The NY Times published an article today that highlights how cities are using energy service contracting to implement off balance sheet projects with guaranteed savings.
Currently 80% to 90% of the market is in the government market. This begs the question, if energy service contracts are such a good idea, why are they not working in the commercial real-estate market?
"Finding projects to make city buildings more energy efficient was far easier. So the city turned to a form of financing that has become common among government agencies at all levels: an energy-savings performance contract that requires no upfront costs and allows the city to pay for the project over time using the savings on utility bills.
“There is no other way we could have undertaken this scope of project in this efficient a manner or time frame,” said Charlie View, Brea’s director of public works. The project included installing high-efficiency lighting systems in 14 city buildings and 4,000 street lamps, updating heating and cooling systems at six buildings and installing 1.8 megawatts of solar panels at three sites.
An energy service company, Chevron Energy Solutions, a unit of the Chevron Corporation, performed all the work and provided all the new equipment. The company’s contract with the city guarantees the project will deliver a certain level of savings on energy costs. If the project fails to perform to the guarantee, the energy service company is on the hook to make up the difference. If savings exceed the guarantee, the city keeps the excess.
READ FULL ARTICLE: Cities Enticed by Pay-if-You-Save Energy Deals
There are a number of reasons that have limited uptake in the commercial real-estate market.
There are a number of projects underway to address these risks.
Credit risk may be solved by attaching a loan to either a utility bill as a rate tariff, the strategy in On-Bill Repayment efforts, or to the property tax bill, as seen in Commercial PACE programs. Each effort has its own challenges but may will open up the market.
Performance risk is being addressed through the ICP project, which creates standards for what comprises an energy efficiency retrofit, and how to measure results. Additionally actuarial efforts such as DOE's building performance database may provide the data-set that will eventually allow for managing performance risk through pools.
We are all for the public markets, but the vast majority of US building stock, representing 40% of our national carbon footprint, is currently being left on the sidelines.
Currently 80% to 90% of the market is in the government market. This begs the question, if energy service contracts are such a good idea, why are they not working in the commercial real-estate market?
"Finding projects to make city buildings more energy efficient was far easier. So the city turned to a form of financing that has become common among government agencies at all levels: an energy-savings performance contract that requires no upfront costs and allows the city to pay for the project over time using the savings on utility bills.
“There is no other way we could have undertaken this scope of project in this efficient a manner or time frame,” said Charlie View, Brea’s director of public works. The project included installing high-efficiency lighting systems in 14 city buildings and 4,000 street lamps, updating heating and cooling systems at six buildings and installing 1.8 megawatts of solar panels at three sites.
An energy service company, Chevron Energy Solutions, a unit of the Chevron Corporation, performed all the work and provided all the new equipment. The company’s contract with the city guarantees the project will deliver a certain level of savings on energy costs. If the project fails to perform to the guarantee, the energy service company is on the hook to make up the difference. If savings exceed the guarantee, the city keeps the excess.
READ FULL ARTICLE: Cities Enticed by Pay-if-You-Save Energy Deals
There are a number of reasons that have limited uptake in the commercial real-estate market.
- Credit issues around non-investment grade building owners (all those LLCs that own most buildings) makes extending credit for long periods problematic.
- Performance risk is not well understood, meaning in practice that many ESCOs take a large margin to cover the potential downside risk. This results in projects that are priced out of the market and do not appeal to CRE customers.
There are a number of projects underway to address these risks.
Credit risk may be solved by attaching a loan to either a utility bill as a rate tariff, the strategy in On-Bill Repayment efforts, or to the property tax bill, as seen in Commercial PACE programs. Each effort has its own challenges but may will open up the market.
Performance risk is being addressed through the ICP project, which creates standards for what comprises an energy efficiency retrofit, and how to measure results. Additionally actuarial efforts such as DOE's building performance database may provide the data-set that will eventually allow for managing performance risk through pools.
We are all for the public markets, but the vast majority of US building stock, representing 40% of our national carbon footprint, is currently being left on the sidelines.
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