Energy efficiency is increasingly viewed by a wide variety of energy market participants as a resource on par with traditional forms of power generation.
With this market shift, more and more large commercial & industrial customers understand energy efficiency's value and have an interest in undertaking a retrofit project. However, comprehensive energy efficiency projects, much like generation projects, require significant capital expenditures. Fortunately, the recognition of energy efficiency as a resource has also led to a growing number of firms that develop, fund and own retrofit projects in customer/host facilities, similar to the third-party ownership (TPO), pay-for-performance model utilized in the solar PV market.
Energy efficiency retrofit projects utilizing this model source equity and debt capital from a range of institutional investors and banks. The requirements for securing this capital are the same as those required for private power and distributed generation projects, namely:
- An offtaker with solid credit (in the case of energy efficiency, a customer/host)
- A bankable performance guarantee from a contractor (in the case of energy efficiency, an ESCO)
- An agreed price per unit of energy (in the case of energy efficiency, realized energy savings)
- Energy metering (in the case of energy efficiency, measurement & verification procedures)
- Contracts that properly allocate risk amongst parties (in the case of energy efficiency, efficiency service agreements or other power purchase agreement-type structures.
Alongside the ascent of energy efficiency finance, a wide array of software solutions have emerged to measure, monitor and maximize energy-efficiency savings in retrofit projects. These solutions include those that identify prospective retrofit customers, reduce the time and cost of screening a potential project’s merits, reduce the time and cost to develop a project, and assist in operating and monitoring projects, including real-time monitoring and control.
Some have suggested that these innovative solutions will fundamentally change the landscape for financing energy-efficiency projects. Although these tools are good for the energy efficiency market, they do not compensate for a lack of any of the five financing requirements listed above.
Software solutions will impact the energy efficiency market in two main areas. First, they make potential customers more aware of energy efficiency opportunities, leading to increased market activity. Second, in the operational phase of a project (post financing), software can augment traditional maintenance and monitoring services to increase energy savings and reduce operating costs. If new software tools can measurably and consistently drive energy and operational savings beyond the status quo, at minimal cost, then their value to customers and capital providers alike will be undeniable.
With time, as a larger data set of projects using these tools becomes available, the measured improvements in savings will start to be valued in the underwriting process. Although the fundamental financing requirements for bankable projects will always remain, these tools may be able to help advance formerly marginal projects and increase the scope of many others.
***Bob Hinkle is CEO of Metrus Energy, a developer and financier of large-scale energy efficiency projects. Scott Henderson is an advisor to Metrus and previously served as the director of finance at the C40 Cities Climate Leadership Group.