In an increasingly environmentally conscious world, going green has become de rigueur. Developers putting up new buildings seek LEED certification in order to command higher rents, while managers of older properties retrofit to dramatically cut down electricity bills. Despite sustainable living’s trendy reputation, living green doesn’t need to break the bill. Some measures are relatively inexpensive, like LED light bulbs, while others can be costlier, such as new plumbing. Most projects require money up front, but easily pay for themselves over their lifetimes. Many cities have very inefficient legacy buildings coupled with increasing population projections; this could mean even greater urban pollution than before. Could energy efficiency projects be the answer?
Upgrades may not be that expensive relative to other property management costs, but can tally up to a huge bill if undertaken across a significant amount of square feet. This upfront cost can be a reasonable financial burden for groups such as universities, which are able to tap into their vast endowments. However others may struggle to justify these upgrades, especially with groups like hospitals[1] and supermarket chains’[2] slim operating margins. Paradoxically, it is these organizations with thin profit margins that would benefit most from energy efficiency upgrades. The slashed energy bills would mean greater savings and reduced operating expenses. Luckily there are a variety of private and public funding sources that can help finance energy efficiency projects.
Many states offer energy efficiency funds to in-state residents. These funds are meant to promote energy efficiency technologies available on the market, foster sustainable innovation, and increase low-income access to energy programs.[3] Depending on the state, the energy efficiency fund can be funded by a small micro-cent fee per kWh purchased by consumers, or from revenue generated through cap and trade programs. Financing is attractive, with interest rates ranging from 0.0-3.0%,[4] but these terms are available mostly for smaller projects. Large-scale retrofits require greater funding, which can be found through PACE loans.
PACE loans are another source of public financing available on the residential and commercial level, with loan sizes ranging from individual apartments to an entire skyscraper. Programs administer PACE loans to pay for an upfront cost such as installing energy panels, with the repayments tied to the property itself through a voluntary assessment. This subsequently increases property taxes.[5] The loan itself is innovative because the repayments are tied to the property, not the person who took out the loan. If the owner who took out a PACE loan sells their property down the line, the new owner assumes responsibility for repayment.[6] PACE loans have become increasing popular, with cumulative financing approaching $4 billion by the end of 2016,[7] and Wall Street has embraced them on the green bond market. However, public subsidization is not without controversy; this year the state of Connecticut was sued for raiding their efficiency fund to fill a gap in last year’s general budget.[8]
Public funds are unable to meet the total demand, and private institutions have appeared to address this gap. Instead of going to a bank to get a traditional loan, there are companies such as the New York Energy efficiency Corporation. They differentiate themselves from public and private financing with their personal touch and patient capital. They offer loans of up to $6 million with term limit of up to 12 years. They also have a team that works with companies to ensure all financial options both public and private are leveraged.[9] A downside is that the deal pipeline is limited by the personal approach in terms of projects financed. Another private sector approach is that Energy Services Companies (ESCOs) such as Honeywell and Johnson Controls[10] have contracted their services to governments both domestically and abroad.[11] An advantage of these ESCOs’ size is that they can offer creative financing to meet agencies’ budgetary restrictions, with solutions such as Energy Savings Performance Contracts, Public Private Partnerships, Utility Energy Service Contracts, and Enhanced Use Leases[12].
The energy efficiency options available in conjunction with increasing interest in Environmental, Social, and Government (ESG) considerations poses an opportunity for the finance sector to create new streams of value. Banks can open energy efficiency funds, attracting clients looking for private financing as well as attract investors looking to add impact projects to their portfolios. The hypothetical energy efficiency fund would be attractive for its relatively low risk exposure as well as almost guaranteed return on investment. Risk is low because energy efficiency products’ effectiveness and reliability make lowered energy bills almost certain. The bank and the client taking out the loan can create an agreement about banks capturing the energy bill savings over a specific time horizon, which will serve as a ROI for the fund’s investors.
Economies of scale would make this an even more attractive opportunity, but there is an issue of the pipeline being sufficiently large enough to strike a deal with energy efficiency product suppliers. However, this is where companies with thin profit margins can be most beneficial to target. These types of companies have a central management overseeing a huge number of square feet, which can make negotiations more efficient.
Living sustainably has become increasingly accessible, thanks to the many financing options available. If banks are able to capitalize on this market opportunity with energy efficiency funds of their own, this could lead to an acceleration of these projects, which can lead in turn to a dramatic reduction of CO2 emissions in large cities.
[1] Teresa Breen. (2017). Hospital Profit Margins Declined From 2015 To 2016, Moody’s Finds.
[2]Ziati Meyer. (2017). Supermarkets Are Losing The Grocery Price War.
[3] Energy.gov. (2018). Energy Efficiency Fund.
[4] Energize CT. (2018). Find A Lender.
[5] Energy.gov. Lessons in Commercial PACE Leadership: The Path from Legislation to Launch.
[6] Pace Nation. (2018). Pace Nation.
[7] Deirdre Hess. (2017). Pace Bonds: Mission Investment? It’s Complicated.
[8] Phil Hall. (2018). Connecticut sued over $155M in energy funding sweeps.
[10] Johnson Controls. (2013). Johnson Controls ESCO Qualification Sheet DOE Super ESPC.
[11]Honeywell. (2015). Honeywell To Support UAE’S ‘Green Economy’ Ambitions.
[12] Honeywell. (2018). Government.