Recently, the Investor Confidence Project was contacted by Justin Montgomery, a graduate student from MIT, who let us know that he and some of his classmates were participating in a student case competition at the International Association for Energy Economics Conference. Their project, “Recommendation for a Clean Investment Mechanism in Energy Efficiency,” focuses largely on incorporating the Investor Confidence Project Energy Performance Protocols into a securitized funding mechanism. Due to their hard work and the success of ICP, the MIT student team was a finalist in the competition, ultimately placing third, and had the opportunity to present their solution at the conference in New York City.
Justin explains in his guest blog below, how he and his team also including Yichen Du and Arthur Yip, came to use ICP for this competition as a means to break down barriers to investment in energy efficiency.
Justin explains in his guest blog below, how he and his team also including Yichen Du and Arthur Yip, came to use ICP for this competition as a means to break down barriers to investment in energy efficiency.
If much of energy efficiency investment is actually “free” or even profitable based on future energy savings, then why is the opportunity not being fully realized?
This was the question that I was faced with answering at a recent case competition addressing energy efficiency investment. This “energy efficiency gap,” as it is often called, frustrates classically trained economists to the point of throwing their hands up at the idea (as I learned at this conference). However, for many energy efficiency projects, there is an opportunity to surmount this gap by removing impediments of high information and transactional costs associated with the planning, funding, and implementation of the energy saving measures. The key to addressing this is standardization, which can be achieved through the application of energy efficiency protocols developed by the Investor Confidence Project (ICP).
In preparing for this case competition, my teammates and I were particularly interested in how we could mobilize private capital to “plug” the energy efficiency gap. Any solution that makes energy efficiency investment more attractive for private investors will also facilitate public investment but is less beholden to uncertain political climates and tightening of budgets. In our findings, the source of private capital best aligned with the timescale and rate of return associated with energy efficiency projects are large institutional investors, such as pension funds. However, there is a mismatch in the size of investment. Energy efficiency projects are often on the order of $1 million, and institutional investors are typically interested in investment funds that are large and liquid, like securities over $100 million. Our proposed solution was an investment fund that appeals to these institutional investors by achieving the scale needed for these securities through the pooling together of vetted energy efficiency projects. The only way that this scale can be achieved is by utilizing the ICP energy efficiency protocols to streamline and validate the assessment of these projects.
One aspect of my own research at MIT is focused on the role of standardization in oil and gas drilling, specifically with the scaling up of operations necessary for unconventionals (i.e. shale gas and tight oil). There are a few parallels between this business and energy efficiency investment including planning, implementation, and evaluation. The successful development of unconventional resources depends on the ability to pool together a number of highly standardized projects, or wells, planning them as a “batch.” As with energy efficiency, if each of these projects were pursued independently, planning would often be prohibitively costly, but the ability to transfer knowledge from one project to the next creates economies of scale. Additionally, during implementation, a large number of similar wells must be drilled in an efficient and effective manner, in order to economically develop the resource. Similarly, the goals of energy efficiency can only be fully realized through the efficient and effective development of many standardized projects. The effective management and pooling of risk between these investments is critical for overall success. Lastly, the petroleum industry has for years relied on standard protocols for assessing the value of reserves, facilitating the communication of information about risk and reward to investors. This creates greater transparency and reduces the burden for investors to assess the value of assets, enabling greater access to capital. The ICP protocols will enable energy efficiency to achieve similar benefits of standardization in planning, implementing, and evaluating projects.
Through working on this energy efficiency investment project I have gained further appreciation for the power of standardization in lowering barriers and realizing benefits of scale. I believe that the ICP energy efficiency protocols are the key to streamlining this process, improving access to capital, enabling more projects and surmounting that pesky energy efficiency gap. I wish the ICP and its partners success moving forward with this great effort.
This was the question that I was faced with answering at a recent case competition addressing energy efficiency investment. This “energy efficiency gap,” as it is often called, frustrates classically trained economists to the point of throwing their hands up at the idea (as I learned at this conference). However, for many energy efficiency projects, there is an opportunity to surmount this gap by removing impediments of high information and transactional costs associated with the planning, funding, and implementation of the energy saving measures. The key to addressing this is standardization, which can be achieved through the application of energy efficiency protocols developed by the Investor Confidence Project (ICP).
In preparing for this case competition, my teammates and I were particularly interested in how we could mobilize private capital to “plug” the energy efficiency gap. Any solution that makes energy efficiency investment more attractive for private investors will also facilitate public investment but is less beholden to uncertain political climates and tightening of budgets. In our findings, the source of private capital best aligned with the timescale and rate of return associated with energy efficiency projects are large institutional investors, such as pension funds. However, there is a mismatch in the size of investment. Energy efficiency projects are often on the order of $1 million, and institutional investors are typically interested in investment funds that are large and liquid, like securities over $100 million. Our proposed solution was an investment fund that appeals to these institutional investors by achieving the scale needed for these securities through the pooling together of vetted energy efficiency projects. The only way that this scale can be achieved is by utilizing the ICP energy efficiency protocols to streamline and validate the assessment of these projects.
One aspect of my own research at MIT is focused on the role of standardization in oil and gas drilling, specifically with the scaling up of operations necessary for unconventionals (i.e. shale gas and tight oil). There are a few parallels between this business and energy efficiency investment including planning, implementation, and evaluation. The successful development of unconventional resources depends on the ability to pool together a number of highly standardized projects, or wells, planning them as a “batch.” As with energy efficiency, if each of these projects were pursued independently, planning would often be prohibitively costly, but the ability to transfer knowledge from one project to the next creates economies of scale. Additionally, during implementation, a large number of similar wells must be drilled in an efficient and effective manner, in order to economically develop the resource. Similarly, the goals of energy efficiency can only be fully realized through the efficient and effective development of many standardized projects. The effective management and pooling of risk between these investments is critical for overall success. Lastly, the petroleum industry has for years relied on standard protocols for assessing the value of reserves, facilitating the communication of information about risk and reward to investors. This creates greater transparency and reduces the burden for investors to assess the value of assets, enabling greater access to capital. The ICP protocols will enable energy efficiency to achieve similar benefits of standardization in planning, implementing, and evaluating projects.
Through working on this energy efficiency investment project I have gained further appreciation for the power of standardization in lowering barriers and realizing benefits of scale. I believe that the ICP energy efficiency protocols are the key to streamlining this process, improving access to capital, enabling more projects and surmounting that pesky energy efficiency gap. I wish the ICP and its partners success moving forward with this great effort.
Justin Montgomery
Masters Candidate - Technology & Policy Program
Massachusetts Institute of Technology
The case competition that motivated this analysis took place at the 2014 International Association for Energy Economics conference in New York. Our submission can be found here. I would like to thank those who planned and participated in the competition, and in particular my outstanding teammates from MIT, Arthur Yip and Yichen Du.
Masters Candidate - Technology & Policy Program
Massachusetts Institute of Technology
The case competition that motivated this analysis took place at the 2014 International Association for Energy Economics conference in New York. Our submission can be found here. I would like to thank those who planned and participated in the competition, and in particular my outstanding teammates from MIT, Arthur Yip and Yichen Du.
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