There's increased optimism in the investment community about the emergence of energy efficiency investment as a standalone asset class. Intelligent efficiency appears to be the force behind this wave of enthusiasm.
Until now, a number of obstacles have put the brakes on a strong primary and secondary market for energy efficiency loan products. Factors ranging from split incentives for commercial landlords and tenants, lack of common metrics for measuring efficiency gains, standardized M&V procedures, and even the efficacy of energy-efficiency products and services have stalled momentum for a breakthrough. It now seems that a consensus is emerging around the promise and reliability of intelligent efficiency solutions to drive energy usage down in the built environment, eliminating a significant obstacle to demand for efficiency loans.
“Intelligent efficiency is very exciting from an investment management perspective,” explained Ken Locklin, Managing Director, Impax Asset Management, at Greentech Media’s Avant EE conference at the PG&E Auditorium in San Francisco last week. “A lot of companies -- Schneider, in France, for example, Legrand, Johnson Controls -- these firms have had terrific runs in large part because they do focus on this new class of activity, and it appears from the involvement of those firms and the growth of their investments in this sector that it’s an area in which we can expect to see substantial growth over the next decade.”
For anyone who has followed the development of the energy efficiency finance market, this is a welcome sentiment from someone on the investment side within the industry. Dating back at least to the first Bush administration, study after article after report after plenary pronounced the promise of energy efficiency investment as an exemplary way to do well by doing good -- if only we could figure out a way to make it work. Among the chief obstacles was a whole lot of doubt within the building industry that any of these newfangled gadgets actually worked. Now that major companies are consistently proving out the concept of intelligent efficiency through their balance sheets, doubts are subsiding. Major investors are starting to take note of the widespread success of energy efficiency investments, and building owners and operators can no longer ignore the benefits of deep retrofit strategies to drive down energy costs.
What’s more, the concept of the energy efficiency project as a single event is evolving into something seen more as an ongoing process of “measurement, analysis, action, repeat” in a feedback loop where rapidly falling costs in technology combine with ever greater real-time analytics capabilities to drive efficiency gains deeper and deeper.
“No matter what you do in this sector,” said Locklin, “if you continue to look, there are more efficiency savings at the next level down and the next level down. Nobody who is committed to doing this has ever hit the bottom. DuPont is twenty years in; they’ve found new things to save money on every single year.” This track record of success in saving energy year after year is what has investors like Locklin excited about the future of this sector, despite the lack of a widely accepted investment model.
To be sure, there are still issues to be addressed in order to scale energy efficiency investment. Working to carry out a directive of the California State Controller to put CALPERS and CALSTRS capital on the ground to spur sustainable job growth, Alan Gordon, Deputy Controller in the California State Controller’s Office, quickly found himself speaking with some of the biggest players on the scene. “As soon as we started working on [employing Californians through energy efficiency investment],” Gordon explained, “international investors -- Deutsche Bank, Goldman Sachs, Barclays, folks at that level -- came in and said 'We have, sitting on the sidelines right now, approximately $3 trillion in assets that we don’t have anywhere to invest. We would love to put some of that on the ground in California, but these are the reasons it’s not happening.’” Gordon highlighted what he sees as the three largest impediments to scale: a lack of common metrics to measure efficiency gains among projects; no standardized loan structure shared throughout the industry; and a lack of faith in the knowledge and ability of project implementers to drive large energy efficiency gains.
Brandon Smithwood, manager of the Policy Program at Ceres and moderator of the Avant EE energy efficiency panel, added a fourth to that list, citing a lack of data on how energy efficiency projects and loans have historically performed. As co-author of a recent report from Ceres on the barriers to scaling a secondary market in energy efficiency loans, Smithwood is well versed in the challenges facing energy efficiency finance advocates, but even he noted that, while energy efficiency investment opportunities aren’t plentiful at the moment, they are happening, and in larger deal sizes than we’ve seen in the past. Pointing to NYSERDA’s recent $24 million bond offering for energy efficiency projects, Smithwood mused, “It’s not like these are financial animals that are nonexistent. They’re just very rare.”
The optimism on display last week, however, seems to be crystallizing around the success stories of intelligent efficiency technologies deployed throughout the industry, and that bodes well for the future. Interest within the investment community to deploy capital for energy efficiency is a signal that confidence in project execution and loan performance may now be high enough to support a sustained pipeline of projects. With two of the four major obstacles largely addressed, that leaves it to the investment community to give a clear signal what the generally accepted metrics will be, and to engineer a standardized loan product simple enough to support the kind of deal velocity necessary for a robust secondary market.
“The demand is out there, “says Locklin. “And when there is demand for a product, it may take a decade, but sooner or later somebody cobbles together the package. The first one gets done, ten years being born, and then in two years, everybody’s doing it and no one understands why it wasn’t being done ten years before. We’re right at that point. I think we’re within a year or two of seeing the first of these packages come out.”
Your move, Wall Street.
Nick Lombardi is Director of Energy & Sustainability Solutions at Spartan Solutions, LLC, and Chairman of the Advisory Board for the Center for the Sustainable Environment (SBE) at the Schack Institute of Real Estate at New York University. His twitter handle is @eefficionado.