The Future of Energy Efficiency is an Even Sweeter Deal for Business

It is widely known that energy efficiency is a great decision for businesses of all stripes. Reduced expenses, greater cash flow, improved productivity - all at a typical payback period of just 2-4 years. Unfortunately, energy efficiency has historically lacked the glamor and following of "sexier" energy resources like solar. Perhaps because of this, financing options and other incentives for efficiency have lagged comparatively. This may be about to change.

A recent CleanTechnies article - "How to Make Energy Efficiency Affordable" - explores recent developments in project financing that make it easier for businesses to install energy-efficient equipment:

Consider the transaction that Metrus Energy, an EE developer and financer, announced in December with defense manufacturer BAE Systems, Siemens Industry and Bank of America. Under the deal, BAE Systems' facility in Greenlawn, New York will install $2 million in energy efficiency with no upfront payment or capital investment.

This may sound like a traditional energy service performance contract, which also spares the customer from an upfront capital investment. But Bob Hinkle, Metrus Energy CEO, explained that the deal is quite different. Called an energy services agreement, or ESA, it is more akin to a solar power purchase agreement (SPPA), except there is no power to be purchased. What's monetized is energy saved.

"Customers do not have to use their own capital. It is like a power purchase agreement where the customer is charged only for the output," Hinkle said. "But in energy efficiency, the output is not a kilowatt-hour generated; it is a kilowatt-hour saved, or a therm saved."

Better yet, there is a demonstrated interest on the part of investors to make such financing agreements a reality. Clean technology investors country-wide are considering ways to enable energy-saving projects - and share in the profits they produce:

The fund could serve as the third-party owner of the energy efficiency installations, collecting payment from the shared savings achieved by the businesses. [It] could then recycle the profits to pay for other clean technology projects.

Here at Octus, we partnered with Five Star Bank to develop the Building Energy Savings financing program, which we pair with utility cash incentives to produce extremely favorable financial outcomes for our clients. We're also working with clients to get them approved for a lucrative 0% financing program that has recently become available to qualified California businesses. As financial alternatives continue to expand, you can be sure we'll be at the forefront to ensure the companies we work with get the sweetest return possible.

Small Business Energy Efficiency: Utilities Court a Historically Underserved Market

Around the country, a quiet revolution is taking place. Small businesses - who at times have played the part of ugly stepsister in the energy efficiency dance - may finally be getting their invitation to the ball. As utilities seek to reduce their customers' consumption of energy (for regulatory compliance or to postpone costly infrastructure upgrades), they are extending a hand to the 22.9 million small businesses country-wide with incentive programs that better meet the needs of these smaller consumers.

"From the neighborhood pizza parlor, dry cleaner and grocery store to service, health care and technology companies, small businesses have become the cornerstone of our economy. However, with all of this power to drive economies, small businesses have been left out of many cost-saving programs. This is especially true with utility-sponsored energy efficiency programs. Why? Small commercial accounts are very disparate and (until now) have been difficult to segment into actionable groups by utilities. Data about these small commercial accounts are often incomplete and difficult to gather, and yet, this is a sector that has great potential to help the environment by becoming greener -- and add precious dollars to their bottom lines."

A huge sector of the economy whose participation in energy efficiency can make a significant impact on the environment and their own financial health? It's hard to imagine that more effective utility programs haven't yet been delivered. Much of this is due to the split incentive (i.e., many small businesses do not own the properties they utilize, and thus are reluctant to invest in facility improvements) and a lack of quality information:

"Typically, utility data consist of the business' name, primary contact, phone number, address and type of business... This lack of information leads to another roadblock to outreach: the current benchmarking process. Utilities review year-over-year data on a business. Did a specific business use more or less energy last year? Have there been unexplained spikes or troughs in consumption? If there were more data points to consider and analyze, the utility would be in a better position to offer customized information about energy usage and recommend energy-efficiency programs; thus, truly offering something useful and economically sound to the business owner."

Thankfully, new technological developments will make it easier for utilities to build a solid knowledge base about their small commercial customers, which in turn will allow them to offer more customized and enticing incentives that speed attainment of the utility's own goals. And, the financial equation is only improving: Utilities are developing more lucrative rebates and incentives, and new financing programs (such as Octus's Building Energy Savings program, PACE financing, and utility-company on-bill financing) are proliferating.

We at Octus have seen many investor- and municipal-owned utilities get in the game by designing and delivering programs with the small commercial customer in mind - programs such as Roseville Electric's Small Business Commercial Lighting Program, for which Octus was one of four approved energy efficiency specialists. But we believe that the utilities are just warming up. And as their ability to better segment and target this diverse - but enormous - slice of the economy grows, so too will participating small business' bottom lines.

The Common Carbon Metric: A Future Enabler of Building Efficiency Projects?

Last week a client asked about the value of his carbon offset post-implementation of his energy-saving improvements: Is there any monetary value and - if not - when will carbon credits become a currency? It's a common and good question. Much has been discussed about negawatts, white tags, and a soon-to-come market for trading carbon offsets. When such a market will emerge is uncertain, but most all are convinced it will happen.

As the folks over at CleanTechies attest, "buildings represent about one-third of emissions worldwide and provide some of the quickest and most cost-effective ways to reduce carbon emissions." However, the full value of building retrofits has yet to be realized, since carbon management and credit trading can't be effectively implemented without consistent and reliable measurement techniques.

Enter the Common Carbon Metric:

A group of industry players, led by UNEP’s Sustainable Buildings and Climate Initiative has been working over the last few years to address the inconsistencies in carbon measurement techniques around the world. The group has been working to develop clear and transferable carbon metrics (known as the Common Carbon Metric) that can be used to measure carbon reductions in buildings, whether it’s a new office park in Mumbai or a retrofit program in Rio de Janeiro.

One of the group’s recent breakthroughs was to enable Clean Development Mechanism (CDM) projects to use these new metrics in CDM building projects. The CDM is a program that allows Annex I countries (i.e., the majority of developed countries) to invest in carbon reduction projects in developing countries and claim the carbon reductions for their Kyoto Protocol carbon reduction targets.

While building projects have technically been eligible for CDM status for the last ten years, inconsistencies in the methods for measuring carbon from CDM projects have made CDM projects for buildings prohibitively expensive. By making the Common Carbon Metric a viable pathway to measuring and certifying carbon reductions, it will be much easier for developed countries to invest in carbon-reducing building projects in the future.

What does this mean for businesses operating in California, the U.S. and abroad? At the moment, financial and reputational (or branding) motivations are often behind companies' efforts to reduce their emissions and slow the effects of climate change. A major development in carbon measurement - one that allows organizations to capture additional financial gains based on the product of their energy savings - should serve as a catalyst to encourage additional participation in the already low-hanging and tasty fruit of building efficiency.

2011: Building Efficiency Takes Center Stage

As 2010 winds down, it's natural to wonder what we can expect in the upcoming year. At Octus, we're looking to 2011 with an anticipatory eye, particularly in light of the ever-expanding opportunity to slash building utility costs. Great timing, then, to dig into Pike Research's latest report, Building Efficiency: Ten Trends to Watch in 2011 and Beyond.

While the last couple of years have seen a construction market crippled by the global economic downturn, it's interesting to note the market for efficiency-improving retrofits of existing buildings has experienced steady if not robust growth. Why? The report cites the "carrots" of saving money, a desire to earn a green building certification, and organization drive to reduce a carbon footprint - as well as the "sticks" of evolving building codes and similar regulations.

Going forward, Pike engages us to pay particular attention to the following key trends:

1. Energy codes will keep raising the bar - and enforcement is catching up.
2. Mandatory disclosure rules will reward building owners who invest in energy efficiency, while minimizing the "split incentive" problems faced by many leased commercial spaces. (We've discussed California's impending disclosure requirements in a previous post).
3. The pace of building certification will increase, led by LEED.
4. Building energy management systems are in high demand, particularly for large and aging infrastructure.
5. The U.S. ESCO market will see moderate growth and ESCOs in Asia Pacific's developing markets will advance rapidly.
6. Lighting: Not yet the "Year of the LED".
7. The connection between efficient buildings and the smart grid will continue to grow.
8. Increasing number of financing options around the world. (Example: the Octus/Five Star Building Energy Savings project financing program).
9. PACE is a financing option struggling to overcome roadblocks, particularly on the residential front.
10. Systemic conditions, policy choices and practical considerations will continue to present barriers to achieving energy efficiency, but investments in training, information access and technology will gradually overcome many of them.
    

10 Ways to Reduce Energy Use and Costs in Your Building

Octus participated in an energy project financing panel at this week's Sacramento Clean Tech conference, shouldered by experts from Ernst & Young, Morrison Foerster and Five Star Bank. Great conversation and content, with an underlying theme (at least from our seat on the podium): If you own or manage a commercial building, investing in energy efficiency improvements is the best investment you can make. Period. And, of course, we plugged the Octus/Five Star Building Energy Savings project financing program and other readily-available financing options.

The panel concluded with standard audience Q&A, including questions about how the economics of energy efficiency retrofits and project finance work, and how CRE professionals can sagely make it happen. We served up a handful of easy-to-consume morsels, both physical (retrofits) and behavioral. Time was short; unfortunately, we did not have an opportunity to orate, in depth, the myriad measures Octus employs to help slash utility bills.

If time allowed, we would/should have shared a top-10 list from Johnson Controls, as reported in GreenBiz.com, summarizing how you can reduce energy use and costs. Bread and butter stuff for folks in the energy- and building-efficiency space, but worthy of a recap:

1. Assess how your building consumes and wastes energy. Conduct regular energy audits to determine what condition your equipment is in and how it is performing. These audits will show where and how energy is being wasted and prioritize energy improvement measures.

2. Use more energy efficient equipment. Install new energy efficient equipment and replace or eliminate outdated, inefficient equipment. Look for Energy Star labels for equipment and appliances.

3. Match HVAC and lighting output to occupancy. Install programmable building controls that enable systems to provide light, heat and cooling to building spaces only when they are occupied.

4. Maintain equipment for maximum efficiency. Make sure that your equipment is properly serviced and maintained so that it runs as efficiently as possible. Increase operating efficiency of chillers, boilers and packaged cooling equipment through proactive service and maintenance.

5. Maximize lighting efficiency. Upgrade lighting to high efficiency bulbs and fixtures. Energy efficient lighting uses less energy and generates less heat, reducing your costs and easing the strain on your HVAC systems.

6. Measure water usage and waste. Conduct water audit in your facilities, campus, or geography to determine where water is being used and wasted. Reduce water consumption by installing low-flow equipment and fixing leaks.

7. Schedule cleaning during regular work hours. Experiment with different "day cleaning" schedules. Arrange cleaning schedules to overlap with work hours instead of having cleaning done after hours and keeping the lights, heating and air conditioning on at night. That will reduce energy consumption.

8. Insulate thoroughly. Insulate exterior walls, outlets, pipes, radiators, etc to reduce heat and cooling loss.

9. Meet LEED standards. Build, renovate, and operate your facilities according to Leadership in Energy and Environmental Design (LEED) standards. That will benefit your bottom line by lowering operating costs and increasing asset value. It will benefit the environment by conserving energy and water, reducing waste sent to landfills, creating healthier, safer occupant environments, and reducing harmful greenhouse gas emissions.

10. Make building occupants more informed. Educate and engage building occupants to promote energy conservation and reward wise energy decisions and behaviors.

Water: The Third Utility (and an efficiency goldmine)

Increasingly, current and prospective Octus clients have inquired about how they can reduce their water and sewer bills. We have deployed a number of energy-centric solutions -- including industrial ozone washing machines for hotels and our proprietary Wickool evaporative cooling device for rooftop HVAC units -- that both reduce energy costs and conserve water. These solutions fill specific needs for specific customers, but there is a more grand and growing opportunity to help building owners conserve water and reduce costs.

Here's our general logic: The thirst (demand) for water is increasing, and the supply of water is decreasing. Conversely, demand for energy -- electricity, in particular -- is increasing, albeit at a slower rate, but the supply, with renewable generation proliferating, is increasing too. If you own or manage a property, you are not myopically concerned with reducing your energy or water use; you care about slashing your utility bills.

From Buildings.com:

Major advancements in the technology and reliability of water equipment in the last 10 years have made the investment in water conservation very cost effective. While water and sewer rates vary, the process is worth your time for a variety of reasons:

• Water conservation is an investment with attractive ROI potential.
• Water rates are increasing.
• Sewer rates are increasing dramatically due to higher EPA mandates on municipal sewer plant operators (100 percent to 400 percent over the past 10 years).
• Droughts are requiring water conservation for businesses, or you face major water cost increases. Atlanta required a 10-percent reduction or a charge of an extra 25 percent.
• Water conservation and sewer plant operations benefit from water conservation since it directly impacts billion-dollar capital investments to address peak loads (like electricity).
• Some cities have demand-side management (DSM) rebates to incentivize water-conservation investment.
• Fresh water is a major element in our lives and the viability of our communities and, ultimately, the earth.

The article highlights that the U.S. government alone owns or leases 500,000 buildings that use 350 million to 500 million gallons of water per day. Water-conservation efforts in federal buildings have produced savings of more than 30 percent with no cutbacks in operations or service levels. These water-conservation projects have included high-efficiency toilets (HETs), high-efficiency urinals (HEIs), and other improvements.

And, it's a threefold savings opportunity: When you reduce water consumption, your reduce sewer charges. (Sewer charges can be one-third to two times the cost of the water, depending on local rates.) When you reduce hot-water use in showers and clothes washing, you’re also reducing your natural gas or electricity bill since the volume of hot water needed has been reduced.

Furthermore, with the Octus/Five Star Bank Building Energy Savings project financing program, building owners can implement energy- and water-saving initiatives with no up-front or ongoing costs.

Commercial Building Energy Efficiency Retrofits: $190 Billion Market

How big is the market for energy-efficient retrofits of commercial buildings? In a word: Immense. In numbers: Tens of billions of dollars, as we've quantified in previous SmartEnergyWorks posts. As ambitious and bullish as we are at Octus about the market -- and our opportunity to build an extraordinary business -- the Urban Land Institute just upped the stakes.

According to ULI, and as reported in SustainableBusiness.com, the market potential for energy efficiency retrofits in commercial real estate is projected to total $190 billion over the next ten years. From the article:

... the sheer size of the commercial real estate sector's carbon footprint illustrates the potential of energy-efficiency measures to make a dramatic impact on reducing emissions. The nation's approximately five million commercial buildings are responsible for 18% of total annual energy consumption in the U.S.; moreover, only 7% of those buildings represent half of the overall floor area of commercial buildings.

Investing in energy efficiency in real estate--an emerging practice with great market potential--requires new business practices and government incentives to overcome investment barriers. "Recent efforts to catalyze investments in energy efficiency in buildings have challenged how policy makers and market participants view real estate finance and valuation practices," the report says.

"Are investments in energy efficiency to be approached as a discreet value capable of being financed independently of the underlying real estate asset, and then traded as "efficiency-backed" securities on secondary markets? Or, is an energy efficiency investment to be treated in the same way a lobby upgrade is, which without question drives new value to the real estate asset? The answer is both, as policymakers work to unleash market forces to reduce energy demand."

The reports states that innovation in this emerging investment market requires evidence of real costs and returns. Information now available on building performance indicates that feasible energy retrofits for an individual building typically save 20% to 30% and in some cases as much as 60% of energy use, depending on a building's age, type, design, condition and maintenance.

As we discussed a few weeks ago, several energy efficiency project financing vehicles (including the Octus-Five Star Bank Building Energy Savings program; click here for a recent Business Journal article) are emerging. Coupled with increasing incentives and rebates from utility companies, the market is ripe, albeit with barriers. The ULI report echoes our thinking: there is a strong business case for commercial real estate owners and managers to incorporate energy efficient practices in their business strategies:

• Operating-cost reductions through energy savings in an era of tighter budgets
• The creation of reputational advantage in the context of evolving voluntary and regulatory emissions reductions targets
• The creation of new markets or lines of service leading to economic expansion
• Improved tenant working environments, leading to employee retention and higher productivity
• Lower building vacancy rates and tenant turnover
• Reduced business risk in the midst of energy price volatility and changes in consumer preferences regarding green building
• Reduced reputational risk in a globalized, increasingly transparent marketplace.

As SustainableBusiness summarizes, the report cites the need for a change in the perception of energy efficiency as an "investment in less," as in less environmental impact, to an "investment in more," or an investment that produces more value and cost-saving.

We could not agree more.