Urban Institute
Policy Assitant

Using pay for success to address appropriations gaps

January 31, 2019 - 11:24am

A Minnesota nonprofit is considering using pay for success (PFS) to compensate for fluctuating funding streams. Rural Renewable Energy Alliance (RREAL) provides community solar power to low-income households. The organization is working towards energy self-sufficiency in low-income areas that typically rely on the federal Low-Income Home Energy Assistance Program (LIHEAP) to subsidize energy costs.

RREAL and the community solar model

RREAL is taking its model to Vermont, where it aims to set up community solar for 50 households. Instead of installing solar panels on individual houses, community solar creates a communal grid. The energy generated from the grid is then sold to offset electricity bills for multiple homes. This communal model provides more flexibility for governments to give subsidies where need is greatest in the community and is more easily integrated into a community’s energy assistance program.

Gaps in funding left by LIHEAP

RREAL's target households generally receive assistance through LIHEAP. During the 2016-17 heating season, over 26,000 Vermont households received LIHEAP. The eligibility criteria for LIHEAP establishes 150 percent of the poverty level as the maximum income level allowed in determining LIHEAP income eligibility, except where 60 percent of state median income is higher. But since appropriations for LIHEAP have declined since 2009, currently, less than one-fifth of the families eligible for energy assistance actually receive it. In Vermont, though demand has remained steady, the $19 million the state received in 2016-2017 was down from $34 million in the 2011-2012 cycle.

RREAL hopes to utilize financing models like PFS to fill the gap in Vermont and other communities until federal funding is restored.

How PFS could help

RREAL is working with state governments, utilities, and first nations to explore the possibility of using PFS. In this model, as in all PFS projects, the states would not have to pay for the energy assistance unless certain targets—such as a 5% reduction in energy assistance costs—are met. In this case, an outside funder would pay the up-front costs for the program through the pay for success project. This allows RREAL to continue improving energy accessibility and creating subsidies until LIHEAP appropriations increase.

PFS projects have scaled existing programs and evaluated newer programs, but the model can also help fund programs in areas where federal or state appropriations have declined or been cut off. Because PFS is time-limited, actors can be intentional about creating a project in years when funding subsides or disappears. Further, some federal legislation, such as the MIECHV pay for outcomes authorization, has included pay for outcomes language in part to incentivize grantees to find innovative ways to expand or enhance service delivery in settings of flat budgets.

PFS is not meant to replace core government-funded programs such as public education because governments need to continue to appropriate funds for these basic services. However, there are many federal and state level interventions and assistance programs, such as LIHEAP, that experience fluctuation in appropriation due to shifting political priorities. PFS and other innovative financing models could be viable tools to address gaps in funding for these programs. 

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