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Please Finance My Energy Efficiency Project

(this article originally appeared in Conduit on November 13, 2014)

Ideas about financing energy efficiency projects are around every corner these days. Some are billed as silver bullets while others are clearly niche products.

Last week’s installment came at the Future Energy Conference, as a panel of five provided some nice variety and perspective. Three financiers and facilitators gave overviews of their respective approaches, and two users provided pragmatic perspective. A missing player was the utility, but you can read Stan Price’s piece, Making Markets Work For Efficiency, to learn more about Seattle City Light’s pay for performance effort.

My key take away from this session was that everything new is old again. Financing projects is still about careful technical and financial planning, credit-worthiness, appropriate leverage, strategic partners, and knowing your customer.

Jimmy Jia walked us through his approach that is based on fiscal discipline and resembles a revolving fund tailored for utilities and related expenses. The idea is fairly simple. Set aside funds to pay your utilities and to invest in improvements. As improvements are made, automatically re-invest the savings since your utility budgets are centralized in one account that is managed by Jia’s firm, Distributed Energy Management. DEM and its capital partner pay the utility bills directly, which further aligns the many utility-related expenses. On the savings side, DEM will also pursue utility incentives, and roll those savings into the master account. So in review, be proactive and create a holistic utility budget that centralizes all aspects and rewards.

McKinstry’s Rachel Brombaugh walked us through the tried and true energy savings performance contracting platform. Here, an energy services company (ESCO)—such as McKinstry—essentially finances a project (partially or fully) and is paid back with the savings over time. The benefit, of course, is that cash is available to the building owner for other purposes. ESCOs often guarantee the projected savings, and building owners retain all future savings once the project is paid off.

Adam Zimmerman from Craft3 offered a third approach—traditional debt. His spin, however, is accessing funds via the Washington State Department of Commerce at very low rates. Craft3 is poised to help leverage this $9 million fund many times over in the coming years. The take away here is that Craft3 is motivated to place lots of money into good energy projects. Zimmerman cited their target project size to be $200K-$5 million, and noted that filling the project pipeline is the fund’s primary constraint.

Now onto the users. We heard from one tenant (General Biodiesel) and one building owner/manager (Unico). The two provided relative opposites (cash-strapped small business vs. long-standing corporation with a strong balance sheet). Roger Coulter from General Biodiesel talked about their relentless preference for cash. Anything that lowers up-front spending and defers investments will win out. Additionally, Coulter mentioned longer-term struggles to compete with sexier energy projects for money and overcome their lack of track record.

Finally, Unico’s Brett Phillips discussed some of the classic challenges within the commercial real estate market. Front and center is the inability for a building to take on secondary debt. It can cloud a title and make transferring assets challenging, so it’s often off the table. Short hold times is an increasingly regular challenge for this market, although Unico is often a long investor. Of course, no energy efficiency financing session is complete without acknowledging the split incentive barrier. And for companies like Unico, it’s huge. Even while dedicated to superior energy performance, it’s challenging to increase the value of a building when most of the savings are realized by tenants. Phillips’ key advice is to know your client, your vertical, and the relevant barriers. Assembling this knowledge to your advantage is all important.

Crowdfunding hits real estate development

Soon after I typed up our vision of the FOD, I landed on an another favorite concept from the real estate world, although this one isn’t mine.

The folks at Fundrise have hit on a long-term frustration of mine—that real estate development is too often saved for those with loads of money, and that, in turn, these people (and corporations) are often not intimately connected to the places they are developing.

Enter crowdfunding. Fundrise jumped on it, and didn’t wait for the federal JOBS Act to be ruled on by the SEC. They made the connection to real estate on their own. Using a rarely used public offering qualified by the Securities and Exchange Commission (technically, Regulation A), Fundrise is removing several middle men and allowing everyday Americans (well, actually Virginians and DC-ians at the moment) to tangibly help revitalize their own neighborhoods. Regulation A permits small offerings to unaccredited investors for under $5 million total. For Fundrise, this means that individuals can directly invest in development projects in their own neighborhood. In theory, this will lead to more appropriate and successful projects because the local community is supporting developments through real ownership.

Check out these more lengthy pieces at Atlantic Cities and VentureBeat.

And speaking of the JOBS Act, the SEC missed its original January deadline for a draft ruleset. Now with a new SEC chair incoming, uncertainty is most certainly the theme.

Sprout Collective starts growing

More neat friends of ours are shaking things up. The Sprout Collective is doing that green jobs thing that we’re all trying to put our finger on. This trio is leveraging a big idea—the Living Building Challenge—and exporting our Northwest knowledge to any school district that is ready. They will solve school capacity issues, provide an innovative and tangible curriculum platform, and create lots of jobs. The team has designed the Seed, which is a net-zero modular classroom. Sprout will coordinate the pre-fab units with partner Method Construction. The primary elements—rainwater collection, PV panels, composting toilet—that make the Seed a Living Building will be contained in a central pod, which can then be enlarged with flanking rooms as needed. The Daily Journal of Commerce has some additional info here. And if you still need convincing, the real point of the Seed is to inspire kids towards a more sustainable future. I can’t think of a better time to simultaneously invest in our kids and the green building industry. Help the mission here if you’re so inclined.

Photo courtesy of Sprout!

Stop skimming & bundle bigger energy projects!

This is a long, but important article on why we’re not achieving deep energy efficiency reductions in buildings. There are many reasons, but Auden Schendler (Vice President of Sustainability at Aspen Skiing Company) digs into the idea that grabbing low-hanging fruit (quick payback projects) prevents us from ever reaching the bigger-ticket items that save more energy. I’ll provide the notes version of the argument here:

  • There are a lot of no-brainer energy efficiency projects out there. Especially when utility incentives are factored in, they are dirt cheap.
  • Not surprising, building owners set basic ROI thresholds and do the easy stuff. They agree to dip their toe into the water, and say they’ll come back later and jump in for the big splash. I’ll do the lighting retrofit now and overhaul my HVAC system later. It does happen, but it’s rare.
  • Problem is, the big jump requires long payback periods and with those short payback projects already off the table, the program dies on the vine.
  • The ROI metric is flawed … a) in the case of energy efficiency, it usually only counts installation and equipment costs and the subsequent energy savings. Maintenance costs, asset value, tenant/employee attraction and retention, health and productivity benefits, energy cost volatility and more should be incorporated into the equation. There’s also the  potential of being forced to replace equipment as time goes on, although this is admittedly a challenge to model … and b) ROI thresholds are just too darn low in light of market investment alternatives.

Building on this, Schendler suggests a few ways to improve our situation…again, the highlights:

  1. Bundle bigger. Combine long and short payback projects from the get-go.
  2. Accurately assess ROI and revisit ROI thresholds.
  3. Lobby for better policy. Cheap energy sends the wrong price signals. A carbon tax would level the energy playing field.
  4. Utilize creative financing mechanisms like MESA and PACE. Moving capital investments to operating expenses can help. And tying improvements to a property rather than a mortgage is smart.
  5. Switch incentives to help encourage longer-payback items … we don’t really need help with the cheap stuff.