Energy Exchange

$4 Billion Of Private Investment In Energy Efficiency Projects Announced Today

By Brad Copithorne / Published: December 2, 2011

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In an era of fiscal austerity, government’s options to create change are frequently limited.  The Obama administration did not let this roadblock slow them down today when they announced $4 billion of private sector investment in energy efficiency projects as part of their Better Buildings Challenge.  This builds on a $500 million financing commitment made in June by Abundant Power, Citi, Green Campus Partners, Metrus Energy, Renewable Funding and Transcend Equity.  The Clinton Global Initiative also played a key role in corralling these commitments.

Half of the $4 billion of investment will be in federal buildings using performance contracts.  Under the standard terms of a performance contract, an energy services company (“ESCO”) designs and executes an energy efficiency upgrade for a building.  The ESCO then provides a guarantee that this upgrade will reduce energy consumption by a certain amount per year and the building owner signs a long-term lease for the project where the annual lease payments are less than or equal to the guaranteed savings.  At the end of the lease, the building owner gets all of the future savings.  This is a win-win-win solution for taxpayers, our economy and the environment.

The remaining $2 billion commitment is divided between the six financial firms from the June announcement as well as several new participants.  These firms are using a wide variety of innovative financial techniques to infuse capital into attractive projects (I highly recommend reading the full White House press release). EDF is working closely with many of these firms to develop new innovations and we’ve been very impressed with the talent, energy and financial commitment currently focused on this issue.

Posted in Energy Efficiency, Washington, DC / Read 1 Response

Innovations In Energy Efficiency Finance Conference

By Brad Copithorne / Published: September 22, 2011

By: Brad Copithorne, EDF’s Energy & Financial Policy Specialist

Earlier this week EDF and Citi co-hosted a successful conference on energy efficiency (EE) finance at Citi’s headquarters in Manhattan.  This is the third similar conference that Citi has hosted.  Four years ago, they had 10 people in a conference room.  Two years back, it was 40 participants.  This week, we were standing room only in a 200-seat venue.  More importantly, however, was the diverse makeup of the audience, including bankers, real estate owners, EE project developers, financial sponsors, government agencies, foundations and nonprofit organizations.  We are optimistic that this high level of interest indicates that we are close to a tipping point in toward the successful development of this market.

Some of the interesting transactions discussed included:

Public Buildings – Nobel Prize winner, John Byrne, explained an innovative structure that he developed and executed with Citi to aggregate, manage and finance $73mm of EE projects for public buildings in Delaware.  Citi is looking to expand this approach in other states.  (We hope to have a future blog post with many more details about this idea.)

Unsecured Loans – Cisco Devries of Renewable Funding discussed how he is working to aggregate a portfolio of unsecured consumer EE loans and how, to date, these loans seem to show much lower default rates than would be expected.  Several speakers at the conference discussed the importance of getting data on EE loan performance and we understand that there are several efforts in place to collect this data.

Energy Services Agreements – Green Campus, Serious Capital, Transcend, Metrus and Sustainable Development discussed their efforts to further develop this market.  We are hopeful for several favorable announcements in the near term.

Measuring and Managing EE Project Performance – Mary Barber of EDF described our project to create protocols to estimate future energy savings so that lenders and other investors can make informed investment decisions.  Angela Ferrante of Energi talked about an insurance contract that will guarantee the energy savings for a project.

On-Bill Repayment – Jeff Pitkin of NYSERDA described New York’s innovative plan to provide low-cost loans to consumers for EE projects.  The loans would be repaid through the customer’s utility bill.  Credit would be improved because nonpayment would eventually result in shut off of power.  Additionally, the obligation will stay with the meter if the customer moves.  I discussed a similar plan that we hope to implement in California.  We hope that the California strategy will work for commercial and multi-family in addition to single family homes.

Philanthropic Capital – Margot Brandenburg of Rockefeller Foundation, Jessica Boehland of Kresge Foundation and John Goldstein of Imprint Capital discussed how targeted investments for mission driven investors can help seed the market for EE finance. 

Lessons for Solar Project Finance – Michael Mittleman of SolarCity and Marshal Salant of Citi described the very long effort that was required to make solar projects viable for financing.  Currently, billions of dollars of solar projects are financed each year and the market is expanding rapidly.  They (and we) are hoping that we will have similar near term success in EE finance.

We want to express appreciation to Citi for co-sponsoring this week’s successful event.  Citi has committed significant resources to developing this market well before there is a likelihood of near term returns.  We recognize that this type of commitment is not easy to make in a difficult economic environment with shareholders primarily focused on quarterly earnings releases.

Posted in Energy Efficiency, New York / Read 2 Responses

Using Financial Innovation To Break Down Barriers to Energy Efficiency Upgrades – Part 2: Residential Buildings

By Brad Copithorne / Published: September 15, 2011

Energy Efficiency Financing Blog Series

By: Brad Copithorne, EDF’s Energy & Financial Policy Specialist

In Part 1 of this blog series, we examined how several innovative companies have developed a structure to finance energy efficiency projects in commercial buildings.  This structure, an Energy Services Agreement (ESA), provides building owners access to capital, solves the split incentive issue and eliminates exposure to performance risk on the project.  In Part 2, we examine another innovative financing solution that will provide capital to residential projects.

McKinsey recently estimated that there is over $225 billion of available cost effective energy efficiency investment opportunities available in the residential sector.  If these investments are made, energy consumption in the residential sector will decline by 28% by the end of this decade.  Unfortunately, most homeowners do not have access to low-cost sources of capital to pay for the upfront costs of the retrofits.

On-Bill Repayment

On-bill repayment (OBR) programs allow customers to repay third-party loans for energy efficiency and renewable energy investments through their utility bills.  Utility bills generally have very low default rates because nobody wants their power turned off.   Loans tied to the utility bills should also have low default rates which will allow lowered costs for borrowers and increased availability of credit.

During the past decade, various utilities have successfully piloted more than a dozen on-bill finance programs.  These programs have used utility, ratepayer, public or mission-driven capital which has greatly limited scalability.  An OBR program, on the other hand, uses entirely third party capital from profit motivated investors such as banks.  Since this is a much larger pool of capital, the supply of funds will increase to meet demand.

Based on extensive consultation with key stakeholders, including banks, the three California investor-owned utilities, project developers and others, EDF believes that an OBR program can be successfully launched statewide in California using entirely private capital, and provide building owners with low-cost funding for energy efficiency and renewable projects.   EDF is currently in discussions with California utilities and regulators on creating an OBR program for the state.

EDF estimates that a statewide OBR program that would generate $2.7 billion of annual investment in energy efficiency and renewable projects.  Over 20,000 installation jobs would be created and after 5 years, annual CO2 emissions would decline by 7 million tons.

On-Bill Repayment: Step By Step

  • Approved contractors and utilities identify projects, and then help building owners apply for a loan to pay for upgrades. 
  • The contractor provides the homeowner with an estimate of the expected monthly energy savings and up-front upgrade costs.  
  • If the loan is approved by a 3rd-party lender, the contractor will execute the project. 
  • Expert, objective inspectors (managed by either the utility or a government entity) validate the estimate of projected savings and that the upgrades are properly installed. 
  • Homeowners pay a combined monthly bill for both energy and loan repayment.  The program would require that savings exceed debt service, so the customer would see a reduction in their monthly utility bill.

Example: Homeowner

Current utility bill: $350 per month
Investments: Solar panels, duct sealing, controls and new refrigerator
Expected utility bill savings: $225 per month
Investment loan: $20,000
Loan terms: 
–          Interest rate on loan: 6.25%
–          15 years repayment schedule
–          Monthly payment: $170

Utility bill after retrofit:  $125
Utility bill + loan payment:  $295

Savings: $55 per month (savings will grow as utility energy rates increase)

Program Terms

  • Any building with a meter would be eligible including commercial, industrial, public, multifamily and single family residential buildings.
  • Eligible measures would include approved list of renewable and energy efficiency projects.
  • Contractors and lenders would be subject to pre-approval.
  • Projected first year savings would need to exceed debt service by a comfortable margin. 
  • Lender would have no ability to request a customer disconnection but partial bill payments would be allocated proportionally between lender and utility.  The utility would follow all standard disconnect procedures.

Innovations In Energy Efficiency Finance

Next week EDF and Citi are co-hosting a conference for institutional investors, real estate owners and project developers on energy efficiency finance.  Both ESAs and on-bill repayment will be discussed extensively.  Our next blog post will report on the outcomes of the conference.

Posted in Energy Efficiency / Tagged , | Read 2 Responses

Using Financial Innovation To Break Down Barriers To Energy Efficiency Upgrades – Part 1: Commercial Buildings

By Brad Copithorne / Published: September 12, 2011

Energy Efficiency Financing Blog Series

By: Brad Copithorne, EDF’s Energy & Financial Policy Specialist

Energy efficiency is the fastest, most cost-effective way to reduce greenhouse gas (GHG) emissions in the United States.  In many cases, energy efficiency (“EE”) projects can provide extremely attractive financial returns.  Using data from a 2009 McKinsey study, EDF estimates that there are at least $40 billion of investment opportunities for EE projects in commercial buildings that will provide annual returns in excess of 20%.  Despite this attractive potential, few of these EE projects are being funded in commercial buildings.

Over the past 12 months, EDF has engaged in an extensive dialogue with dozens of key industry participants to determine the barriers that are preventing development of this market.  We spoke with leading owners of real estate, lenders, institutional investors, EE project developers, academics and other nonprofits.  Based on this work, EDF has identified three primary market barriers that are preventing investment in EE projects for commercial buildings (for further details, see our recent white paper Show Me The Money: How Energy Efficiency Financing Makes Dollars And Sense):

1)     Lack of debt capacity – Most commercial buildings cannot borrow additional funds and/or have a first mortgage that includes a limitation on additional indebtedness that prevents incremental borrowing.

2)    Split incentives – Under the terms of most commercial leases, tenants pay for many operating expenses including energy costs.  Landlords, however, must absorb most capital expenses.  For an EE project this may mean that the landlord pays for the project but tenants capture the bulk of the savings.

3)    Lack of confidence in projected energy savings – Many building owners and lenders are skeptical that EE projects will achieve projected energy savings.


Energy Services Agreement – Part of the Solution

EDF has been working closely with several entrepreneurs to develop and promote a financing structure that may solve the debt capacity, split incentive and projection of savings barriers.  The structure, known as an Energy Services Agreement (“ESA”), allows an investor to agree to provide energy to a building at a price based on the building’s historical costs.  The investor pays for EE upgrades and then uses the savings to provide a return on investment.

For example, imagine a building that currently pays $100,000 per month for electricity and an investor that spends $2MM to reduce the monthly expense to $60,000.  The investor collects the $40,000 in monthly savings for 6 years in order to generate a return on invested capital.  From the building owner’s perspective, all payments are operating expense so they can be passed directly to tenants (solves split incentive) and the building incurs no additional debt.  The investor takes the risk that the project may not generate expected savings.

We have been working closely with several companies in this space, including Transcend Equity, Metrus Energy, Green Campus Partners, Serious Energy, Abundant Power, Sustainable Development Capital and GEAR Energy.  Each of them has a slightly different structure and/or target market, but EDF is optimistic that these companies, among others, will be able to change how energy efficiency retrofits are financed for commercial buildings.

Innovations in Energy Efficiency Finance Conference

Citi and EDF are co-hosting a daylong conference on energy efficiency finance on September 20, 2011 to examine innovative financing solutions for energy efficiency projects in the commercial, residential and public sectors.  Stay tuned.

Posted in Energy Efficiency / Comments are closed