Serious Energy says it can finance a billion dollars' worth of building energy efficiency retrofits, without its customers paying a dime. All they have to do is let Serious pay their energy bills -- and let the firm keep whatever savings they can squeeze out of better building efficiency over the next 10 to 20 years.

That’s a short description of Serious Capital, the turnkey energy efficiency service launched by San Francisco green building and software startup Serious Energy this morning. For a startup with $140 million and counting in venture capital investment, it’s a pretty audacious plan. Sure, energy efficiency upgrades are proven to pay themselves off in a matter of years. But where’s a startup going to get the cash to finance a billion dollars in projects?

That’s a question that only time will answer. Still, Serious Capital has a pretty big partner to help get the ball rolling -- international property management firm Grubb & Ellis, which revealed this morning that it is working with Serious Capital to pitch the zero-down, off-balance-sheet program to U.S. building owners.

Maybe that’s given Serious Capital general manager Claire Broido Johnson so much confidence in meeting the company’s pipeline of projects, which she said stood at nearly a billion dollars of potential investment as of last month.

“We install, at no cost to customers, energy conservation measures that will save energy … and we become the agent for utility bill payments,” Broido-Johnson, a SunEdison co-founder and former Department of Energy efficiency advisor, said in an interview last month. “Instead of the customer paying the utility bill, the customer pays us -- we’re monetizing the future stream of cash flows.”

Own the Retrofit, Own the Savings

Think of it as a power purchase agreement for solar and wind, except that it pays out for energy not consumed. Serious Capital owns the upgrade, and pays itself and whoever loaned it the money for the project out of those power savings.

Broido Johnson wouldn’t say what financial partners were funding Serious Capital’s projects, but did mention pilot projects for a number of Fortune 500 institutional owners and universities. It’s not the first time the idea has been tested -- startup Transcend Equity is trying it out -- but Serious Capital does bring a pretty hefty roster of projects and partners to the table.

Energy efficiency has about the fastest and most proven return of any “green” energy investment out there, and the potential market is huge. Buildings account for nearly one-fifth of total U.S. energy consumption, or about $400 billion a year in energy costs, and up to 30 percent of that energy is wasted or used inefficiently.

But as of today, energy efficiency services contracts -- the so-called ESCO work done by giants like Honeywell, Siemens, Johnson Controls and Schneider Electric -- are largely limited to government and institutional building owners. The commercial real estate market remains relatively untapped.

Why aren’t commercial building owners financing their own retrofits? First off, commercial building owners “don’t have the capital, or can’t use the capital, because there are other things they should be spending the money on,” Broido Johnson said. The other problem, she added, is risk.

Take the risk of turnover. Unlike government buildings or universities, commercial buildings change owners every five to 10 years or so. Who wants to pay for an efficiency upgrade if some new owner will end up reaping the long-term savings? Serious Capital solves that problem by owning the retrofit and its rewards as an asset, to be passed on at no cost to future owners.

The Software Solution

Another big challenge facing commercial building energy efficiency is how to measure just how much is saved. Unlike solar panels that generate power that can be measured, efficiency improvements are subtracting their value from a baseline that can change over time due to differences in weather, tenants moving in and out and energy prices that change over time.

Serious Energy Manager -- the software platform Serious Materials got when it bought Valence Energy last year and repositioned itself from being a green windows and drywall maker to being an energy services company -- is meant to take care of that. SEM first creates default weather and occupancy-adjusted energy usage baselines for the target building, along with estimates of what the building should be consuming and what low- or no-cost retrofits can help reach that goal.

In a lot of cases, it will be simple stuff like changing old fluorescent lights for new ones or replacing windows, Broido Johnson noted. In other cases, Serious will want to install SEM on top of the building management system (BMS) to gain access to equipment power metering data, maintenance alerts and control capabilities -- or even reach up to the utility for changing power prices, peak reduction rebates and other price-side opportunities.

One key differentiator for Serious Energy Manager, Broido Johnson said, is how the software is “very good at being transparent at how we’re using our energy. That’s very, very different from a standard ESCO.” In fact, she said that many building owners complain that the way ESCO contracts calculate how much money they’re owed and the energy stats behind them are a bit of a “black box.” It's not the first time I’ve heard this complaint leveled at the ESCO model. 

Accounting for the Competition

All in all, Serious Energy Manager sounds a bit like the software on offer from startups like SCIEnergy, Sky Foundry and BuildingIQ, or the newly released platforms from ESCOs like Johnson Controls and Schneider Electric. Serious has installed the software in more than 100 buildings covering some 5 million square feet, Broido Johnson said. That sounds like a lot, until you see that SCIEnergy had 15 million square feet under management as of last year -- and the big ESCOs and BMS vendors have who knows how many millions of square feet with their customers to pitch their products to.

Certainly, Serious Capital will need all the measurements it can muster to prove to both its customers and its financial backers that its 10- to 20-year efficiency services contracts can make a profit over time. Even so, what if the upgrades don’t deliver the promised savings, leaving Serious Capital on the hook for paying a utility bill it hasn’t reduced?

To manage that risk, Serious Capital “literally buy(s) an insurance product, where we insure a certain kilowatt-hour reduction,” Broido-Johnson said. She didn't go into more detail on that, but doubtless its financial backers will be very interested in how that works.

Serious Energy has participated in such high-profile retrofits as the Empire State Building, and it will able to draw on contacts from founder Marc Porat and CEO Kevin Surace’s work in green building and software, as well as from Broido Johnson’s SunEdison contacts. On the other hand, the launch of Serious Capital marks the third business plan change for the startup, which started as Serious Materials only to shift to energy services with its rebranding last year.

Is Serious serious about making its materials-software-financing model work? The company seems to be raising money pretty confidently. CEO Kevin Surace said in June that the company is looking for potential acquisitions down the road, perhaps to beef up the software and services it jumped into with its Valence purchase.

In fact, court documents show that Serious had proposed buying competitor SCIEnergy last year, although that plan has obviously fallen through: SCI’s founder left the company to join Serious earlier this year, which led SCI to file a lawsuit alleging breach of trade secrets. Serious, needless to say, has denied the allegations.