The take-up of energy efficiency measures in buildings remains extremely low given the economic rewards on offer. 

This statement is true here in the Unites States, but is equally true around the world. Dr. Steven Fawkes (Only Eleven Percent) explores what's really needed to unlock the potential from a European and global perspective. The following article, reposted from 2Degrees, goes into some of the specific challenges impeding adoption of energy efficiency across the globe, and some of the solutions that can help overcome these barriers. 

High energy prices and increased environmental concerns have accelerated the take-up of energy efficiency globally. In the UK as well as some other markets such as South Africa, real concerns about declining electricity generation supply margins – the threat of the “lights going out” - have helped raise efficiency up the political agenda. We all know that the potential for improved energy efficiency is still massive, and we know what the barriers to achieving that potential are.

However, the take-up of efficiency remains relatively small and patchy compared to the economic potential, especially around third party financed investment which remains largely a holy grail, despite the availability of dedicated efficiency funds in the UK (and elsewhere) such as those established by the Green Investment Bank. These funds are having difficulties deploying capital into energy efficiency - and this is not confined to the UK funds.

So what is missing in the energy efficiency eco-system that if it was available would make the market really grow and start to achieve much more of its massive potential, producing greater economic benefits, reduced emissions, reduced dependence on energy imports and fostering local economic development and job creation?

"What we don't have is project developers that can develop large multi-site investment projects in line with the client's strategic goals."

Well several things seem to be missing. The first is in the area of project development. We have many energy consultants and energy service companies, as well as technology vendors that can develop stand-alone projects in single buildings or facilities. We even have a few (not enough) consultants who are experienced in developing and rolling out projects in multi-site portfolios such as retailers. What we don't have is project developers that can develop large multi-site investment projects in line with the client organization's strategic goals or who can develop large multi-client projects.

These kind of projects would go a long way to addressing a fundamental problem of energy efficiency financing - lack of scale. Developing such projects requires different skills than those found in traditional efficiency project developers including, managing multiple stake holders, aggregating and managing multiple small projects, and evaluating project risks and returns. It also requires risk taking and considerable working capital. Even developing a normal, "simple", Energy Performance Contract for a single site can take 12 to 24 months, time and technical resources that need working capital. Energy service companies and small under-capitalized consultancies cannot put the working capital into developing these projects.

Of course, we also need customers who demand such projects. On this side we need to think about how to develop and encourage groups or organizations in sectors, or across sectors that have some association or commonality, to work together and to demand large-scale projects.

Local authorities can do this with their own buildings but even the largest local authority portfolios would only represent a fraction of the quantum of capital required by institutional investor standards. Local authorities could convene groups of organizations within their areas but with a few exceptions lack the in-house capability to do this. Central government has a massive property portfolio and should take a lead in procuring massive, multi-site energy efficiency projects in a similar way to programs in the USA run by the General Services Administration. This however means cutting across departmental boundaries which of course requires leadership at the highest levels.

In the private sector large organizations such as manufacturers could take a leadership role around energy efficiency and convene their supply chain.In the private sector large organizations such as retailers and manufacturers could take a leadership role and convene their supply chain. This has to be handled carefully but it can lead to aggregation of opportunities and the grouping of buying power will lead to savings on capex, as well as opportunities to provide third party finance at scale. The large customer at the end of the supply chain could work with its banks to provide a standardized financial product to support investment in energy efficiency, possibly providing some corner stone capital or other support such as first loss reserves. Utilities are also well placed to develop and aggregate multi-customer projects.

From the investor side energy efficiency still suffers from a lack of confidence – confidence in the results and confidence in the technology. Although the energy efficiency industry always says the technology is proven, and it is usually is, there isn’t actually much in the way of independent post-investment assessment that can be used to build confidence.

Also the process to develop projects is generally ad hoc – every consultant and energy service company uses its own approach. If five energy surveyors reviewed your building you would get five different answers on savings, even if the technologies chosen were similar. Results would also be presented in five different ways. There are no standardized approaches to development and analysis and the five estimates of savings would have a large range – uncertainty which does not give investors (either external or even internal) confidence.

Investors like standardization. In any asset class such as residential mortgages, or wind power, there are standardized approaches to developing and evaluating projects as well as presenting the investment case. This reduces transaction costs. In energy efficiency there are no standardized approaches – everyone makes it up as they go along, a situation analogous to wind power in the late 1980s and early 1990s. Over time the wind industry working with the banks evolved standardized approaches to developing and assessing projects and so today, twenty-five years after the wind industry started, there are standardized processes.

Over time the wind industry working with the banks evolved standardized approaches to developing and assessing projects.The result of this lack of standardization in energy efficiency is that the banks and financial institutions may have a round hole in their criteria through which energy efficiency projects could pass, but the projects being developed and presented are square, rectangular, five sided and every other shape under the sun. Standardization can be supported by projects like the Investor Confidence Project (ICP) in the USA (www.eeperformance.org) which brings together investors and energy efficiency companies to develop standardized protocols for the assessment, evaluation and presentation of energy efficiency projects with different protocols for different types of buildings. Leading investors and others need to promote the ICP approach and anyone who wants to work on this should contact me.

The lack of confidence manifests itself in the form of short payback period criterion (typically two to three years maximum) for internally funded projects and the high cost of capital, relative to the real risks, that inhibits growth of the third party financed market. This high cost is successfully being exploited by some investors but inhibits the growth of the market which would result from accessing appropriately priced money from institutional investors and the capital markets.

So how do we fill these gaps in the energy efficiency ecosystem? Firstly we need to foster both the idea that we can develop larger multi-site projects amongst appropriate groups of organizations such as the supply chains referred to above, and the capacity to develop them. The former will require both co-operation and partnership between organizations and some means of education or capacity building in the art of the possible – as well as in the need for standardized approaches and processes. The latter requires capacity building in the energy efficiency development community to ensure the ability to develop large complex, multi-stakeholder, multi-site projects using standardized protocols.

"The lack of confidence manifests itself in the form of short payback period criterion for internally funded projects."

We also need to ensure that the development process uses state-of-the-art techniques such as integrative design and the latest technology on modelling of efficiency projects. We cannot continue to use conventional, silo driven engineering design techniques, promoted both by vendors selling their technologies and by inherently conservative engineering design that works in single disciplines and tends to reproduce the last design used.

To address the working capital constraint we either need a new type of development company that can finance the considerable working capital required from equity, (unlike today’s consultancies or ESCOs), or some degree of technical assistance type funding from those institutions that want to build the lending market in energy efficiency. International financial institutions like the EBRD have long realized this and use soft funding to support project development. Until government or institutions like the Green Investment Bank and the private banks interested in the market realize this, the growth of the third party finance market will remain stunted. An increase in the size and visibility of the market for efficiency projects, particularly the growth of a secondary market, would also help project developers raise equity capital.

So to summarize – what’s missing from the energy efficiency ecosystem?

• Capacity to develop large multi-site and multi-client projects using: 0 integrated design and state-of-the-art modelling 0 appropriate standardization of development and evaluation including appropriate financial risk analysis
• Capacity amongst end-users to bring together multi-site, multi-client projects.
• Developers that have sufficient risk equity to develop large projects.
• And/or technical assistance funds from governments/investors wanting to develop the energy efficiency financing market.

We are currently in the early stages of evolution of the energy efficiency ecosystem – particularly when it comes to externally funded projects but evolution can happen quickly. To build the market the players need to adapt to developing large multi-site, multi-client projects using advanced design techniques and standardization in partnership with appropriately priced sources of finance.

For more blogs from Dr. Steven Fawkes and an infographic summarizing the supply, production and import statistics for the UK's energy please visit Only Eleven Percent.

Recently, the second annual report was released analyzing New York City benchmarking data collected for calendar year 2011 from 13,258 properties encompassing 24,071 buildings, constituting more than two billion square feet of real estate. Representing a compliance rate with the ordinance of 75 percent. 

New York City Local Law 84, part of the Greener, Greater Buildings Plan, requires all privately-owned properties with individual buildings more than 50,000 square feet (sq ft) and properties with multiple buildings with a combined gross floor area more than 100,000 sq ft to annually measure and submit their energy and water use data to the City. 

One of the key observation from the report is that the median ENERGY STAR score increased to 67 from 64. This increase in the relative efficiency of buildings in year two of NYC’s benchmarking effort, could have to do with either different characteristics of the building stock, or the impacts of benchmarking on behavior or even owners taking proactive measures to improve their scores. While the report does not seem to take a position on the cause of this improvement in the score, the potential for disclosed scores to drive energy efficiency in the competitive commercial building sector represents one of the key outcomes of benchmarking, and should warrant continued study.

There were also some key takeaways related to the NYC building stock, including:

• Retail uses showed the widest range in energy utilization intensities with the highest users consuming five times more than the lowest users when measured on a per area basis. 
  
• The multifamily sector was the largest share of benchmarked buildings, and showed the narrowest variation in energy consumption between the most and least intensive users. 
  
• The most intensive water consumption was observed in multifamily properties. 

This report is a great first step toward a world where there is transparency in the real-estate markets into energy performance as a driver of asset value, rental rates, and other key metrics. We are looking at the tip of the iceberg and the possibilities are termendous.

Download the complete report.

Energy Service Companies (ESCOs) are an exceptions and have experienced steady growth in the 2009-2011 period. A recently released  Lawrence Berkeley National Laboratory report titled “Current Size and Remaining Market Potential of the U.S. Energy Service Company Industry” predicts that the ESCO industry could more than double in size from $5 billion in 2013 to $11-$15 billion by 2020.  

Recent growth has occurred largely in the so-called MUSH market consisting of municipal and state governments, universities and colleges, K-12 schools, and hospitals.  In fact, the report states that in 2011 over 80% of ESCO revenues were derived from this sector.  A number of factors have spurred energy efficiency investments in the public sector including limited budgets that have made performance based contracts offered by ESCOs attractive as well as various grants and stimulus funding initiatives such as ARPA.  

The report explores in detail remaining market potential as a driver to achieve continued future growth.  The largest opportunities are clearly located in the private sector which made up a mere 8% of ESCO revenues in the last 3 years.  The potential of this sector has been noted by a number of other reports as well and there is much focus in the industry on addressing various well known hurdles and risk factors that have prevented market penetration to date.  The report also concludes that future earnings will be influenced by  energy, water, and possibly emissions pricing; policies that allow public/institutional customers to address non-energy, deferred maintenance issues with performance-based contracts; and the ability of ESCOs to partner with utility customer-funded program administrators and state regulators to meet aggressive energy related mandates.  

The full report can be downloaded here.

On September 18th the California Public Utilities Commision released their proposed Decisions Implementing 2013 - 2014 Energy Efficiency Finance Pilot Programs.  This blog is an attempt to distill down the 156 pages into the key information you need to prepare for the coming California energy efficiency finance pilot programs. 

The Basics
The California Public Utility Commission (CPUC) is allocating $65.9 million to launch implementation of selected pilot programs designed to test market incentives for attracting private capital through investment of limited ratepayer funds. 

A core feature of the authorized pilots is the leverage of limited ratepayer energy efficiency funds for Credit Enhancements (CE), such as a loan loss reserves, to provide incentives to lenders to extend or improve credit terms for energy efficiency projects. A key objective is to test whether transitional ratepayer support for credit enhancements can lead to self supporting energy efficiency finance programs in the future.

The Decision establishes an administrative hub, identified as the California Hub for Energy Efficiency Financing (CHEEF), created to increase the flow of private capital to energy efficiency projects.  The California Alternative Energy & Alternative Transportation Financing Authority (CAEATFA) will assume the CHEEF functions and direct the IOUs and Commission staff to assist CAEATFA with implementation.  

Implementation of both the CHEEF, and the financing pilots, will be phased in beginning in the fourth quarter of 2013, and all pilots should be online by mid-2014, due to potential for delays, the pilot period has been extended to include 2015.

Three residential energy efficiency financing pilot programs are approved, all of which have a component to reach low-to-moderate income households currently overlooked by the capital markets. None would permit shut off of electric service as a result of non-payment of energy efficiency financing obligations. One program supports lending to the single family market sector, complemented by another program which allows the loan payment to appear as an itemized charge on the electric bill. A third pilot program targets master-metered multifamily buildings that house primarily low and moderate income households. 

The Decision also authorizes three non-residential energy efficiency financing pilot programs, two for small businesses, and expand on-bill utility collection of the monthly finance payments. The On-Bill Repayment (OBR) feature will test whether payment on the utility bill increases debt service performance across market sectors. No “credit enhancements” (i.e., ratepayer funds) are authorized to support OBR financing for medium and large businesses. This decision requires the utilities to develop uniform OBR tariff language that includes transferability of the obligation through written consent (and other mechanisms), and service disconnection for default on the debt obligation.

A cornerstone of the recommended pilot programs is a “credit enhancement” strategy (e.g., loan loss reserve) for residential and non-residential markets in which ratepayer funds are leveraged to achieve more deal flow, primarily through reduced interest rates, during the pilot period. A second critical element is the introduction of a repayment feature on a customer’s utility bill for non-utility energy efficiency financing. Significantly, no residential service  disconnection is authorized for non-payment of energy efficiency loans. A third feature is a database that includes project performance and loan repayment history to inform what hopefully will become new underwriting criteria for the financial industry.

The Commission specifically authorizes two types of Credit Enhancements: Loan Loss Reserve (LLR) and Debt Service Reserve Fund (DSRF). 

Highlights of the Implementation Plan, as modified to reflect comments, include the following approximate milestones: 

• CAEATFA is fully operational to act as the CHEEF in December 2013 
  
• Two pilots are operational in an early “pre-development’’ phase by December 2013 (EFLIC and MMMF) 
  
• On-Bill Repayment tariff filed by January 2014 
  
• Trust Accounts are established in February 2014 
  
• Credit Enhancement functionality is ready in February 2014 
  
• Two pilots (Single Family and off-bill Non-residential Lease) are operational by March 2014 
  
• Master Servicer begins operations in April 2014 
  
• OBR is launched in July 2014
  

Eligible Energy Efficiency Measures 
There is significant disagreement about whether and how to limit energy efficiency financing pilot programs to funding in support of qualified energy efficiency projects, identified here as Eligible Energy Efficiency Measures (EEEM). EEEMs are measures that have been approved by the Commission for a Utility’s energy efficiency rebate and incentive program, although the customer need not get an incentive or rebate to qualify for the loan. Each utility is directed to make a list of EEEMs publicly available, including on the utility’s website. 

The Decision authorized energy efficiency pilot program financing qualifying for CEs must apply a minimum of 70% of the funding to Eligible Energy Efficiency Measures (EEEMs). Therefore, financing eligible for CEs may include funds for non-EEEMs totaling up to 30% of the loan total. 

The 70% / 30% ratio of energy efficiency measures and non-energy efficiency measures also applies to financing which does not rely on ratepayer-funded CEs (e.g., OBR for medium and large businesses). However, a wider range of eligible projects (e.g., demand response, distributed generation) may be included in the 70% eligible energy efficiency measures for those pilots. Based on the Decision, it appears that projects that receive no credit enhancements, such as through OBR, will be able to finance projects that consist of only distributed generation or demand responce.

Residential Pilot Programs
The primary goals of the Single Family pilot programs are:

1. Increase the volume of energy efficiency financing to attract capital providers and attract new market 
   
2. Provide a reliable, one-stop mechanism which provides attractive rates and terms for consumers; and 
   
3. Have a auick turn-around for payments to contractors.
   
   

The Decisions allocates $26.0 million to programs targeting single family energy efficiency improvements. However, in this decision we do not adopt two of the pilots proposed by HBC (i.e., Warehouse for energy efficiency Loans or “WHEEL” and a pilot targeted to middle income residents.) CPUC finance consultants proposed a direct loan pilot open to all ratepayers occupying single family residences. In response to parties’ comments, the CPUC is modifying this program to also allow indirect loans.

The fact that the CPUC is not authorizing WHEEL represents a serious disconnect. CA has goals that will cost by their own estimation at least $68 Billion. Of all the proposed financing options, only the WHEEL program, which is a securitization and access to senior capital markets for energy efficiency, has the potential to deliver the volume of capital to CA that is required to hit even a fraction of the CPUC’s goals. By not authorizing this pilot, CA is building on a foundation that from the beginning  cannot drive sufficient capital. Learn more about WHEEL.

It is also a little surprising that in this pilot period, which is meant to lay a foundation for goals that may require as much as $4 Billion per year (based on a CPUC estimate) in available financing, the CPUC chose to pilot Loan Loss Reserve approaches that closely mirror existing financing mechanisms that currently exist in CA for single family retrofits - in some cases already administered by CAEATFA.  These existing product have not seen significant demand to date, and it questionable why these new products will deliver different results.

Energy Financing Line-Item Charge (EFLIC) PILOT
The Decision creates a Pilot for “Line Item Billing” whereby collection of principal and interest payments on customer loans occurs through utility bills. The primary purpose of this sub-pilot is to test the attractiveness of on-bill repayment and its impact on residential loan performance. In this decision, the sub-pilot is identified as the Energy Financing Line-Item Charge (EFLIC). 

The Energy Financing Line-Item Charge differs from non-residential OBR in significant ways. The primary differences are that it does not result in utility disconnection for failure to pay the debt charges, nor does it involve an allocation of partial customer payments between utility energy bills and energy improvement finance charges. The loan obligation does not transfer to subsequent owners or occupants.

Also authorized is a pilot targeting master-metered multifamily housing and offers owners repayment on the master utility bill without the risk of service disconnection. Bill neutrality will not be require for this pilot. (This leaves the owner free to size the project and loan to meet their own objectives and cash flow.) 

Non-Residential Pilot Programs
The primary goal of the Non-Residential pilot programs is to build the deal flow necessary to test the value of On-Bill Repayment (OBR) as a bridge to overcome traditional lending barriers in these markets.

On-Bill Repayment 
The primary goal of the On-Bill Repayment (OBR) pilots is to test whether the combined single bill payment can overcome lending barriers in the non‐residential sector, and attract large pools of accessible private capital to energy efficiency markets.

The OBR system is what is often called an open market approach. Project developers, building owners, and investors can agree to terms on private sources of financing (can include loans, leases, energy service agreements (ESAs), or other structures). By attaching the payment to the meter as a rate tariff, the premise is that this creates a significant credit enhancement without the need for public investment.

OBR, as authorized here, will have two applications: with CEs for small business energy efficiency financing and leases, and without CEs for all sized businesses, primarily medium and large-sized non-residential customers. 

Three non‐residential OBR pilot programs are authorized in this decision. Two apply credit enhancement and target Small Businesses: one for financing to support energy efficiency improvements and one to support energy efficiency equipment leasing. The third pilot would expand use of OBR without any CEs to energy efficiency financing incurred by any size business using CAEATFA ‐ administered financing products.

The authorized OBR pilot feature discussed herein will be offered only to non-residential customers, and no prohibition exists against disconnection of a non-residential utility customer for nonpayment of a third party change. The Decision requires that the IOUs use the same shut‐off protocols in place for the OBF program for the non‐residential OBR program.

The Decision concludes that written consent should be part of the OBR tariff in order to achieve transferability. Specifically, property owners and landlords that initially commit to the energy efficiency financing and OBR program (“current landlord”) and all of the current landlord’s tenants responsible for repayment under the OBR program (“current tenants”) should be required to give their written consent to abide by the terms and obligations of the OBR program. 

While the OBR Pilot, as laid out it the Decision will  likely be great for publically owned buildings where there is no transferability.  For privately held buildings, however, there is a concern that without automatic transferability lender interest in the program may be limited. EDF recently laid out their concerns in the blog: On-Bill Repayment in California: A Step Forward and a Missed Opportunity 

The 70% / 30% ratio for EEEMs / non-EEEMS applies to all OBR pilots, with one exception. For OBR without CEs, the 70% eligible energy efficiency measures may include distributed generation and demand response since no ratepayer funds are involved in the loans. CAEATFA has reasonable flexibility, through its rulemaking, to develop basic minimum standards for financing terms and underwriting criteria, consistent with this decision. 

California Hub for Energy Efficiency Financing (CHEEF)
CHEEF, is designed to act as a facilitator to allow for the easy flow of cash, information and data, among Investor Owned Utilities, financial institutions, the Commission and others. CHEEF will be run by the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA).

Master Servicer
CAEATFA is encouraged to contract with a Master Servicer (MS), as its agent, to provide CE fund flow management, oversight, instructions, and reporting. The Decision finds it reasonable for CAEATFA, as CHEEF, to hire an MS through a competitive solicitation. According to the Implementation Plan, CAEATFA expects to complete the RFP process and award the MS contract by January 2014.

If CAEATFA cannot perform the CHEEF role by January 15, 2014, the record in the consolidated proceedings should be reopened to determine another entity to effectively assume the CHEEF role.

The Energy Finance Database
The Energy Efficiency Finance database has the objective of providing sufficient accessible data to see whether energy efficiency financing outperforms non-energy debt obligations. The database should be housed and managed by the CHEEF for the benefit of ratepayers. 

CAEATFA would need to develop and manage an RFP process for the Energy Finance Database, competitively select a Data Manager, and obtain final approval of the Data Manager contract by February 2014.

No later than November 30, 2013, each Investor Owned Utility shall provide the Commission with a breakdown of utility bill payment history segregated by minimum customer classes of Residential, Commercial and Industrial, for a period of seven to ten years (from December 31, 2012) as identified by the IOU above. The data should be broken down monthly, if available. 

The data shall include, to the extent available through reasonable efforts, what percentage of customers within a customer class received, monthly or annually, late notices, shutoff notices, and service disconnection. Finally, annual write-offs per customer class should be expressed as a percent of customer class revenue, no later than January 31, 2014

Where exactly is all the money going?

The Investor Confidence Project (ICP) is pleased to announce the release of our newest Energy Performance Protocol for Standard Commercial projects - defined as multiple-measure energy efficiency projects typically costing less than $1MM.

This protocol strikes a balance between engineering and measurement and verification best practices and the need for a streamlined, cost-effective approach to developing a standardized investment quality energy efficiency project.  This latest addition complements our existing Large Commercial Protocol in an effort to develop a family of protocols addressing the range of projects types common in the growing energy efficiency retrofit marketplace.

The goal of the Energy Performance Protocols, as a whole, is to reduce transaction costs associated with investing in energy efficiency projects by standardizing how projects are baselined, engineered, installed, operated and measured.  This allows investors and building owners to gain confidence in the long-term return on their energy efficiency investments.  The goal is to bring together project originators, building owners and investors in a more transparent, and thus more robust, marketplace.

Currently, every energy efficiency retrofit is a custom project.  Even though many firms are following similar sets of technical standards, it is extremely difficult for an investor to evaluate the differences, resulting in costly engineering review processes that often take months to conduct.  By following an ICP Energy Performance Protocol with a documentation package stamped by a responsible Professional Engineer, the time and effort required to assess performance risk on projects will be substantially reduced, allowing for a more competitive and open energy efficiency investment market.

The ICP is working on a family of protocols to fit the range of projects currently in the market.  We are currently working on a Targeted Commercial Protocol for single measure projects and a Multifamily Protocol, as well as piloting a Quality Assurance Protocol that will standardize how projects are validated and enable a streamlined third-party validation system.

Without further ado, the ICP team is proud to present version 1.0 of the ICP Energy Performance Protocol for Standard Commercial.