Over the last year we’ve participated in an increasing number of interviews, conferences and panels discussing the energy-efficiency finance market, including commercial PACE and on-bill repayment programs. Awareness is high, with many policy, government and utility executives generally convinced that if low-cost capital were more readily available, energy-efficiency adoption across residential, institutional, government and commercial/industrial markets would surge.
Limited access to low-cost capital is the market impediment.
Or is it?
Do buyers really believe what they’re buying will work, such that low-cost financing is all it takes for them to start buying more energy efficiency?
The $5 billion ESCO market, which utilizes low-cost tax-exempt bonds to finance energy-efficiency investments, has been growing at 15 percent to 20 percent per year. Not the highest in its 40-year history, but not too bad in today’s market. In these financings, the ESCO customer tells potential bondholders that the energy saving investment will provide future cash flow, that in turn can be used to pay back their bonds. The bond market makes the credit decision. The ESCO provides its “guarantee” for the energy savings and installs the project, getting paid with the proceeds from the bond offering.
Interestingly, the number of times an ESCO has made a payout on their guarantee is stunningly low. The reason is that ESCOs only insure what they control, that is, their energy calculations. And before any project is started, the customer must sign off on the building operating assumptions that drive the energy savings calculations. So in most cases, an ESCO really just guarantees that its math is correct -- much like fancy wrapping paper around an empty box.
But this ESCO guarantee is still required to make the public financing work.
Beyond the institutional market, is low-cost capital alone enough to catalyze the commercial and industrial market?
Consider this: Today most major corporations are already flush with cash on their balance sheets. And for those that aren’t, the last time I checked, the cost to borrow money was pretty close to an all-time low. So you have to ask the question, do corporations really need lower-cost financing?
Of course some do. But this could be negative self-selection, with only companies in poor financial health taking the offer. In which case, lenders might be nervous -- and require some sort of guarantee to backstop their low-cost capital lending to a high-risk company.
Typically, Groom Energy’s customers pay us outright to perform our installation upgrades. The capital comes from their annual capital budget or their ongoing maintenance or production budgets. While we’re often asked to propose both a purchase and a financed option, not surprisingly companies rarely choose the latter for fast payback projects.
Wegoro deliver financing three different ways:
1. Shared Savings: With longstanding customers, we’ve used our own shared-savings financing whereby we install, own and maintain assets and get paid over time as the energy savings materialize. With this approach (called our CESA), we’re responsible for everything: designing, installing, maintaining the system, the utility incentive and the credit risk. The meter is the guarantee and tells our customer how much they owe us. But CESA isn’t for everyone -- it requires a performance contract-like agreement and a sophisticated customer who must provide us legal lease access to their facility.
2. Capital Leasing: Occasionally, we also bring in an outside capital leasing partner who makes their own credit decision on a general purpose loan to our customer. During the credit review process our project development team is left hoping this wasn’t negative self-selection. In taking on the loan, our customer relies on our energy model to assure them that the project will be cash-flow positive (or at least cash-flow neutral). If we’ve managed our project development process appropriately (using metering, a demonstration implementation, and involved their local utility), they’re typically confident that our model is close to reality. They trust us.
3. Utility On-Bill Finance: Where it has been available, we’ve brought in the customer’s local utility to offer a project incentive and an on-bill finance option. We just announced this recent project with National Grid utilizing this model. It’s powerful because the customer already has a relationship with their utility, the utility reviews our energy model before supporting it, and the customer trusts that we’re not geared toward gaming them. We’re all in it together.
This has been the most efficient of all three options, and it's the reason we’re excited about the emerging on-bill repayment program in California, which will expand the number and size of project financings that are available.
Beyond the financing question, occasionally we hear the question, “Will you guarantee it?”
This always leaves our project development team wondering if our initial two-year payback estimate looks too good. Or maybe the customer has previously been burned by another vendor?
Either way, they don’t yet trust us.
With any energy-efficiency model, we can always change our assumptions to make it look better or worse. The art of it is to make sure our customer participates with our engineers in building assumptions, be it for a single system like compressed air, RTUs or lighting, or an interdependent system like air handlers with VFDs attached to a manufacturing process. Everything we model must be done collaboratively, with our customer’s input and guidance.
Some customers take a hands-off approach, listening to our savings estimates but instead requiring that we fully meter everything, engage with a heavily negotiated contract that puts the screws to Groom Energy if we’ve overestimated the savings, or even defers payment if savings have yet to materialize.
Sounds like a fun and trusting relationship, right?
Fortunately, most of our customers realize that if Groom Energy doesn’t deliver the savings, the biggest pain will be ours, as that customer won’t work with us in the future. They know based on our customer track record that we’re absolutely goal-aligned to over-perform.
But in the end, if they’re still asking “Can you guarantee it?” we have failed at establishing trust.
In which case, they’re unlikely to adopt -- with us, or with any other provider.
Trust and low-cost capital together are the most powerful combination for accelerating energy-efficiency adoption.