TODAY’S STUDY: MAKING MONEY IN EE

Making Energy Efficiency Bankable: Lessons Learned from a Global Market Transformation Effort

Milton Bevington and Christopher Seeley, July 2012 (American Council for an Energy Efficient Economy)

Abstract

In May 2007, former U.S. President Bill Clinton launched an ambitious energy efficiency best practices effort. The Energy Efficiency Building Retrofit Program of the Clinton Climate Initiative (CCI) explored ways to make efficiency retrofit projects more bankable by using unsubsidized, commercial models applicable in a variety of countries and considerably more scalable globally than current regulated and legislated models tied to local jurisdictions. This paper describes the innovative pilots undertaken, lessons learned, and implications for a broad acceleration of energy efficiency investment. It also confirms the emergence of a new Asian center of innovation in energy efficiency project finance.

The authors provided pro bono advisory services to building owners in over twenty large cities worldwide, negotiating technical and financial performance terms on more than a hundred projects. Their experience suggests that, when deployed in combination with each other, these models can potentially transform the global market for energy efficiency retrofit projects, especially in the underserved private sector where financing is perhaps most difficult.

Energy Performance Contracting (EPC) – An updated performance-based, design-build approach to contracting efficiency retrofit projects designed to be the sine qua non of EE project finance by turning energy savings guarantees into a true credit enhancement Energy Performance Lending – For mortgaged properties with limited refinancing options, a new form of collateral and underwriting process for energy efficiency projects Managed Utilities – For multi-tenanted buildings, a special entity structure that removes a significant decision hurdle by aligning incentives between owners and leaseholders Municipal Leasing – For local governments, thinking about existing public finance mechanisms in new ways that eliminate capital budget competition and concerns over agency borrowing limits associated with traditional bonding Tax-exempt Equipment Leasing – For nonprofit institutions, partnering with public finance agencies, outside accountants, and credit rating agencies to create a new class of energy efficiency projects not subject to normal borrowing limits or rating concerns

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Introduction

Secretary of Energy Steven Chu once lamented publicly that the country might have more energy efficient homes were it not for the fact that people preferred granite counter tops (Wald, 2008). A 2006 survey by Lawrence Berkeley National Laboratory found that the commercial buildings sector is, relatively speaking, underserved by the energy services industry and also observed that total energy services industry investment in efficiency projects was no more than the authorized budgets of all ratepayer-funded electric and gas efficiency programs (Hopper, 2007). In the authors’ view, the reasons behind such meager levels of investment in energy efficiency are structural, not economic; and potential solutions can be summed up in one word, bankability.

For the energy efficiency market to develop globally, projects must become more easily bankable. The terms and underwriting requirements dictated by the providers of capital to many energy efficiency projects currently make investing needlessly difficult. An appropriate analogy is the situation faced by nineteenth century home buyers offered loans covering only fifty percent of the property’s value for a term of less than five years (Weiss, 1989, p. 110). In the past century, financing a home has changed in ways that dramatically accelerated per-capita home ownership; and that is the kind of progress needed to transform the market for energy efficiency.

The data behind this paper was collected by the authors during their work as pro-bono advisors to public and private building owners around the world. The CCI best practices effort entailed working on behalf of building owners in a number of ways:

• Negotiated uniform performance contracting terms and conditions with ESCOs representing 60% of global industry revenue and made it a requirement on every project.

• Provided capacity building and technical assistance to building owners, investors, and lenders in over twenty global capitals committed to taking action on climate change.

• Connected building owners and providers of investment capital willing to work under the new model, shaping underwriting rules and term sheets.

• Pre-qualified ESCOs capable of meeting the stringent EPC terms, qualified project economics, and represented owners in negotiations with vendors.

• Established uniform performance monitoring processes to measure energy savings.

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The Clinton Foundation program successfully demonstrated a number of commercial banking solutions which appear to be broadly applicable without intervention by government or regulators (WJCF, 2007). In that critical regard, they go beyond financing models described elsewhere in the literature, notably recent reports funded by The Energy Foundation (Kats, 2011) and The Rockefeller Foundation (DB Climate Change Advisors, 2012). Over the course of a hundred projects, every model described was demonstrated in at least one sovereign jurisdiction, most in several. Two of the models depend on U.S. laws and tax code, while three have been demonstrated outside the U.S., in Bangkok hotels, South African municipal buildings, Chinese state-owned enterprises, Indian shopping malls, and London public transportation facilities.

The advantage of commercial models over others presently under consideration is that the legal and regulatory environment does not have to be manipulated for them to work, eliminating a significant barrier to adoption. The rights and obligations of the principals work equally well in a number of sovereignties and banking regimes and without special inducements. It is hoped that focusing attention on commercial structures and processes will facilitate globalization of energy efficiency project finance and create the scale needed to attract substantial capital.

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Conclusion

The models described are not the last word in energy efficiency finance, but a beginning. In some cases, they are little more than prototypes. Experience suggests that many challenges remain to attracting large amounts of capital. On the other hand, success to date also suggests that some potentially sturdy solutions are emerging which do not rely on a specific regulatory regime or special incentives, meaning they can scale in many places at once. Confirming their value will require greater familiarity and experience with the models, and that will entail a broad reeducation of professionals engaged in budgeting, finance, legal counsel, and procurement.

Necessary pilots and professional education do not currently exist, and someone must develop them. Trusted leaders in civil-society, philanthropic and international institutions, and an engaged global banking industry are all needed. At scale, such cooperation might create broad investor appetite for efficiency retrofit debt; and thereby turn the financial services industry into efficiency’s greatest promoter. At the same time, banking regulators might analyze financing models that reduce credit risk by improving the quality of underlying security. Together, upgrading building systems and lowering operating costs make property more valuable in ways that ought to be quantifiable in a risk model. Finally, policy makers might consider the advantages of frameworks that deliver a widely acknowledged public good through market mechanisms. Should something of the sort emerge, it could be transformative indeed.

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