Hawaii raised $150 million via the bond market for its Green Energy Securitization (GEMS) program in November 2014 but the program’s latest quarterly report shows that this money has yet to reach its intended recipients: lower income homeowners and renters.

GEMS was marketed as a way to provide low-cost capital to finance solar photovoltaic systems and other clean energy improvements for those who may otherwise have difficulty obtaining financing for these projects.

However since the program’s launch in November 2014, not a single loan has been made, according to an editorial published on the website of the Heartland Institute and authored by a senior fellow at the National Center for Policy Analysis, H. Sterling Burnett. As of Sept. 30, 149 loan applications had been completed; 43 applications came from non-profit organizations, 41 of which were classified as “under review,” while two were declined. Another 106 came from residences, 35 of which were declined, five withdrawn, and 66 remain listed as “under review.”

For bondholders, the slow take-up of GEMS has not impacted cash flow. That is because the securitization has a rate reduction featureg. The cash flow supporting the GEMS bond is generated by payments from all electric customers in Hawaiian Electric Company’s service area. 

Similar to rate reduction bonds, GEMS transactions employ a “true-up” to protect bondholders from fluctuations in collections. These “true-ups” adjust the green infrastructure fee to ensure collections are sufficient to provide all scheduled payments of principal and interest, pay fees and expenses and replenish the debt service reserve account. 

In October, Fitch Ratings affirmed the ‘AAA’ ratings on the bonds. The rating agency said at the time that the bonds were performing in line with expectations, “with levels of outstanding principal in-line with their targeted amortization schedules and no shortfalls in the capital subaccount. Additionally, the true-up mechanism continues to provide adequate credit support for all outstanding classes.”

Fitch, in its October review, conducted an analysis that provides an alternative means to measure the potential effects of rapid, significant declines in customers while capping the residential GIF at 20% of the total residential customer bill. This analysis determines the maximum level of customer decline that would cause a default in required payments on the securitization or cause the GIF to exceed 20% of the total residual customer bill. “Despite this severe decline, due to the true-up mechanism, GIFs are able to pay all debt service by the legal final maturity date,” the report states.

However, one major difference between traditional rate reduction bonds and GEMS is that true-ups are based on the number of customers instead of the electricity usage of each customer. This creates the “remote” risk that if ratepayers, put off by rising tariffs, decide to self-generate with clean energy technologies, cash flows to the bonds would be reduced.

Burnett’s report indicates that running GEMS has cost electric ratepayers more than $15 million since November of 2014 without impacting the states’ green energy build out target (Hawaii has set a goal of 70% green energy by 2030). A worksheet from Hawaiian Electric covering the period of December 2014 through June 30,  2015 indicates the company anticipated collecting more $7.9 million in GIF from utility customers, 45% from residential ratepayers, with the entire amount slated to pay principal and interest on the GEMS bonds. In addition, by the end of 2015, the utility will need to collect $7.9 million more to fulfill “revenue requirements” for GEMS.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.