Three years ago, as we were developing our own energy efficiency finance program, I was struck by how few people had yet recognized the market opportunity for financing energy efficient building upgrades through a shared savings approach. Large ESCO performance contract firms continued to rely solely on their customers using tax-exempt bonds to pay for their projects and solar PPA firms focused, surprise, on solar. Only a handful of us were hustling after this emerging market.
Things have really picked up since then.
Last week I attended Citi Group’s conference entitled “Innovations in Energy Efficiency Finance” in NYC – a day long event, just on this topic. Co-produced by our friends at EDF, it was the actually the third time they’ve held the event – the first having 20 attendees, then 50, then this year almost 100. The agenda covered Federal and State government initiatives, things happening around the world and the commercial and industrial market (Groom Energy’s interest area.) The full agenda and some good observations can be found here.
It was reassuring to hear panel discussions confirm the view on the large market opportunity, where even early “competitors” aren’t yet running into each other in their customer negotations. But you coudn’t miss an older gentleman, with an entire career in energy efficiency, commenting from the crowd that “when they were considering this approach 20 years ago” it made a lot of sense then too…It alerted even the most optimistic folks that the shared savings financing approach is not new, but remains a market of the future. The collective hope is that this time adoption will be driven by larger potential energy cost savings and a more willing set of buyers and sellers.
Like any new financing model, buyers will have to trust that they’re getting a good deal in exchange for the perceived risk of signing a multi-year energy savings contract. Unlike banking institutions, new companies like Metrus Energy, Serious Energy, Transcend Equity, Green Campus Partners and Groom Energy have not been around for decades. To address the perceived risk, Transcend says that they perform their projects “open book” – allowing the customer to see actual retrofit costs and returns, so they know what’s behind the curtain. Metrus often works through ESCO partners who presumably have long solid customer relationships. Everyone on the panel claimed they were working through a large funnels of potential projects.
The most significant players yet to enter the market are the utilities. As Groom Energy has learned, when utilities offer on-bill financing in order to accelerate energy efficiency projects, customers move fast to sign these deals. It makes sense – customers are obviously less concerned signing finance contracts with someone who they trust, who bills them every month and who is likely to be around for a long time. But thus far utilities seem not too excited to go beyond limited use of on-bill financing. Although NY recently passed an on-bill financing initiative in their August Power Act of NY bill, it will likely be implemented only for multi-unit housing and residential retrofits and does not include shared savings.
Of course the bankers in the room are crossing their fingers this turns into a more mainstream market, where they can package and resell the energy efficiency obligations as blind pooled bonds. Although this looks a lot like a mortgage backed security, we’ll expect it to have a better outcome.
via How Soon Until We See Energy Efficiency Backed Securities? | Enterprise Smart Grid