This year we flew the whole Groom Energy field engineering team to Las Vegas for LightFair, the 25th annual lighting industry show. While Vegas is a fun location for our team meeting, our real plan was to conduct an LED scavenger hunt, sending our engineers onto LightFair’s 500+ vendor filled exhibit hall in search of the latest, coolest LED lighting technologies.
Can you remember the world pre-iPhone (2007)? It was the same year of the last pre-LED Lightfair and within two years the show had fully shifted, becoming “LEDFair.” LEDs have since become the industry’s iPhone – with near universal awareness, third generation apps, innovation and coolness – and an industry fawning all over how best to participate in it’s growth. This week 25,000 attendees will walk the show searching for all things LED, strolling right by any pre-iPhone (HID & fluorescent) lighting displays. And the products have advanced dramatically since our first Commercial and Industrial LED Research Report in 2010, with some we studied now having a third the original cost, twice the performance, higher CRI and 10 year warranties.
Last year’s LightFair was about advancements in LED color quality, intelligent control and fixture type adoption. This year we had armed our 30 engineers with lists of “must sees” and “nice to sees” and expected they would also uncover some unexpecteds. The morning after our hunt the team met to debrief.
Their high level takeaway?
Scary to say, but Lightfair has actually become a bit more ho-hum.
Oh yes there are lots of new things – but after several years of new product intros, higher lumen/watt performance milestones and plunging prices, the LED market has become more like the traditional lighting world it so quickly supplanted. It’s no longer if, but when LED takes over and senior managers have no career risk by adopting LED.
Like the years pre-iPhone, Lightfair has gone back to being dominated by big guy announcements (Philips, GE, CREE, Sylvania and Lithonia) with crowds forming around their booths. At one moment we did see a gathering at the Gigatera booth, but it turned out one of their LED fixtures had literally caught on fire:) ”Chinatown,” which five years ago hosted no-name manufacturers offering crude first versions LEDs, has disappeared, moving onto the exhibit floor as private label knock off products offered by bigger brands.
So what did our team bring back as new and interesting?
Controls: Wattstopper, Daintree and Digitial Lumens all showed their latest control advancements, with a continuing theme of smaller, cheaper, modular and more features for controlling and measuring energy savings activities. Form factors have gone from $60 six inch wired bricks to $10 one inch plug-in chips in just one year. Acuity, CREE, GE also had “intelligent” control announcements.
Legacy Manufacturers turn LED: A newly supported global standard (Zhaga) for LED modules now allows fixture manufacturers to easily convert their fluorescent and HID fixtures into LED, using simple LED modules from name brand companies like Philips, Sylvania and LG. These modules now have standardized power inputs, screw patterns and lumen output. Its a bolt-on and presto – a new LED fixture that looks like the old one. One of our engineers even found an LED version of an HID fixture which had been tuned to produce the original obnoxious yellow high pressure sodium light output.
LED Fixture Retrofits: Like the module conversions, the market is transitioning from replacing entire lighting fixtures with their LED equivalents to retrofitting existing fixtures with new LED guts. This approach lowers costs further, driving better paybacks while mitigating employee reactions to a new fixture’s different look and feel in their workplace. These retrofits can be performed quietly at night, without anyone even knowing it happened – but the utility bill and lighting maintenance budgets get a big benefit.
LED T8: On one of our 2010 market predictions we were dead wrong. As engineers we pontificated that heat dissipation challenges would ultimately prevent LEDs from replacing fluorescent T8 lamps with LED versions in the same form factors. In 2011 the DOE put out a technical study which showed that performance and price were still not there, with one of the “best in class” LED products costing $120 per lamp. Today a T8 fluorescent only costs $2 to 5 depending on volume.
Wow, did we miss this one.
LED T8 has arrived and is being offered by the market’s most reputable players. A few weeks ago CREE introduced their own T8 LED, announcing their LED T8 Series, while Philips did the same thing earlier this year with their InstantFit product. Not too far behind, GE was showing their yet to be released LED T8 product as well. While these lamps are still $20-40, utility rebates are supporting many of these upgrades and long run hour applications can hit fast paybacks.
The key to these newest lamps is that the replacement is a simple twist and swap out with the existing fluorescent lamp. No rewiring necessary. First and second versions had required bypassing the existing ballast, or installing a separate driver, both adding electrical labor cost to each replacement. Sylvania’s UltraLED version has this challenge, although we shouldn’t be surprised if their next one is a twist version.
On a recent plant visit our engineers followed a rumbling noise from a backroom to discover a large air compressor running flat out. The 300 horsepower (HP) system was pushing 100psi air to a set of production lines located at the other end of the facility. Serious industrial production stuff.
To the layman the slight hissing sound heard outside the room jumped out as an energy efficiency opportunity. Repairing the leak would save wasted air pressure and translate into energy dollar savings.
But there was a bigger missed opportunity:
Only one of the company’s six production lines was running.
In manufacturing compressed air often powers critical production processes. Pressurized air can actuate valves, move product down conveyors, pick-up product cases, clean off surfaces or power pneumatic tools. Both for volume and redundancy, multiple compressors are often staggered around a large plant, connected to a piping header that distributes the air, with ceiling “drops” located wherever air is needed.
But just as HVAC contractors oversize home air conditioning systems for the hottest day, most manufacturers take the same approach with compressed air, modeling designs for the plant running at full capacity, their ultimate production objective. Sizing is based on every line running at once, with production output at the highest volume. The oversized systems often run all day long, all year round.
So what does it cost?
At full load the simple calculation is the product of total Brake Horsepower (BHP is slightly higher than nameplate HP) times .746 (the conversion factor for HP to kilowatts) times the plant’s annual operating hours times the cost per kWh divided by the motor’s efficiency rating. At $0.10 kWh the 300HP system our engineers uncovered consumed $217k per year in electricity.
Thinking about efficiency, on first pass the variables don’t seem easy to manipulate. BHP is the cumulative sum of the compressors’ horsepower. The plant’s operating hours are what they are, as is their cost per kWh and the motor’s efficiency rating.
Beyond repairing leaks, where’s the opportunity?
Our team focuses on redefining “full capacity.”
At full production compressed air will likely be maxed out, but at most other times the system’s output can be scaled back. Stunningly, $187k of the $217k in electricity costs come from overproduction of air and generating waste heat.
Reducing total HP running at any moment has a 1:1 impact on the numerator in the cost equation. Sequencing controls can bring online only the optimal number of compressors based on varying production levels while shutting down pipe runs to idled production equipment.
Running individual compressors at reduced speeds can also have a big savings impact. Variable speed drives (VFDs) enable constant torque piston and screw compressors to be slowed down, ramping speed back up when air pressure demand increases.
And waste heat can be reclaimed from the motor, producing zero cost therms for drying out the moisture buildup typically occurring in compressed air systems.
The simple paybacks for these types of upgrades are fast – almost always under three years, and usually closer to one.
But before making any suggestions we always start by installing metering.
No eager, sustainability-minded engineer can have a credible conversation with a plant manager without actual usage data. Production correlated flow and power metering for all critical processes allows us to have a fact-based discussion. Only then can we consider a redesign, resizing or upgrade that reduces energy consumed without impacting production.
In the end we’re aiming to convert “full capacity” to “on-demand,” with a system that intelligently produces air only where and when necessary. And apart from a little less hissing sound, the principal difference should only appear in next month’s electricity bill.
Last week I attended EDF/Citibank’s 3rd Energy Efficiency Finance conference in NYC. Since their inaugural event a few years ago this conference has always provided a good gauge on the market’s rate of progress.
Brad Copithorne‘s (EDF) opening summarized the overall mood, providing statistics confirming we’re broadly headed in the right direction, but acknowledging the disappointment that deal volume hasn’t developed more quickly. Brad reminded us that at the first event speakers joked that we “needed to do more deals than conferences.” Thankfully we’ve probably passed that point.
The room was filled with finance oriented folks, one step removed from customer’s decision making, all wondering why the market isn’t moving faster. Bankers, sitting between project developers and lenders, describe a weird disconnect where investors say they are “anxious” to put money to work and project developers say all they need is financing and their projects will start closing. No one could explain why these two willing players aren’t connecting.
Richard Kauffmann, Chairman of Energy and Finance for NY and NYSERDA, reflected that a few years ago we had all hoped the Federal Government would “give us a hand” by putting a cost on carbon or introducing a National Clean Energy Standard. But with no policy out of Washington, individual states have been forced to address things on their own and NY is leading with a bunch of new programs.
Yet Richard reminded all that financing programs must satisfy the market’s naturally developing demand, not precede it. He suggests NY is trying to walk the fine line between funding what policy makers find interesting and catalyzing existing market activity which can later be financed by the private markets. As an example NY isn’t rushing to introduce a solar thermal financing offering, even though solar hot water is three times as efficient as solar PV. There is currently no obvious customer or developer demand.
So from the day’s talks three key themes emerged:
Green Banking is happening
PACE and On-Bill continue to make bumpy progress
Solar PV financing dwarfs energy efficiency
One part of NY’s effort is the launch of the NY Green Bank, a public/private partnership run by Alfred Griffin, which is now “open for business.” In December the State of NY funded it with $200+ million of initial capital, with a promise of more to come if successful. It’s mission is to address a market gap, not provide a subsidy, and it’s been granted a broad charter to offer a variety of specialty financings, be they subordinated, mezzanine, senior debt or credit enhancements. Like other banks, the goal is to participate in investment grade projects while earning a fee. The expectation is that over time the private markets will step into the markets that the bank helps initially develop by de-risking the early phases. As a result, they clearly are not looking to do projects without some private market participation or that won’t have scaled impact over time.
Bryan Garcia from CT’s Green Bank described how their model has shifted from a few years ago when their targets were to fund solar leases and loans with seed equity investments. Today they’ve restructured as a public/private partnership, acting as a quasi-public clean energy finance company focused on clean energy and energy efficiency, as well as clean vehicles. The group already has $100 million in assets and is supported by a $30 million operating budget, all coming through a $0.001/kWh rate-payer contribution and proceeds from the RGGI auctions. They too are determined to spur the market with the state’s money.
2. PACE and On-Bill
On the consumer front, residential PACE is coming back.
Originally stalled in 2010, today residential PACE focused companies are raising capital and putting it to work. Renovate America has just completed their first securitization for California PACE projects (having completed 10,000 projects costing $185 million.) Renewable Funding and Kleiner Perkins-funded Kilowatt Financial have both recently announced closings of their own credit facilities, both with our conference host Citibank. Citi is really leading this space, having funded Green Campus Partners a few years ago as well.
Cisco DeVries from Renewable Funding described how CA’s recently introduced loan loss insurance reserve will reduce the perceived risk of lending and his firm is now revisiting 160+ counties who have been waiting for the PACE opportunity.
Jessica Bailey from CT-PACE described their latest activities in the C&I market, which include $20 million in projects currently being packaged and sold off. Their pipeline has 120 projects valued at $60 million. Afterwards Jessica told me that roughly 50% of the projects involved solar while most of the energy efficiency projects included a boiler or chiller upgrade or replacement.
John Hayes (AFC First Financial Corporation) described Hawaii’s recently launched OBR and OBF programs, where OBF has a focus on solar thermal, and OBR includes energy efficiency and solar PV. Initially funded with $25 million of debt and tax equity, the OBF program will support 10 to 12 year borrowing terms with repayments tied to the premise through the meter and repaid as tariff on the utility bill. The program has lots of support from over 100 solar thermal and 450 solar PV developers already operating in HI.
With local electricity costs at $0.34 per kWh (three times the US national average) John noted that in HI “solar sells itself.” Almost 20% of all single family homes already have solar installed, most coming in the last few years. But to keep it moving, the next wave of homeowners will likely need financing assistance. To address this Renewable Funding is helping with the development of GEMS (Green Energy Market Securitization) which uses rate reduction bonds backed by rate-payers to create a $150 million funding pool, which funds projects and gets repaid through customer on-bill financing payments.
Interestingly in coming months the HI program is also expected to adopt an open-source model where various lenders, leasing companies and other investors compete to win each property owner’s business. Various financing models including loans, leases, PPAs and ESAs would all be eligible and larger commercial properties may be added to the program within a few months of launch.
3. Solar lending
Clearly solar lending is the large growth market.
The recent numbers suggest over $3 billion has been raised in 2013. As one speaker noted Solar City’s $250 million new credit facility (announced two days before) makes it the poster child for the “resy rooftop” financing market.
Clean Power Finance (CPF) is betting that large brand service companies like utilities, banks and phone companies will see opportunity to upsell their customer relationships, offering solar as a service. CPF offers them a third party white label service which assists with all aspects of the service offering, acquisition, installation, billing, etc. They raised a bunch of money last year to push this value proposition and just announced an offering with the Midwest based utility Integrys that will do exactly this.
But with the solar PV wave a potentially thorny issue is looming: what happens to the Federal investment tax credit (ITC) which is set to expire at the end of 2016?
Until now solar finance players have been addressing the complexity (and therefore opportunity) to apply tax equity to pass through the ITC value for solar as a service. Yet again the market is stuck waiting until the Federal government provides some leadership to signal longer term plans to support or not support this key program. With 55% of the entire US market for solar in California, the assumption is that CA will have to use its leverage in solving this problem.
Some other interesting speaker observations?
Scott Harmon, CEO of Noesis noted that in listening to the presentations he had lost count of the use of the phrase “deal flow” at 22. His software company is focused on helping to solve this problem by streamlining deal flow for energy efficiency projects, standardizing the process and providing contractors selling tools so they can generate their own deals with their customers. Many of the projects they facilitate are good candidates for energy efficiency financing so Noesis has lined up five financing lending partners and just announced their own $30 million shared savings fund.
Riggs Kubiak, founder of Honest Buildings (HB), described how his company has shifted its founding three years ago. Riggs’ described that his original idea was to deliver a portal for rating buildings and their condition, but once launched the site was overwhelmed with interest from the sell side (contractors) trying to find new prospective projects and customers. Now a few years later HB has built a marketplace (Connection Engine) which connects building and real estate manager to these contractors, facilitating a bidding portal with other value added services alongside. If you are a NY building manager looking to do a building retrofit (energy related or not) the platform is a great way to get bids from new web-friendly contractors. In 2013 HB facilitated $55 million in projects in areas like architecture, windows, HVAC and BMS systems. In the last three months they’ve already done $90 million.
Jody Clark, from Hannon Armstrong (HA) described how their success in gaining a private letter ruling to operate as a REIT helped their growth. Unlike other REITs which own the building, HA can use the REIT structure for the energy efficiency assets inside the building. This structure allowed them to raise $200 million through IPO last year, and then lever the proceeds with $700 million in debt. Their target has been the Federal market with typical ESPC financings of $10 million per project, along with more traditional solar PV financings.
So back to the question about why are things are developing more slowly for energy efficiency finance than everyone expects?
There’s lots of money waiting at the table and policy makers have been focused on offering market incentives which help it take off.
Solar is having success.
What’s the issue with energy efficiency?
Could it be that project developers are off in their assertion that customers are so close to doing projects, if only the financing capital was made available? I can confirm when Groom Energy is asked by a customer to offer a financed/shared savings proposal, 90% of the time it is used purely to justify the capital expenditure request.
Could it be that borrowing money to fund a $250k boiler upgrade doesn’t get the same management attention (isn’t as sexy) as funding a $20 million Federal, state or municipal owned solar installation?
Or could it be that where Solar City brings collective enthusiasm to a whole town driving solar PV adoption that this emotional excitement doesn’t translate to energy efficiency upgrades?
A few speakers postulated that it may be based most on changing managers’ and customers’ psychology and orientation – a real marketing challenge – and this sort of thing can sometimes take a long while to affect.
Maybe the 4th Energy Efficiency Finance conference will tell us all how fast this all plays out.
During World War II energy security meant access to oil for our fighting troops. Years later the 1970′s oil crisis highlighted our supply risk with the Middle East.
Post September 11th, with terrorism on the top of Washington’s agenda, the US connected energy to national security, taking steps like fortifying entrance points to nuclear power plants and natural gas storage facilities and building added physical protection for our electric grid infrastructure. Last week’s gunfire attack on PG&E’s San Jose substation was likely the type of event they were anticipating.
By 2009, as stimulus dollars funded new smart grid rollouts, reports highlighting the new risk of cyber-terrorism for our electric grid surfaced. A group of senators and congressman pushed to get the Department of Homeland Security and FERC involved, setting standards which better would protect it. In his 2012 book Quest: Energy, Security and the Remaking of the Modern World, Pulitzer-Prize winning author Daniel Yergin detailed this emerging risk, calling it ”cyber-vulnerability.”
And it is this energy security theme which is quickly becoming more visible in 2014.
Cyber threats are not new. What’s new is the appreciation for risk to new networks being utilized for energy related systems. Like most security themes all it takes are a few events to get an issue on top of everyone’s agenda.
Where a decade ago the US was busy constructing a second layer of barbed wire fencing around nuclear plants, the 2010 Stuxnet worm attack come throughout the wires, specifically targeted Iran’s nuclear infrastructure through it’s Siemens energy control systems. It later reached Russian nuclear plants as well.
Last week’s revelation that 70 million Target customers were compromised through an HVAC vendor’s network was revealing. The HVAC contractor later clarified that back door network access came not through an HVAC monitoring system, but through their access to Target’s vendor portal for billing & project management. However, the most telling quote was the contractor’s description that it’s level of security protection was “industry standard.”
At Groom Energy we’ve seen our customers increasingly point us towards installing completely separate networks for energy management applications. Corporate IT doesn’t like providing access for outside vendors and building management teams prefer to avoid the battle. While installing secondary networks adds cost, the latest wireless HVAC, lighting, metering and energy monitoring systems are now designed to operate on a standalone basis and bring lower installation costs than even just three years ago.
Our friend Paul Baier, VP of Products at First Fuel, tells us that they too are seeing more security audit requirements from their utility and corporate customers. While First Fuel only needs access to monthly interval cost and consumption data to power their energy audit and monitoring application, customers are now holding them accountable to the security standards associated with Personal Identifiable Information (PII).
Security challenges become even more daunting in the residential market, as smart meter and internet-based thermostat installations roll on. Here mom and dad are the IT security consultants.
Residential smart meters have already sparked health, safety, privacy and even risk of fire concerns - but you have to be entertained when folks are publishing “how to” guides on hacking these newly installed digital meters.
And think about your Nest thermostat. Google’s Nest system already has perpetual internet access to over 1 million homes. Backend network access could provide open visibility to all of your home’s computers, Nintendos and iPhones.
But in a world with so many systems at risk for cyber attacks maybe it’s only fitting that energy technology, a growing new market, gets the attention it deserves – and becomes one of the newest cyber-targets.
Like for many businesses, end of year is a busy time at Groom Energy. Our engineering team is scrambling to satisfy utilities’ requirements, our back office is beginning year-end closing and our customers are pushing us to complete projects with budgets that disappear if unused.
With the EPAct tax deduction expiring on New Year’s Eve, this year’s end-of-year push was even more harried. Starting last October we began hearing customers ask us for confirmation that their projects would be EPAct eligible, meaning they had to be “in service” before the champagne bottles were popped. We even saw some stalled projects being approved principally because companies thought EPAct was disappearing.
It seems like forever ago that EPAct went live. Originally introduced in August of 2005, Federal guidance for how to claim EPAct’s benefits weren’t even solidly defined until early in 2007. The Act was a part of our last official US national energy policy, authored by the Bush administration. It defined a deduction incentive of up to $1.80 per square foot of affected space for qualifying efficiency improvements in Lighting, HVAC, and Building Envelope. The deduction was in the form of taking accelerated depreciation on these investments.
Since then it’s been a bit bumpy, with the Act having been criticized, but still extended as part of a flurry of stimulus packages in 2008′s economic meltdown. But this past year customers had priced in that Washington would not come to agreement that it should extend it yet again. Fracking and solar growth made last night’s State of the Union address, not EPAct. (Even the Secretary of Energy was the one selected to “stay home”.)
Before the beginning of last year some believed that Senator Snowe’s (I-ME) proposed Commercial Building Modernization Act (CBMA), with relatively unusual bi-partisan support, might successfully navigate the labyrinth in Congress. The CBMA would have corrected some of the principal flaws inherent in the EPAct 179D incentive. First it would have increased the value of the tax deduction from $1.80/square foot to $4.00/square foot, while allowing a sliding scale for initiatives that delivered less than 50% energy savings against ASHRAE 90.1 2001 standards. It would have also loosened rules around the beneficiary of the incentive, allowing a huge new pool of REIT owned facilities to enjoy the deduction, where with owner tenant buildings, investments by tenants previously gained no EPAct incentive.
Unfortunately the bill was sent to the scrap heap in the Finance committee after Sen. Snowe announced in late 2012 that she would not run for re-election, citing the extreme partisan nature of the Senate.
A similar initiative, co-sponsored by Senators Portman (R-OH) and Shaken (D-NH) in late 2011(Shaheen-Portman (S. 761) has yet to gather a visible level of interest.
With no national energy policy in the last six years and little hope for EPAct renewal, there are few reasons to be optimistic that similar policy encouraging corporate energy efficiency investment will happen in the near term.
So brainstorm for a bit. Imagine that for a day everyone in Congress and the Senate got along and the President dropped by to talk about Google’s Nest acquisition, and how Washington really needs to approve something which addresses energy efficiency. In this dreamworld what policy should they author?
Real estate owners of hotels and commercial offices want to see incentives that are assignable to their energy installation partners. Trying to allocate tax deductions across a wide range of Limited Partners (179D) is too complex. They’d also like to see scaling incentives for different levels of HVAC and building envelope improvements.
Obviously moving from a tax deduction to a tax credit would provide a more direct incentive to a wider range of institutions. Manufacturing owners want this. During the capital budgeting processes most management teams don’t acknowledge the EPAct effect on their investment. However, they do get credit for utility rebates, and use the net payback in their internal budget requests. Clearly, for them, cash back through a tax credit would work better than accelerated depreciation.
Our engineers also note that EPAct’s standards for HVAC and building envelope were too complex (a full building software model was required for full credit.) As a result, most companies taking EPAct credits only managed to qualify for the lighting deduction. $1.20 of the $1.80 in available incentives was rarely taken.
Washington could consider these sorts of issues, with our politicians working on what they are supposed to be good at doing – which is defining forward-thinking policy that is straight-forward to implement, and refines prior policies which weren’t as successful as hoped.
But let’s not forget…we were just dreaming.
Last week we had our year-end team meeting, reviewing 2013 and discussing our draft 2014 business plans. We brainstormed about energy efficiency market trends and came up with three things to watch for in 2014 – one economic, one application and one fun, futuristic idea.
Electricity rates. Will 2014 be the year when electricity price inflation returns?
Since the 2008 market crash consumers and businesses have gotten used to “flat to down” pricing for electricity. Low single digit escalation has been the norm.
Yet there are signs that 2014 could be different.
The first half of 2013 has already seen price escalation. Next year some fundamental challenges may produce even bigger, longer term pricing pressure. New England and New York have exposure as a result of limited investment in natural gas pipeline infrastructure. Texas has already seen rates rising due to higher natural gas prices coupled with no new power plants being constructed. And California’s costs are rising due to climate legislation which requires the purchase of more expensive renewable power.
It’s been a long time since our customers acknowledged any energy escalation factor in our financial return calculations – maybe in 2014 we’ll be adding a new column to our proposals?
RTUs. Based on what our engineers are hearing from corporate customers 2014 could be the year for RTU energy efficiency upgrades.
Historically these big metal boxes have been out-of-sight, out-of-mind. They run long hours, consume a large percentage of a building’s energy, yet are rarely monitored or maintained with an energy mindset. The BMS (if there is one) acts purely as a scheduling box 99% of the time. ”End of life” was 10 years ago. Break/fix is the only reason an RTU unit is visited. We’ve been to facilities where there was literally no roof access to even inspect a building’s RTUs. Kind of makes preventative maintenance hard.
But awareness for the RTU opportunity is changing. The DOE’s Better Building Alliance has the High Performance Rooftop Unit Challenge which is gathering steam. Facility managers who have already done low hanging fruit lighting upgrades know the RTU is the largest target. Demand control ventilation, economizers, internet-based thermostats, even regular coil cleaning – all can have fast payback without a total RTU replacement. And major utilities are increasingly more inclined to support these projects with attractive incentives and are marketing their own “upgrade your RTU” programs.
In 2014 there’s energy efficiency gold on the roof (and I’m not talking solar.)
Energy Audit Drones. Let’s face it, the Amazon announcement was really cool. Imagining drones delivering small packages to our door from Amazon Prime feels like The Jetsons.
And it got us thinking about how Groom Energy could use the same technology to supplement our overworked engineering team. We need to introduce a fleet of Groom Energy quadcopters, all trained to perform our on-site building energy assessments, literally on the fly. Our engineers can sit in their pajamas (tough visual, huh?) while navigating a building, video streaming, photo-capturing equipment nameplates and thermal imagery, logging activity below and integrating utility interval data to produce real-time calculations for energy savings opportunities. And the quadcopters solve our roof access issue for RTUs.
We need to get to Brookstone’s before the holiday rush drains all the drone inventory. Should be a fun year.
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?