Energy Efficiency Project Financing: Solutions Proliferate

A few weeks ago, we debuted a unique project financing platform (click here to read the news release). In concert with Five Star Bank, Octus can finance energy-savings retrofit projects ranging from $25,000 to $500,000, with little to no out-of-pocket investment by property owners; the utility company rebate/incentive serves as the down payment/equity for the financing. And, energy savings generated from our work more than cover the cost of facility improvements. We're bullish about the financing vehicle and its prospects, and our program's debut coincides with several emerging energy-efficiency financing programs.

Portland-based Equilibrium Capital published a study earlier this year, Energy Efficiency: Turning Negawatts into Marketable Securities. The study commences with a quick history of the energy efficiency market opportunity:

In his 1990 article, “The Negawatt Revolution,” Amory Lovins envisioned “negawatt markets” which would treat saved electricity like any other energy source or commodity. He estimated that energy efficiency ultimately represented a trillion-dollar-a-year global market. Last year, the World Business Council for Sustainable Development estimated in their report, “Transforming the Market,” that the worldwide market for energy efficiency in buildings could be worth between $900 billion and $1.3 trillion by 2050.

Last year McKinsey & Company conducted a comprehensive study of the U.S. energy efficiency market. The study analyzed the potential of retrofitting buildings by market sector, providing metrics based on the current pace of efficiency investment. McKinsey estimated that the total 2009-2020 present value of energy savings across all U.S. sectors is $1.2 trillion, representing a 130% return on $523 billion of upfront investment. This translates to $130 billion in total annual end-use energy savings in 2020.

Big numbers, terrific macro economics. As the report states, "These numbers are impressive, but we estimate that the U.S. market will be significantly bigger. The market drivers will be increasing access to capital and utility markets, as well as making it easy for property owners to understand and attain the benefits of energy efficiency retrofits. Our forecast shows that the U.S. market for end-use energy savings due to energy efficiency will reach $170 billion in 2020 and generate attractive returns for building owners, energy providers, and investors."

But, the challenge remains: Financing commercial building energy-savings measures to capitalize such opportunities. That's where Octus's financing program comes in (on a micro, project-by-project level). And, it's where several emerging financing vehicles are focused. EqCap continues:

In the energy efficiency ecosystem, we see four major segments: utility and energy firms; energy efficiency executors; energy efficiency equipment vendors; and funding sources. While some of the major players have broad solutions covering multiple segments, including companies like Johnson Controls, Schneider Electric, Siemens Building Solutions, and Constellation Energy, we expect to see a next generation of companies that will emerge into big players in energy efficiency. The winners in this space in the long term will not only offer excellent products and services in their core area of expertise, but they will need strong alliances throughout the ecosystem, and also have a thorough understanding of government and regulatory policies in their regions.

The biggest investment opportunity in this market is innovative financial instruments that can fund energy efficiency building retrofit projects on a large scale, turning negawatts, or saved energy, into marketable securities. To-date, most of the revenue in this market has been generated in the public sector. But emerging new business models and approaches for financing retrofits will dramatically increase progress in the commercial, industrial, and residential market segments. Our portfolio company, Equilibrium Resource Management (EqRM), is one of four players addressing this major opportunity in the United States, along with Metrus Energy, Transcend Equity, and E&I Advisors.

To paraphrase Jackson Browne, at Octus, we may not have the answer, but we believe we've got a plan. Our approach focuses solely on the result commercial building owners desire -- generating energy savings through facility improvements -- which, we believe, is best accomplished through a turnkey solution: Analysis, design, utility rebates, project financing, project implementation, and measurement and verification.