PACE Financing: Mass * Velocity = Momentum

We wrote a few weeks ago about PACE (property assessed clean energy) financing for commercial building energy efficiency projects. While it may not be a panacea nor tipping point for the development of energy efficiency measures, it's certainly a tremendous boost, particularly for small-to-mid-sized commercial and industrial building owners. At Octus, we're becoming increasingly involved and engaged -- by the day -- in PACE and its implementation.

Earlier this week, GoingGreen featured an interview with Dennis Tsu, who manages Business Development for Commercial PACE with Renewable Funding. Based in Oakland, Renewable Funding is the leader in the turnkey administration of PACE programs. They get it and they're catalyzing the momentum of PACE. In the interview, Tsu engaged how PACE financing differs from traditional bank loans, therein nailing the virtue and viability of the financial vehicle:

If a property owner were to go to a large commercial bank today and say, “I want to borrow 500,000 dollars to swap out all the lighting systems in my big office building, and I can get a three-year payback on the investment,” the bank will then reply, “Okay, we will give you a three year loan.”

Then for the first three years of the life of those lights – which is typically about ten years – you haven’t made any money and you haven’t saved any money. You’ve saved energy, but all the energy savings you had is going to repay the bank loan. So, it’s not until year four that you start to see cash using a traditional bank loan.

One of the fundamental elements of PACE is that you can amortize the cost of the project over its anticipated useful life. You can take that half-million-dollar lighting project and amortize it over ten years, and your energy savings are going to be greater than your property tax assessment from the very start. So, you actually start generating cash in year one, instead of having to wait until year four.

In most of the projects we’ve examined, property owners can save money and immediately generate cash by taking advantage of PACE. In today’s economic environment, this makes PACE compelling.

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Post-script (21 June 2010): Pike Research released a report today forecasting PACE financing for commercial buildings will reach $2.5 billion by 2015. “PACE programs are gaining momentum around the country, and they represent a very promising mechanism for overcoming many of the barriers to energy efficiency retrofits for commercial buildings,” says managing director Clint Wheelock. “The majority of buildings would benefit from energy retrofits, with neutral to positive cash flow in addition to the other environmental and social benefits.”

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Post-script (1 July 2010): Great piece in CoStar's newsletter today, amplifying the opportunity. Summary:

[PACE] helps commercial property owners overcome the hurdle of the high upfront cost of energy upgrades. While the industry has come to agree that retrofits can sharply reduce energy costs and consumption and offset greenhouse gas emissions, private owners have struggled to finance such improvements due to capital constraints, especially in today’s economy.

Aggressive NOI goals and the need to split the benefits of tax credits and other incentives with tenants present other barriers for owners. PACE financing has emerged as a promising, albeit untested, tool for commercial owners.

“The opportunities are really tremendous from an energy retrofit perspective,” Hasner tells CoStar. “A lot of the hesitation from building owners comes from the upstream expenses and not wanting to make those expenditures. This type of financing can help alleviate some of those concerns and convince owners to make these types of investments, which are going to be cost effective as well as energy efficient in the long run.”

Octus, Wickool featured in UC Davis Innovator magazine

Hot off the presses: The UC Davis Graduate School of Management's Spring 2010 Innovator magazine includes a cover story -- The Drivetrain of Sustainability: Powering Innovation in Clean Tech -- profiling, among others, Octus and our team. Here's an excerpt:

For a virtual case study in the power of GSM networking, look no further than Octus Energy.

Davis-based Octus specializes in reducing energy use for its clients by applying an array of tools and approaches, from lighting and HVAC retrofits to smart energy automation and creative project financing. “We try to cut a building’s utility bill in half,” says alumnus Chris Soderquist ’98, CEO and president of Octus.

The company recently licensed Wickool®, a passive evaporative cooling technology from UC Davis that promises to pay for itself in three years through energy savings. Within five months of the first napkin sketch, Wal-Mart was trying it out atop a West Sacramento store and it’s now installed on a Target retail store’s roof-top air conditioners.

“It wouldn’t have happened without the UC Davis Western Cooling Efficiency Center and without the GSM,” says Soderquist. The company has a distinct Davis flavor to it. “We have five GSM grads out of seven people at the company… because of our networks.”

On top of that, several of the GSM connections also have been—or still are—involved in other local start-ups that grew out of the Big Bang! or other university programs. “The greatest untapped asset the GSM has is its alumni and their networks,” Soderquist says.

Soderquist sees UC Davis as rich in the expertise, technologies, networks and relationships needed to become a hotbed for clean tech. And Dean Currall notes that a reputation for world-class science and connections with government will attract more financial and social capital to seed start-ups.

“It would be difficult to argue,” Soderquist says, “that there’s a better place to build a company in the cleantech area… than Davis.”

$50 billion reasons energy efficiency works

The growth of energy efficiency has been hamstrung by its relative transparency, its invisible nature. Is it real? Does it work? A recent GreenerBuildings post authored by Evan Smith, Kickstarting the Green Economy with Building Energy Efficiency, lends credence -- $50 billion worth -- to the immediate and perpetual efficacy of energy efficiency.

Quick synopsis:

What isn't getting enough play in our green technology economy is work we can and need to undertake right away: A serious coordinated effort to deploy network-based portfolio-management energy efficiency strategies and measures across our buildings and fleet transportation systems as rapidly as possible.

Here's one specific area for consideration. United States commercial real estate (all buildings except residential housing and goods-producing industries like manufacturing, agriculture and construction) consumes energy at a substantial and growing rate. It will grow at two-thirds the rate of gross domestic product through 2025, according to the Annual Energy Outlook 2005 published by the U.S. Energy Information Agency. In 2003, the commercial building sector, which is made up of 4.9 million commercial buildings covering more than 71.6 billion square feet of floor space, consumed 17,548 trillion BTUs of energy. Estimating a conservative nominal energy cost of $10 per MMBTU, the energy bill for commercial buildings in the U.S. exceeds $175 billion annually.

What is absolutely criminal is that today, somewhere between 20 percent and 40 percent of that energy is wasted, even from buildings built within the last 10 years.

The translation of energy waste to money lost -- seemingly simple, certainly proven -- is a cognitive challenge. Utility rates go up. Buildings age and become increasingly inefficient. Property owners and managers pay their utility bill every month. They can't see the energy they're wasting, and the hole in their pocket expands. It's groundhogs' day, and hole gets deeper with each setting of the sun.

Simply stated:

Start with the $175 billion in annual energy costs for the U.S. commercial real estate. Conservatively, 30 percent is available to conserve. The savings potential therefore approximates $50 billion annually.

What to do? The article frames a common scenario for facility owners and managers, and proffers a sage suggestion amplifying the purpose and utility of Octus's Smart Energy Platform:

In most facilities, maintenance staff work on the most egregious failures when they detect them, but the reality is that maintenance only detects and addresses some fraction of failures. The energy performance of most buildings today, even new ones, relying on alert maintenance staff and manual controls, is well below optimal.

New approaches to smart building facilities portfolio management enables digital readouts on zones, nodes and systems within wired buildings that can tell maintenance the energy (and air quality, safety, carbon footprint, etc.) impact of each failure on a real-time basis. These readouts - like giving each building an MRI every 15 minutes - can help maintenance staff to rapidly staunch energy losses and conserve most of the energy loss potential identified. These technologies and approaches are available now.

California cities and counties set the PACE in financing energy efficiency projects

Amongst the barriers of implementing energy efficiency solutions, project financing often tops the list. It’s a decades old paradox: Most (smart) energy efficiency projects generate sufficient energy savings (cash flow) to pay for the facility improvements over time, but property owners and tenants often lack the up-front capital to finance projects. What to do?

Fortunately, a number of new and pragmatic energy efficiency project financing mechanisms are emerging. And, not too soon, particularly given the tremendous waste (energy and money in inefficient buildings) and lucrative incentives (federal, state, local and utility incentives). Given our focus at Octus Energy to rapidly implement smart energy solutions, we’re acutely focused on what’s available and what’s in the pipe.

Property Accessed Clean Energy (PACE) financing is an innovative solution that might be the – or, at least, an -- answer to mitigate the financing migraine. This financing program was originally developed by Berkeley-based Renewable Funding, when they partnered up with the City of Berkeley to create BerkeleyFIRST. PACE programs, according to Renewable Funding, “enable local governments to finance clean energy and energy efficiency projects on private property, including residential, commercial and industrial properties.”

Here’s how it works:

1. Local government creates an improvement district;
2. A bond, secured by property within the district, is issued;
3. Bond proceeds are used to fund renewable energy and energy efficiency projects; and,
4. Property owners repay the debt service in fixed payments as part of their property tax bill over a period of up to 20 years.

Simple, clean and, hopefully, catalytic. Following Berkeley’s lead, other California cities and counties have sagely developed analogous financing programs, including:

• Palm Desert’s Energy Independence Program
  
• Sonoma County’s Energy Independence Program
  
• San Francisco’s GreenFinanceSF
  
• Placer County’s mPower Placer

CaliforniaFIRST, established by the California Statewide Communities Development Authority (CSCDA) with a program team that includes Renewable Funding as the program administrator and Royal Bank of Canada, is primed to be a statewide PACE. The pilot phase of the program includes 14 counties and more than 120 cities throughout California. Utilizing ARRA stimulus funds, the California Energy Commission awarded CaliforniaFIRST $16.5 million to pilot the programs as part of the State Energy Program, with Sacramento County as the lead grant contractor.

Paradox solved? At Octus, we’re bullish. As the economics of energy efficiency continue to improve with the advent of more efficacious technologies, smart financing solutions – presuming common sense and economic theory prevail – will hopefully proliferate.

New York City completes energy efficiency benchmarking for all City-owned buildings

You can't manage what you don't measure.

So opined NYC Mayor Michael Bloomberg in announcing the City has benchmarked the energy efficiency of every city-owned building over 10,000 square feet (2,790 total facilities). “Understanding the consumption across the city’s portfolio is a critical component of meeting our goal of reducing city government carbon emissions 30% by 2017," the mayor explained.

The project was undertaken using the US Environmental Protection Agency’s Energy Star Portfolio Manager benchmarking tool, a process analogous to Octus Energy's methodology in developing energy efficiency projects. As summarized in the GlobeSt.com post:

Benchmarking measures the total electricity, natural gas, steam and fuel oil consumed in a property and adjusts for other factors—including building type, year of construction, number of workers and gross square footage–to help determine which facilities operate inefficiently. The idea is to allow the city to prioritize buildings for energy efficiency investments and monitor performance over time, according to a release.

On an annual cash flow basis, the city expects to break even on its energy efficiency investments in 2013, and projects that by fiscal year 2015 it will have saved more on its energy bills than it has spent on all the planned investments to that point.