Critical need for energy savings and loan performance data remains unmet

By Kat Friedrich

Guest Blogger, Energy Efficiency Markets

A vast gap exists between the detailed information financial institutions need to support energy efficiency financing and the limited data they currently have. Several examples suggest these loan programs can succeed, but there are no large datasets supporting investment in energy efficiency.

Providing energy efficiency loans could give financial institutions new market opportunities. Unfortunately, their underwriters don’t have enough loan performance information to finance large volumes of energy efficiency projects yet. This lack of information inhibits the scaling up of energy efficiency retrofits in the residential and commercial sectors.

The small size of the market for energy efficiency loans inhibits market growth, said John Joshi, Managing Director and Business Strategist at Capital Fusion Partners. Investors seek liquidity; they want to be able to move their assets within a market. As the energy efficiency loan market grows, this lack of liquidity will no longer be an issue. Right now, “it’s a Catch-22,” Joshi said.

“We need strong political and regulatory support to make the market more viable,” Joshi said. “If it’s left to capital markets’ intervention, it will be a much slower process.” He said government financial support for renewable energy programs is key to opening this market.

“Investors want to compare apples to apples within transactions,” Joshi said. “They also want analytics so they can do scenario modeling.” Investors also ask third parties to participate in the analysis, so data needs to be accessible to a range of stakeholders.

When approving loans, underwriters need reliable data on the expected energy savings from energy improvements so they can factor this into their credit risk analysis. To consider an energy efficiency loan a safe investment, investors and rating agencies need reliable data on expected energy savings from efficiency installations in similar buildings in similar locations. They also need statistics on loan repayment. Much of this information is currently missing.

Kerry O’Neill, Senior Advisor at the Clean Energy Finance Center, said we need a national database where energy programs can share performance information for energy improvements in buildings. Many programs have done small evaluation, measurement and verification studies, but these are hard to generalize. The energy data needs to be combined with performance data on efficiency loans to provide a complete picture.  O’Neill suggested that a third-party nonprofit or nonprofit co-op model might work well, with foundation support.

O’Neill said that a recent study commissioned by the Deutsche Bank Americas Foundation compared energy savings estimates to actual savings in 21,000 multi-family rental units in New York City.  The results showed that the savings estimates were overstated by 40 percent. These findings suggest that underwriters can expect a large difference between estimated and actual savings. Because this study covered multifamily buildings in New York City, its numbers aren’t transferable to single-family homes or commercial properties.

John Byrne, Director of the Center for Energy and Environmental Policy at the University of Delaware, said a bond initiated by the Delaware Sustainable Energy Utility earned an AA+  rating from Standard and Poor’s (S&P) in large part because the program developers collected data from a variety of buildings. They used these data to develop financial savings estimates for the energy efficiency projects. As a result, energy service companies (ESCOs) were able to guarantee financial savings – not just energy savings. This financial guarantee changed the underwriters’ perspectives.

Byrne said the S&P underwriters asked for very specific data. They were interested in variables such as climate, the local economy, building type, and energy savings over time.

O’Neill said data from Pennsylvania’s Keystone Home Energy Loan Program shows energy efficiency loans are outperforming other unsecured debt. However, some investors raise the question of whether program participants are a self-selected group and are skeptical about generalizing these numbers. With larger data sets and analytics on performance, programs can address these investor concerns.

Byrne recommended organizing “education days” to bring the financial industry and the energy efficiency industry together. He has organized events like this before in Delaware and believes they are a successful way to explain the importance of collaboration and encourage organizations to share data.

“Until the industry addresses this issue of scarce data on energy savings and financial performance, it will continue to meet resistance from the financial community,” said O’Neill. “This will impact the rates and terms that can be secured, as well as the size of investment.”

Reposted with permission of the Clean Energy Finance Center, which works with stakeholders to develop policies and programs that drive investment in energy efficiency and small-scale renewable energy.

EE funding: The cascade begins

By Elisa Wood

March 25, 2010

It’s been a heady time for the energy efficiency businesses, with the federal government last year announcing financial support never before seen by the industry. But months after the initial hoopla many of the smaller companies – which make up a large swath of the marketplace – say they still have not seen dollars come their way.

That’s changing now, according to the National Association of Energy Service Companies, which held a recent workshop in Washington, DC to discuss federal energy efficiency initiatives. Donald Gilligan, NAESCO president, and James Dixon, NAESCO, vice chairman, took a few minutes away from the action to talk to me about their view of the marketplace.

Dixon, who is also a vice president at ConEdison Solutions, says his company has been seeing a lot of business spurred by federal stimulus dollars. The funds are now flowing from the energy service performance contractors and energy service companies (ESCOs) down to the general contractors, lighting contractors, manufacturers and others in the chain of services. “It’s a huge cascading effect with far ranging impact throughout the country,” Dixon said.

Gilligan expects this cascade to flow even faster in the second quarter. “It is ramping up quickly. We expect most the money to be committed in a few months.”

How do you stay on top of the action?

The federal government is engaged in a large-scale effort to bring more efficiency to its buildings. Those contracts tend to go directly to the “super ESCos,” sixteen companies that were awarded special umbrella energy savings performance contracts by the U.S. Department of Energy late last year. A list of the super ESCOs and contacts is here: http://www.nema.org/gov/economic-stimulus/upload/Fact%20Sheet%20and%20Contact%20Info%20for%20ESCOs.pdf

Super ESCos often subcontract work out to the smaller energy companies. Smaller players also can keep an eye on the significant increase in energy efficiency spending by state governments, particularly in the Northeast. Much of the state money flows directly to utilities who in turn subcontract projects to energy service companies.

Those who have been in the industry for decades have seen interest in energy efficiency ebb and flow. What’s the impetus this time? And how long will efficiency hold society’s interest?

“If you go back four to five years, then you begin to see the trend toward increased energy efficiency. That was also the time when you began to see utility companies propose to build new power plants,” Gilligan said.

“Those new power plants are phenomenally expensive. What happened across the country, at the state level, at the public utility commissions, when they were asked to review the applications for those power plants, they said, ‘What else is there? There has got to be something less expensive than this.’ You saw a real renewed interest in energy efficiency in parts of the country that had not show interest in energy efficiency for 10 or 15 years. That trend is not going to stop, as the country continues to grow, as we continue to need more power supplies. Energy efficiency is always less expensive than new power plants,” Gilligan added.

Dixon concurred: “I‘ve been working the utility industry for about 28 years, so I’ve seen this ebb and flow. I think this is a long term trend.”

So if you’re in the energy efficiency business and haven’t yet seen increased action yet, hang on, it’s coming soon. And it looks like you’re in for a long ride.

Visit Elisa Wood at http://www.realenergywriters.com/ and pick up her free Energy Efficiency Markets podcast and newsletter.