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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.

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