U.S. Department of Energy Energy Efficiency and Renewable Energy

Glossary of Terms

The glossary features an alphabetical listing of terms used in this guide.

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1603 Grant
For nearly all technologies and project types that qualify under either the Production Tax Credit  or the Investment Tax Credit , section 1603 of the American Recovery and Reinvestment Act of 2009  provides funding to reimburse applicants for a portion (either 10% or 30%) of the cost of eligible property under the Internal Revenue Service Code.
A "C" Corporation
Corporations that are taxed as a stand-alone entity, meaning earnings may be subject to “double taxation” (once at the corporate level and again as dividends to the owners). C corporations may be able to obtain credit without the owner’s personal guarantee if the corporation has done so in the past for a similar or larger lending amount and can show profitability and a strong balance sheet. However, most small business C corporations are required to give the personal guarantee of the owners in order to obtain financing, especially when the owner is needed to run the business.
A Sub-Chapter S Corporation
A Sub-chapter S corporation is not considered a tax paying entity (like a C corporation) and passes all profits (and losses) on to the owners.
Accelerated Depreciation for Onsite Generation Equipment
Under the Federal Modified Accelerated Cost-Recovery System (MACRS), businesses may recover investments in certain energy property through accelerated depreciation deductions. MACRS establishes “class lives” for various types of property, and a number of renewable energy properties (systems) are classed as 5-year properties. They include solar-electric and solar thermal property, wind property, geothermal property, combined heat and power equipment, fuel cells, and microturbines. If the property is leased to an Ineligible Entity, however, it is subject to an alternative (longer) depreciation schedule.
ASHRAE Level I Audit
Walk-through Analysis; Brief review of building systems with primarily qualitative results.
ASHRAE Level II Audit
Energy Survey and Engineering Analysis;
Includes identification of energy efficiency measures with estimates of energy and cost savings for capital projects.
ASHRAE Level III Audit
Detailed Analysis of Capital-intensive Modifications; Includes more detailed calculations based on monitored end-use data or hourly building simulations. Also includes more detailed project specifications for retrofits.
Bank Capital
Banks can invest their own depository capital in clean energy lending projects if the banks feel that the return is sufficient, given their understanding of the risk involved in the investment.
Bonds
Bonds consist of many different types of funds. Some of the more common types of bonds are tax-exempt bonds that can fund investments in government facilities or, subject to many limitations, investments in certain private activities. Those are known as private activity bonds. Another category is tax credit and tax subsidy bonds, the proceeds from the sale of which can be used to fund some energy efficiency and renewable energy projects. Qualified Energy Conservation Bonds are one such example.
Bullet Bonds
A noncallable, regular coupon-paying debt instrument with a single repayment of principal on the maturity date. Issuers of bullet bonds pay only interest during the life of the bond and pay all of the principal back at maturity.
Callable Bond
A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called. It is also known as a "redeemable bond."
Call Provision
A provision on a bond or other fixed-income instrument that allows the original issuer to repurchase and retire the bond(s). If there is a call provision in place, it will typically come with a time window under which the bond can be called; and a specific price to be paid to bondholders and any accrued interest are defined. Callable bonds will pay a higher yield than comparable noncallable bonds.
Capital Provider
Manages capital source funds.
Capital Source
The capital source provides the funding to pay for clean energy projects.
CDFIs
CDFIs are Community Development Financial Institutions,  nonprofit lenders that aggregate lending capital from a mix of federal or state government, foundation, and private capital sources and relend that money to targeted groups.
Community Reinvestment Act (CRA) Funds
Commercial financial institutions often meet their regulatory responsibilities under the federal CRA by placing funds at a low interest rate with CDFI lenders. Like foundation program-related investment funds, CRA investments often earn a below-market rate of 2% to 3%. In turn, CDFI lenders are expected to lend these funds at this same low rate plus a small interest rate spread that typically ranges from 2% to 3%.
Corporations
Corporations are considered natural persons under the law and can enter into their own contracts (including loans). A corporation’s legal exposure is limited to its balance sheet, which excludes the owner’s personal assets.
Credit Enhancements
A credit enhancement is anything that improves the chances that financing will be repaid to the capital provider. Sometimes a credit enhancement involves setting aside some American Recovery and Reinvestment Act funds to cover potential losses in case of nonpayment. A credit enhancement can take one of several forms: loan loss reserves, loan guarantees, loan loss insurance, debt service reserves, and subordinated/senior capital structure.
Credit Unions
Credit unions are nonprofit organizations with a charter to serve the financial needs of specific parts of a community, such as an employer group, a group of graduates of a particular college, or some other defined group of people.
Credit Union Capital
Like banks, credit unions invest their capital in projects for which they feel the return will justify the risks as they understand them. Credit unions tend to be smaller than most banks and often more closely tied to particular communities or constituents. Credit unions may also have less capital to lend and a smaller network of branches than the large banks.  
Davis-Bacon Act
Section 1606 of the Recovery Act specifically requires that all laborers and mechanics performing work on any project “funded directly by or assisted in whole or part by” Recovery Act funds be paid prevailing wages as determined by the Secretary of Labor.
Debt Service Reserve Fund (DSRF)
A DSRF covers bond debt service (i.e., payments made to bond investors) in the event of late payments or defaults by participants. This is typically an amount set aside with a trustee.
Debt-to-Income Ratio
Debt-to-income (DTI) ratio is calculated using total debt service and gross income. A typical ratio is 40%; but grantees can argue for and some FIs have agreed to higher DTI ratios, given the fact that energy cost savings from the EE/RE project will improve the homeowner’s ability to pay their principal and interest obligations. In some markets, the acceptable DTIs are as high as 45% to 50% for residential EE loans.
Emissions Allowance Revenues
States that receive revenues from their participation in a cap and trade structure (e.g., the Regional Greenhouse Gas Initiative can use those funds to seed clean energy finance programs.
Energy Audit
The process wherein an expert reviews a property’s current energy usage, conducts an onsite inspection of the property and its systems (e.g., lighting, HVAC, processes, etc.), and makes recommendations for reducing energy usage.
Escrow Account
An account into which the Recovery Act grantee deposits the loan loss reserve funds. Rules for disbursements of funds from the reserve account are defined up front and tied to the definition of “Loss” and “Event of Loss.” These accounts can be held by the same FI that is doing the lending, but the rules for transfers and disbursements have to be clear and unambiguous. The FI assumes responsibility as a fiduciary for applying the rules.
FHFA
Federal Housing Finance Agency; the regulator over Fannie Mae and Freddie Mac, which are the government-sponsored enterprises chartered by Congress with a mission to provide liquidity, stability, and affordability to the U.S. housing and mortgage markets.
First Lien Position
A lien on property, in the form of a first mortgage lien or a tax lien, establishes the right of the lien holder (almost always the lender) to make a claim on the proceeds from the sale of foreclosed property. The best lien position to be in is “the first priority lien.” It means that, if a bank holds a mortgage on a home for $250,000 and a foreclosure sale yields $270,000, then the bank with its first position lien gets the full $250,000 and any other creditors (lenders) in second or third position must fight for the remaining $20,000. This would include the lenders who provided capital for clean energy improvements and are not in that first lien position.
First Losses
These are the losses on individual loans covered by a loan loss reserve. Typically, a loan loss reserve covers first losses up to a prespecified amount, and the partner financial institution covers all other losses. 
Fixture Filings
In the event of foreclosure, UCC-1 Filings allow the entity that holds a loan to repossess the property/equipment that has been financed.
General Partnership
A general partnership in civil law refers to the participation of two or more individuals in a common business activity. Individuals are personally liable.
Government Lenders
Government lenders can include state energy offices, or state-chartered finance authorities, or their local government equivalent.
Interest Rate Buydown
A reduction in the interest rate that will be paid by borrowers as a result of an up-front payment by a grantee to the lender. This up-front payment is based on the difference between the sum of all principal and interest payments that a lender would be projected to receive at the market-based interest rate and the sum of payments that the lender would receive from the target (incentivized) interest rate—adjusted for the time value of money. 
Investment Tax Credit
The Investment Tax Credit in section 45 of the Internal Revenue Service Code is available for EE/RE improvements. It is equal to 30% of the value of the capitalized basis costs to develop, design, build, and install systems that— 1. Use solar energy to generate electricity, or to heat, cool, (or provide hot water for use in) a structure (building), although heating swimming pool water does not qualify. 2. Consist of fuel cell property with nameplate capacity of at least 0.5 kW and an electricity-only efficiency of at least 30% (up to $1,500 per 0.05 kW of capacity). 3. Consist of small wind property with a nameplate capacity of 100 kW or less; or 4. Use fiber optic distributed sunlight to illuminate the inside of a structure.

Also available is an ITC equal to 10% of the value of the capitalized basis costs to develop, design, build, and install systems for the following types of energy property: (1) geothermal electric systems, (2) micro-turbines (stationary plant of less than 2 MW with an electricity-only efficiency of 26%), (3) combined heat and power systems, and (4) geothermal heat pumps. 
Investment-Grade Audit (IGA)
A very rigorous audit, typically undertaken to evaluate a potential upgrade to a facility's energy infrastructure wherein it must compete for capital funding with nonenergy-related investments. The projected operating savings from the implementation of the project must be developed such that they provide a high level of confidence.
Leasing and Lease Financing
A lease is in essence an extended rental agreement under which the owner of the equipment allows the user to operate or otherwise make use of the equipment in exchange for periodic lease payments. In leasing terminology, the owner is the “lessor,” and the user is the “lessee.” Equipment leasing is particularly favored by many small businesses, which often have fewer options because of limited capital. The two primary types of leases are operating and long-term or "capital" leases. Operating leases are characterized by short-term, cancelable terms; the lessor bears the risk of obsolescence and enjoys such benefits as depreciation, including, if applicable, accelerated depreciation. Those leases are generally preferable when the company needs the equipment for a short period of time. Under the usual terms of operating leases, a lessee can usually cancel the lease, assuming prior notice, without a major penalty. Long-term, "capital," non-cancelable leases, also known as full payout or financial leases, are sources of financing for assets the lessee company wants to acquire and use for longer periods of time. Most financial leases are "net" leases, meaning that the lessee is responsible for maintaining and insuring the asset and paying all property taxes, if applicable. Financial leases are often used by businesses for expensive capital equipment.
Leverage
Leverage refers to the amount of private capital that a grantee might attract to a clean energy financing program by offering a loan loss reserve or other credit enhancement. Leverage can also refer to the total amount of EE/RE project investment that a grantee can support with its lending program.
Limited Partnership
This is a form of corporation wherein financial exposure (liability) is limited to the assets of the Limited Partnership and the general partner.
Liquidity
Refers to the ability to sell a loan or a loan portfolio to an investor. A lack of liquidity means that lenders who make loans must hold on to those loans until they mature. 
Loan Guarantee
A loan guarantee covers the entire amount of a capital provider’s potential losses on a portfolio of loans. A guarantee differs from a loss reserve fund because it is not capped at the amount of money set aside in the reserve. Federal statute does not allow State Energy Program or Energy Efficiency and Conservation Bond Grant funds (and by extension Recovery Act funds) to be used as a loan guarantee. The federal government provides loan guarantees through the U.S. Departments of Agriculture and Energy, as well as several Small Business Administration programs.  
Loan Loss Insurance
Loan loss insurance is a private insurance product that lenders can purchase or a grantee can purchase on behalf of a lender. Loan loss insurance is similar in some respects to a loan loss reserve in that the insurance covers a portion of the total losses (in case of no repayment), up to some capped amount. The difference is that instead of setting funds aside in a reserve account to cover the losses, the grantee or lender pays an insurance premium to a private insurer. Loan loss insurance is not easy to secure at the moment. 
Loan Loss Reserve Fund (LRF)
A loan loss reserve fund provides partial risk coverage to lenders—meaning that the reserve will cover a prespecified amount of loan losses.
Loan Tenor
The length of a loan, from loan closing until its maturity.  
LRF Agreement
An agreement between the financial institution partner(s) and the Recovery Act grantee, which addresses the deposit and use of the loan loss reserve fund monies.
OCC
Office of the Comptroller of the Currency, the main regulator of national banks; OCC policies and regulations can affect commercial lending.
Off-Balance Sheet
This term describes a case in which assets or liabilities do not appear on the balance sheet, and the business owner can treat the entire financing payment as a business expense. Treatment as an off balance sheet item reduces the business’ taxable profit and, consequently, its tax liability. Off balance sheet treatment also typically means that energy projects do not trigger restrictive lender covenants that may prohibit businesses from assuming new debt obligations.  
On-Bill Repayment
On-bill repayment means that the principal and interest notification (the amount due) appears on the monthly utility bill of the entity responsible for paying the utility bill, and the borrower repays the principal and interest as part of the regular utility bill payment.
PACE
The property-assessed clean energy (PACE) model is an innovative mechanism for financing energy efficiency and renewable energy improvements on private property—commercial or residential. PACE programs allow local governments, when authorized by state law, to fund energy improvements on commercial and residential properties.
Pooled Bond
In the pooled bond approach to financing clean energy projects, loan applicants submit their applications, and those applications are accepted and aggregated. Applications can be approved during this aggregation period, but are not given permission to proceed to implementation. When a sufficient pool of requested project funding has been assembled, then a bond is sold to cover and fund all the included projects.
Power Purchase Agreements
A legal contract between an electricity generator (provider) and a power purchaser (host). The power purchaser purchases energy, and sometimes also capacity and/or ancillary services, from the electricity generator. Such agreements play a key role in the financing of independently owned (i.e., not owned by a utility) electricity generating assets.
Production Tax Credit
Renewable electricity Production Tax Credits  in section 45 of the Internal Revenue Code are available for the domestic production and sale of electricity from qualified sources and are equal to either $0.022/kWh ($0.015 adjusted for inflation each year; $0.022/kWh is the current value), or half that amount for certain types of power-producing systems during their first 10 years of operation.
Qualified Energy Conservation Bonds (QECBs)
QECBs are debt instruments; they are not grants. “Qualified issuers” can issue QECBs to fund “qualified energy conservation projects.” These bonds may be structured as either a “tax credit” bond in which the bondholder receives a tax credit as a part of its return together with taxable interest, or a “direct payment subsidy option” in which the bondholder receives taxable interest and the issuer receives a direct subsidy (Direct Payment) from the U.S. Treasury for a portion of the interest paid to the bondholder. Virtually all QECBs are expected to be issued using the direct payment subsidy due to the relative benefits of these options and the lack of investor appetite for tax credit bonds.
Qualified Energy Conservation Project (under QECBs)
QECBs may be used to fund capital expenditures for the following conservation purposes/projects: 1. Reducing energy consumption in publicly owned buildings by at least 20%. 2. Implementing green community programs (including loans grants or other repayment mechanisms). 3. Developing rural capacity, specifically involving the production of electricity from renewable energy resources. 4. Improving any “qualified facility,” including for example, solar, wind energy, geothermal, and biomass facilities. 5. Supporting research facilities, research grants, and research in the 6. Implementing mass commuting and related facilities that reduce energy consumption and pollution. 7. Designing/Running demonstration projects designed to promote the commercialization 8. Launching public education campaigns to promote energy efficiency.
Qualified Issuer (under QECBs)
A qualified issuer is a state, local, or tribal government that has been allocated the right to issue QECBs by the federal government. Local governments include municipalities and unincorporated counties. Under the federal tax rules, certain authorities may issue the QECBs on behalf of state, local, and tribal governments.
Qualified Tax Credit Rate (QTCR)
The QTCR is set daily by the U.S. Treasury.
Residential Tax Benefit
A number of federal tax benefits are available for individual taxpayers installing energy efficiency and renewable energy equipment in their homes. Individual taxpayers purchasing or installing home envelope or home heating/cooling equipment may qualify for a tax credit equal to 30% of the cost of eligible equipment up to a $1,500 tax credit per home.
Secured Loan
A secured loan is a loan in which the borrower pledges some asset (e.g., a car or property) as collateral for the loan. In the residential sector, such loans are typically in excess of $15,000. Almost all loans outside the residential sector are secured. 
Serial Bonds
Serial bonds are structured so that a portion of the bonds matures at regular intervals (thus both interest and principal are paid back throughout the life of the overall bond).  
Soft Lien/Lien at the Meter
The threat to disconnect utility service in the event of nonpayment of the utility bill.
Sole Proprietorship
A type of business entity in which there is no legal distinction between the owner and the business. Profits (and losses) go directly to the owner and are reported on his/her personal income tax returns.
Specialized Lenders
Nonbank finance companies that have access to capital from a variety of sources. Examples include the three Fannie Mae-qualified energy efficiency loan program lenders and the Electric & Gas Industries Association (EGIA).
Subordinated/Senior Capital Structure
A subordinated/senior capital structure allows two types of capital to be placed into a loan. The first one, subordinated capital (which could be provided by a grantee using ARRA funds), absorbs the potential first losses on a loan and might be set at 10% of the total loan amount. The second one, senior capital, does not absorb any losses until the subordinated capital is exhausted. This structure acts in some ways like a loan loss reserve and serves to attract the senior capital because the subordinated capital takes on the majority of the risk.
Tax or True Lease
A lease with a true “fair market value” purchase option, essentially a long- term rental agreement.
Tax-Exempt Bond
A bond, issued by a municipal, county, or state government, whose interest payments are not subject to federal income tax, and sometimes not subject to state or local income tax.
Term Bonds
Term bonds are similar to bullet bonds as the issuer pays only interest to the investor during the life of the bond—the difference is that term bonds can be structured to include call provisions. Call provisions give the bond issuer the right to purchase (or call) part or all of a bond issue at specified times. Whether call provisions are included in a bond’s structure is a matter of negotiation between the bond issuer and investor.
Truth in Lending Act
The Truth in Lending Act is contained in Title I of the Consumer Credit Protection Act (CCPA, 15 U.S.C.A. § 1601 et seq.). The CCPA is designed to assure that every customer who needs consumer credit is given meaningful information concerning the cost of such credit. The Truth in Lending Act requires that the terms in transactions involving consumer credit be fully explained to the prospective debtors. It sets forth three basic rules: (1) A creditor cannot advertise a deal that ordinarily is not available to anyone except a preferred borrower; (2) Advertisements must contain either all of the terms of a credit transaction or none of them; and (3) If the credit is to be repaid in more than four payments, the agreement must indicate, in clear and conspicuous print, that "the cost of credit is included in the price quoted for the goods and services." This law does not impose regulations on the advertising media, only on the prospective creditor. This Act is sometimes called Regulation Z or TILA.   
Unsecured Loan
Unsecured loans are loans that are not secured against the borrower's assets.
Vendor Sales
Many large equipment vendors offer financing programs to help promote the sale of their equipment. This is often handled through captive financing companies (a finance company generally owned by a manufacturer and occasionally a large distributor) at attractive rates.