally opens in September and closes on August 31 of the following year, the end of the state's fiscal year. During this application process, funds are set aside for approved applications on a first-come, first-served basis.

What should be the loan repayment terms of the RLF?
Consider any limits to loan repayments that are dictated by statute if your RLF is established legislatively.

What would be the length of the payback periods, e.g., five years or 10 years. (The length could be a range based on objective factors.) Typically, repayment periods do not exceed the expected useful life of the financed improvements.
What would be the frequency of the loan repayments?
Would there be prepayment penalties?
Could part of a loan be repaid during the construction period, when a borrower would still be drawing down loan funds?
How would loan interest be calculated?
How would borrowers repay the loans (e.g., by check or electronic payment)?

What would be the underwriting criteria required by the fund?
The RLF would need to decide which borrowers to approve, and what criteria it should prioritize for borrower approvals. Programs could consider an applicant's independent credit ratings (e.g., Dun & Bradstreet ratings for commercial enterprises, or bond ratings for government entities), if available, or establish a minimum credit rating requirement for loan applicants.

What interest rate would the RLF charge for its loans? Would the interest rate be different based on the length of a loan?
One advantage of RLFs is that they can charge below-market interest rates, which makes them more attractive to borrowers. A State Energy Office should determine what interest rate would make the RLF attractive to potential borrowers and consider if that rate includes adequate risk premiums (protection) based on a borrower. State Energy Offices also should compare interest rates offered by the private lending market and bond markets if that is an option for borrowers in a given state.

LoanSTAR offers interest rates for its loans that are generally 2% below the prevailing Independent School District (ISD) 15-year bond rates. The current interest rate for LoanSTAR's loans is 2.5%.
Minnesota's program interest rates are required by statute to be under 6% and end up generally in the 4% to 4.5% range.

Would the RLF require projects to meet cost-effectiveness requirements (e.g., projected energy savings must equal or exceed loan payments) to qualify for financing?
RLFs should consider requiring projects to meet cost-effectiveness requirements to reduce the risk to the RLF program and borrowers. Including cost-effectiveness requirements may also reduce legislative scrutiny of an RLF. An alternative strategy that is less restrictive but more complicated is to evaluate projects using a social cost-of-carbon approach.

How would the RLF deal with delinquencies or defaults by borrowers?
Lending capital involves an element of risk, and sometimes borrowers are late in their repayments or cannot repay loans altogether. An RLF should have a system and process in place for tracking loan payments and handling delinquencies or defaults.

LoanSTAR only makes loans to public entities. The default risk for public entities is very low, which means that any defaults in the program's history have been exceedingly rare.

Would the RLF require pre-construction audits?
Some RLFs require pre-construction audits to identify cost-effective energy upgrades within potential borrowers' buildings and to establish a baseline to calculate savings. This can identify savings opportunities that borrowers may not have considered and enable deeper retrofits of their buildings, as well as validate initial borrower claims about a building.

LoanSTAR requires prospective projects to complete an investment grade audit of their facilities before it will loan capital.

Would the RLF require follow-up measurement and verification (M&V) for completed projects?
Proper M&V ensures that buildings are realizing the energy savings expected from the improvements they installed. It also can help identify defective or improperly working equipment so those improvements can be proactively repaired. M&V costs during construction can be included in a loan program. However, during the repayment portion of the loan process, M&V costs are [typically?] handled with separate contracts. M&V adds costs to a project's overall bottom line but M&V should be considered to validate savings to a borrower's overseers during the loan repayment process. Borrowers may be reluctant to utilize M&V unless they understand the benefits it brings to their projects. M&V is also a good way to document that a borrower is realizing the benefits of an improvement.

Would the program require use of State Energy Office-approved project contractors, or would building owners be free to use whichever contractors they select?

Equity Considerations

State Energy Offices and their partners may wish to consider assessing various dimensions of their RLFs, including such factors as the ability of disadvantaged and diverse individuals and communities to influence, participate in, and access the benefits of state policies and programs, and explore metrics and reporting strategies that would help illustrate the equity impacts of their RLFs. Available resources to support these actions include:

Guidance on Community Benefits Plans in Proposals for IIJA Funding
Instructions for Using the Climate and Economic Justice Screening Tool

Through NASEO's Energy Equity Committee, State Energy Offices can learn about ongoing developments and resources that support state energy equity and environmental justice goals.

When designing RLF programs, State Energy Offices can structure loans so that businesses in disadvantaged communities are well-positioned to access and receive low or no-cost financing to support or expand their operations by virtue of making energy improvements.

Determine the Program Administration Structure

Once a State Energy Office has determined the basic structure of their RLF, it should decide how it would be administered. There are three main pathways that State Energy Offices can utilize to administer an RLF: operate the fund in-house, partner with another state agency to run the RLF, or contract the RLF's administration to a third party. Each approach has its own strengths and weaknesses.

Administering an RLF within a State Energy Office allows for easier oversight of the RLF and may enable even lower fees and borrower closing costs. However, State Energy Offices may not have the staff expertise and/or capacity to effectively manage an RLF. Outsourcing the administration of an RLF to a third party can reduce the burden on a State Energy Office and free up limited staff resources for other priorities. The third party could either be another state agency with financing experience or a private administrator. However, this may make it more challenging for a State Energy Office to provide close oversight and may increase borrower closing costs. It is up to a State Energy Office to decide the best approach based on its resources and situation.

In Texas, SECO fully administers LoanSTAR within the office, while the Minnesota Energy Office partners with a CDFI to manage its RLF.
While SECO keeps LoanSTAR's available capital with the Texas Treasury, a CDFI directly handles the capital for the Minnesota RLF.

How would the RLF cover the fund's management expenses?
A State Energy Office should decide what funds are available to administratively support the RLF, if any. Typically, administrative costs are covered by dedicating a modest portion of the interest income from loans.

LoanSTAR, the largest State Energy Office RLF, has annual administrative expenses of approximately $550,000 to $650,000. These expenses cover the salaries and benefits of two full-time loan program employees as well as the cost of professional engineering consultants that review Utility Assessment Reports and monitor projects under construction at 50 percent and 100 percent completion. LoanSTAR's engineering costs are dependent on the number of projects in the investment grade audit review and construction phase. SECO operates LoanSTAR in-house and covers administrative costs with a small portion of the income from interest on loans. SECO does not charge origination fees or early payment penalty fees.
Minnesota's Trillion BTU program also folds any management fees into the overall interest rate for the loans. Outside lenders that do loans with the program pay 25 basis points on the outstanding principal at the beginning of the year as an administrative fee, which is built into the interest rate.
Many RLFs include an administrative fee per loan to cover the costs of issuing the loan. This fee can either be stand-alone or folded into the overall interest rate.
Some RLFs charge fees to cover closing costs, which can include the costs of any audits, processing, underwriting, and/or servicing activities the administrator may undertake as part of issuing a loan.

What constitutes success, and how would the RLF measure it?
A State Energy Office should consider developing performance metrics for their RLF. Potential performance metrics could include, but are not limited to:

GHG emissions reduced or eliminated;
Buildings retrofitted;
Loans issued;
Dollars invested/leveraged; and
Jobs created.

RLF Performance Metrics Comparison Table

	Texas LoanSTAR Revolving Loan Program	Minnesota Trillion BTU Program
Total loans Issued	337 (as of 9/1/2023)	279
Total funds loaned	Over $600 million	$46,832,239
CO2 emissions reductions (tons)	7,396,829 from program inception to May 31, 2024	Not available
Energy units saved	Not available	57,089,153 kWhs
Money saved	$841 million as of May 31, 2024	$4.172 million/year
Jobs created	Not available	Not available

Program In a Box

State Energy Revolving Loan Funds (RLFs)