Emerging models for energy efficiency financing

In previous blogs we have discussed the pros and cons of Energy Performance Contracting (EPC) as a mechanism to enable financing of energy efficiency investments and seen that EPCs have a number of issues and may not be suitable in all situations.  In the EU the main focus of attention is still on fostering growth of the EPC market, (which to be clear is a worthwhile objective), but in the USA we are seeing a flowering of innovation in contract forms and financial structures.  Some of these innovations have the potential to unlock a huge market and transform energy efficiency financing into a mainstream market, rather than the rather small niche market it is today.  Here we take a look at the emerging contract structures.

PACE

Property Assessed Clean Energy financing (PACE) is a modification of an old approach to funding public goods.  Benjamin Franklin invented the original concept in the 1700s to finance investment in sewers.  PACE is a senior obligation which is on an equal footing with other taxes on the house and the system is still commonly used to finance sewers and projects to put utility wires underground.  It is tied to the house and not the owner or tenant.  PACE was first used in California and the first schemes were operated in two very different Californian markets, Berkeley – which has a mild wet climate and liberal politics – and Palm City which has hot dry climate and conservative politics – and it was a success in both markets.

Despite its subsequent adoption in 28 states and Washington DC and rapid growth, PACE in the residential market has been stopped by a controversial decision by the Federal Housing Finance Agency (FHFA) to limit its use in housing.  Since then several states have started to implement PACE schemes in the commercial sector and these hold great promise.  The potential for commercial PACE is estimated at $2.5 to $7.5 billion annually in 2015 with a total opportunity of $88 to $180 billion in large commercial buildings alone.  The largest project to date, recently announced, is a $3.16 million retrofit to a four building, 250,000 square feet, office park in Sacramento California.  The retrofit was financed through Clean Energy Sacramento, a city-wide programme backed by up to $100 million of financing from Ygrene Energy Fund.

Efficiency Services Agreement (ESA)

In the ESA structure, pioneered by Metrus, the agreement leads to the contractor being paid purely for savings on a price per MWh basis.  This makes the client – contractor agreement much more of a services agreement than a traditional EPC and therefore can help in getting the project off the client’s balance sheet.  Metrus contract with service providers (ESCOs) who guarantee a level of savings to Metrus.  Metrus have applied this structure to a number of sites including four sites belonging to BAE Systems and invested $8 million.  It is now rolling it to other BAE Systems’ sites in the US.

Managed Energy Services Agreement (MESA™)

The MESA™ has been pioneered by SciEnergy.  It involves the contractor taking over responsibility for the clients energy bill and the relationship with the utility provider(s).  The building owner then pays the contractor the historical energy bills corrected for weather and other factors i.e. what they would have paid.  SciEnergy invests in energy efficiency upgrades.

On- bill repayment (OBR)

On-bill repayment, where the repayment of capital is added to utility bills, is also growing but this is more of a collection mechanism than a type of financing, as it can be tied to various contract forms.  Investment funds for many OBRs came originally from stimulus money or utilities mandated to invest in efficiency but there is a move towards attracting private investment.  Work is typically carried out by a certified contractor who often introduces the client to the financing scheme.  OBR has been mainly used in the residential sector but is now attracting attention in the commercial sector.  In 2011 New York was the first state to enact state-wide OBR and offers finance at 3.49%.  The New York State Energy Research and Development Authority (NYSERDA) is currently issuing $24.3 million of AAA rated bonds backed by residential energy efficiency loans – 35% of which were on-bill loans and the rest being direct with the householder.  The UK Green Deal is a form of OBR with external financing provided through the Green Deal Finance Company and faces many of the same difficulties as OBR schemes in the US such as generating sufficient demand and the accuracy (or otherwise) of building energy models that are used to predict savings.

Measured Energy Efficiency Transaction Structure (MEETS)

MEETS is the latest structure to emerge and was developed by EnergyRM and applied to the Bullitt Foundation’s “Living Building” in Seattle.  It uses EnergyRM’s “DeltaMeter™ dynamic baseline metering system” which is a system for measuring savings that has been approved by the utility industry in the Pacific North West.  The client pays the agreed price per unit of energy as per normal and an agreed price per unit saved (negawatt hour) on a 20-year agreement similar to a Power Purchase Agreement.  The advantage is that the repayment is linked to the building rather than the occupier and this allows a longer time-frame to be considered when looking at retro-fit options – allowing deeper retrofits to be financed.  The system is well suited to US markets where the utilities are mandated to make energy efficiency improvements (which of course includes EU countries after the implementation of the Energy Efficiency Directive).

Conclusions

The US is seeing significant innovation in energy efficiency financing, prompted by the falling away of stimulus money over the last few years.  Although currently small, these new contract forms have the potential to grow the energy efficiency financing market from its (2010) level of c.$14 billion (some $3 billion of which was stimulus money) to more like the $100 to $200 billion market some analysts predict it could become.  Commercial PACE shows particular promise.  With the exception of the Green Deal, which is an on-bill repayment scheme, we have yet to see these kinds of innovation in Europe, and some structures such as PACE are constrained by existing property taxation systems.  To grow the market for energy efficiency financing to the level we know it could achieve, and the level we need to hit environmental targets, we need to recognise that EPCs are not the be-all and end-all and foster greater innovation in contract form and financial structure.

Dr. Steven Fawkes

Steve’s latest book, “Energy Efficiency: the Definitive Guide to the Cheapest, Cleanest, Fastest Source of Energy”, will be released in September.  It is available with a pre-publication discount of 35% by using the link to the right of this page