This week I attended a USGBC hosted discussion on PACE financing held in downtown Boston. Based just on Massachusetts Senator Brian Joyce’s opening remarks attendees got the clear impression that PACE is on a roll again…
Back in 2010 PACE also appeared to have momentum (16 states had already enacted legislation) only to have Fannie Mae and Freddie Mac suggest they wouldn’t “support” PACE, as it subordinated their mortgage loans. While Fannie/Freddie had no legal means to stop it, even their expression of concern had the effect of changing market perception. Just like that PACE looked to be stalled.
Surprise – three years later 31 states have now enacted legislations, with even conservative Texas having recently joined the ranks.
What’s kept it moving? In my view, three things:
1. Jobs. PACE generates local jobs (no outsourcing local mechanical contractors to China) and politicians have latched onto this message. In today’s economy there are very few jobs stories and energy efficiency finance is a feel-good, voter friendly message.
2. Greed. Bankers and Wall Street now support PACE as they see the chance to lend high quality, secured dollars and make money repackaging and reselling them. Get ready, energy efficiency bonds are coming your way.
3. Dropping Residential. With the overhang of Fannie/Freddie’s concern, and the like hood of consumer lending scrutiny, successful PACE programs are quietly bypassing the residential market. And in multi-family housing there are already a ton of existing financing programs, which means PACE stands to get lost in the weeds there as well. The best initial programs are focusing on C&I as it is cleaner and easier.
If Brian Joyce has his way Massachusetts will become the 32nd PACE state next month. His team is busy studying neighbor Connecticut, who also joined late (state #28) but whose C-PACE program has quickly implemented projects. Meantime only six other states have live programs underway post-legislation. With so many constituents needed to sign off (municipals, state agencies, bankers, etc.) the new program design and implementation process has proven to be challenging.
Unlike some others, CT has taken a single state approach (one program for the whole state) and has fast tracked the first projects using their own equity and debt capital. To do this, two years ago CT launched the nation’s first green bank, CEFIA, to provide the capital and use its bonding authority. The proceeds from their RGGI auctions flow into this entity as well. New England neighbor NY state will soon follow with their own green bank.
By priming the pump with their own capital C-PACE is now in a position to show demand and strong results, as opposed to living in hypotheticals. Their lending rates for these initial projects have been 4.5 to 5% and they are now collecting sealed bids to sell off these first loans.
Genevieve Sherman, the manager behind the CT program, had some interesting early stats: CT now reaches 65% of the state (59 towns have opted-in already), has $7 million of closed projects, another $13 million (100+ projects) in the funnel, Groom Energy is one of 300 contractors already trained and 14 capital providers are lined up. They had expected the average project sizes to be @ $300 to $500k, but projects are coming in higher. All good news and impressive.
For those of us who have been cheerleaders in energy efficiency finance for the last several years, PACE now looks to have some ingredients which overcome obstacles faced by alternative financing approaches (ESCO, capital leasing, operating leasing & on-bill finance.) In the past building owners have pointed to three reasons they haven’t already pursued energy efficiency upgrades for their buildings:
1. Lack of capital
2. The energy savings weren’t certain
3. The owner-tenant split incentive problem
C-PACE solves # 1 using their own money to get started, replacing it with private third-party capital over time, #2 by having engaged a third-party engineering firm to confirm project savings projections and #3 by enabling the owner to recapture their increased tax costs from their tenants.
On #2 there was the expected question from the audience – “what happens if the savings don’t materialize?” The answer? The owner is still obligated to pay. No guarantees. No third party insurance. As we’ve commented before on this topic, adding guarantees (or even the perception of a guarantee) is expensive. And C-PACE is betting that a third party engineering review will suffice and preserve a light weight, low-cost administrative layer. Unlike traditional utility rebate program’s technical review (which is a black box) the results of these engineering reviews will be made publicly available. One building owner panelist even commented that this is “a government program which is “non-offensive” and allows him to shift the performance risk to his tenant.”
Interestingly, CT appeased the bankers association by requiring that any PACE financing first gain a sign off from the bank owning the mortgage on the property. While it seems like a no-brainer that the bank would not stand in the way of a cash flow positive building upgrade, CT has already seen cases where an owner shifted banks when their own bank hesitated to give the sign off.
But in the end it’s #3 that is most curious and potentially the biggest opportunity.
As a flow through tax to triple-net tenants an energy efficiency upgrade can finally be considered regardless of where the tenant is in their lease cycle, and with less landlord tension about who pays for the upgrade. The tenant decides how to accrue the benefits, absorb costs over time, and, using up to 20 year PACE financing, how cash flow positive it is from day one.
Compared to yesterday’s announcement that the Federal Government is bringing back Cleantech Loan Guarantees, this sounds like a way more compelling loan program.
A few weeks ago one of our thoughtful engineers sent me a note wondering aloud about the correlation of sustainability-minded companies to above average stock price performance. Like others with an environmental bias he hoped to feel good about buying shares in publicly traded, relatively greener companies while still making a strong financial return (and further driving down the cost of capital for these same companies.)
On a whim he had picked a few companies he viewed as “green” (Whole Foods, Chipotle and Starbucks) and plotted them against more traditional companies in their sectors (Kroger, McDonalds and Dunkin Donuts) along with the S&P 500 as a benchmark. Sure enough the green ones performed better over time.
“How would you explain their far superior performance if you can’t chalk it up to the CEO’s sustainable beliefs and operating principles?” he wondered.
If only it were that easy.
What he also knows is that everyday we politely provoke our F500 customers into investing more money in under three-year payback energy efficiency projects. We’ve field demonstrated the applications, metered and verified that the energy and cost savings will materialize. And we’ve already secured a rebate incentive from the company’s local utility. The risk is low and the opportunities are always there.
But while we hope F500 companies invest because “it’s the right thing to do,” we know even these fast-payback investments must first get the attention of senior management and then make it past the brutal annual budgeting cycle, going against all other discretionary investments. This is true for larger (over $1 million) and smaller (under $50k) investments alike.
One recent more positive trend we’ve observed is the “this works – let’s do a lot more of it” phenomenon. In these cases we’ve already performed a project for company’s management, they’ve seen the energy savings and know that many more of the IDENTICAL projects exist within their portfolio. They engage us for an efficiency rollout program with much bigger dollar savings that can be forecasted for their operating budget. Their investment is 10x the size of their original project – as is the savings. Still, for my purposes, we don’t see this often enough
Ironically, while on the plane headed to Greentech Media’s Avant EE conference in San Francisco, I read about a recent research project by Thomas Lys, one of my former accounting professors at Kellogg School of Management, on the stock price question.
Professors Lys, James Naughton and Clare Wang had collected data for hundreds of companies, across multiple industries, for the period from 2002 through 2010. Knowing that over 50% of the F500 now issue corporate accountability reports, the team wondered whether the corporate sustainability investments led to improved financial performance.
The team concluded that companies making significant CSR investments did not deliver better financial performance. They confirmed what I had debated with our engineer – from the investors perspective CSR investments do not make a sufficient impact to the bottom line.
However, investors sometimes did respond favorably to these companies as a result of their CSR investments.
Equity analysts took the investments as a signal of management’s confidence that future earnings would be strong. (Presumably thinking why else would they be investing in non-core areas?)
It’s counterintuitive – and makes me wonder whether Groom Energy needs to change how we coach our customers.
As we do each spring, this week a team of Groom Energy engineers made the pilgrimage to Lightfair in search of “the next big thing” in lighting. We went to training sessions, walked the exhibit floor and talked with smart folks to develop a collective view of what’s going on, what’s hot and what’s not.
As it’s now Year 5 since LEDs took over LightFair, we were already anticipating an overwhelming number of new LED products. Showing that “anyone with a brand name” needs to enter the LED game, this year’s winner was Whirlpool, a company extending their energy management apps for appliances into lighting?
But beyond sheer volume, three subthemes emerged:
1. Warmer colors: Better LED price performance now gives vendors the chance to show off products that come in warmer color temperatures (2700K and 3000K.)
In the past manufacturers prioritized achieving high lumen output over producing warmer colors (which also takes chip performance.) First and second generation LED lamps and fixtures were often cold, operating at 5000 to 6500K.
Today they can do both. Booth marketing teams this year talked about CRI, color blending and warmer colors instead of bragging about how long LEDs last.
One vendor took us into a dark booth to show off two side by side LED retail displays, both with high CRI and warm color. Evidently 97% of the retail merchandizers surveyed at a prior conference had picked one over the other. Our team had a blank stare – with our energy-efficiency eye both looked equally great.
2. Smarts are in (literally): Lighting control for digital LEDs is happening and it’s even moving from add-on systems to embedded.
Vendors are showing off their integration with third party controls and more booths have LCDs showing fancy software screens with lighting control graphics. Maybe CA’s Title 24, which requires lighting controls, and is set to go live January 1, 2014 is helping?
Up and coming players all had their announcements – Enlighted announcing another fund raise of $20 million and Digital Lumens demonstrated their integration to other LED fixtures.
Where last year Lutron announced their plan to embed their controls widget into CREE fixtures, this year the move is to add capabilities directly into LED drivers and ballasts. Marvel’s partnership with Daintree moves this direction. And its even happening with smart, connected street lighting like Echelon’s deal to be embed their technology directly into Osram ballasts.
While the embedded wave generally doesn’t add new control capabilities, it does attack lowering the cost – which is the real sign of a maturing market.
3. Lamps and fixtures look the same, now they just have LEDs inside. A few years ago manufacturers were struggling with how to replace round and tubular HID and fluorescent lamps with flat LED chips inside “traditional” lamp housings . This year we saw a noticeable number of lamps and fixtures where you didn’t know LEDs were inside.
Part of this comes as a result of LED performance increases, which now allow manufacturers to add glare reducing diffusors to cover the point source chips. Where lots of bright dots used to give away the fact that it was an LED fixture, now lighting distribution is more even. In an effort to get more configurability out of one lamp or fixture, manufacturers like Soraa and Amerlux showed a set of clip-on lenses which can be used to shape light as needed even after installation.
This move to “look like what you know” was strongest at the CREE booth. Earlier they had already introduced a new LED A lamp, which looks virtually identical to a traditional incandescent bulb in your home. This year they showed off a T8 retrofit look alike, which replaces the linear fluorescent lamps in a traditional 2×2 or 2×4 office troffer fixture. The color was great, the shape was identical and you could keep your existing fixture in place. Looking up you could not tell the difference – looking down at your utility bill you likely will…
Harvard economist Robert Stavins recently published a study assessing the impact when US cities require their real estate owners to perform periodic energy analysis on their buildings. As Boston considers passing its own energy benchmarking ordinance, Stavin studied other existing programs and concluded “there is currently no real evidence that these mandatory programs lead to any changes whatsoever in energy use.’’
Then we read the fine print. The study, funded by the Greater Boston Real Estate Board, was neither peer reviewed nor academically published. Uh boy.
So let’s take a step back and consider the following timeframes:
NYC’s and San Francisco’s energy benchmarking programs only went live requiring reporting a year ago. Seattle, Philadelphia, Austin started since then and Washington DC and Minneapolis just launched in the last few months. (Which means Boston’s Green Ribbon Commission is actually late to the party in pushing to get this new policy passed.)
To convince a building owner to implement an energy efficiency upgrade takes our team an average of twelve months. Then we install the project a few months later. Then the savings need to materialize and be measured. A utility study which independently measured results could probably be delivered a year after that – then it could given to Professor Stavin’s team so they could draw their own conclusions.
Get the picture? It takes at least a few years for this sort of adoption to be fully measurable.
The report also asserts that similar programs in Europe have no academic studies validating such a policy’s impact.
But while many countries are implementing their own programs, like the US, most of these have also developed in the last few years. It may have been better to analyze the adoption in Australia, whose benchmarking ordinances were initially introduced in 1998, likely making it the world’s longest standing program? And back here in the US there are studies which counter his “too early to tell” opinion – check out the Georgia Tech study, the California PUC study or the Facilities Manager review.
Pushing it further, Larry Harman’s Boston Globe editorial suggested that the new policy would “aggravate” Boston’s real estate owners. He opined that the policy of forcing expensive energy audits for buildings that are generally older than the rest of the country, with fines for non-compliance, would just be unfair.
Yes, Boston’s built environment may be old, but in real estate reducing a building’s operating costs adds directly to the property’s income, which increases the value of that property. Massachusetts has some of the highest energy rates in the country and ranks number three (behind CA and NY) in providing tax-payer funded energy efficiency incentives. In our experience in doing work across the country the financial return for upgrading older buildings in Boston is probably one of the best in the US.
You can’t catalyze energy efficiency change if you don’t first measure and report energy consumption. Building energy benchmarking is only a first step, but it can change consumer psychology through new awareness, which in turn can drive behavior change and investment in energy efficiency. You either want to drive it or you don’t – which is the question Boston legislators can vote on next…
Economist’s normally search for the social drivers. Stavin’s colleagues down the hall in HBS’s Marketing department must have already analyzed the now famous Oberlin college dorm research study where dorm residents, given their own energy usage information, competed to reduce their consumption. And the consumer research which confirms the reduction impact when consumers are told how much energy they consume relative to their neighbors. Putting a ranking on a commercial building is the same bet. Australia’s NABERS system uses a one to five gold star rating and Energy Star uses scores from 1 to 100 – but either way, it gets the simple point across – you’re doing well or you’re not.
But Stavin comes at it from an economist’s viewpoint, not a consumer behavior angle – so let’s stick to the business and the financial implications.
So let’s consider a 250,000 square foot office building in Boston.
At an average value of $250 per foot, the building would be worth @ $62.5 million. Its annual real estate taxes might be $2 million, common area maintenance costs $2.5 million and utilities $1 million. Let’s assume the owners have @ 50% leverage and expect to make 15% on their equity or $4.7 million in earnings per year.
Running an Energy Star Portfolio Manager model on this building might cost $2k. A full blown energy assessment (likely subsidized for 50% of its cost by the utility) might be another $5 – $10k. (btw – energy audit costs are only going down, as we now see a number of new startups focused on providing high volume, low-cost energy audit tools.)
So over a five year period, if the owner runs an Energy Star model every year and performs one energy assessment, the added cost for Boston’s energy benchmarking ordinance would be approximately $15 – 20k.
A typical energy assessment for this sized building might identify HVAC and lighting upgrades which save 15% of the building’s utility costs ($150k). The investment would be $450k, but the utility would support a third of the project’s cost, producing a two-year payback on the owner’s net $300k investment. The study would likely identify no-cost behavior changes that save another 3% of the building’s energy costs ($30k).
Post the energy efficiency upgrade and behavior change savings the building now earns $4.9 million and is worth $2.4 million more using a Boston Class A cap rate of 7.5%. (Income taxes would also reduced using Federal EPAct accelerated depreciation, but that’s icing on the cake.)
So let’s recap:
Boston implements a new real estate policy and this owner is forced to spend @ $20k over five years to comply.
If the owner decides to invest nothing, the energy assessment alone will likely show a way to save $30k per year.
If the owner decides to invest in upgrades, the $320k investment over five years will add $180k in operating income each year, and increases the property’s value by over $ 2 million whenever they sell the building.
When you consider typical government compliance policies, does this one really seem that unfair?
During building energy assessments we often find obvious, no-cost behavior changes savings: A compressor running flat-out for an idled production line. Flood lights illuminating an unused parking lot all year long. Warehouse dock doors that stay open all day. Our very technical recommendations come with a smiley face:
Step 1. Shut off the compressor. Step 2. Turn off the lights. Step 3. Close the door.
But the best visuals come from situations where we find a heating system and a cooling system operating at the same time.
Some are short duration – like a surgeon needing the operating room to be kept at very low temperatures to slow the patient’s blood flow during the procedure, while the surrounding rooms require heating. Some are longer duration - like the college dorm with old steam radiators cranking too much heat, spurring students to leave the windows open all winter long.
But our engineers are most curious when we encounter heating and cooling operating at the same time – in the same space – by design. Sounds wacky, but consider these:
1. Big Box Retail Stores
Big box retail stores typically have packaged rooftop units (RTUs) providing space conditioning. Most RTUs are configured to cycle fresh air into the store at a certain rate, based on the estimated number of shoppers. So while the RTU is working to cool and dehumidify on a summer day, it’s simultaneously drawing in hot, humid “fresh” outside air, removing “stale” air that it just finished cooling. The more outside air the RTU brings in, the harder it needs to work to cool and dehumidify the space. (Just reverse this for the winter season example.)
Options here? We add demand control ventilation (DCV) which measures the amount of CO2 in the store and brings in fresh air only when needed, as opposed to hard-wiring 6 to 10 fresh air changes per day. We can also add energy-recovery ventilators, which use the cold or heat from air being removed to pre-cool or pre-heat the incoming outside air, thereby reducing the RTU’s work load.
2. Cold Storage Warehouses
Ammonia chillers keep these buildings at below freezing temperatures all year round, preserving stored frozen product. Yet the building’s concrete slab floor also contains its own heating system. Without it the subsoil below the slab would freeze, swell and buckle the floor. The heating system might be hot liquid or electric within the slab, or forced hot air blown under the building’s foundation. Either way, the chillers fight a heated floor 24 x 7 x 365.
Options here? Some warehouses have already optimized by using recaptured waste heat from the chillers for the floor heating. As a large thermal mass, slab floors take a long time to change temperature, so we consider running the heated floor only when necessary, based on the temperature differential at that time. If the floor is heated electrically we can time-shift the system to nighttime operation, when kWh can be less expensive – or turn the system off briefly at peak periods in order to reduce utility demand charges.
3. Grocery Stores
Next time you reach into a cooler cabinet to grab a Ben & Jerry’s, take a look at the glass door. It’s heated. To combat condensation buildup, case manufacturers have designed in an electric door heating system which operates in tandem with the cooling system. Interestingly the heater draws nearly four times more electricity than the cooling.
Options here? We add moisture sensors (called anti-sweat controllers) just within the door frame connected to the glass. The controllers then cycle heat to the doors only when moisture is detected by the sensor.
Unlike “close the door” and “turn off the lights” most of these solutions require a retrofit and cost money. While the investments are typically fast payback, they only reduce consumption a modest amount. But remember we started with two systems designed to fight each other – which is never a good thing in energy efficiency.
Over the last year we’ve participated in an increasing number of interviews, conferences and panels discussing the energy-efficiency finance market, including commercial PACE and on-bill repayment programs. Awareness is high, with many policy, government and utility executives generally convinced that if low-cost capital were more readily available, energy-efficiency adoption across residential, institutional, government and commercial/industrial markets would surge.
Limited access to low-cost capital is the market impediment.
Or is it?
Do buyers really believe what they’re buying will work, such that low-cost financing is all it takes for them to start buying more energy-efficiency?
The $5 billion ESCO market, which utilizes low-cost tax-exempt bonds to finance energy-efficiency investments, has been growing at 15-20% per year. Not the highest in its 40-year history, but not too bad in today’s market. In these financings the ESCO customer tells potential bondholders that the energy saving investment will provide future cash flow, that in turn can be used to pay back their bonds. The bond market makes the credit decision. The ESCO provides its “guarantee” for the energy savings and installs the project, getting paid with the proceeds from the bond offering.
Interestingly, the number of times an ESCO has made a payout on their guarantee is stunningly low. The reason is that ESCOs only insure what they control, i.e. their energy calculations. And before any project is started the customer must sign off on the building operating assumptions that drive the energy savings calculations. So in most cases an ESCO really just guarantees that its math is correct – like fancy wrapping paper around an empty box.
But this ESCO guarantee is still required to make the public financing work.
Beyond the institutional market, is low-cost capital alone enough to catalyze the commercial and industrial market?
Consider this. Today most major corporations are already flush with cash on their balance sheets. And for those that aren’t, the last time I checked the cost to borrow money was pretty close to an all-time low. So you have to ask the question, do corporations really need lower cost financing?
Of course some do. But this could be negative self-selection, with only companies in poor financial health taking the offer. In which case lenders might be nervous – and require some sort of guarantee to backstop their low-cost capital lending to a high-risk company.
Typically Groom Energy’s customers pay us outright to perform our installation upgrades. The capital comes from their annual capital budget or their on-going maintenance or production budgets. While we’re often asked to propose both a purchase and a financed option, not surprisingly companies rarely choose the latter for fast payback projects.
We’ve deliver financing three different ways:
1. Shared Savings: With long-standing customers we’ve used our own shared-savings financing whereby we install, own and maintain assets and get paid over time as the energy savings materialize. With this approach (called our CESA) we’re responsible for everything – designing, installing, maintaining the system, the utility incentive and the credit risk. The meter is the guarantee and tells our customer how much they owe us. But CESA isn’t for everyone – it requires a performance contract-like agreement and a sophisticated customer who must provide us legal lease access to their facility.
2. Capital Leasing: Occasionally we also bring in an outside capital leasing partner who makes their own credit decision on a general purpose loan to our customer. During the credit review process our project development team is left hoping this wasn’t negative self selection In taking on the loan our customer relies on our energy model to assure them that the project will be cash-flow positive (or at least cash-flow neutral.) If we’ve managed our project development process appropriately (using metering, a demonstration implementation, and involved their local utility) they’re typically confident that our model is close to reality. They trust us.
3. Utility On-Bill Finance: Where it has been available we’ve brought in the customer’s local utility to offer a project incentive and an on-bill finance option. We just announced this recent project with National Grid utilizing this model. It’s powerful because the customer already has a relationship with their utility, the utility reviews our energy model before supporting it and the customer trusts that we’re not geared toward gaming them. We’re all in it together.
This has been the most efficient of all three options and the reason we’re excited about the emerging on-bill repayment program in CA, which will expand the number & size of project financing available.
Beyond the financing question, occasionally we hear the question “will you guarantee it?”
This always leaves our project development team wondering if our initial two-year payback estimate looks too good? Or maybe the customer has previously been burned by another vendor?
Either way they don’t yet trust us.
With any energy-efficiency model we can always change our assumptions to make it look better or worse. The art of it is to make sure our customer participates with our engineers in building assumptions, be it for a single system like compressed air, RTUs or lighting or interdependent system like air handlers with VFDs attached to a manufacturing process. Everything we model must be done collaboratively – with our customer’s input and guidance.
Some customers take a hand’s off approach, listening to our savings estimates but instead requiring that we fully meter everything, engage with a heavily negotiated contract that puts the screws to Groom Energy if we’ve over estimated the savings, or even defers payment if savings have yet to materialize.
Sounds like a fun and trusting relationship, right?
Fortunately, most of our customers realize that if Groom Energy doesn’t deliver the savings, the biggest pain with be ours, as that customer will won’t work with us in the future. They know based on our customer resumé that we’re absolutely goal aligned to over perform.
But in the end, if they’re still asking “can you guarantee it” we have failed at establishing trust.
In which case they’re unlikely to adopt – with us, or any other provider.
Trust and low-cost capital together are the most powerful combination for accelerating energy-efficiency adoption.
If you weren’t one of last night’s 100+ million Superbowl viewers, by now you’ve probably heard that a stadium wide power outage stalled the game for 34 minutes.
Was it a conspiracy by CBS to sell more advertising? One brand team used the dark time to quickly execute an Oreo cookie twitter campaign which said “Power Outage? You Can Still Dunk In The Dark. And there were some entertaining tweets from the masses about the a Superbowl with no power. Or maybe the 34 minutes was paid for by Caterpillar, hoping to drive awareness for their backup generators? It could certainly help the calculation of the monetary value for reliable backup generation.
But NRG says that there was a full backup system in place and, after a portion of the electrical network overloaded, it operated as designed and power was restored. CBS also claimed full backup, and although they didn’t stop broadcasting, the booth with Phil Simms and Jim Nantz was off the air for 30 minutes.
So while engineers begin studying how the backup system could have restored power faster, eventually they’ll come to the stadium’s lighting.
You probably know stadium lighting from afar. It could be from when you were last a spectator at a major sporting event and looked up at the lighting towers, each holding 10 to 100 individual round domed shaped fixtures. Or if you’ve been on a quiet and lit neighborhood playing field you might remember that annoying background buzzing sound. Or that the lights need a warm up period before practice can begin. Whether its the Superbowl or your town field we’ve all been exposed to this high intensity discharge (HID) based lighting.
Each HID fixture draws 1 to 1.5 kilowatts of energy. As a comparison, to provide reliable electricity service to your home, a local utility will likely model 1.5 – 2 kw of demand. And here’s a shocker – HIDs are not energy efficient. The light output from an HID lamp depreciates quickly, with each fixture giving out less light for the same power consumed. Once the default lighting type for other high-mounting height locations like warehouses, factories and gymnasiums, HIDs have broadly been replaced by more energy efficient fluorescent lighting, and, more recently, long lasting LEDs.
But the Superbowl feature that stands out most is instant on – instant off.
What many didn’t pick up last night is the fact that even with power restored HID systems take 10-15 minutes just to come to full light output – or roughly half of last night’s Superbowl downtime. Not exactly what we’ve all come to expect from a light switch at home or at the office. In energy efficiency land, not being able to turn something on and off when needed is a killer. The world is moving toward demand based everything – controls should automatically know when you need something and when you don’t – and turn things on and off accordingly.
So the Superbowl power outage may actually have been a commercial in disguise – and anyone selling HID lighting was NOT using twitter to tell the world how much they enjoyed it.
In the case of wind, Congress even enhanced the incentive, making the industry’s requested language change, so a wind system need only be “in construction” phase, not “fully commissioned” by end of 2013. Since large wind turbine projects take 18-24 months to plan, this will provide some relief, but likely only for project developers who were ready to pull the trigger ordering turbines by Q3 of this year.
In the case of solar, Congress punted the ball down the field for two months on 1603 (cash instead of tax credit) and gave a full year extension for the bonus depreciation (MACRS) tax incentive.
It’s funny to think how just a month ago, with the cliff looming, those of us in the midst of constructing projects were scrambling.
Here in New England, Varian Semiconductor had completed it’s own $8 million turbine in Gloucester, commissioning its system in early December. But down the road a private developer for an $11 million two turbine project was racing to get the systems commissioned by year-end. In the end their installation was hampered by the interconnection process with National Grid. Millions of dollars were on the line as the ball dropped on Times Square. You can bet the fiscal cliff drama had a different meaning for that management team.
At Groom Energy our team was on a rooftop getting our final utility signoff for a solar system on New Year’s Eve, not knowing if the solar incentives would be extended.
Unfortunately we’ve now become trained to expect that government and utility incentive programs will start and stop with no warning.
Just this week Arizona, the sunniest state in the country, suddenly killed it’s developing solar industry. With one quick decision they slashed all the incentives that had existing for some time. Businesses had for years been hiring based on the availability of this program, so the effect of a complete cut will be severe to say the least.
As the soon-to-be unemployed Arizona solar workers start the trek to California in search of new jobs, there is a much bigger lesson for any politician defining an industry focused support program.
Incentive programs need time to ramp up AND ramp down.
While there will be contentious debate anytime a government funded incentive is considered – once the decision is made, policy makers must design them for the long term. This means they should recognize that companies don’t hire in a day, and customers don’t make purchasing decisions the next. Programs take time to change behavior.
But when a program ends abruptly the reverse is true – customers do stop buying immediately – and businesses shut down faster than you can say shovel-ready stimulus.
So instead of basing a program’s end on the whims of future policy makers, the original authors should define price ratchets which step down over time. The ratchets should be based on real economic metrics – i.e. the number of MWs installed, the payback of a base system or the market price of a commodity. With this signaling businesses and customers can make rational decisions during the life of the program. And policy makers can show constituents that the funding will not be required in perpetuity.
Perhaps most importantly – employees can feel better that the day after the next election a newly elected politician won’t decide whether or not they have a job.
Six weeks till Christmas – which means time to think about cool energy efficiency gifts for your loved ones.
Last year, if you had stuffed family’s stockings with the latest LED light bulbs, you would have been one very hip uncle or aunt. But at $50 each, they would have been better gifts under the tree than in a stocking. And if you had tried to save money by picking up less expensive, lower output, non-dimmable “cool” 5000K LED bulbs, your family members would have been underwhelmed. “Honey? It kinda has that hospital feel….can you take it out?”
Now, one LED year later, the replacement for a 60 watt incandescent is ready for primetime.
This year at $15 per bulb you can stuff stockings with my personal favorite – a high quality Philips lamp – and not break the bank. This lamp produces fully dimmable 2700K “warm” light with the only downside being it’s Hannibal Lecter-like design, which means you should keep it hidden under a lamp shade. Once family members are hooked they’ll simply buy more on their next trip to Home Depot. Or maybe while shopping for a new LED TV they’ll pick up this bulb recently introduced by BestBuy.
If you’re a gotta-have-the-latest technology enthusiast you could upgrade to the newest 100 watt equivalent LED bulbs like this one from Osram which like last year is $5o, but now with higher output. For a more funky gift you could consider the Brookstone-like iPhone controllable LED bulbs from Philips (at your local Apple store), GreenWaveReality or Insteon.
For under the tree, you can splurge on the new, Internet accessible iPhonesque thermostat from Nest. Control your home heating and air conditioning, all from your iPad, and save money managing the largest energy consuming system in your home. For $250 on Amazon you can have it gift-wrapped and shipped directly to your favorite aunt, uncle (or yourself.) Having shipped 300,000+ units in their first year of production, Nest’s customer service folks have turned supporting the weekend DIY installation into a science. Email them a photo of your old wiring, use the color coded labels provided, add your home’s wireless network access code and away you go.
But it may be worth waiting until after the holidays to start your own install. After the presents are opened Nest’s call center elves will likely be swamped. If something goes wrong you’ll save money without any heat or AC, but try explaining that to a house full of holiday visitors.
A few months ago we installed a backup generator for a customer in the food distribution business. Their decision to add the generator was ultimately prompted by yet another New England storm that left them without power. In the wake of hurricane Sandy many folks are wishing they had made the same decision…
The psychology involved as a company considers adding backup generation is curious. No company’s management disputes that having on-site backup is a valuable addition to their operation. But invariably there is a rational explanation for why they have yet to make the investment.
Some businesses don’t have facilities in geographic areas where power outages are common – so they really haven’t felt the pain. Some manage their risk by pre-arranging flatbed trucks carrying emergency generators which can be delivered to their sites in advance of a weather event. And, most commonly, facility managers have been unsuccessful at winning their company’s annual capital budgeting war.
Let’s be frank. Other than the week immediately following a loss of power event, the “let’s add backup generation” conversation is akin to asking your boss to buy more general liability insurance coverage – not an upbeat topic. Where energy efficiency projects show a measurable financial payback based on energy savings, the financial return for adding backup generation is harder. It requires putting a valuation on safety, assets at risk and “business continuity.”
Safety is usually easier as businesses already follow Federal and local fire and safety codes for what is required. It’s pretty black and white if an elevator needs to be able to operate in a power outage. So “valuation” has already been defined.
Assets at risk are also pretty straightforward. In the case of our food distribution customer, the value of all perishable food product housed in their warehouse is a large $ number. Or, for a metals manufacturer running a test on a very sensitive piece of military equipment, a power loss means the entire production run would be compromised – another easy valuation.
Business continuity is the hardest one. For a commercial office, where the company has a work from home alternative for most employees, what is it really worth? How much business would be lost if a company loses power for an hour? For a day? On the IT front there are wacky stats such as 93% of the companies who lost their data center for 10 days filed for bankruptcy within a year.
Again, can you imagine how excited a manager is heading into corporate budget negotiations to present this case.
However, there are some exceptions.
Recently we performed an assessment for adding backup generation at our customer’s facility in Texas. Here ERCOT pays financial incentives for low-emission generators which can be added to their grid and controlled as a resource instantaneously – called “spinning reserves.” The added generation makes the ERCOT grid more reliable – which has a value that they quantify.
The low-emission backup system costs more than a traditional diesel generator ($400k versus $200k), but ERCOT pays $150k per year for the system we designed, where a dirty diesel generator gets nothing. So our customer gets a better than 3-year payback on their purchase of insurance.
While post-Sandy more Northeast US companies may be reassessing how they value backup generators, it’s not hard to see how incentive programs like ERCOT’s could really spur action – a win for both customers and the utilities.
Which could make buying insurance a much more engaging conversation.