Archive for April 2011
Whenever a utility offers our customer on-bill financing we know we’ll be installing this energy efficiency project within a few months. Our hit rate for these projects is literally 100%.
The model is so straight forward it’s no surprise customers quickly say yes. No capital budgeting process, no new banking relationship, just an extension to an existing long-standing utility relationship. Whether its a municipal facility or a large corporation both recognize this option as a smart decision. Their monthly bill stays the same or goes down, with energy savings offsetting the interest and principal on the loan. Once paid off in a few years their monthly cost savings goes up even higher.
So why isn’t on-bill financing offered more widely?
Across the country PUC’s are increasingly mandating energy efficiency goals during their rate negotiations with utilities. As part of the PUC’s rate negotiation they know on-bill financing adds another layer of cost, essentially taxing utilities twice – first requiring them to offer energy efficiency rebates and second having them extend loans to their customers.
Although utilities already take credit risk everyday with their customers, they don’t like being a bank. At the end of 2010 we learned that one publicly traded utility was discontinuing their wildly successful on-bill financing program for this exact reason.
Meanwhile the DOE’s Loan Guarantee program’s stated mission is to “accelerate the domestic commercial deployment of innovative and advanced clean energy technologies.” The controversial program seems to have spent $ billions funding cleantech development (ie. manufacturing) more than deployment.
How about accelerating less sexy, but proven energy efficiency deployment?
Offer utilities a loan guarantee which supports on-bill financing.
With a Federal guarantee for loan repayment, utilities in every region would run fast to deliver on-bill financing. The model would help them hit their PUC negotiated energy efficiency goals and, most importantly, reduce customer consumption. Utilities would continue to source and qualify energy projects – but could then leverage their existing monthly billing relationships to off-load this high quality debt to banks and finance companies. These could even be packaged and resold. Can you say CARBs (Cleantech Account Receivables Bonds)?
Where PACE got derailed because Freddie Mac and Fannie Mae wouldn’t support taking a subordinate position on their mortgages, the on-bill financing model requires very few participants to be initiated – the customer and the utility.
In the past few weeks I’ve pushed this idea with a few folks, including the Environmental Defense Fund, a few utilities and on two Cleantech panels, one hosted by the New England Clean Energy Council, and another hosted by Boston’s Kellogg School of Management alumni group.
As I rarely spend cycles trying to influence Federal policy it occured to me that our blog may be a better way to reach folks who can carry this idea a bit further.
With our $2.6 million investment announcement we described that a portion of these proceeds would fund our CESA (Corporate Energy Services Agreement), our PPA for energy efficiency we began delivering in 2009.
For the background on how we developed our CESA let’s go back to 2007 to 2008, pre-financial market collapse, when solar power purchase agreements (PPAs) were all the rage in cleantech finance.
Cash starved tax-exempt customers with facilities in California (US Air Force, UC San Diego, etc.) were signing PPA contracts, outsourcing the ownership, maintenance and monetization of federal tax credits in exchange for “fixed” long term green electricity performance contracts. A flurry of fund raising in 2007/2008 by Sun Edison, Solar Power Partners, Tioga and Recurrent gave everyone the impression that real money was being made…
At that time retail companies, including BJ Wholesalers, North Face and Wal-Mart, signed PPAs with grand carbon reduction statements. In some cases they even projected saving real money – just consider Wal-Mart’s project in Hawaii where kWh is > $0.25/kWh. But in most cases the actual $ cost savings per year for signing these PPA’s was a non-event. Post the market collapse these corporate solar PPA deals have all but disappeared.
Corporate solar PPAs have been like teen sex. Most companies talk about how they’ve considered them, even negotiated contracts – but very few have closed the deal. Think about it – as a corporate manager, do you want to sign up your employer for a 20-year purchase contract, with kWh rate escalation, where the bulk savings are likely to occur after you’re retired? The evidence says no.
However, the PPA craze did catalyze corporate debate about outsourcing energy projects, be they solar PV or energy efficiency. While managers didn’t like a 20-year contract owned by a solar finance company with whom they’d never done business, they did like the no-cash down performance based services model. Which is where we saw the opportunity for CESA.
Energy efficiency upgrade projects often get mired in the corporate capital budgeting process, taking 1 to 2 years to get approved. Ironically some of these projects have a 1 to 2 year return on capital (causing us to wonder about the real capital efficiency of corporate investing.) Also, as utility incentives change regularly, including them in budget payback calculations for projects to be purchased 18 months from now is an imperfect science to say the least.
In early 2009 we began developing our first CESA with an existing Groom Energy customer who was frustrated with their budgeting process. Unlike their view of a third-party solar PV finance company, they wanted Groom Energy to own it – as a long term service partner. The economic trade was a shared savings model which would eliminate their one to two year budgeting lag, guarantee them energy savings and outsource the maintainance and energy monitoring to someone who was already doing projects inside their facilities. It also allowed us to put our money where our mouth was….we jumped at the opportunity.
By definition we’ve made our CESA structure performance based – priced in flat rate kWh or therms delivered – meaning if we don’t produce the energy (such as from a PV system) or reduce the energy (such as by adding VFDs) the company doesn’t pay anything. And the company doesn’t need to speculate on energy rates 5 years from now in order to get comfortable with the savings opportunity. Today’s low cost metering and software produces utility-like reporting for both our customer and our engineering team.
And while any contract structure can get complicated, our CESA terms are typically 5 years long, which is more consistent with a business plan, not a retirement plan – and means that we celebrate the results during the lifespan of our respective careers.