Money out the window

“How many of you live in a building that has had a deep energy efficiency audit? Do you even know? What about the building that you work in?” Marshall Salant, the Head of Citigroup’s Alternative Energy Finance Department, taunted the audience at the ARPA-E Energy Innovation Summit, during a panel entitled “The Future of Financing Energy Efficiency.”

Despite present market opportunities, over $50 billion in commercial sector and $80 billion in industrial sector, that would yield over $1.2 trillion in savings, the ‘free’ market has failed to finance retrofits.

“The volume of truly low-hanging fruit, with less than an eight-year payback, is enormous,” said Dr. John Byrne, distinguished professor of Energy at University Delaware and advisor to the IPCC. The panel’s moderator Richard Kauffman, Senior Advisor to the Secretary of Energy Steven Chu, likened the efficiency savings left lying on the table to the old finance joke in which two economists walk away from a $20 bill on the ground because “if it was really there, someone would have picked it up already.”

Efficiency projects face barriers that include: lack of education about services and benefits, complicated financing mechanisms, and a landscape of standards that looks like the wild west. However, emerging IT platforms and business models are succeeding in breaking through economic barriers while adding dollars to their customers’ bottom line.

What is the deal with efficiency financing?

Following the wake of Fannie Mae and Freddie Mac’s pullout from the PACE program, residential retrofits have suffered with very little loan support for energy efficiency and renewable installations. However, despite Fannie Mae and Freddie Mac’s exit, 16 states have moved forward, ruling that municipalities can set up their own PACE programs. Several states have sued the Federal Housing Finance Authority (FHFA) for directing Fannie and Freddy to refuse to purchase mortgages on properties subject to PACE with first-priority liens. California has succeeded in forcing the FHFA to issue a new Notice of Proposed Rulemaking regarding PACE, comments are due on July 30, 2012.

While the commercial sector was not as affected by PACE as the residential sector, there are still large gaps to fill before this market reaches full potential. “Financing mechanisms must be made easily available. Incentives need to be aligned and methodology for measuring risk must to be standardized,” states Byrne. There is also the issue of split incentives, the opposing interests of landlords and tenants. However, some building owners and utilities are using structures such as triple net (NNN) leases, where all costs are passed on to tenants, or on-bill financing to address split incentives. The market needs more innovation mechanisms in order to fill the gaps.

One promising financing mechanism, On-Bill Financing (OBF), keeps costs completely off the balance sheet. Utilities will sponsor 100 percent of the upfront costs of a retrofit and allow the customer to pay back the investment through their monthly utility bills. Because customers are saving money through efficiency from day one, they are able to pay back the loan and interest, without ever having to swallow capital costs.

At least 20 states have on-bill financing programs, yet there is a low participation rate of only 1 percent, according to ACEEE. Customers’ slow uptake may be attributed to lack of awareness around the programs, or by utilities stringent standards to qualify for on-bill financing.

“What we suffer from is ignorance in the market,” says Jeff Bartos, “not just on the part of the customer, but between institutions.” Bartos is President and CEO of Mark Group that conducts 6,000 efficiency upgrades a week out of 25 offices internationally. “There is a lack of understanding between public policy makers, lenders, investors and consumers on how to combine public dollars with private capital to do good,” says Kerry O’Neill, Co-founder and President of Earth Markets.

Considering the low default rate on paying utility bills (most people will do what it takes to keep the lights on), and given the fact that efficiency retrofits start saving money immediately, efficiency financing investments ought be considered extremely low-risk.

Another potential source of financing (not discussed on the panel) is an efficiency bond, or E-Bond. If a government-backed note with a stable, long-term interest rate, the E-Bond, were to be created, it would be a very attractive place for investors to put blue-chip funds.

Retrofitting the situation

To impart efficiency on a massive scale and reap all of the benefits that it would bring in terms of cost savings, job creation, reduced emissions, grid security and economic growth, there are several easy steps the market can take:

1. Engagement in the forms of education and competition
2. An ‘outfit approach’ by segment
3. Create additional financing mechanisms
4. Secure financing
5. National standardization