Creative borrowing spurs commercial retrofits
On the heels of San Francisco’s announcement last week that it plans to spend $150 million greening up homes, comes a new report that studies a slew of other innovative ways to finance energy efficiency improvements for all types of buildings.
It’s no big surprise that the key to ramping up the energy efficiency industry and fostering technological advances is no-money-down financing so building owners can avoid the capital costs of retrofits. And that’s exactly what the California Clean Energy Fund (CalCEF) is working toward.
Energy efficiency “immediately saves money for end-users, improves the bottom line for companies, reduces local exposure to electricity grid outages and offsets the need for new power plants,” wrote the authors of the report from the CalCEF, a non-profit venture capital outfit based in San Francisco. “Yet, efficiency upgrades and their respective financing options are often out of reach for most end-users, as the initial capital cost exceeds near-term savings.”
Yes, you read that right — CalCEF is a non-profit VC, a product of the California energy crisis of 2000-2001 — remember Enron? — that resulted in the bankruptcy of Pacific Gas and Electric, Northern California’s dominant utility. As part of the bankruptcy settlement, CalCEF was created to accelerate energy innovation and was seeded with $30 million from PG&E.
The best known such program is Property Assessed Clean Energy, or PACE, in which cities float bonds to finance retrofits and homeowners pay back the cost through a surcharge on their property tax bills over 20 years.
While that can work well for middle and upper-middle class homeowners in environmentally conscious communities, PACE is not as useful for commercial buildings, office towers, and industrial sites, whose owners may be solely motivated by the bottom line, according to the CalCEF report.
“High upfront costs are preventing large entities from addressing energy inefficiencies,” says Paul Frankel, the managing director of CalCEF Innovations, the organization’s initiative that focuses on developing green energy financing and policy.
That led CalCEF to investigate possible solutions to the dollar dilemma, some of which are currently being implemented.
One workaround is something called on-bill financing. For instance, San Diego Gas & Electric will finance up to $100,000 in energy efficiency retrofits for commercial customers (and up to $250,000 for school and government buildings). Recipients then pay back the loans through a surcharge on their monthly utility bill.
Best of all, the loans carry zero percent interest, though business customers have to repay them in five years. In the first two years of the program, San Diego Gas & Electric financed 180 retrofits and has another 100 in the queue. Over the next two years, the utility will make $41.5 million available for on-bill retrofits.
“It has significant potential as it’s something customers understand and like,” says Frankel. “The challenge right now is that because utilities are not banks, most programs don’t go beyond five years for the loan and cap the size of projects, which limits what you can do.”
Another cool — and I mean literally cool — utility-related green financing scheme involves freezing water at night when electricity demand and rates are low. During the heat of the day — when power demand spikes — the melting ice cools the refrigerant of a commercial building’s air conditioner so it doesn’t have to consume electricity to run a compressor.
The system, called the Ice Bear and made by a Windsor, Colo., company called Ice Energy, is not new. What is new is that some utilities are financing the installation of Ice Bears in commercial buildings as way to cut electricity use on hot days when everyone flips on their air conditioning.
Last month, the Southern California Public Power Authority announced a deal with Ice Energy to reduce peak demand by 53 megawatts by installing Ice Bears throughout the Southland. Under such distributed generation programs — in utility geek speak they’re called “Aggregated Deployment of Thermal Energy Storage Systems” — the utility owns the Ice Bears much like it would a conventional power plant.
Building owners benefit from lower electricity bills while the utility lowers its costs and its greenhouse gas emissions. And in California, such systems can maximize the use of wind farms, which tend to generate most of their electricity at night when the Ice Bears need power to freeze water.
But for really big retrofit projects — those involving large industrial facilities and millions of dollars — other even more creative financing models are emerging.
One is being pioneered by one of the report’s authors, Bob Hinkle, an entrepreneur-in-residence at CalCEF and chief executive of a startup called Metrus Energy.
Metrus finances and manages the energy efficiency retrofit for the corporation. The customer repays the cost over the life of the contract. The payments are based on how much energy is saved.
“We lock in the price per unit of energy saved during the contract term, which is typically 10 years or less,” says Hinkle. “A lot of customers will not fund those projects themselves because if they have the money they’ll want to put it in their core business operations, or they don’t want to take out a loan.”
Metrus, which recently completed its first project for a large industrial company Hinkle declined to identify, uses equity raised from investors, as well as bank financing, to pay for the retrofits, which are performed by a third party. Metrus retains ownership of the retrofit assets — boilers, air conditioning systems, and the like — and will sell them back to the customer when the contract ends.
The customer, of course, continues to benefit from the efficiency savings, especially as energy costs continue to rise.
The company Transcend Equity promotes a variation of the Metrus model called a “managed energy services agreement.” Transcend finances retrofits for owners of office towers and other large commercial properties and then takes over responsibility for paying the owners’ now-lower utility bills for the term of the contract. The property owner pays Transcend what it would have paid the utility without the retrofit, and Transcend pockets the difference.
“Everyone talks about what a great opportunity energy efficiency is,” says Frankel, “but until recently there hasn’t been investment commensurate with the hype.”
At last, the financial creativity appears to be catching up to green technological innovation.
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