Energy efficiency isn't the sexiest topic in the utility sector. And the necessary steps needed for efficiency to scale up are less so.
Matt Golden, the senior energy finance consultant for the Environmental Defense Fund acknowledges the dryness of subject. But his work may be key to helping grow building efficiency in this country, though it's also the stuff of small-type and appendixes: Underwriting standards.
“This is, frankly, extremely basic, boring stuff that we just need to put in place for efficiency to scale up," he told Utility Dive.
Efficiency projects aimed at commercial and multi-family residential buildings are expensive, and building owners operate on thin margins. Reducing barriers, including transaction costs, is one way to help the market expand and more projects find funding.
“These projects are very complicated and are unique by nature,” Golden said. “This results in very expensive, time consuming and complicated due diligence by every market actor. It's one of the major barriers to getting these projects completed, whether it's a building owner or an investor looking at a prospective investment.”
Golden is also head of the Investor Confidence Project, an initiative developed by the Environmental Defense Fund which aims to create a toolkit – a set of protocols – that would allow projects to be designated “Investor Ready Energy Efficiency.” That designation means investors don't need to re-do complicated engineering work to ensure a project will generate the expected savings, and revenues, because ICP certified the project as adhering to a set of common standards.
“If you're an investor or building owner, you know that what you're looking at is a standard project with standard documentation that has been reviewed by a third party engineer,” Golden said.
“A lot of building owners and managers are very, very risk adverse when it comes to putting their cash flow at risk,” said Jim Barrett, chief economist for the American Council for an Energy-Efficient Economy (ACEEE). “It's not whether the energy efficiency pays for itself, but on Day 1 are they going to get enough savings to manage the debt service they had to pick up to make the project work? And if there is any risk at all they are very hesitant to move forward. A lot of them are working on pretty slim margins.”
The problem ICP is trying to solve is one of confidence in commercial efficiency projects: How to convince all the parties that the project will be profitable. "They have to gain the confidence before they pull the trigger," said Golden. But it is also just one effort in a broader, global push to access value in efficiency and clean projects, including the expansion of green banks, investment vehicles for sustainable homes, and standardized metrics for pay-as-you-go solar.
Creating investment tools for clean energy
The Investor Confidence Project's is beginning to spread, with utilities are buying in and the concepts being expanded into Europe. While ICP doesn't do the efficiency work, find the projects or provide the contractors, it manages a set of protocols and standards that must be adhered to.
Last month, the project announced it had forged a partnership with the largest utility in the United States, Pacific Gas and Electric (PG&E), to accelerate energy efficiency retrofits in existing buildings by providing interest-free loans to energy performance contractors who use ICP’s Investor Ready Energy Efficiency.
Though it will require approval from the California Public Utilities Commission (CPUC), Environmental Defense Fund said in a statement the partnership and the loans it enables "could unleash a wave of private investment in energy efficiency retrofits across California, and provide a model for similar efforts in other states."
The loans will be provided under a pilot in PG&E’s existing on-bill financing program, giving qualifying energy efficiency projects in existing buildings access to up to $100,000 at 0% interest. And by using ICP's standards and protocols, investors know qualifying projects will show positive cash flow for building owners – meaning loan payments will be less than bill savings.
The "investor" is anyone putting money into a project, Golden said. And while in the early stages that likely means building owners, eventually the scale-up will include larger investors looking to efficiency as a revenue stream.
Earlier this year, New Jersey became the first state to "bring ICP’s market-based approach to energy efficiency into an existing state efficiency incentive program." The New Jersey Clean Energy Program’s pilot will incorporate ICP protocols into the state’s Pay for Performance program, introducing s ICP’s Investor Ready Energy Efficiency projects as an alternative way for buildings to meet the pay-for-performance requirements.
Other investment concepts for clean energy
The Investor Confidence Project is just one idea among many that aim to spread efficiency and sustainable concepts while creating large-scale investments.
Last year, the Union of Concerned Scientists issued a report showing how states can help finance investments needed to meet Clean Power Plan mandates, utilizing “green banks” to fund renewable energy and efficiency. Much like issues ICP looks to tackle, the UCS report found clean energy projects and market development are often hampered by financiers' “limited understanding of the technology and their concerns about performance risk,” along with the relatively small scale of individual clean energy projects and high transaction costs.
“Several states have used 'green banks' and other new financing initiatives to help secure the funding to scale up clean energy investments without the need for substantial direct incentives,” UCS wrote.
In Connecticut, for example, in 2014 the state's legislature renamed the Connecticut Clean Energy Finance and Investment Authority (CEFIA) the “Connecticut Green Bank in 2014," a comprehensive state-based clean energy financing entity, capitalized by with $48 million in utility surcharges and Regional Greenhouse Gas Initiative auction proceeds.
Similar efforts are expanding globally, as well. Housing investment fund manager International Housing Solutions already builds homes in Africa and is now looking to construct affordable green residences. The initiative is looking for $100 million in investments to grow its projects.
The World Bank has been involved in developing develop harmonized data standards for pay-as-you-go solar energy, because perceived risk has been limiting the growth of an industry that could help spread affordable energy solutions.
A billion-dollar market
About half of the commercial buildings in the United States were built before 1980, according to Navigant Research, creating an enormous opportunity for energy efficiency and a potentially huge financial market to enable it.
“When you look at the number of buildings in the United States, and what it would take to address those buildings, you're really talking about hundreds and hundreds of billions of dollars,” Golden said. “That's looking at cost-effective energy efficiency across sectors of the U.S. building stock. Right now we're just scratching the surface.”
The near-term goal of the ICP is to reduce transaction costs, which will help more projects become viable. But the second step, Golden said, is to scale that up to create not just efficiency but the financial tools to enable energy efficiency investment vehicles.
“If we can standardize certified, investor-ready projects as a requirement to get access to financing, utility rebates and everything else, we can reduce the cost broadly in the industry,” he said. “A certified project gives you access to all the investors in the marketplace and you don't have to essentially re-do your work for each one.”
“As we get more volume in the efficiency retrofit industry, you can aggregate and take potentially hundreds of projects together and turn them into things like green bonds, to get access to capital markets.”
Bundling the projects together will be necessary to access private capital. “It takes $50 million to get Wall Street out of bed in the morning,” said Barrett. But he also noted that the financial aspect is only one part.
“Finance solves one problem – the up front costs of upgrading energy efficiency. And it's an important hurdle, but it's really just one of the hurdles we see to energy efficiency on the large scale," Barrett said.
Successful efficiency programs will bundle not just the financing, but also management of utility rebate and incentives, as well as services, he said. A turnkey service that packaged finance, operations and service would be a huge boon to the commercial building sector.
“Use incentives to lower the overall costs, finance to spread out the payments and the combination of the two provides enough savings, with enough margin of error, that building owners are less hesitant to go ahead and make the leap,” Barrett said. “If you want to reach every corner of that market, having the ability to leverage private dollars through finance is going to be pretty useful. It might even be essential.”