Too much money chasing too few projects?

Some thoughts from ACEEE Finance Forum in Washington DC, 12th-13th May 2014

For the third year running I attended the American Council for an Energy Efficient Economy’s Finance Forum (ACEEE FF) which is the leading conference on financing energy efficiency. It is a great place to get up to speed on the latest developments in the rapidly changing US market for efficiency finance and this year I chaired an international panel to bring a wider global perspective. The following are some thoughts inspired by the event.

Firstly it is clear that 2014 is an inflection point in energy efficiency finance and as Marshall Salant of Citi said in the opening session the ratio of deals to conferences is finally getting better. This year we have seen several landmark transactions including the securitisation of WHEEL (Warehouse for Energy Efficiency Loans) residential energy efficiency loans and $100 m funds for Joule assets and Kilowatt Financial. It now seems that until recently the challenge was bringing finance to the market but now it seems that the real problem may be creating sufficient demand to utilise the available finance. I have been saying for a long while that to massively expand the energy efficiency market and start to take up the massive potential we know exists, we need to scale up demand for energy efficiency goods and services, expand the supply of energy efficient goods and services, and expand the supply of finance flowing into energy efficiency from all sources, both internal money (I.e. Internal to the host organisation with the efficiency opportunity) and third party money. The provision of finance alone is insufficient to solve the problem. The analogy is that the fact that car manufacturers offer easy to arrange and often very cheap finance does not make people want to buy a car, we want to buy a car because we need a car to go work or whatever, or we lust after a particular car because we like the brand or in some hard to define way it meets some basic desire we have. The fact that finance does not mean people want to buy energy efficiency is reflected by the fact that several specialised funds that have been established in the UK and elsewhere are having trouble deploying money.

So an important issue is how to increase demand for energy efficiency. This requires a real understanding of markets and market segments. As one speaker at ACEEE FF said, the energy efficiency industry has always been woefully bad at marketing i.e. really understanding market segments and how purchase decisions are made. To build energy efficiency demand we need to really understand market segments, and that means segments way below the normal, residential, commercial, public sector split that most energy efficiency presentations talk about. Within each segment we need to really understand decision points and when interventions can be made. For instance there is little or no point trying to sell a major commercial building retrofit at any other point in the building life cycle than the point of major refurbishment. Property owners are extremely unlikely to undertake energy efficiency retrofits at any other point and so we need to focus on making sure these opportunities are maximised which requires capacity building in clients as well as property managers and architects and engineers. These critical decision points can also be influenced of course by regulation, if major refurbishments have to meet certain energy performance standards it will help drive demand but alongside regulation capacity building is needed. Likewise in the domestic/residential sector we need to understand and influence moments of intervention such as re-roofing or boiler/HVAC replacements in order to maximise the uptake of opportunities for improving energy efficiency.

Anyone contemplating design of energy efficiency finance programmes has to address demand and not just the supply of finance.

For several years people have talked about the bond market and securitisation for energy efficiency loans. With the first WHEEL deal we have now moved from theory to initial practice. There is, however, an awful long way to go before securitisation of energy efficiency loans is normal. Jack Bernard of Renewable Finance, who has had a long career in securitisation, forcefully made the point that the industry has to recognise the requirements of the securitisation industry and make products that look like products that serve other markets like auto loans or credit cards. An interesting emerging securitisation market, worth some $5 billion in 2014, is the single family home rental market. This is now growing but faces some of the same data issues as energy efficiency, the market just does not have the years of loan performance data that other markets have. In the US market there is some 150 years of loan performance data and auto loans have been offered for nearly 100 years and so there is a lot of data covering the full range of economic cycles.

Securitisation clearly needs standardisation and that is where initiatives such as the Investor Confidence Project (www.eeperformance.org) come in. The Investor Confidence Project is a US initiative of the Environmental Defense Fund and we are now close to launching a European version. It has developed a number of protocols which cover the development and documentation of energy efficiency projects in different types of buildings. Standardising processes and documentation will improve investor confidence in the performance of projects and reduce transaction costs. The ICP is increasingly being specified by large energy efficiency programmes such as the Texas PACE programme and a growing number of investors and insurers.

So, we now seem to be at the initial stages of solving the finance problems. The shortage now seems to be the ability to develop large scale, multi-premise, energy efficiency programmes that are standardised and designed to take advantage of the available finance.