The pipeline for energy efficiency projects is set to get a big boost from institutional investors.
Two organizations, Joule Assets and Kilowatt Financial, have unveiled separate $100 million funds for efficiency projects. The two funds were announced within one day of each other.
Kilowatt Financial, a financier of solar and efficiency projects, closed a $100 million credit facility with Citi yesterday -- creating a fund for ten- to twelve-year loans of up to $30,000 targeted at homeowners.
The fund may open the door to securitization, a financial tool that could expand efficiency investment to mutual funds, pension funds and big banks eager for new pooled assets.
"This transaction will allow Kilowatt to launch a much-anticipated market for the securitization of consumer energy efficiency loans in the U.S.," said Marshal Salant, Citi's managing director of alternative energy finance in a statement.
As Kilowatt's portfolio swells, Citi will be able to slice and dice the loans and sell them in tranches, much like was done in the mortgage industry. SolarCity recently announced the first securitization of solar projects, a $54.4 million pool with a 4.8 percent yield. That issuance was a landmark for the solar industry, and may soon bring similar deals from other large solar service companies.
Financial experts often mark the threshold for securitization at around $100 million. Without such a big portfolio of projects, it's very difficult to bundle projects and get institutional investors involved. This has led to the industry-wide effort to create large funds for projects.
"To attract the capital at pension funds, mutual funds, insurance companies and others, these retrofits need to be packaged into something these funds can invest in," said Brandon Smithwood, senior manager of the policy program at Ceres, in an email.
The second fund, put together by the efficiency financier and insurer Joule Assets, will aggregate global demand response and efficiency projects for private equity investors. Joule CEO Mike Gordon said in an interview that "at minimum" he expects to deploy $100 million over three years, with the long-term goal of scaling up to $500 million and beyond.
Joule has set up a C corporation to manage the captive fund. The firm plans to aggregate portfolios of projects using software that identifies values and risks without having to negotiate with every individual contractor. Gordon said the product "acts as an underpinning for the investment fund."
Joule is partnering with developers that already have sizable portfolios of demand response and efficiency projects, not one-off retrofits. Gordon said developers are required to provide a loan loss reserve that covers failures -- giving them access greater amounts of capital, but making them responsible for poorly performing projects.
"It's their reserve covering any failed projects. They might get $10 million in financing, but they are still exposed to the loss of a million dollars. On the flip side, they're able to extend $10 million in financing by putting down a million bucks. They're ultimately able to make that decision as long as they have diversification in their portfolio," said Gordon.
So far, the fund has been open to family and friends close to Joule Assets, and it was recently opened up to family foundations. Now Gordon says Joule has built a big enough pipeline to offer it to a broader range of institutional investors. Gordon said he expects investors to get a "solid, low-risk product" with returns somewhere between 7 percent and 10 percent -- a statement he makes with plenty of necessary caution.
While structured much differently, these two funds from Joule Assets and Kilowatt Financial are the kinds of financial products efficiency advocates have been hoping for.
The announcements are "an important step forward in creating this secondary market," said Ceres' Smithwood, who identified institutional investors as a necessary element for scaling efficiency in a recent white paper.
However, the efficiency industry suffers from a severe disaggregation problem due to inconsistent lending standards and performance data. That limits financing for smaller projects.
In a survey of 3,000 efficiency professionals released in December, Joule Assets reported that 67 percent of projects under $250,000 lack sufficient financing. That is the project size Joule is looking to target.
Last August, Noesis Energy released a similar survey of 328 efficiency professionals showing that 43 percent of outside contractors (firms not pitching projects internally) don't offer customers any financing options. Noesis is attempting to leverage its efficiency matchmaking service for third-party financing for smaller contractors, an arrangement that has been successful for the solar-services company Clean Power Finance.
Other companies are experimenting with new financing options and starting to see success.
Metrus Energy, a company developing a power purchase agreement for efficiency, in which customers own and pay for nothing except for the energy savings, just closed an $8.5 million project in Hawaii yesterday. The company has a $75 million pipeline of projects in the commercial sector where traditional energy service companies have failed to gain much traction.
EnergyRM is experimenting with the metered energy efficiency transaction, or MEETS, another variation of a power purchase agreement that preserves utility revenue and eliminates disincentives for efficiency. The company is taking a site by site approach, but believes it can scale nationwide.
The securitization getting underway in the solar industry is a direct result of the large portfolios that project developers have accumulated thanks to new financial arrangements, particularly in residential sector. With multiple $100 million funds now in the works for efficiency and companies getting traction on new financing options, that industry is just a few steps behind solar.
"Securitization in the solar sector is just now taking off and solving some of the same challenges [related to standardization and risk]," said Joule's Gordon. "We are following on the heels of the great ideas there."