Each year the Climate Change Business Journal (CCBJ) awards businesses and non-profits for their outstanding work in the climate and environment industry. This year, we are thrilled to announce that EDF’s own Investor Confidence Project (ICP) was named a winner of CCBJ’s Business Achievement Award in the category of Finance. Winners of the 18 categories – ranging from solar and wind power to transportation and energy efficiency – were recognized this month at an Environmental Industry Summit in San Diego.

The Investor Confidence Project received recognition for its efforts to help create a market for Investor Ready Energy Efficiency™  projects. From the CCBJ award website: “ICP is moving the energy efficiency industry closer to the Holy Grail of securitization, in which energy efficiency projects can be valued based on consistent parameters with little project-specific analysis and vetting-processes that ratchet up soft costs quickly.”

Investors need a way to manage risk, and they abhor uncertainty. The fact that historically every energy efficiency project is unique, makes the process of underwriting performance risk very challenging and expensive. ICP creates a standardized class of projects assembling existing technical standards into a set of Energy Performance Protocols that outline best practices, existing standards, and documentation that can enable financing or managing of energy performance risk.

As with all red carpet award winners, our list of “thank yous” is long – so instead check out our amazing list of supporting project allies. It was the contributions from our many industry and public sector stakeholders that ensure the ICP Protocols strike the right balance and can help remove long standing barriers to large-scale investment in energy efficiency. EDF is honored and thrilled to be a recipient of this prestigious award, but as the saying goes, “it takes a village” to accomplish true success.

EDF’s Investor Confidence Program (ICP) works with a wide range of stakeholders to develop our Energy Performance Protocols.  In our discussions, the topic of cost effectiveness for building retrofits arises often as it is a hot topic in the industry.  ICP has deliberately avoided taking a position on what the requirements should be for energy efficiency projects’ return on investment, as we believe that organizations and programs should align requirements with their own unique underwriting criteria and should include the host of non-energy benefits that are delivered by many energy efficiency projects.

Energy Efficiency projects have multiple benefits to building owners that often extend well beyond energy savings. ICP believes that when a building owners or investors decides to undertake a project, it is important that there is confidence that whatever savings are expected will be delivered, but that each investor can weigh the many benefits of each project and make an overall informed decision, without being required to only consider direct cost effectiveness based only on energy savings.

However, when cost effectiveness is required, for example in utility programs or other publicly funded efforts, then savings calculations should be consistent, reliable and transparent.  In fact, cost effectiveness requirements are irrelevant unless unless the underlying savings benefits are real and there is a consistent and agreed to approach to calculating those results.

In any case, whether a program is requiring a specific level of cost effectiveness, or an investor or building owner is making an underwriting decision based on multiple factors, understanding and having confidence in payback is essential.  The following methods represent some of the most common approaches to expressing the returns associated with energy efficiency investments.  

Simple Payback
Perhaps the most commonly used metric when evaluating energy efficiency projects is the simple payback (SPB). It compares the cost of a measure relative to the annual energy savings produced by dividing the cost of the measures by the savings resulting from implementing those measures.  The resulting calculation is the number of years that will be required for the measure to pay back the initial investment.  Its popularity is probably due to it simplicity and how easy it is to evaluate a project’s benefits and risks.  However, the other financial metrics covered below provide a more comprehensive view of financial performance as SPB does not consider the time value of money or financial benefits beyond the initial payback period.

Internal Rate of Return (IRR)
The internal rate of return (IRR) quantifies the rate of return and determines the “profitability” of a potential investment by calculating the rate at which a project’s present value of all future cash flows is equal to the initial investment – in other words the rate at which an investment breaks even. In general, the higher a project's IRR, the more desirable it is to undertake the project thus, assuming all projects require the same amount of up-front investment, the project with the highest IRR would be considered the best and undertaken first.  Theoretically all projects whose IRR is higher than an organization’s cost of available capital should be undertaken. IRR provides a very easy means to compare different projects associated benefits and risks.  The main drawback to using IRR is that the method does not accommodate changes to returns or to the cost of capital including those associated with inflation.

Net Present Value (NPV)
Another commonly used financial metric is net present value (NPV) which calculates future cash flows and discounts them in order to account for the time value of money.  The result is the profit (or loss) over the lifetime of the project based on an organization’s blended cost of capital.  This analysis incorporates inflation and other changes to cost of capital and cash flows. Since a profit/loss of zero is the “cost” of doing nothing, projects with positive NPV’s should theoretically be implemented if capital is available.  In reality, capital is often less than abundant which means projects must be prioritized, and NPV does not provide as easy as a method for project comparison as IRR.  

Savings to Investment Ratio (SIR)
A last method, that is used more specifically in the energy efficiency industry, is the savings to investment ratio (SIR).  It is calculated by dividing the total savings over the project's expected useful life by the cost of the project. The key to this metric is that it incorporates the expected life of the measure and accounts for the benefits throughout, but not past, the expected useful life of the measure.  SIR provides an easy to understand ROI metric that allows easy comparison of projects and is more useful than simple payback since it is based off the useful life of equipment.  The challenge, which is not limited to this metric, is that accurately predicting the maintenance, efficiency, and obsolescence of equipment over its entire lifetime is more of art than science (See: DOE SIR Definition).

Expressing Cash Flow for Energy Efficiency
A growing number of software providers, including a number of members in ICP’s Ally Network, market applications that incorporate a comprehensive financial analysis of projects.  ICP’s Project Performance Appraisal also provides a complete financial overview that automatically incorporates standardized savings calculations based on ICP the protocols which solves the “garbage in / garbage out” issue if metrics are based off of erroneous savings predictions.

While these methods focus on expressing return on investment in terms of energy savings, it is important not to limit analysis only to those financial outcomes that are directly associated with projects. Often there are non-energy benefits that affect tenant comfort, attraction, and retention that may be even more impactful.  For instance, comfort issues are one of the most important factors for tenant satisfaction and there is a growing focus on utility bills as well as “green” aspects of buildings which directly impacts net operating incomes in the form of vacancies and rent rates.

Considerations should also be made according to the overall goals of the owner and the needs of the building. Before undertaking energy efficiency retrofits, the timing and incorporation of non-energy related projects should be evaluated.  Would it make sense to coordinate replacement of the sprinkler system with a lighting retrofit? Are there projects that may in fact  increase energy usage? Are you optimally combining comfort oriented and energy oriented measures?  Have you fully considered how associated health and safety measures, such as air quality concerns or code compliance, might be related to energy efficiency upgrades? And what interaction do the proposed projects have on each other and on the building’s energy loads? Taking a comprehensive look at the project in combination with overall short and long term goals  can help with the development of a robust package of measures that provides the most return on investment.   

Financial metrics are a necessary tool to analyze any investments in energy efficiency regardless of whether the whether the projects make use of public programs and incentives.  But hard and fast rules such as a “simple payback less than seven years” or “an SIR greater than one” can create a short-sighted view of a project’s potential. Failing to evaluate the full potential of projects in a comprehensive manner can result in missing opportunities that can increase tenant satisfaction, building value, net operating income, and energy efficiency itself.  

The Investor Confidence Project's goal is to increase confidence in savings regardless of underwriting criteria or program requirements.  We believe that confidence is critical to scaling up energy efficiency in all cases.

The Investor Confidence Project (ICP) can help accelerate a range of public programs focused on encouraging investment in energy efficiency.  ICP can make energy efficiency programs more effective by standardizing technical requirements to a national set of protocols that align with industry best practices, software tools, and a growing number of programs. There is flexibility in how to engage ICP Protocols, enumerated below, that enable this national approach to integrate with a wide array of State, Local, and Utility efforts to spur investment in energy efficiency.

The ICP Protocols provide ready-made best practices based on practical input from industry and existing technical standards. By standardizing how projects are developed and savings estimates are calculated, programs can reduce transaction costs of participants while increasing confidence in projected savings in order to encourage program adoption.

ICP Protocols provide a number of important benefits for programs including:

• Market tested technical protocols, developed, maintained, and available
  
• National standardization reducing costs to industry, investors, and software providers
  
• Network of ICP Allies including ESCOs, finance, insurance, and software vendors
  
• Best practices to ensure building owners and investors are fully informed 

Working with ICP will help attract investors to your community and make it easier for local building owners and project developers to get projects built. The ICP team will work with each program to connect local companies, building owners, and deal flow to local investors. Our national network ofAllies provides a range of options from energy service agreements, debt and equity financing, insurance products, and software options.  

Adopting ICP saves each program from the expensive and time consuming process of creating and maintaining a unique set of technical project requirements.  A process that is not only costly, but will also results in a patchwork of programs and projects that increase transaction costs for project developers, building owners and investors alike.  

ICP Protocols can overlay just about any type of program from PACE financing and OBR, to Building Benchmarking and outreach programs such as Architecture 2030 and Better Building Challenge.  ICP is applied at the point that a building owner is ready to move forward with a project.  It creates a roadmap once demand has been generated, to deliver investor ready projects to a market of investors who can help get projects built, and leaves plenty of room for local innovation.

There are currently a range of programs in the marketplace, and depending on each program’s design, ICP can be applied in different ways.

1) Resource and Incentive Programs  (Cost Effectiveness, SIR, or Bill Neutrality Requirements)

If a program requires a degree of cost effectiveness in order for projects to be eligible, then we strongly recommend adopting the ICP Protocols as your standard method for technical project development and measurement of savings. Having such a system in place is necessary in order to comply with this type of program requirement. This is typical for State or Utility funded programs that have a statutory requirement to spend public dollars “wisely” based on the public good associated with energy efficiency.  

ICP Protocols layout a set of well vetted engineering steps and standards that makes compliance straight forward, consistent across markets, and will reduce transaction costs by standardizing the projects documentation package and quality review process.

2) Market Transformation Programs 

For programs that are meant to encourage participation in energy efficiency, use private capital sources or other methods, and do not require specific levels of cost effectiveness, SIR, or bill neutrality, we suggest adopting ICP as a “recommended best practice” rather than a requirement.

By including the ICP Protocols on a program's website and communications, and through education and market outreach, a program will further the goal of a quality industry that can reliably deliver energy efficiency, help establish a marketplace with lower transaction costs, and protect building owners by ensuring they are aware of industry best practices and go into transactions with full disclosure.

Recommending ICP is an easy first step.  It enables the ICP team to work with each program, developing an engagement plan that will encourage adoption of best practices by rewarding projects with access to a range of investment options and capital sources.  However, it will still allow building owners to make their own investment choices based on a more complete understanding of the market.

3) Programs with Existing Technical Standards

There are many great programs out there with technical standards already in place. We understand the need to maintain consistency in existing programs, but would encourage potentially piloting ICP in parallel with comparable existing standards as a way to test the waters without creating uncertainty. We invite every program to engage without Technical Forms to gain a working knowledge of the ICP Protocols and process. As we leverage existing standards and best practices, we often find that there are more parallels than differences and we have an ongoing process that encourages feedback and iteration.

Ultimately, we think there is great utility in standardization across programs, however we are happy to work with every program to develop strategies based on program and market realities.  As a simple first step please consider becoming an ICP Ally to join the conversation.

Help ICP Enable a National Market For Energy Efficiency Investment

It’s easy to become part of our growing network for programs who have elected to join forces and align standards through ICP.  The ICP team is happy to discuss what application of ICP makes most sense for your program and work to develop a go-to-market strategy customized for the unique realities of every program and location.  

Once the ICP Protocols are adopted either as program requirements, or a recommended approach, we will work with you and your local stakeholders to encourage interaction between origination channels, building owners, project developers, and investors.

Please contact the ICP Team to discuss how we can help align your program with emerging national standards, a growing network of investors, and an ever expanding group of public programs.