Cleantech Insights | Efficiency Finance: A new perspective

In our 2011 fourth quarter Investment Monitor, I asserted that 2012 would be ?a proving period when bets are placed, and programs and companies either mature or wilt? for efficiency finance players. This statement was a bet on consolidation in the short term. While the year has started off with some major moves (as I discuss here), attending ACEEE?s Energy Efficiency Finance Forum last week highlighted a different perspective on the market?s trajectory. Taking a longer view, it?s clear that (1) many financing options can and should flourish, and (2) the market is still in its exciting early days.

For those who follow the efficiency finance market closely, the assertion that multiple options should flourish may seem obvious. Yet, participating in the Forum?s discussions reinforced several important facts:

• The real estate market consists of many sub-sectors, which each have unique drivers and barriers. To emphasize this point, Deutsche Bank presented its breakdown of the real estate market, which showcased 3 sectors and 17 sub-sectors. From split incentives in multi-tenant commercial buildings, to high turnover rates in residential and office buildings, each of these sectors requires unique financing solutions.
• All finance providers are not the same. Funding for projects comes from various sources including VC?s, investment banks, and in time, secondary markets. Among these sources, appetite for risk and corresponding expected return vary drastically. As an example, executives from Citi and Deutsche Bank pointed out that developing a secondary market with low rates requires an established project risk profile that is built on decades of data points. This stands in stark contrast to investment firms like Blue Hill Partners that are interested in taking on more risk, and reaping the reward through profits.
• Energy efficiency solutions provide differing ROI periods. The upfront capital cost and expected rates of returns on an LED project are very different than when installing a new HVAC or energy management system. So, developing projects that meet ROI expectations requires a portfolio of solutions at both the site and investment portfolio

These are just a few of the variables that financing solutions aim to align. Much of the finance discussion pits one option against another. Yet, given the market?s complexity, it seems clear that there is no silver bullet. Instead, eventually some form of many of the current structures (ESAs, On Bill Finance or Repayment, PACE, etc.) will be needed to address the market.

Second, as Sean Neill of SCIenergy pointed out during his presentation, ?this is a marathon, not a sprint?. In other words, while the finance market is growing and garnering attention in the short term, establishing a successful track record and scaling investment to meet the size of the opportunity will take time. Recent studies by Deutsche Bank and Cap E put the efficiency investment opportunity between $150 and almost $300 billion (with a B), which could yield more than $1 trillion (with a T) in energy savings over 10 years. In comparison with these numbers, current investment is in the very early stages, with the most mature companies like SCIenergy (through its recent acquisition of Transcend Equity), Metrus Energy, Green Campus Partners, and Clean Fund having completed around 50-60 projects. In this light, there is room for incredible growth of these existing players, as well as opportunities for many new entities like the recently launched New York City Energy Efficiency Corporation (NYCEEC) to catalyze the market. NYCEEC provides financing and educational resources to building owners in New York and just announced its first project, which it partnered with SCIenergy (then Transcend Equity) to develop. With around 8 more projects in the pipeline, NYCEEC may be partnering with other entities to provide financing, and growing the industry?s track record with each new project. So, while the efficiency market is still in its early days, exciting new initiatives like NYCEEC are popping up around the US. Momentum in the marathon continues to grow, and we?ll be watching as it does.

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