Revolving Loan Funds

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On this page:

• Examples from the Field
• Program Characteristics
• Reaching Underserved Communities and Addressing Consumer Protections
• Roles and Responsibilities
• Getting Started

Revolving loan funds (RLFs) use a source of capital, typically offered by a local or state government, to make direct loans to borrowers for clean energy projects. Proceeds from loan repayments flow back into the fund and become available to lend again. Government agencies may manage RLFs or a third-party financial institution may manage the fund and make loans on behalf of the government. In either case, the capital provider can set the loan terms and conditions. The loans are typically long-term and low-interest.¹ RLFs are effective financing tools for residential energy efficiency improvements that require high up-front capital but don’t warrant mortgages or equity line, and they are attractive to for small businesses and the “MUSH sector”— municipal and state governments, universities and colleges, K-12 schools, and hospitals – seeking access to cheap credit for building energy efficiency improvements or renewable energy projects.² By providing up-front capital, renewable energy and energy efficiency projects that may not have otherwise had access to capital are able to proceed.

RLFs can be internal or external to an organization:

• Some organizations develop their own internal RLFs to create a pool of capital for ongoing investment in their own clean energy projects, which is often called a green revolving fund (GRF).³ These programs start with a fixed pool of internal funds to pay for projects; then the fund “lends” capital internally to specific projects; and then some or all of the savings that accrue as a result of the clean energy improvements flow back into the RLF via repayments. The replenished RLF can then fund additional projects. Internal RLFs, while often considered more of an accounting treatment than a formal fund, can be an effective tool for capturing and using the energy savings from clean energy improvements to fund additional facilities investments.
• External, government-sponsored RLFs typically offer lower interest rates and more flexible terms for repayment than are available in commercial capital markets by accepting a reduced rate of return on government funds. These programs often focus on financing the cost of efficiency upgrades, such as appliances, lighting, insulation, and heating and cooling system upgrades, but can include other clean energy projects, such as renewable energy systems and electric vehicle infrastructure. Depending upon each government’s needs, capital for RLFs can come from a variety of sources, including state bond proceeds, treasury investments, ratepayer funds, and other special funds. Moreover, states have used RLFs to introduce a variety of financing tools to the market, including energy performance contracts, on-bill loans, and property assessed clean energy.⁴

Local or state governments would typically identify funding sources and establish an RLF program for their own internal use or for target community sectors with a financing partner. Some RLFs require that the loans be secured by collateral, while other programs create loan loss reserve (LLR) funds⁵ to mitigate default risk.⁶ Program administrators typically set the interest rate for RLFs by matching the rate to their own borrowing rate or by using program funds to buy down the interest rate. Loan terms are typically less than 10 years. Utilities can advertise the availability of an RLF program to their customers, but utilities typically do not take a significant role in the loan process.

As of 2022, more than 30 states have established revolving loan programs for energy efficiency and renewable energy improvements.⁷ The success of these programs has varied based on interest rates, loan terms, credit requirements, and marketing effectiveness.⁸ Some states, such as Connecticut, have RLFs specifically tailored to providing renewable energy and energy efficiency to low- and moderate-income (LMI) communities.⁹

Revolving loan funds generally share the following key features:

• They use a pool of capital from which loans can be made for clean energy projects.
• They use the proceeds from loan repayments to finance the issuance of additional loans.

Revolving loan funds may be administered by the following entities:

• State governments (e.g., energy offices) may establish an external revolving loan fund to make loans to borrowers for clean energy projects or an internal fund for public agencies. In addition, state agencies may identify a specific sector for their loans and may develop specific program criteria to serve this sector.
• Local government agencies may establish revolving loan funds. The funds can be operated as internal funds to finance public improvements or could be external revolving loan funds that may offer low-interest rate loans for area residents, businesses, or organizations.

Examples from the Field

City of Hillsboro Sustainability Revolving Loan Fund

• In 2013, The City of Hillsboro, Oregon, created the Sustainability Revolving Fund (SRF) with a $51,000 investment.
• The fund finances projects that address goals in their Sustainability Plan, which calls for a reduction of municipal facility energy usage by 60% by 2030.
• The SRF provides city departments with access to funding for internal sustainability projects. Applicants can apply for up to $25,000 for a project, which must support one or more of the sustainability goals.

Pittsburgh Green Initiatives Trust Fund

• In 2008, the City of Pittsburgh, PA, launched its Green Initiatives Trust Fund (GITF) to support a continuous pipeline of energy-saving projects.
• The city seeded the GITF with an initial deposit of $100,000. The city makes additional deposits into the fund based on savings in comparison to the 2003 baseline year.
• Savings result from reduced utility rates due to aggregated energy purchases, energy efficiency projects, and renewable energy generation.
• The city revolves those funds back into the GITF for future investment in additional projects.

Texas LoanSTAR Fund

• The Texas State Energy Conservation Office has administered the Texas LoanSTAR (Saving Taxes and Resources) Program since 1989.
• The program finances retrofits for state, public school, college, university, and nonprofit hospital facilities.
• As of May 2020, the LoanSTAR fund had provided more than $545 million to fund 325 projects, which resulted in more than $665 million in energy savings.
• The fund provides low-interest loans to assist institutions in financing energy efficiency projects and uses repayment of the loans to finance future projects.

Montana Alternative Energy Revolving Loan Program

• Montana’s Alternative Energy Revolving Loan Program, established in 2001, provides low-interest loans to Montana homeowners, small businesses, nonprofit organizations, and government entities to install renewable energy systems.
• Air quality penalties collected by the Montana Department of Environmental Quality fund the program. Penalties are limited to $10,000 for each violation.¹⁰
• Property owners participating in the program must use renewable energy on site but may use net-metering programs.

The University of Vermont Energy Revolving Fund

• The University of Vermont (UVM), because of its commitment to the Sustainable Endowment Institute’s Billion Dollar Green Challenge, established a revolving loan fund to finance on-campus energy efficiency improvements.
• UVM earmarked $13 million for the Energy Revolving Fund.
• To be eligible, projects must have a payback period of no more than seven years and cost no more than $3 million.

EnergizeCT Health and Safety Revolving Fund

• The Connecticut Green Bank received funding from Connecticut’s Department of Energy and Environmental Protection to fund the EnergizeCT Health and Safety Revolving Loan Fund.
• The fund focuses on health and safety remediation measures, such as the removal of mold or asbestos, that must be completed in tandem with energy upgrades.
• The Fund offers low-interest and long-term loans of up to $300,000 to owners of multifamily housing projects where at least 60% of the units serve LMI residents.

Program Characteristics

Here are the typical characteristics of revolving loan funds.

Program types	Internal RLFs; external RLFs
Target sectors	Commercial; Industrial; Residential: Homeowners; Public; Nonprofit
Potential funding sources	Public funds or bonds
Security required of borrower	Varies; may require a Universal Commercial Code Filing
Repayment mechanism	Monthly or quarterly repayment to the RLF
Funding needs	Typically, sponsors must provide a moderate level of funding to make the program successful for a large number of participants
Enabling legislation requirement	Not required

Reaching Underserved Communities and Addressing Consumer Protections

When developing a financing program, considering the needs of underserved communities early in the process can help decisionmakers create a comprehensive financing program and incorporate consumer protections. Decisionmakers can evaluate how and to what extent marginalized communities and considerations of equity have been included in the policymaking process for developing a financing program by considering the following questions:¹¹

• Have marginalized communities participated meaningfully in the policymaking process?
• Does the policy help address the impacts of inequality or inequity, or does it widen existing disparities?
• What are the barriers to more equitable outcomes?
• How will the policy increase or decrease economic, social, and health benefits for marginalized communities?
• Does the policy make clean energy more accessible and affordable to marginalized communities?

Many of the financing programs covered in this Clean Energy Financing Toolkit for Decisionmakers resource can provide specific benefits to underserved communities through increasing access to clean energy (e.g., lower energy bills, upgraded equipment, improved comfort). However, financing programs that put additional debt on customers could place LMI households at an increased risk if adequate consumer protections are not in place. For example, customers could face penalties for failing to repay program funds, including having their power shut off, adverse credit scores, and in some instances losing their homes. Decisionmakers can implement consumer protection frameworks to address these concerns, including increasing awareness, analyzing the applicant’s ability to pay, and requiring disclosure of financing costs. Considerations for consumer protections are specific to each program.

RLFs can offer low-interest loans with favorable terms that helps overcome high initial costs for LMI borrowers to invest in energy efficiency and renewable energy with minimal risk and low payments. If an RLF requires analysis of a borrower’s credit history, it may limit access to funding for some LMI borrowers.

Roles and Responsibilities

State and local governments can implement and operate revolving loan funds. Agencies would typically begin by identifying a source of funding and then establishing a program either for internal use or for targeted sectors. As state or local agencies implement a revolving loan fund, the government determines eligibility criteria, loan terms, and repayment mechanisms. State and local governments may issue loans and monitor repayment or may contract with a third party to administer the fund. If the revolving loan fund is implemented at the state level, local governments can partner such as by advertising the availability of funding to local businesses and residents.

Utilities and other third parties usually play a limited role in the implementation and operation of RLFs. Utilities may advertise the financing opportunity to their customers or, less commonly, collect loan repayments via customer utility bills.^12,13 As noted above, third parties may play a role as a program administrator when state or local entities decide to contract out this responsibility.

Getting Started

State and local governments should consider these steps and best practices during the design, approval, and management of an RLF:

References and Footnotes

¹ National Association of State Energy Officials. 2022. State Revolving Loan Funds and Credit Enhancement Mechanisms.

² U.S. Department of Energy. n.d. Revolving Loan Funds.

³ U.S. Department of the Energy Green Revolving Funds.

⁴ National Association of State Energy Officials. 2022. State Revolving Loan Funds and Credit Enhancement Mechanisms.

⁵ Local and state governments commonly use LLR to provide partial risk coverage to lenders—meaning that the reserve will cover a pre-specified amount of loan losses. For example, an LLR might cover a lender’s losses up to 10% of the total principal of a loan portfolio.

⁶ U.S. Department of Energy. n.d. Revolving Loan Funds.

⁷ National Association of State Energy Officials. 2022. State Revolving Loan Funds and Credit Enhancement Mechanisms.

⁸ U.S. Department of Energy. n.d. Revolving Loan Funds.

⁹ Connecticut Green Bank. n.d. EnergizeCT Health & Safety Revolving Loan Fund.

¹⁰ Montana Code Annotated. 2019. Title 75. Environmental Protection, Chapter 2. Air Quality, Part 4. Enforcement, Appeal, and Penalties.

¹¹ Governments, agencies, and nonprofits have developed equity lenses and frameworks to ensure that issues of race and equity are incorporated throughout policy-making processes. These questions draw from the following frameworks: Institute for Energy Justice, “Section 2 – Energy Justice Scorecard”; City of Seattle, “Racial Equity Toolkit”; and Higher Education Coordinating Commission, “Oregon Equity Lens.”

¹² Colorado Energy Office. Colorado Energy Office Launches Statewide Residential Energy Loan.

¹³ City of Fort Collins. Epic Home Loans.