How risky are energy efficiency investments?

By Elisa Wood

February 25, 2010

Last week’s announcement of $8.3 billion – and possibly as much as $54.5 billion – in US federal loan guarantees for nuclear power plants sparked debate about risk of default on loans. What are the chances the plants will be built?

Critics unearthed a Congressional Budget Office report citing a 50% risk the projects will fail. The Department of Energy countered that the report is seven years old and not germane. http://motherjones.com/blue-marble/2010/02/chu-not-aware-nuclear-default-rates

The truth is that all power projects entail significant risk. In some regions of the country, up to 60% of the plants proposed are never built.http://www.lowellsun.com/ci_14331942?source=most_emailed Projects fall by the wayside as they try to win government approvals, contract with suppliers and buyers, and secure financing. And even if all of this is accomplished, the bizarre can occur. Witness the explosion in February that killed six people at a nearly complete gas-fired plant in Connecticut — temporarily and possibly permanently shutting down construction.

Considering the risks associated with power plant development, energy efficiency looks like a good alternative. But efficiency installations – whether for lighting, heating, cooling, refrigeration, industrial processes or home weatherization — carry uncertainty too.

What are these risks? For one, promised energy savings might not materialize. Or results may not continue as long as expected over time. So an appliance or installation may not produce its promised bang for the buck. This is why it is crucial that the efficiency industry ensure its credibility with accurate data collection, measurement and verification. Unfortunately, baseline data is not always accurate. As the Alliance to Save Energy points out, states cannot even agree on how much energy is saved from a single compact fluorescent light bulbhttp://ase.org/content/article/detail/5976.

The efficiency industry also, at times, faces the problem of ‘if-we-build-it-will-they-come?’ A government agency or utility may offer generous financial incentives, but find it cannot meet its efficiency goals because customers ignore the offer. For example, the Center for an Urban Future recently found such missed opportunities in New York City where small businesses often ignore generous city and state conservation subsidies. http://www.nycfuture.org/

Burned by our current risk-induced financial crisis, the public is increasingly wary of investment failures. Thus, it is important for the efficiency industry to address risk factors with honesty, especially as the US undertakes an unprecedented ramp up in efficiency funding. The nation’s utilities increased their spending on energy efficiency by 43% in 2009, according to the Consortium for Energy Efficiency. In all, utilities spent $4.4 billion for electric energy efficiency and $930 million for natural gas programs. In addition, CEE found that 46 states offered energy efficiency programs last year, up from 37 states in 2008.http://www.cee1.org/files/2009CEEAnnualReport.pdf.

The federal government has heightened the stakes by offering about $25 billion in energy efficiency programs through federal stimulus funds. The money represents the biggest boon – and biggest risk — ever faced by the energy efficiency industry. The public needs accurate information about return on this investment. As ASE says, “This is the windfall efficiency advocates have long waited for – should we prove unable to realize energy savings commensurate with the funding, we may never again have a chance to do so.”

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

Efficiency “sweet spot” for investors

By Elisa Wood

February 18, 2010

Energy efficiency appears to have married rich in partnering with smart grid. Yet another report shows that together they have formed what has become today’s most appealing clean tech sector for venture capital.

Ernst & Young, using data from Dow Jones VentureSource, recently reported that financing rounds grew 11% in 2009 for energy efficiency, this as deals for the clean tech sector as a whole dropped by 16%.

The findings echo recent conclusions by Peachtree Green Advisors that found money pouring into the efficiency sector last year, pumping up total deal values by 664.7%. (See Elisa Wood’s January 21 blog, “Investors and public back energy efficiency.”)

What’s attracting investors? Ernst & Young – which incorporates smart grid into the efficiency category — points out that these technologies require little capital and can be commercialized quickly — characteristics of special appeal in an economy still nervous about high risk. While not exactly the stuff of dorm room startups, they are more akin to dotcom inventions than capital-intensive power plants. Smart grid revolves around digitalizing the electric grid to achieve greater efficiency in energy use.

“Energy efficiency is in the sweet spot of many venture capital investors in terms of skill sets and funding parameters, particularly given its basis in information technology. Consequently, we may see investor participation in clean tech broaden,” said John de Yonge, Ernst & Young, associate director, Americas Cleantech Network.

Energy efficiency’s share of total financing activity in 2009 rose from 24% to 32%, Ernst & Young said. The category raised $593.3 million for 2009; of that $252.8 million came from fourth quarter 2009.

The report cites the $105 million investment in Silver Spring Networks as the largest deal of the fourth quarter. The Redwood City, California company provides smart grid networking and services for Florida Power & Light, Pacific Gas & Electric and Pepco Holdings, among others. Institutional investors led the financing round, including several repeats: Google Ventures, Foundation Capital, Kleiner Perkins Caufield & Byers and Northgate Capital.

Government policy is clearly playing a big role in energy efficiency’s appeal. The areas of the country with the most clean tech investment have strong clean energy policies: California and New England.

What’s in store for 2010? The picture, so far, is good for efficiency companies looking for customers. Ernst & Young found that half of the major global corporations with more than $1 billion in revenue plan to spend $10 million on clean tech products and services in 2010, with 22% spending at least $100 million.

More details here: http://www.ey.com/US/en/Newsroom/News-releases/Venture-capital-2009-investments-in-cleantech-fall-50-percent-to-2-billion-dollars-as-investors-shift-focus-to-energy-efficiency.

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

Report Reveals Unusual EE Market Pattern

By Elisa Wood

“Big dogs eat first” is a phrase often used to describe energy markets. That is, expect large energy consumers – usually manufacturers -- to be the first at the plate to take advantage of any economic benefits. But a recent report suggests that when it comes to energy efficiency, householders may nudge the Mastiffs out of the way.

The American Council for an Energy-Efficient Economy found that in divvying up EE investment dollars, the US home makes up a disproportionate share. Specifically, appliances and electronics made up 48% of the $178 billion spent on buildings in 2004. Yet these devices represented only 8% of the energy consumed by buildings. Meanwhile, the industrial sector received only 25% of EE investment dollars even though these businesses use up 34% of our energy.

The report “The Size of the U.S. Energy Efficiency Market: Generating a More Complete Picture,” noted that this phenomenon is curious. We agreed, and contacted the authors for their insight into the cause.

Karen Ehrhardt-Martinez, co-author with John A. “Skip” Laitner, attributed the unusual pattern to the fact that homeowners now change out their appliances and electronics more frequently. They are not necessarily looking for greater efficiency, but more likely better performance or aesthetics. She cited computers as an example. Large advancements occurred in a relatively short period of time, resulting in out-of-date equipment over the short-run that people seek to replace. New appliances and electronics also happen to be more efficient, in line with government and industry standards.

So without trying, the average person contributed significantly to EE, avoiding the need for about 40 mid-sized coal-fired power plants during the one year the report analyzed. This “invisible” nature of EE, discussed in the report, may be one of its largest benefits. Consumers can take advantage of EE with little effort on their part.

Much hoopla is made about windmills and solar panels these days. While they are clearly a valuable part of the energy supply, they have not met 75% of our new energy demand since 1970, as EE has. Given its silent clout, EE may deserve its own new energy market catch-phrase: Big dog barks quietest.

Visit energy writer Elisa Wood and pick up her free Energy Efficiency Markets newsletter and podcast at www.realenergywriters.com