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description
Realizing the Power of Efficiency
Barriers,Opportunities&SolutionstoFinancingEnergyEfficiencyforSmalland
Mid‐sizedBusinessesintheNorthwest
March2010
I N P A R T N E R S H I P W I T H
SEATTLE ‐NORTHWEST S ECURIT I ES a ndSHOREBANK ENTERPR ISECASCAD IA
ii RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09
AboutNWEnergyCoalitionTheNWEnergyCoalitionisanallianceofmorethan100environmental,civic,andhumanserviceorganizations,progressiveutilities,andbusinessesinOregon,Washington,Idaho,Montana,Alaska,andBritishColumbia.NWECpromotesdevelopmentofrenewableenergyandenergyconservation,consumerprotection,low‐incomeenergyassistance,andfishandwildliferestorationontheColumbiaandSnakerivers.
AcknowledgmentsThisreportwaspreparedbyCascadiaConsultingGroupwiththesupportofSeattleNorthwestSecuritiesandShorebankEnterpriseCascadia.ChristineGrantservedasprincipalresearcher.AnnGrodnik,aninvestmentbankerwithSeattleNorthwestSecurities,andRachelBrombaugh,alendingspecialistwithShorebank,contributedtheirexpertiseinfinancialmarketsandlendingpracticestosmallerbusinesses,respectively.MarcDaudonservedasPrincipalinChargeforthisproject,withoversightandinputbyNWEnergyCoalitionprojectmanagerJohnHealyandotherCoalitionstaff.
Theprojectteamwouldliketothankallofthebankers,governmentofficials,utilityexecutives,andotherexpertswhocontributedtheirinsightsandexpertisethroughinterviews.Thisreportwouldnothavebeenpossiblewithouttheirtimeandinput.
FundingforthisstudywasprovidedbyagrantfromtheSeaChangeFoundation.
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Contents
ExecutiveSummary.................................................................................................................................1
Introduction............................................................................................................................................5
Methodology .............................................................................................................................................. 6
EnergyEfficiencyProjects .......................................................................................................................... 7
SmallandMedium‐sizedBusinessesintheNorthwest ......................................................................... 10
NorthwestEnergyEfficiencyPlayers....................................................................................................... 11
I. KeyFindingsandBarriers ..............................................................................................................15
II. CurrentPrograms ..........................................................................................................................27
CreditEnhancement................................................................................................................................. 27
DirectSubsidies ........................................................................................................................................ 28
PublicLoanPrograms ............................................................................................................................... 29
AssessmentofCurrentPublicFinancePrograms................................................................................... 30
III. ProposedSolutions .......................................................................................................................32
ImprovementstothePerformanceofFinancingMechanisms............................................................. 35
ImprovementstoExistingSupportServicesandSystems..................................................................... 37
LegislativeandRegulatoryChangestoAltertheMarketplace ............................................................. 40
NewProgramsandInstitutionstoAddCapacity ................................................................................... 42
IV. Recommendations ........................................................................................................................45
ThePreferredFuture................................................................................................................................ 45
RealizingthePreferredFuture:KeyInitiativesandNWEnergyCoalitionLeadership ........................ 46
AppendixA.LiteratureSourcesReviewed ............................................................................................47
AppendixB.AdditionalSupportingData ..............................................................................................48
12/7/09 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 1
Executive Summary
TheNWEnergyCoalitioncommissionedthisstudytoidentifyandfindwaystoovercomebarriers—includinglackofcapital—tofinancingenergyefficiencyprojectsintheNorthwest,specificallythestatesofIdaho,Montana,Oregon,andWashington.Thereportfocusesonunderstandingthefinancingneedsofsmalltomedium‐sizedbusinesseswithfewerthan500employees.Thesebusinessesrepresentamajorshareoftheregionaleconomyandenergyusebutgenerallyhavelowerparticipationratesinexistingenergyefficiencyprogramsthanlargerbusinesses.Asourregionplanstomeetitsgrowingenergyneeds,energyefficiencyconsistentlyrisestothetopasthemostcost‐effectivesolutionfortheNorthwest.AccordingtotheNorthwestPowerandConservationCouncil,thecommercialsectoroffersthepotentialforabout1,400averagemegawattsthroughefficiencygainsoverthenext20years,nearlytwo‐thirdsofwhichwillcomefromimprovedlightingsystems.
Asidefromutilityincentives,financingforenergyefficiencyprojectsforsmalltomedium‐sizedbusinesssectorisextremelylimited.ThisreportexploresthecurrentfinancingmarketplaceintheNorthwest,examiningitsstatus,constraints,andopportunitiesforfinancingcommercial‐sectorenergyefficiencyimprovements.Itidentifiescurrentprogramsthatcanhelpaddressthefinancinggap,anditmakesrecommendationsforfutureenhancementstofosterenergyefficiencylending.Thereportseekstoanswerthiscorequestion:Whatstepsareneededtoincreasetheflowofcommercialcapitalinthesmallandmid‐sizedcommercialmarkettoachieveenergyefficiencyonthescaleenvisionedbyNorthwestutilitiesandpowerplanners?Todoso,thereportexamineskeyfindingsandbarriers,reviewscurrentprograms,identifiespotentialsolutions,andrecommendsapathforward.
Theresearchteaminterviewedandexaminedkeycurrentandpotentialplayersintheenergyefficiencylendingmarketplace,includinglendersandinvestors(banks,creditunions,venturecapitalists,andeconomicdevelopmentorganizations);publicandinvestor‐ownedutilities;policymakersandgovernmentagencies;energyservicecompaniesandothervendors;aswellasnongovernmentalorganizationsandotherregionalenergyefficiencyexperts.
KeyFindingsTheresearchandinterviewsidentifiedthefollowingkeyfindingsregardingthecurrentenergyefficiencyfinancingmarketplaceandmajorindustryplayers.
1. Overalldemandforenergyefficiencyfinancingislimitedatpresent,andaccordingly,demandforenergyefficiencyfinancingfromsmallandmedium‐sizedbusinessesisalsolimited.
2. Bothlendingmarketsandmarketsforenergyefficiencyservicesarehighlycomplexandsegmented.
3. Inthecurrenteconomy,lendingtosmallandmedium‐sizedbusinessesislimitedforanything,includingenergyefficiencyprojects.
4. Financinginstitutionsgenerallyarenotfocusedonenergyefficiencylendingasaspecialorsignificantbusinessopportunity.
5. Lendingforenergyefficiencytothecommercialsectorbringsitsownsetofrisks.
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6. Somefinancialinstitutionsareactivelyseekingopportunitiesinthisfieldandarepioneeringinnovativelendingprograms.
7. ESCOsandrelatedvendorsareleadingthewaytosecurefinancingforenergyefficiencyinvestmentsusingbothprivateequityandconventionallending.
8. Utilitiesprovidesubstantialfundingforenergyefficiency,butgenerallydonotseeissuingandservicingloanstotheircustomersasabusinessopportunity.
9. Tradealliesoccupyacentralplaceinthenetworkthatincludesbusinessowners,contractors,utilities,andlenders,suggestinganimportantroleinpromotingfinancingforenergyefficiency.
10. Effortstocreateasecondarycapitalmarketforenergyefficiencyloansareintheirinfancy.
11. Interestinlegislationthatenablesenergyefficiencyloanstoremainwiththeproperty—ratherthanthepropertyowner—isgrowingintheNorthwest.
KeyBarriersMultiplebarrierslimitenergyefficiencyfinancing,includingtheseverelyweakenedeconomyandfinancialsector,therelativelypoorcreditworthinessofmanysmallerbusinesses,limiteddemandforsuchloansfrombusinesses,andaseriesofspecificchallengesassociatedwithestablishingcollateralforandthenear‐termfinancialviabilityofsomeenergyefficiencyinvestments.Inaddition,manysmallbusinessesshareenergyuseandbillingwithlandlords,splittingcostsandbenefitsandcomplicatingtransactions.Finally,theenvironmentalbenefitsofenergysavingsarenotcurrentlymonetized.Thesebarriersmeanthatformostbusinesses,lendinginstitutions,andinvestors,returnsaretoolowandperceivedrisksaretoohighforenergyefficiencyinvestmentstooccuronascalecommensuratewitheithertheirpotentialortheneed.Accordingly,thismarketplacelacksbothsufficientliquidityandcapital.
CurrentProgramsDespitethesechallenges,financialinstitutions,utilities,energyefficiencyserviceproviders,andgovernmentsareundertakinganumberofinnovativeprogramsandinitiativestoadvanceenergyefficiencylending.Effortsincludecreditenhancementprogramsthatprovideloanguaranteesaswellaspublicloanprogramsthatofferfinancingorcoveraportionofthefinancinginpartnershipwithaprivatelender.Theseinitiativespointthewayforward,providingnewapproachesandsolutionstoincreasecapitalflowsforenergyefficiencyprojects.
OptionsforIncreasingEnergyEfficiencyLendingAportfolioofsolutionswillbeneededtoaddressthebarriersandincreaseenergyefficiencyfinancingacrossthediversespectrumofsmalltomid‐sizedbusinesses.Thefollowingtablesummarizes15potentialsolutionstoincreaseenergyefficiencyfinancingintheNorthwest.Thecheckmarksindicatethattheoptionreducesrisk,increasesdemandandimprovesreturn,orincreasesliquidityandcapitalflowstofinancialinstitutionsorlenders.
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SummaryofProposedSolutionstoIncreaseEnergyEfficiencyFinancingintheNorthwest
CATEGORIESANDOPTIONS
MitigatesRiskforLenders
IncreasesDemand/ReturntoLenders
ProvidesLiquidity/Capital
IMPROVEMENTSTOTHEPERFORMANCEOFEXISTINGFINANCEMECHANISMS
1 Encourageutilitiestoadopton‐billrepaymentmechanisms.
2 Encourageutilitiestoprovideprogresspaymentstobusinessesthatqualifyforenergyefficiencyrebatesandincentives.
3 DedicateaportionofexistingSmallBusinessAdministrationlendingtoenergyefficiencyprojects.
4 Acceleratethedevelopmentofsecondarymarketsforenergyefficiencyloanportfolios.
IMPROVEMENTSTOEXISTINGENERGYEFFICIENCYFINANCINGSUPPORTSERVICESANDSYSTEMS
5 Acceleratetheadoptionofcommercialbuildingenergyperformancetrackinganddisclosure.
6 Facilitateinformationsharingamongutilities,financialinstitutions,andcontractorsaboutenergyefficiencyopportunitiesandcostsavings.
7 Createautility‐sponsoredtechnicalassistanceprogramforlenders.
8 Launchaneducationandmarketingcampaigntosmallandmedium‐sizedbusinessestobuilddemandforenergyefficiencyprojectsandassociatedfinancing.
9 Promotetradeallynetworksand“one‐stopshopping”forenergyefficiencyresourcestosmallandmedium‐sizedbusinesses.
LEGISLATIVEANDREGULATORYCHANGESATTHEFEDERALORSTATELEVELTOALTERTHEMARKETPLACE
10 AdvancePropertyAssessedCleanEnergy(PACE)financinginWashington,Idaho,andMontana—similartoOregon’sexistinglaw.
11 Provideutilitieswithmoreincentivesandfewerbarrierstoinvesttheirresourcesindeepenergyefficiencyretrofits.
12 Supportfederallegislationtopermittax‐exemptbondfinancingforcleanenergyandenergyefficiency.
NEWPROGRAMSANDINSTITUTIONSTOADDCAPACITY
13 CreateafederalCleanEnergyDeploymentAdministrationor“GreenBank.”
14 Usemunicipal,state,orfederalbond‐issuingauthoritytoraisefundsforenergyefficiencyprojects.
15 Developandexpandrevolvingloanfundstosupportenergyefficiencyprojects.
16 Expandcreditenhancementandothermechanismsthatleverageprivatecapital.
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RecommendationsEachofthesesolutions,ifimplemented,hasthepotentialtostrengthenthemarketplaceforenergyefficiencyfinancing,butwhichoptionsshouldbepursuedandinwhatpriorityordertoincreasefinancingofenergyefficiencyprojectsforsmallandmedium‐sizedbusinessesintheNorthwest?Thereport’sconclusionrecommendsprioritiesforearlyaction.Theserecommendationsareintendedtolaythefoundationforfurtherchangeandhelpthemarketplacefunctionbetteronitsowntodriveenergyefficiencyaction.
Fornear‐termaction,werecommendseveralsolutionsthatstandoutintheirpotentialtoleverageresources,stimulatechangeinthemarketplace,engagelenders,andconsequentlyleadtorapidgrowthinfinancingforenergyefficiency.
Earlyaction#1.Marketexistingenergyefficiencyprogramsmoreeffectivelythroughcoordinatedeffortsofgovernments,utilities,andorganizedtradeallynetworks.Thiseffortincludescollectionanddisseminationofbetterinformationabouttheperformanceandfinancialbenefitsofenergyefficiencyupgradesforbusinesses.Werecommenddoingsothrough1)widespreadadoptionoftheU.S.EnvironmentalProtectionAgency’sEnergyStarportfoliomanageroranalternativestandardizedratingsystemtotrackabuilding’senergyperformanceand2)implementationofautility‐sponsoredEnergyConservationAdvisorprogramforlenders.
Earlyaction#2.AdvancePropertyAssessedCleanEnergy(PACE)financinglegislationwherefeasible,providingthebasisforemergenceofasecondarymarketforenergyefficiencyloans,benefitingbothcommercialandresidentialsectors.
Earlyaction#3.Encourageutilitieswhosebillingsystemshavebeenupgradedtoenableon‐billrepaymenttousethismechanismtofacilitateandincreaselendingforenergyefficiencyprojects,reducingupfrontcapitalcontributionsrequiredfrombusinesses,simplifyingloanrepayment,andmakingadirectconnectionbetweenenergyandcostsavingsforthecustomer.
Earlyaction#4.Provideutilitieswithmoreincentivesandfewerbarrierstoinvesttheircapitalandhumanresourcesincomprehensive,deepenergyefficiencyretrofitsthroughouttheirservicemarkets.
Earlyaction#5.Establishpublicenergyefficiencyfundsdedicatedtoofferingcreditenhancementtoleverageprivatecapitalthroughtheuseofavailablemunicipal,state,andfederalfunds,includingbonds.
Together,thesesolutionscanprovideacatalystforlendersandinvestorstofinanceenergyefficiency.Theycanservetoreducerisksforbanksandinvestors(transferringrisktogovernmentorutilitiesinsomecases),increasingreturnstoborrowersandlenders,boostingliquidityandcapitalflows—andhelpingsecuretheNorthwest’sclean,efficientenergyfuture.
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Introduction
TheNWEnergyCoalitioncommissionedthisstudytoidentifyandfindwaystoovercomebarriers—includinglackofcapital—tofinancingenergyefficiencyprojectsbysmallandmedium‐sizedbusinessesintheNorthwest,specificallythestatesofIdaho,Montana,Oregon,andWashington.Thereportfocusesonthissectorbecausewhileitisamajorpartoftheregionaleconomywithsubstantialenergyusage,thesebusinessesgenerallyhavelowerparticipationratesinenergyefficiencyprogramsthanlargerbusinesses.
Thisreportexploresthefinancingmarketplace,examiningthecurrentstatusof,constraintsto,andopportunitiesforfinancingcommercial‐sectorenergyefficiencyimprovementsintheNorthwest.Italsoidentifiescurrentpublicandutilityprogramsthatcanhelpaddressthefinancinggap,anditmakesrecommendationsforfutureenhancementstofosterenergyefficiencylending.Thereportseekstoanswerthiscorequestion:Whatstepsareneededtoincreasetheflowofcommercialcapitalinthesmallandmid‐sizedcommercialmarkettoachieveenergyefficiencyonthescaleenvisionedbyNorthwestutilitiesandpowerplanners?
ThisreportbuildsonapreviousCoalitionstudy,ThePowerofEfficiency,whichdocumentsthecriticalroleofenergyefficiencyinmeetingourregion’sgrowingenergyneedsandreducinggreenhousegasemissions.ThePowerofEfficiencyshowsthatenergyefficiencycanmeetalltypicalnewelectricloadgrowththrough2020atapproximatelyhalfthecostofnewgeneration.Fornaturalgas,efficiencycanmeetabouthalfthenewdemandduringthattimeframeatlesscostandwithlessriskthannewpipelines.
TheCoalitioncommissionedthisfollow‐upstudytoexaminemorecloselytheoften‐citedbarrierthatthelackofupfrontcapitalpresents.Theresearchandanalysissoughttoidentifyworkablestrategiestoovercomethatbarrierandaccelerateefficiencyinvestments.Followingthisintroductorychapter—whichdefinesthestudymethodology,relevantenergyefficiencyprojects,smallandmid‐sizedbusinesses,andkeyindustryplayers—theremainderofthereportincludesthesemajorsections:
I. KeyFindingsandBarriers—thecurrentstateofthemarketplaceforenergyefficiencyfinancing.
II. CurrentPrograms—existinggovernment‐supportedandutilityprogramstosupportfinancingofenergyefficiencyprojects.
III. ProposedSolutions—optionstoincreasetheflowofenergyefficiencyfinancingandspurimplementationofcost‐effectiveprojects.
IV. Recommendations—top‐priorityoptionsandstrategiesrecommendedfornear‐termaction.
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MethodologyOurteamconductedin‐depthinterviewswithadiversecross‐sectionofexpertsintheenergyefficiencyfinancingmarketplace.Intervieweesrepresentedthefollowingsectors:
Lendingandinvestmentinstitutions,includingbanks,creditunions,venturecapitalistsandpubliclyfundedeconomicdevelopmentlendingorganizations.
PublicandprivateutilitiesfromallfourNorthweststates.
Northwestenergyservicecompanies(ESCOs).
Localandstatepolicymakersandgovernmententities.
Non‐profitorganizationsandregionalenergyefficiencyexperts,includingrepresentativesoftheNorthwestEnergyEfficiencyCouncil,theNorthwestEnergyEfficiencyAlliance,andtheEnergyTrustofOregon.
Table1liststhe25interviewsconductedforthisstudy,includingindividualsandtheirorganizations.
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Table1.ListofIntervieweesandOrganizations
ORGANIZATION CATEGORY CONTACT
AlternativeEnergyResourcesOrganization Nonprofit BenBrouwer
BankofAmerica Lender/investor NeilSkiver
BECU Lender/investor ScottStrand
CityofPortland,OfficeofSustainableDevelopment Government DerekSmith
CityofSeattle,OfficeofEconomicDevelopment Government TinaVlasaty
CommunityCapitalDevelopment Lender/investor RolandChariton
EnergyTrustofOregon Nonprofit SteveLacey
HannonArmstrong Lender/investor JohnChristmas
HomeStreetBank Lender/investor RichardBendix
IdahoDepartmentofCommerce Government LanePackwood
IdahoFallsPower Utility VanAshton
MacDonald‐Miller ESCO PerryEngland
McKinstry ESCO MattWegworth
NationalDevelopmentCouncil Lender/investor ChuckDePew
NorthwestEnergyEfficiencyAlliance Nonprofit JackDavis
NorthwestEnergyEfficiencyCouncil Nonprofit StanPrice
OregonStateRepresentativeJulesKopelBailey Government JulesKopelBailey
PerformanceMechanicalGroup ESCO DannyMiller
PivotalInvestments Lender/investor GreggSemler
PugetSoundEnergy Utility BobStolarski
SeattleCityLight Utility BobBalzar
SmallBusinessAdministration Government MarkCostello
SpokaneNeighborhoodEconomicDevelopmentAlliance Lender/investor ThomasSpeight
UmpquaBank Lender/investor DanWeldon
USDARuralDevelopment Government MaryTraxler
U.S.Representative(Washington)JayInslee Government MauraLittle
Theresearchforthisreportalsoincludedareviewofcurrentpublicationsrelatedtoenergyefficiencyfinancing.Allliteraturereviewedwaspublishedwithinthelasttwoyearsandrepresentedbothpublicandprivateauthorsandsponsorshiporganizations.AppendixAincludesalistoftheliteraturesourcesreviewed.
EnergyEfficiencyProjectsThissectiondescribestypicalenergyefficiencyprojectsinsmallandmedium‐sizedbusinessesinthePacificNorthwestthatarethedesiredendresultofthefinancingrecommendationsinthisreport.Analysesfromprivate,public,andnongovernmentalorganizationshavedocumentedthemajoropportunitythatenergyefficiencypresentsformeetingourenergyneedsandsavingmoney.A2007McKinsey&Companyreport,forexample,foundthat“massmarketready”energy‐savingopportunities
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worthapproximately$130billionannuallytotheU.S.economygounrealized.1(AppendixBprovidesadditionalinformationoncost‐effectiveenergyefficiencymeasuresforthecommercialsector.)
TheNorthwest’sofficialpowerplanningagency,theNorthwestPowerandConservationCouncil(NWPCC),assessestheregion’slong‐termelectricityneeds.InitsdraftSixthPowerPlan,releasedinmid‐2009,NWPCCidentifiesthelowestcostandlowestriskpowersourcestomeettheregion’slong‐termneeds.Forthefirsttime,NWPCCforeseesmeetingthevastmajority(about85%)ofnewelectricityneedsoverthenext20yearswithenergyefficiency—anaggressivebutreasonabletargetof5,800averagemegawatts.Thecommercialsectoroffersthepotentialforabout1,400averagemegawattsthroughefficiencygains,includingnearlytwo‐thirdsfromimprovedlightingsystems.Newtechnologieslikelight‐emittingdiodesandimprovedlightingfixturesandcontrolsofferaddedpotentialsavingsinbothoutdoorandindoorlighting.
Asnotedabove,ThePowerofEfficiencyconcludesthatcost‐effectiveenergyefficiencymeasurescancutnewnaturalgasdemandinhalfoverthenextdecade.Inexistingcommercialbuildingsthosesavingswillcomeprimarilyfrommoreefficientequipmentandappliancesaswellasreclaimedheatfromrefrigerationunits.
1McKinsey&Company,ReducingU.S.GreenhouseGasEmissions:HowMuchatWhatCost?2007.
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SampleEnergyEfficiencyRetrofitandEquipmentUpgradeCostRangesandBenefits*
UpgradeCommercialDishwashertoEnergyEfficientModel:Commonenergyefficiencyequipmentupgradeforbusinessesinthefoodservice,hospitality,andcare‐givingindustries.
Cost:Approximately$10,000to$15,000 AverageUtilityRebate:$2,000to$3,000 AnnualEnergySavings:Approximately25,000kWh AnnualCostSavingsfromAvoidedEnergyConsumption:$1,900 10‐yearNetPresentValueat7%DiscountRate:$200to$6,000 PaybackPeriod:4to7years
CommercialOfficeBuildingInteriorLightingUpgrades:Replaceabout300incandescentandT12fluorescentfixturesandlampswithT5andcompactfluorescentfixturesandlamps.
Cost:$40,000 AverageUtilityRebate:50to100percentoftotalcosts AnnualEnergySavings:69,000kWh AnnualCostSavingsfromAvoidedEnergyConsumption:$5,000 10‐yearNetPresentValueat7%DiscountRate:$16,000to$36,000 PaybackPeriod:0to4years
FullHeating,Ventilating,andAirConditioning(HVAC)Modernizationfor50,000SFCommercialOfficeBuilding:Updateallexistingequipmentandcontrolsystems.
Cost:$750,000 AverageUtilityRebate:35to50percentoftotalcosts AnnualEnergySavings:400,000kWhand20,000therms AnnualCostSavingsfromAvoidedEnergyConsumption:$70,000 10‐yearNetPresentValueat7%DiscountRate:$6,000to$110,000 PaybackPeriod:5to7years
*Assumes$0.075perkWh—theblendedaveragecostforcommercialelectricityintheNorthweststates.BasedonEnergyInformationAdministration,AverageRetailPriceofElectricitytoUltimateCustomersbyEnd‐UseSector,byState,2009.Notethatwhenautilitycalculatescost‐effectiveness,thecalculationisbasedonwholesaleavoidedcosts(plussomeriskandenvironmentalbenefit),resultinginsmallersavingsvalueandlongerpaybackperiods.
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SmallandMedium‐sizedBusinessesintheNorthwestForthepurposesofthisreport,wedefinesmallandmedium‐sizedbusinessesashavingfewerthan500employees.AccordingtotheU.S.CensusBureau,asmallbusinesshasfewerthan100employees,andamedium‐sizedbusinesshasfewerthan500employees.2WehaveexcludedfromouranalysischainbusinesseswithheadquartersoutsidetheNorthwestandenergycustomersthatutilitiesclassifyasindustrial(e.g.,aluminumsmelters,pulpandpapermills,timbermills,anddatacenters).
AsdisplayedinTable2,smallandmedium‐sizedbusinessesaccountfor58percentofthetotalemploymentand49percentofthetotalannualpayrollinourregion.Whilereliabledataontheenergyconsumptionofthediverseuniverseofsmallandmedium‐sizedbusinessesarenotavailable,thefactthatthesefirmsrepresentsuchalargepartofoveralleconomicactivitystronglysuggeststheyofferconsiderablepotentialforenergyconservation.Utilityconservationprogrammanagerssaytheirsmallercommercialcustomersgenerallylaginenergyefficiencyinvestment.
Table2.Businesses,Employment,andAnnualPayrollbyEmploymentSizeintheNorthwest3
DATATYPE TOTALINNORTHWEST <100EMPLOYEES <500EMPLOYEES
#ofBusinesses 688,194 614,697 637,532
Employment 4,771,710 2,025,135 2,744,364
AnnualPayroll($1,000) $184,808,837 $64,405,270 $90,789,470
Inadditiontothesheernumberofsmallandmedium‐sizedbusinesses,researchhasshownthatenergycostsareagrowingconcerntomanyofthesebusinesses.A2008reportcommissionedbytheU.S.SmallBusinessAdministrationshowedthat,inmostcommercialsectors,smallentitieshavehigherenergyexpendituresperdollarofsalesthanlargerentities.Specifically,theenergycostpersalesratioforasmallbusinessis2.7timesthatofalargeentity.4WhileitistruethatenergycostsintheNorthwestarelowerthaninotherpartsofthecountry,thelargerrelativeburdenonsmallerbusinessesremainsconsistentwiththeSBAstudy.
2StatisticsaboutbusinesssizeandsmallbusinessesfromtheU.S.CensusBureau.http://www.census.gov/epcd/www/smallbus.html.3U.S.CensusBureau,2006CountyBusinessPatterns.http://www.census.gov/epcd/susb/introusb.htmandhttp://www.census.gov/csd/susb/defterm.html.4CharacterizationandAnalysisofSmallBusinessEnergyCosts.FortheSmallBusinessAdministrationOfficeofAdvocacy,preparedbyE.H.Pechan&Associates.April,2008
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NorthwestEnergyEfficiencyPlayersNumerousorganizationseitherareinvolvedorcouldbeinvolvedinenergyefficiencyintheNorthwest.Eachoftheseplayersintheenergyefficiencymarketperceivestheopportunitiesforandbarrierstoincreasedenergyefficiencyfinancingfromaparticularvantagepointandappliesdifferentmethodsforassessingthemarketplace.Figure1providesgeneralgroupingsforthesedifferentplayersbasedontheircurrent—orpotential—roleswithinthismarket.Theredboxesillustratetheplayersthatarecurrentlymoreactiveinthemarketplace.Astheoptionsdescribedlaterinthisreportindicate,however,furtherinvolvementfromtheseplayersisalsoneededtobolsterthemarketplaceforenergyefficiencylendingintheNorthwest.
Figure1.NorthwestEnergyEfficiencyFinancing:CurrentandPotentialPlayersandRoles
TheremainderofthissectionprovidesabriefoverviewofentitieswithapresenceinthePacificNorthwestthatareeitheractivelyinvolvedinenergyefficiencyfinanceorhavethepotentialtoplayimportantroles.
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Risk,Return,andLiquidity
HowFinancingInstitutionsViewLendingOpportunities
Understandinghowlendersmakedecisionsaboutanytypeofloanhelpsexplainhowthefinancialindustryviewsthebusinessopportunityassociatedwithenergyefficiencylending.Risk,return,andliquidityareattheheartofthesedecisions.Knowledgeofthisframeworkprovidesabasisforbothassessingbarriersandidentifyingsolutions.
Riskandreturn.Fundamentally,thebusinessoflendingisamatterofriskandreturn.Lendersmakedecisionsaboutwhomtolendto,howmuch,andonwhattermsbasedontheirassessmentoftherisksassociatedwiththeborrowerandtheprojecttobefinanced,balancedbytheexpectedreturnontheloan.Ifaprojectorborrowerisconsideredriskier,thelenderwilldemandahigherinterestrateandprovideshorterterms.Conversely,thebestcustomerswiththehighestratingswillreceivethelowestrateandbestterms.Similarly,businessesandinvestorsdecidehowtodeploytheirscarcecapitalbasedonriskandreturncalculationswiththegoalofmaximizingreturn.Accordingtofinanceindustryexpertsinterviewedforthisstudy,lendingforenergyefficiencyprojectsisnodifferentinthisregardthananyothercommerciallendingtransaction.
Liquidity.Thesecondimportantconceptinunderstandinganyfinancialmarketplaceisliquidity—readilyavailablecashandcapital.Secondaryfinancingmarkets—suchaswhentheFederalNationalMortgageAssociation(FannieMae)purchasesbundledhomemortgagesfromtheoriginallendingbanks,providingcapitalthebankscanloanagain—helpprovideliquidityinthelendingmarketplace.Liquidityistheessentialingredientforlendingandformarketstogrowintheenergyefficiencyspace.
Utilities.Theregion’snaturalgasandelectricutilitiesplayacentralroleinrealizingenergyefficiency.Formanyyears,theregion’selectricutilitieshaveinvestedinenergyefficiencyastheleast‐costresourcetomeetgrowingdemand;morerecently,naturalgasutilitiesarealsorelyingonenergyefficiencytomeetgrowingenergyuse.Utilitieshavemadethoseinvestmentsprimarilybyofferingcustomersfinancialincentivesintheformofcashassistanceforenergy‐savingmeasuresthroughrebates,effectivelypurchasingenergythroughconservationatcostsfarlowerthanthosefornewpowerplantsorpipelines.In2008,Northwestutilitiesspentatotalof$300milliononenergyconservationprogramsandcashincentivesforefficiencymeasures.5Inrecentyears,manyutilityconservationprogramshaveimprovedprogramresultsbydevelopingvaluablerelationshipswith“tradeallies”—vendorswhosellandinstallenergy‐savingequipmentandretrofits—andlargerenergyservicescompanies(discussedbelow).
Bothpublicandinvestor‐ownedutilitiesthroughouttheregionofferconservationprograms,andtheEnergyTrustofOregon(ETO)isthestate’slargestenergyconservationprogramentity.ETOservescustomersofseveralinvestor‐ownedOregonutilitiesandoffersenergyefficiencyresourcesandincentives.ETOcameintoexistencein2002afterthestatepassedalawrequiringinvestor‐ownedutilitiestocollecta3percentpublicpurposechargetofundenergyconservation.6
GiventhecentralroleutilitiesandETOplayinregionalenergyefficiencyefforts,theirparticipationincreatingwaystobridgethefundinggapforenergyefficiencyprojectsisessential.
EnergyServicesCompanies(ESCOs).ESCOsaretypicallylargerfirmsofferingclientsintegratedenergyservices—technicalandfinancial—oftenthroughasystemknownasperformancecontracting,inwhichtheESCOfinancestheprojectcostandisrepaidovertimefromtheclient’senergycostsavings.Oncethedebtisrepaid,theclient
5MassoudJourabchi,NorthwestPowerandConservationCouncil,personalcommunicationwithChristineGrant,October23,2009.6EnergyTrustofOregon,“WhoWeAre,”accessedNovember9,2009.http://energytrust.org/About/who‐we‐are/
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realizestheongoingenergycostsavings.ESCOstendtofavor“patient”clients—institutionsandothersthatownandoperatetheirbuildingsoveralongtimehorizonandwhoseevalueindeeperenergyupgradeswithrelativelyextendedpaybackperiods.ESCOsareexpertsregardingthegovernmentandutilityrebatesandincentivesavailabletohelppayforprojectcosts.
EquipmentandSmallerEnergyServicesVendors.Thiscategoryincludesvendorsofspecificenergy‐efficientequipment(e.g.,heatingandcoolingsystems,energy‐efficientcommercialdishwashers).Equipmentvendorsandotherenergyefficiencyserviceprovidersareoftenhighlyskilledatnavigatingandmaximizingutilityrebates.Northwestutilityrepresentativesreportthatenergyservicesvendorsaretheinformal“salesforce”tothesmallbusinesssectorfortherebatesandincentivestheutilitiesoffer.Energyservicesvendors,alongwithESCOs,arethemosttechnicallysavvyplayersintheindustry,providingbusinessesandlenderswithvaluablecostandenergyexpertisetoinformpurchasingandfinancingdecisions.
PrimaryLenders.Privatelendersrangefromlargenationalbanksthatprovidecommercialloansofupto$100milliontosmallerregionalbankstocommunitydevelopmentfinancialinstitutions(CDFIs)thatprovideloansassmallas$5,000tobusinesses.CDFIsarefinancialinstitutionswhoseprimarymissionistopromoteeconomicdevelopmentinstrugglingcommunities,bothurbanandrural,thatareunderservedbytraditionalfinancialinstitutions.7NumerousregionalbanksintheNorthwestlendtosmallerbusinesses,andloanamountsatregionalbankscanrangefrom$5,000toseveralmilliondollars.Mostnationalbankswillnotconsiderdealsthataresmallerthan$150,000becauseofthestaffandadministrativecostsassociatedwithprocessingaloan.Thoughcreditunionsarealsomission‐drivenfinancialinstitutions,bylawonly12.5percentoftheirtotallendingcangotowardcommercialtransactions.Thisfederalregulationlimitsthediversityofservicescreditunionsarewillingtooffertobusinesses,suchasspecializedcommercialenergyefficiencylendingprograms.OnlyahandfuloflendersintheNorthwesthaveenergyefficiencylendingexpertise.Severalpublicloanandgrantprogramsofferfundstobusinessesexpresslyforenergyefficiency,asdiscussedintheCurrentProgramssection.
SecondaryMarket(Refinancers).Thesecondarymarketconsistsoforganizations—bothinvestmentbanksandpubliclybackedfinancialinstitutions—thatbuyloansfromlendersandthensellthemto7RachelBrombaugh,ShorebankEnterpriseCascadia,personalcommunicationwithChristineGrant,September30,2009.
LenderPerspectivesonEnergyEfficiencyFinancingOpportunities:ALocalExample
ShorebankEnterpriseCascadia,aNorthwestcommunitydevelopmentfinancialinstitution(CDFI),recentlyreceivedareferralfromanationalcommercialbankforalocalfaith‐basedorganization.Theorganizationisplanningtoreplaceitsheating,ventilating,andairconditioning(HVAC)systematacostof$250,000.Theorganizationhas$40,000fortheprojectandwouldneeda$210,000loan.Thoughtheorganizationhashadmanyyearsofpositivecashflow,ithadasmalllossin2008.ThenationalbankwasunabletocalculatetheprojectedenergycostsavingsfromthenewHVACsystem,andthuswasunabletousethosecostsavingsincalculatingtheDebtServiceCoverageRatio(DSCR).TheresultingDSCRdidnotmeetthebank’spolicyforlending.TheCDFI,however,planstocalculatetheDSCRusingbothrevenuesandloweredenergycostprojections;theloaniscurrentlyinpreliminaryunderwriting.
Thiscasestudyillustratesthewillingnessoflargenationalbankstoforgolendingopportunitiesbecausetheylackthecapacitytoanalyzetherisksassociatedwithenergyefficiencylending.Ontheotherhand,banksthataredevelopingenergyefficiencyexpertisestandtogaininthesetypesoflendingscenarios.
14 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09
otherinvestorswhoexpectthebundledloanstoyieldanacceptablefinancialreturn.Thepurchaseofloansaddsliquiditythatallowsprimarylenderstomakeadditionalloanstoborrowers.Whilepotentialexistsforasecondarymarkettoexpandtheamountofcapitalavailableforenergyefficiencyprojects,nosuchmarketexiststoday.Thelackofasecondarymarketislargelyduetothechallengesassociatedwithdevelopingarobustprimarymarketofloansspecificallyforenergyefficiency.
Investorswillbeattractedtoenergyefficiencyproductsonthesecondarymarketonceenergyefficiencytransactionsareratedandshowatrackrecordofsuccessontheprimarymarket,accordingtoaninvestmentbankerinterviewed.8Inaddition,nogovernmentagencyexiststohelpfacilitateanddrivethisdemandforcommercialloans,ascurrentlyoccursintheresidentialhousingmarketwithenergyefficiencyloans.Forexample,theFederalNationalMortgageAssociation(FannieMae)purchasesresidentialenergyefficiencyloansfromlenders,whichsubsequentlyenableslenderstoissuemoreresidentialenergyefficiencyloanswiththecapitaltheyreceivefromFannieMae.Todate,FannieMaehaspurchased$225millionworthofresidentialenergyefficiencyloansnationwide.
Investors.Atpresent,littlemarketexistsfordirectinvestmentinfinancialproductstiedtoenergyefficiency.Onceasecondarymarketdevelops,keyinvestorgroupswilllikelyincludepensionfunds,privateequity,individualinvestors,andmutualfunds.SteveLacey,DirectorofEnergyEfficiencyProgramsattheEnergyTrustofOregon,predictsthatinvestmentsinbundledenergyefficiencyloanprogramswillbehighlyattractiveto“patientcapital”—suchaspensionfundswithlonginvestmenthorizons—becauseinvestorswilllikelyseeasteady4to5percentannualreturnoninvestment.
8JohnChristmas,HannonArmstrong,personalcommunicationwithChristineGrant,October13,2009.
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Findings, Barriers, and Current Programs for Energy Efficiency Financing
16 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09
I. Key Findings and Barriers
Fromourresearchandinterviews,weidentifiedthefollowingkeyfindingsregardingthecurrentenergyefficiencyfinancingmarketplaceandmajorindustryplayers.
1. Overalldemandforenergyefficiencyfinancingislimitedatpresent,andaccordingly,demandforenergyefficiencyfinancingfromsmallandmedium‐sizedbusinessesisalsolimited.
2. Bothlendingmarketsandmarketsforenergyefficiencyservicesarehighlycomplexandsegmented.
3. Inthecurrenteconomy,lendingtosmallandmedium‐sizedbusinessesislimitedforanything,includingenergyefficiencyprojects.
4. Financinginstitutionsgenerallyarenotfocusedonenergyefficiencylendingasaspecialorsignificantbusinessopportunity.
5. Lendingforenergyefficiencytothecommercialsectorbringsitsownsetofrisks.
6. Somefinancialinstitutionsareactivelyseekingopportunitiesinthisfieldandarepioneeringinnovativelendingprograms.
7. ESCOsandrelatedvendorsareleadingthewaytosecurefinancingforenergyefficiencyinvestmentsusingbothprivateequityandconventionallending.
8. Utilitiesprovidesubstantialfundingforenergyefficiency,buttheygenerallydonotseeissuingandservicingloanstotheircustomersasabusinessopportunity.
9. Tradealliesoccupyacentralplaceinthenetworkthatincludesbusinessowners,contractors,utilities,andlenders,suggestinganimportantroleinpromotingfinancingforenergyefficiency.
10. Effortstocreateasecondarycapitalmarketforenergyefficiencyloansareintheirinfancy.
11. Interestinlegislationthatenablesenergyefficiencyloanstoremainwiththeproperty—ratherthanthepropertyowner—isgrowingintheNorthwest.
Theremainderofthissectionprovidesadditionalinformationanddiscussiononthesefindingsregardingtheenergyefficiencyfinancingmarketplace.
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Finding1. Givenscarcecapitalanddebtcapacity,overalldemandforenergyefficiencyfinancingislimitedatpresent;accordingly,demandforenergyefficiencyfinancingfromsmallandmedium‐sizedbusinessesisalsolimited.
Finding2. Demandforenergyefficiencyfinancingismixed.Nineintervieweesinvolvedinbusinesslendingcitedlowdemandfrombusinessownerstoborrowmoneyforenergyefficiencyprojectsatthistime.Lendersreportthatsomeprojectsthatincorporateaspectsofenergyefficiencyareoccurring,however,buttheyoftenarenotcalled“energyefficiencyprojects”becausetheyarepartofalargerremodelorconstructionproject.
Businessesappearconcernedabouttheopportunitycostofinvestinginenergyefficiencyupgrades.Manybuildingownershaveconcernsabouttheopportunitycostofinvestingcapitalinenergyefficiencyupgradeswhenthosefundscouldbeusedforanotherinvestmentwithagreaterreturn,suchasnewproductioncapacitiesthatwouldincreaserevenue.Interviewsindicatethatintoday’scapital‐constrainedeconomy,businessesarecautiousaboutborrowingforallbutthemostessentialprojectsorthosewiththequickestreturn.
TheNorthwest’srelativelylow‐costelectricityprovideslesseconomicincentiveforenergyefficiencyupgrades.Whilesmallerbusinessesbearanenergycost‐per‐salesratiothatisnearlytriplethatoflargefirms,theNorthwest’selectricratesmeanenergyremainsarelativelysmallpartofoperatingexpensesformostbusinesses.Thisfactcomplicateseffortstospurgreateractivityinthemarketplacebecausepaybackforefficiencyupgradestakelonger.AccordingtotheEnergyInformationAdministration,WashingtonandIdahorankedsecondandthirdrespectivelyfortheleastexpensivecommercialelectricityinthenation.TheaveragecostofcommercialelectricityinthefourNorthweststatesin2009was7.5centsperkWh,comparedtoanationalaverageof10.5centsperkWhandasmuchas16.2centsperkWhintheNewEnglandregion.9
Finding3. Bothlendingmarketsandmarketsforenergyefficiencyservicesarehighlycomplexandsegmented.Themarketplaceforenergyefficiencyservicesandassociatedfinancingtosmallandmedium‐sizedbusinessesisfragmentedandcomplicated.Businessesvaryinsizesandtype,withmyriadenergyefficiencyprojectneeds,balancesheets,cashflowrequirements,ownershipstructures,energycosts,locations,andbusinesspriorities.Similarly,manydifferenttypesoffinancialinstitutions,investors,andotherplayershavethepotentialtooperateinthemarketplace.ItisimportanttounderstandthiscomplexityandrecognizethatavarietyofsolutionsultimatelywillbeneededtoaddressthemanydifferenttypesofbusinessesandfinancialinstitutionsintheNorthwest.
9EnergyInformationAdministration,AverageRetailPriceofElectricitytoUltimateCustomersbyEnd‐UseSector,byState,June2009and2008,releasedSeptember11,2009.
18 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09
Finding4. Inthecurrenteconomy,lendingtosmallandmedium‐sizedbusinessesislimitedforanything,includingenergyefficiencyprojects.Commercialbankshavealowappetiteforriskandarelendingonlytotheirbestcustomersandtothosewiththestrongestbalancesheets.Financialinstitutionscurrentlyarehesitanttoconsidernewlendingopportunitiessuchasthoseassociatedwithenergyefficiency.
Overalllendingtosmallandmedium‐sizedbusinessesisdown.BothlendersandESCOsreportthat,asaresultofthecreditcrisis,lesslendingisavailabletosmallerbusinessesthattendtobelesscreditworthythanlargerbusinesses.Asaresult,manybusinessesarehavingdifficultysecuringafixed,lowrateloanforanytypeofproject.
Abusiness’slackofcreditworthinessisakeyobstacleforlenderswhentheyareconsideringmakingaloanforanenergyefficiencyproject.AnintervieweefromMcKinstry,amajorESCO,estimatedthatpoorcreditworthinesscauses90percentofthefinancingfailuresforpotentialcommercialenergyefficiencyprojects.AnotherintervieweefromtheESCOMacDonald‐Milleremphasizedthatmanyoftheircommercialcustomers’balancesheetswerestressedatthistime,andthosecustomersareunabletotakeonmoredebt.
Mostbusinessesdonotborrowmoneyfromlargenationalbanksforenergyefficiencyupgrades.Anintervieweefromonemajornationalbankreportedthatmedium‐sizedbusinessestypicallymakeenergyefficiencyupgradesonanas‐neededbasis(e.g.,whentheagingboilerbreaks)andpayforthoseupgradesoutoftheircapitalbudgets.10Smallerbusinessesareconstrainedintheamountmoneytheycanborrow.Largenationalbanksobservethatwhenasmallerbusinessdoesborrow,itwillinvestinprojectsthatresultinthequickestpaybackandimmediatelyimprovequarterlyearnings.Forexample,businesseswillinvestinmachinerythatautomatesaprocessorincreaseslaborproductivity.
Finding5. Financinginstitutionsgenerallyarenotfocusedonenergyefficiencylendingasaspecialorsignificantbusinessopportunity.Mostlendersassessenergyefficiencyprojectsastheywouldanyothertypeofloan—comparingreturnandriskwhileconsideringcollateral,creditworthinessofthebusiness,andcashflowtomeetrepaymentterms.
Lendinginstitutionsareloyaltotheirtraditionallendingmodels.Althoughahandfuloflendersareconsideringandevendevelopingcustomizedenergyefficiencylendingtoolsandservices,thisfieldisstillinthe“earlyadopter”stage.Mostcommerciallendersarenotcognizantofenergyefficiencyasadistinctmarket.
Lendersareonlybeginningtounderstandtheimpactofenergyefficiencyupgradesontheassetvalueofaholding.Energyefficiencyupgradescanaddvaluetopropertiesandprojects,primarilythroughloweroperatingcosts.Lendershavehaddifficultyportrayingthisvalue‐addinfinancialtermsuntilrecently.ESCOrepresentativesandenergypolicyexpertsnotedthatthegrowthofsystemsinwhichbuildingsreceivepublishedenergyefficiencyscoreswillmoveenergyefficiencyvaluationmoreintothemainstream.Furthermore,asmorebuildingsobtainenergyefficiencyratings,moredatawillbecomeavailabletodemonstratethatthenet
10NeilSkiver,BankofAmerica,personalcommunicationwithChristineGrant,October13,2009.
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operatingincomeofabuildingincreasesafterupgradesaremade.AccordingtoaninterviewwithMcKinstry,agrowingnumberofinsurancecompaniesandrealestateprofessionalsarenowconsideringenergyefficiencywhenappraisingabuilding.11Lendersmaybegintofavorfinancingforenergyefficientprojectsonthebasisofimprovedcash‐flowandcollateralassetvaluationasitbecomesmorecommontoincludeenergyefficiencyratingsinfinancialanalyses.
Mostlendersinterviewedcitedalackofstandardized,financialdataonenergyefficiencyoutcomes,meaningtheycannotincludeoperatingsavingscalculationsintheirevaluationoftheviabilityofenergyefficiencylending.A2009policybriefingfromtheNaturalResourcesDefenseCouncilalsofoundthatalackofdatademonstratingthefinancialbenefitsofenergyefficiencyinvestmentsisakeybarriertotheparticipationofprivatelendersinthismarket.12
Venturecapitalfirmsdonotinvestinsmalltomedium‐sizedbusinessenergyefficiencyprojects.Eventhoughventurecapitalfirmshaveagrowinginterestinthecleanenergyeconomy,Northwestventurecapitalrepresentativesstatedthatfirmsusuallylookforlarge‐scaleprojectsthataremoretechnology‐based,particularlyinrenewableenergy.Also,venturecapitalfirmstypicallyseekreturnsbetween20to35percent.
Longpaybackperiodof“deep”energyefficiencyretrofitslimitslenderinterest.SeveralESCOrepresentativesnotedthatlendersarefrequentlyuncomfortablewiththelongpaybackperiodsassociatedwith“deeper”commercialenergyefficiencyprojects—suchasbuildingshellimprovements.Manylendersdonotwanttoofferaloantermthatmatchesthepaybackperiodoftheretrofit,whichinturnmakesshorter‐termfinancingpackagesunattractivetopotentialborrowers.
Finding6. Lendingforenergyefficiencytothecommercialsectorbringsitsownsetofrisks.Risksandreturnsassociatedwithenergyefficiencyprojectsvarywidelyanddifferinimportantwaysfromothertypesofequipmentorprojectinvestment.Theserisksareinadditiontothegenericrisksoflendingtosmallandmedium‐sizedbusinessesandcomplicatethedevelopmentofnewprogramsandinitiativestoexpandlendingforenergyefficiency.
Manyenergyefficiencyinvestmentsarecharacterizedbyhighinitialcostsandlongrepaymentperiods.Thiscombinationrequireslenderstotakeonmorerisk.Althoughthelifecyclecostsofenergyefficiencyarenearlyalwayspositive,theinitialoutlayofcapitalcanbeastumblingblockforlendersandbusinessesalike.Inaddition,thesimplepayback—nottobeconfusedwithloanrepaymentperiods—forenergyefficiencyupgradesfrequentlycanexceed10years.ArecentMcKinseyreportfoundthattheaveragepaybackperiodexpectedbycommercialcustomersconsideringenergyefficiencyinvestmentsisonly3.6years.13Thelongerthepaybackperiod,theriskiertheinvestmentfromalender’sperspective.Notsurprisingly,demandislimitedforenergyefficiencyprojectsthathavealongerpaybackthanbusinessesexpect.
11MattWegworth,McKinstry,personalcommunicationwithChristineGrant,October15,2009.12NaturalResourcesDefenseCouncil,ScalingupInvestmentinEnergyEfficiencywithaFederalEnergyEfficiencyFinancingFacility,April2009.13McKinsey&Company,UnlockingEnergyEfficiencyintheU.S.Economy,July2009.
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Theownershipstructureofbuildingsfrequentlyresultsinsplitincentives.Commercialbuildingownerswholeasetheirbuildingsandrequiretenantstopaytheutilitybillshavelessincentivetoinstallconservationmeasures,asenergysavingsbenefitsaccruetothetenantsratherthanowners.Ownersofsmalltomedium‐sizedbusinessescanbefoundamongbothtenantsandbuildingowners.
Collateralisakeybarriertoincreasedfinancing.Lendershavelimitedrecourseintheeventofnonpaymentoncertainenergyefficiencyloans.Manyenergyefficiencyretrofitsareconsideredfixtures(permanentlyattachedtotheproperty)andthereforeareconsideredrealpropertyandthushavelimitedvalueascollateral.Ontheotherhand,certaintypesofequipmentandappliancescanberemovedIntheeventofnon‐paymentand,therefore,canbeusedascollateral.14
Finding7. Somefinancialinstitutionsareactivelyseekingopportunitiesinthisfieldandarepioneeringinnovativelendingprograms.
Basedoninterviews,CDFIsarepresentlythemostactivelyengagedentitiesinenergyefficiencylendingtosmallandmedium‐sizedbusinesses.CDFIsreceivegrantsfromprivatefoundationsandgovernmentprograms,whichallowthemtoprovidealowercostofcapitaltobusinessesmakingenergyefficiencyupgrades(orothertypesoftargetedinvestments).Recently,manyCDFIshavestartedtoseeincreasedinterestinenergyefficiencyfromtheirpublicandprivatefundersandhavethereforestartedtotransitionmorequicklyintoenergyefficiencylendingthanlargercommercialbanks.Asaresult,CDFIstendtobesomewhatsavvieraboutenergyefficiencylending;forthemostpart,however,CDFIscontinuetoevaluateloansforenergyefficiencyprojectsinthesamewayasmostotherloanrequests.
Someregionalbanksseeenergyefficiencylendingasanichemarket.Inthecourseofourresearch,weidentifiedoneregionalbankoperatingacommercial‐sectorenergyefficiencylendingprogram.In2008,UmpquaBanklauncheditsGreenStreetLendingprogramincollaborationwiththeEnergyTrustofOregon(ETO).Thisprogramprovideslow‐interestfinancingofupto$500,000forsmallbusinessestoimplementenergyefficiencyprojectsthatareeligibleforETOincentives.Theseloansareequipment‐secured,ortheyhaveaseniorlienontheproperty.ThebenefitofthiscollaborationforUmpquaBankisthatETO’sTradeAlliesserveasasalesforceforGreenStreetwhiletheyaresellingtheirownproductsandservicestocustomers.DanWeldon,Umpqua’sEco‐bankingManagerexplainedthattheGreenStreetprogramhashelpedUmpquareachnewcustomersandreinforceitsvalues‐drivenbankingphilosophy.
UmpquaBankisstayingtruetoitstriple‐bottomlinephilosophyofenvironmental,economic,andcommunitybenefits,thoughitisforgoingsomerevenuebyoperatingtheGreenStreetprogram.ToleveragetheETOTradeAllynetwork,UmpquaagreedtowaiveallclosingfeesforGreenStreetloans(typically1to2percentofthetotalloanamount),andUmpquaalsooffers
14U.S.DepartmentofEnergy,EnergyEfficiencyandRenewableEnergy,InnovativeEnergyEfficiencyFinancingApproaches,June2009.
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interestratesforGreenStreetloansthatareabout50basispointslowerthantheirtypicalcommercialloans—approximately6.5percent.
Innovativelendersareincorporatingenergyefficiencyintotheirstandardlendingscreeningprocess.Forexample,theNationalDevelopmentCouncil(NDC),oneoftheCDFIsinterviewed,reportedthatitwillnotapprovealoanforacapitalorconstructionprojectunlesstheborrowerdemonstratesawarenessofallapplicableutilityrebatesandincentives.Thoughitinquiresabouttheuseofutilityrebatesandincentives,NDCwillnotmodifyloantermsbasedontheuseofrebatesorincentivesbecauseitalreadyoffersverylowratestoitscustomers.NDCseesthispolicyasaneducationalstep,ratherthanapartofdeterminingtheloanpackage.
Finding8. ESCOsandrelatedvendorsareleadingthewaytosecurefinancingforenergyefficiencyinvestmentsusingbothprivateequityandconventionallending.Thesefirmstypicallyworkwithlargerbusinesses,however,alongwithpublicandnon‐profitinstitutions.Generally,smallercompaniesoffewerthan100employeesarenotattractiveclientsforESCOsbecauseadministrativecostsarehighrelativetothetypicalrevenuesofsmallbusinessenergyefficiencyprojects.
ESCOspredominantlyfinanceenergyefficiencyprojectsintheMunicipal–University–School–Hospital(MUSH)marketandatthefederallevel.Publicclientslikeschools,citiesandcountieshavelongerinvestmenthorizonsandinmanycasesarepoliticallyandsociallyobligedtoactas“earlyadopters.”ManylargenationalbanksandESCOswillnotofferlong‐termfinancingtoprivatebusinessesforenergyefficiencyprojectsbutwilldosoforMUSHmarketandfederalgovernmententitiesbecausetheyareconsideredlowerlong‐termrisks.
OnelocalESCOhasforgedrelationshipswithlendinginstitutionstofacilitatestreamlinedfinancingforenergyefficiencyprojects.McKinstryCapital,apracticegroupwithinMcKinstry,issuesrequeststoabroadrangeoflenderstoidentifypossiblefinancingpartners.Thecompanyleveragestheselenderpartnershipsasitproposesservicestopotentialclients.
AnotherESCOhascreatedaninvestmentvehiclethatisattractingpublicandprivateinvestors.MacDonald‐Miller’scustomerbaseisbusinesseswith250to500employees.Manyofthesebusinessesareconservingcapitalforotherprojects,andtheyarecautiousaboutaddingmoredebt.ThecompanycreateditsEnergyFund,whichbehavesmuchlikeatypicalESCOperformancecontract:thebusinessagreestoamonthlychargetopayfortheupgradesbasedonamonthlyenergysavingsguaranteeresultingfromtheinstalledupgrades.Businessesdonothavealoanontheirbooksanddonotneedupfrontcapital.ThissystemhasessentiallymadeMacDonald‐Milleranaggregatorofsmallenergyefficiencyprojects,andthecompanyiscurrentlyseeinginterestfrompublicandprivateinstitutionalinvestorsinexpandingthismodelbecauseofthesubstantialcost‐savingopportunitiesavailableinthissector.Forexample,arecentanalysiscompletedbyMacDonald‐Millerfoundapproximately$9millionworthofannualenergyefficiencysavingsamong70commercialfacilitiesindowntownSeattle.15MacDonald‐Millerrecentlyreceiveda$1.5millionloanfromtheWashingtonStateDepartmentofCommercetohelpfueltheexpansionofitsEnergyFund.
15PerryEngland,MacDonald‐MillerFacilitiesSolutions,personalcommunicationwithChristineGrant,October5,2009.
22 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09
Finding9. Utilitiesprovidesubstantialfundingforenergyefficiency,buttheygenerallydonotseeissuingandservicingloanstotheircustomersasabusinessopportunity.
Energyprovidersarepromotersandfundersofenergyefficiency.Utilitiesfundmillionsofdollarsworthofenergyefficiencyupgradesinthecommercialsectoreachyear.In2007,theBonnevillePowerAdministrationalonespentover$7milliononcommercialenergyconservationprogramsthroughouttheNorthwest.16
Rulesandregulationslimitutilityinvestmentsinenergyefficiencytowhatiscost‐effective.Incalculatingcost‐effectiveness,utilitiesweighallenergyefficiencyprogramcosts—marketing,administrationandthefullcostoftheconservationmeasureorproject—againsttheprojectedlifetimeenergy‐savingbenefits.Thefinancialincentiveautilityoffersacustomerisbasedonthatcost‐effectivenesstest;rarelydoutilityconservationprogramspay100percentofthecostofanenergyefficiencymeasureorproject.Ifutilitieschoosetooffertheircustomersfinancing,itaddsanadditionalcosttothemeasure,reducingthepercentageofprojectcostpaidbytheutility.Inthepast,whenutilitieshaveofferedachoicebetweenloansorrebatestocustomersforenergyconservationprojects,customersnearlyalwayschoserebatesbecauseitwasabetterfinancial“deal”forthem.
On‐billfinancingismoreattractivetoutilities,butstart‐upcostsarehigh.On‐billfinancingfacilitatestherepaymentofloansforefficiencyupgradesonutilitybills.ManyNorthwestutilitieshavewitnessedthesuccessofon‐billfinancinginotherpartsofthecountryandarepotentiallyamenabletoprocessingloansinpartnershipwithafinancialentitythatwouldassessthecreditworthinessofborrowersandtakeonthefinancialrisk.Oneutilityrepresentativeexplainedthaton‐billfinancingsystemscouldbecomeawidespreadenergyefficiencyfinancingrepaymentmechanism,butatthistimehisutility,likemanyothersintheNorthwest,lacksthebudgetorstafftostartanon‐billfinancingprogram.17
Tradealliesoccupyacentralplaceinthenetworkthatincludesbusinessowners,contractors,utilities,andlenders,suggestinganimportantroleinpromotingfinancingforenergyefficiency.
Tradeallynetworkscanhelpensureeffectiveservicedeliveryandenhancedmarketingforallinvolvedplayers.TheGreenStreetLendingprogramofferedbyUmpquaBankwiththeEnergyTrustofOregonisanexampleofhowtradeallynetworksusethestrengthsofallinvolvedpartners.ETO’sTradeAllyNetworkofcontractors,realestateprofessionals,distributors,andotherprofessionalssupporttheprogram.ThetradealliespromoteETOprograms,provideenergyefficiencyandrenewableenergyservices,andassistcustomerswithnecessarypaperwork.Inreturn,ETOstaffmembersrefercustomerstoTradeAllies,providetrainingandassistance,anddirectcustomerstoUmpqua’sGreenStreetLendingprogramforprojectfinancing.18
16BonnevillePowerAdministration,ConservationResourceEnergyData—FiscalYear2007,released2008.http://www.bpa.gov/energy/n/pdf/RED_Book_FY07_FINAL.pdf17VanAshton,IdahoFallsPower,personalcommunicationwithChristineGrant,October21,2009.18DanWeldon,UmpquaBank,personalcommunicationwithChristineGrantandJohnHealy,October19,2009.
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Contractorsandotherenergyservicesvendorsprovideaneffectivesalesforceforenergyefficiency.Contractorsandenergyservicesvendorsplayasignificantroleinprogramdeliverybecausetheyoftenhaveestablishedrelationshipswithsmallbusinessesintheircommunities.ArecentreportbytheSouthwestEnergyEfficiencyProjectonfinancingcleanenergyprojectsfoundthatthemostsuccessfulenergyefficiencyprogramsempowercontractorsandretailerstosellnotonlyenergyefficiencyproducts,buttoalsoconnectcustomerstoavailablefinancing.19
Finding10. Effortstocreateasecondarycapitalmarketforenergyefficiencyloansareintheirinfancy.
Currently,noestablishedsecondarymarketexistsforcommercialenergyefficiencyloans.Creatingdemandforenergyefficiencyloansonthesecondarymarketwillprovideliquiditytolendinginstitutions—allowinglenderstoissueandservicemoreloansforenergyefficiencyprojects.Manyenergyefficiencyfinancingexpertsandpolicymakersrecognizetheimportanceofasecondarymarketforcommercialenergyefficiencyloans,buttheyarefocusingtheirpresenteffortsoncreatingaprimarylendingmarketforenergyefficiencyloans.Whenaskedaboutthecreationofasecondarymarketforenergyefficiencyloans,OregonHouseRepresentativeandeconomicconsultant,JulesKopel‐Bailey,remarkedthat“investorsstillneedabettersenseofriskandreturn.Weneedadatabanktoproveconcepttoinvestors.”20
Asmallsecondarymarketexistsforresidentialenergyefficiencyloans,whichcouldindicatehowthesecondarymarketforcommercialloansmightdevelop.Residentialenergyefficiencyloanshavemadealegitimatedebutonthesecondarymarket,thoughthedemandfromprivateinvestorsfortheseloansremainstenuous.Todate,FannieMaehaspurchasedapproximately$225millioninenergyefficiencyloansfromahandfuloflendersinCalifornia,NewYork,Pennsylvania,andWisconsin.FannieMaeischarginglendersarelativelyhighinterestrate(12to14percent)—despitethatdefaultratesarelowontheseloans.Tocontinuetheselendingtransactionsdespitehighrates,thefourhoststatesarecoveringaportionoftheinterest(upto8percent)tobuydownratesforborrowers.LendersalsohaveanincentivetocontinueprovidingtheenergyefficiencyloansbecauseFannieMaepaysthelendersanoriginationfeeandaservicingfee.21
EarlyeffortsareunderwaytoexpandthesecondarymarketforenergyefficiencyloansintheNorthwest.Forexample,oneregionalfinancialinstitution,Seattle‐NorthwestSecurities,isactivelyworkingwithutilities,municipalgovernments,andstateagenciestocreatemechanismsthatprovideasecondarymarketforenergyefficiencyloans.
Finding11. Interestinlegislationthatenablesenergyefficiencyloanstoremainwiththeproperty—ratherthanthepropertyowner—isgrowingintheNorthwest.
PropertyAssessedCleanEnergy(PACE)bondsofferapromisingmodel.WithamorethanadozenprogramsnowoperatingintheUnitedStates,PACEbondfinancingisgainingtractionasaninnovationthatcanaddresstheupfrontcapitalbarrier.Inthismodel,PACEbondproceeds
19SouthwestEnergyEfficiencyProject,RecentInnovationsinFinancingforCleanEnergy,October2009.20Kopel‐Bailey,Jules,OregonStateHouseofRepresentatives,personalcommunicationwithChristineGrant,October20,2009.21HowardBanker,EnergyProgramsConsortium,personalcommunicationwithAnnGrodnik,October1,2009.
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arelenttocommercialandresidentialpropertyownerstofinanceenergyefficiencyretrofits.Theownersthenrepaytheloansthroughannualassessmentsontheirpropertytaxbillsorinsomecasesthroughtheirutilitybills.PACEfinancingisavailableeitherthroughmunicipalbondissue(asisfrequentlydoneformunicipalcapitalinvestmentprojects)orthroughanalternativefunder,suchasthefederalgovernmentoraprivateinvestmentbank.WithPACEfinancing,theriskoflossisminimizedaspropertytaxlienscanbemadeseniortomortgagedebt.22OneinvestmentbankerexplainedthatPACE“willprovidelenderswiththestrongestcollateralavailableincommercialenergyefficiencytransactions:thebuildingitself.Thiswillreduceratesandextendlendingperiods,allowingdeepandcomprehensiveretrofitstobeperformed.”23PACEfinancingdoesraiseconcernfromcommercialbanksthattheirmortgageswouldbesubordinatedbytheseniorpositionofanenergyefficiencyloanandfromutilitiesworriedthatlocalgovernmentscouldcompetewiththeminthedeliveryofenergyefficiencyservices.
OregonhasadopteditsversionofPACE.InJuly2009,theGovernorofOregonsignedHB2626,theEnergyEfficiencyandSustainableTechnologyActof2009(EEAST).AresidentialpilotprogramcalledCleanEnergyWorks:PortlandusingtheEEASTfinancingmechanismisscheduledtobegininPortlandlaterthisyearandwillbefundedinitiallywithfederalstimulusdollars.Acommercialpilotisalsoscheduledtobeintroducedlaterin2010andislikelytobefundedwithfederalstimulusdollars,aswell.OregonStateRep.JulesKopel‐Bailey,aprimarysponsorofthelaw,reportedthatEEASTisa“hugefirststepinallowingforstatebondingcapacityandprovidinglow‐costenergyefficiencyloansacrossbuildingtypes.”24
Washington’sconstitutionalprohibitionagainstthelendingofcreditcreateschallengesforproponentsofPACE.AlternativeapproachessuchasestablishingConservationUtilityDistrictsrunbymunicipalitiescreateaseparatesetofissues.UtilitiesraiseconcernsthatmunicipallyrunConservationUtilityDistrictswouldoverlapwithexistingutilityenergyconservationprograms,creatingconfusionforconsumersandpotentiallymakeprogramdeliverymoreexpensive.
IdahoisconsideringitsownversionofPACEfinancing—IdahoEnergyIndependenceDistricts.Thesedistrictswouldprovideinterestedpropertyownerswithfinancingforrenewableenergygenerationequipmentandenergyefficiencyimprovementsthatwouldberepaidthroughaspecialpropertytaxassessment.Idahopolicymakershavebeenstymiedbyregulationsthatlimitthelendingofpublicmoneyforprivatepurposes.LanePackwood,AdministratorofEconomicDevelopmentfortheIdahoDepartmentofCommerce,reportsthatIdaholawmakersandenergyadvocatesareconsideringavarietyofsolutionstoovercomingthisbarrier.Packwoodisnotoptimisticthatelectedofficialswillamendthestate’sconstitutionintheneartermtoallowformunicipalfinancing,buthedoesbelievethatthePACErepaymentmethodcouldbeaviableoptionifloanfundsoriginatedfromstatebondissue,federalfunds,orprivatefunds.
Inearly2009,MontanaStateRepresentativeBradyWisemansponsoredPACElegislation—HB361:EnergyImprovementsDistricts.Thebillfailed,butgarneredsupportfromthebuildingindustry,cleanenergyadvocates,andotherMontanapoliticians.SimilartoPACEframeworksinotherstates,thebill
22PACENOW.http://www.pacenow.org/23JohnChristmas,HannonArmstrong,personalcommunicationwithChristineGrant,October13,2009.24Kopel‐Bailey,Jules,OregonStateHouseofRepresentatives,personalcommunicationwithChristineGrant,October20,2009.
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wouldhaveauthorizedcitiesandcountiesinMontanatocreateEnergyImprovementDistrictsandissuespecialassessmentrevenuebonds.BondproceedswouldbeusedtomakeloanstopropertyownerswithinanEnergyImprovementDistrictforthepurposesofinstallingrenewableenergysystemsorenergyefficiencyimprovementstoresidential,commercial,orindustrialproperties.ThoughthebillfacedstrongoppositionfromutilitiesandtheMontanaBankingAssociationforthereasonsstatedearlier,proponentsareconsideringintroducingasimilarmeasureinthe2011legislativesession.
Table3summarizesthemostimportant—andmostpersistent—barrierstoenergyefficiencyfinancing.
26 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09
Table2.SummaryofKeyBarrierstoEnergyEfficiencyFinancing
ENERGYEFFICIENCYFINANCINGBARRIERS
Lowenergycosts Thelowcostofenergytobusinesses,relativetootheroperatingexpensesand/orrevenueopportunities.Thissituationtranslatesintoahighopportunitycostforabusinesstousescarcecapitaland/orlendingcapitalforenergyefficiencyratherthansomeothertypeofinvestment.Lowenergycostsgenerallyreducebusinessinterestinenergyefficiencymeasures.
Longerpaybackperiods
Investmentswithlongerpaybacks,asisthecasewithsomeenergyefficiencyprojects,areinherentlyrisky.Lendersdemandacommensuratelyhigherrateofreturn,whichinturn,reducesthefinancialviabilityoftheprojecttothebusiness.Thisbarrierwasreferredtobysomeintervieweesasthe“expectationshurdle.”
Poorcreditratings Theunderlyingpoorcreditworthinessofmanysmallerbusinesses,especiallyintoday’srecessionaryeconomymakesthembadrisks.Thesmallbusinesssectorhasanotoriouslylimitedborrowingcapacity.
Lackofcollateral Thelackofcollateralassociatedwithmanytypesofenergyefficiencyprojectsmakeslendingforsuchprojectsunattractivetomanyfinancialinstitutions.
Hurdlestoon‐billorpropertytaxfinancing
Therearelegal,institutional,andpoliticalchallengesassociatedwithcreatingon‐billorPACEfinancingschemesinIdaho,Montana,andWashington.
Lackofdataonfinancialbenefits
The“DataGap”—thatis,thelackofdataavailablethatcandemonstratetheactualfinancialbenefitsofenergyefficiencylending.Manylendersinterviewedcitedthislackofinformationasakeybarrier,translatingintoaninabilitytoincludeoperatingsavingscalculationsintheirevaluationoftheviabilityofenergyefficiencylending.
Lackofstandardizedfinancialproductsforenergyefficiency
Thecosts,time,andeffortassociatedwithdevelopingstandardizedenergyefficiencyproductsandassociatedenergyefficiencyloanportfolios.Timeandresourcesarerequiredtoassessopportunitiesandtodevelopappropriatefinancingproductsacrossfinancialinstitutionsforenergyefficiencylendingspecifically.Inleantimes,itisunlikelythatcommercialbankswillinvestthetimeandresourcestounderstandingthisemergingmarket.
Insufficienttrackrecordofloanperformance
Thelackofanyrealtrackrecordassociatedwithenergyefficiencyloanperformancemakesmanylendershesitanttogetintothismarket.Issuesandconcernsthatlendershaverelativetothislackofperformanceincludepre‐existingliens,difficultysecuringactionableliens,termconstraints,andlimitationsofmanyrealestateownershiparrangements.25
Delayedtimingofutilityincentives
Inmostcases,utilitiesdonotprovidetheirincentivesupfront,andmostlendersareunwillingtoconsiderutilityrebatesortaxcreditsasdirectequityinunderwritingloans.Consequently,businesseshavetoassemblemoreinitialcapital,whichincreasesrisksandfinancingcostsandreducesthefeasibilityofsuchprojectsforpoorlycapitalizedbusinesses.
25NaturalResourcesDefenseCouncil,ScalingUpInvestmentinEnergyEfficiencywithaFederalEnergyEfficiencyFinancingFacility,April2009.
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II. Current Programs
Manynewgovernment‐backedprogramsandinitiativesareunderwayintheNorthwestandelsewheretostimulatelendingandcapitalflowsforenergyefficiencyprojects.Severalpubliclysponsoredprogramsintheregionprovidecreditenhancementanddirectsubsidiesthatcanhelpattractandleverageprivatecapitaltofinancecommercialenergyefficiencyprojects.Publicloanprogramsforgotheparticipationofprivatelendersalltogetherorcoveraportionofthefinancinginpartnershipwithaprivatelender.
TheprogramshighlightedbelowarenotanexhaustivelistofthepubliclysupportedenergyefficiencyfinancingprogramsavailabletoNorthwestbusinesses.Rather,theprogramslistedbelowrepresentasubsetofprogramsthatarethemostfrequentlycitedfortheirhighparticipationrates,uniquestructure,orabilitytochangehowlendersperceivetherisk,return,andliquidityequation.
CreditEnhancement WashingtonStateDepartmentofCommerce:CreditEnhancementProgram
TheDepartmentofCommercedesigneda$5millionrevolvingloanprogramcomprisedofStateEnergyProgramfundstoprovidecreditenhancement—mitigatingriskthroughloanlossreserves,loanguaranteesorotherfinancialcommitments—forlendersandfinancialinstitutionsthatparticipateinenergyefficiencyfinancing.Theloanprogramspansresidentialandcommercialsegmentsandisprimarilyfocusedonleveragingprivatecapitaltowardenergyefficiencylending.Fundingwillbedistributedinearly2010.WashingtonisthefirststatetodesignsuchaprogramwithfederalstimulusfundingundertheAmericanRecoveryandReinvestmentAct(ARRA)of2009.
SmallBusinessAdministration7(a)LoanGuaranteeProgram
Underthe7(a)loanprogram,theSmallBusinessAdministration(SBA)itselfdoesnotprovideloans;instead,theSBAguaranteesallorpartofloansmadebybanksandotherlenders.The7(a)programoffersseveralindividualtypesofloanguarantees.Aspartofthe7(a)program,theSBAcreatedtheSBAExpressProgramwhichoffersa50percentSBA‐backedguaranty,andanaverageloanof$35,000withamaximumloansizeof$350,000.RecentlytheSBAandtheU.S.EPAhavecollaboratedtopromotetheuseoftheSBAExpressProgramtohelpsmallbusinessesadoptmoreenergy‐efficientpractices.SBAExpressloanfundscanbeusedforthepurchaseofenergy‐efficientappliances,high‐efficiencyHVACandheatpumpunits,lightingretrofits,andmore.OverthelasttwoyearstherehasbeenasubstantialdeclineinSBAlendingbecausethesecondarymarketforSBAguaranteeshasbeenfrozen.Lendershavenotbeenabletomaintainliquidityandsubsequentlystoppedmakingloanstosmallbusinesses.AccordingtoMarkCostello,anSBALenderRelationsSpecialist,thesecondarymarketisnowmakingaslightrecoveryandlendersarebeginningtosellSBAguaranteesagain.26
26MarkCostello,SmallBusinessAdministration,personalcommunicationwithChristineGrant,October1,2009.
28 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09
DepartmentofAgriculture’sRuralEnergyforAmericaProgram(REAP)—LoanGuarantee
TheUnitedStatesDepartmentofAgriculture(USDA)providesloanguaranteesforrenewableenergyandenergyefficiencyprojectsforagriculturalproducersandruralsmallbusinessesthroughitsREAPprogram.TheREAPguaranteedprogramislender‐driven.USDAguaranteestheloanratherthanlendingdirectly.Acommerciallenderseekstheguarantee,and,ifapproved,itmakes(andservices)theloan.Thefederalguaranteeforlendersisbetween60and80percentofthetotalloanamount.ThebenefittolendersisthatthereisanactivesecondarymarketforREAPguaranteesandtheguaranteedportionoftheloanisprotectedagainstlossbyafederalguarantee.MaryTraxler,aWashingtonStateBusinessProgramsSpecialistforUSDA,remarkedthatUSDAstaffhasmetwithoractivelymarketedtheprogramtoallWashingtonStatelenders.Since2003,onlytwoloanguaranteesinWashingtonStatehavebeenprocessedthroughthisprogram—bothforrenewableenergyprojects.
DirectSubsidies UtilityRebateandIncentivePrograms
Asnotedpreviously,utilitiesthroughouttheNorthwestsponsornumerousrebateandincentiveprogramsforbusinesses.Typically,utilitiesprovideincentivescoveringapproximately50percentoftotalprojectcostsforcommercialenergyefficiencyupgradesorappliances.Insomeinstances,utilitieswillcovertheentirecostofthemeasure.Forexample,SeattleCityLightcoversthefullcostofT8lightfixturereplacementandinstallationforbusinessesthroughtheirQuickLightingUpgradeInitiative.Innovativelendersarebeginningtoconsidertherebatesandincentivesofferedbyutilitiesasequitythatcanhelpincreasethecreditworthinessofpotentialcustomers.ChuckDePew,theSeattledirectoroftheNationalDevelopmentCouncil(NDC)—anationalnon‐profiteconomicdevelopmentorganization—reportedthatnearlyallutilitieshaveenergyefficiencyrebatesandincentivesthatlendersshouldbeawareofAnybusinessborrowingfromNDCforacapitalorconstructionprojectisaskedabouttheenergyefficiencyaspectsoftheirprojects.Typically,loanswillnotbeapproveduntiltheborrowerdemonstratesthattheyaretakingfulladvantageofallapplicableutilityrebatesandincentives.
Oregon’sBusinessEnergyTaxCredit(BETC)
Oregonofferstaxcreditsforenergyefficiencymeasures.Thetaxcreditisequalto35percentofeligibleprojectcosts,generallymeaningtheextracostassociatedwithenergyefficiencyaboveandbeyondthecostofstandard,code‐compliantsystemsorequipment.Eligibleconservationprojectsincludebutarenotlimitedtoinsulation,HVAC,commercialsystems,andindustrialprocessupgradesthatreduceenergyuse.Mostprojectsmustsaveatleast10percentofenergyabovethebaselinelevel,butlightingretrofitsmustsave25percentofenergyabovetheexistinginstallation.In2007and2008,theBusinessEnergyTaxCreditfundedover3,600conservationprojects.
MontanaEnergyConservationTaxCreditforBusiness
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Businessescandeductupto$3,600fromgrosscorporateincomeforacapitalinvestmentinacommercialbuildingforenergyconservationpurposesthatisnotfinancedbystate,federal,orprivategrantfundsforenergyconservation.Toqualifyforthiscredit,thetaxpayerhastoshowthattheinvestmentwillreducethewasteofenergyorreducetheamountofenergyrequiredtoaccomplishagivenamountofwork.27
PublicLoanPrograms Oregon’sDepartmentofEnergy:EnergyLoanProgram
Oregon’sEnergyLoanProgram(knownasSELP)offerslow‐interestloanstobusinessestohelpfundenergyefficiencyandrenewableenergyprojects.Ratesarebetween6and7percentwithtermsbetween5and15years.In2008,theprogramdisbursed$15.5millionfor31conservationprojects,oranaverageofabout$500,000perproject.Theloanprogramisself‐supporting,withfundsraisedthroughthesaleofOregongeneralobligationbonds.CommercialSELPloansmustbefullysecured.Afirstorsecondmortgageontheproject´sland,buildings,andequipmentisusuallypledged.TheSELPprogramhasseenonlyonedefault,producingadefaultrateofaround0.3percent.
IdahoEnergyEfficiencyBusinessLoanProgram
TheIdahoOfficeofEnergyResourcesofferslow‐interestloansrangingfrom$1,000to$100,000tobusinessesforenergyefficiencyandrenewableenergyprojects.Eligibleefficiencyprojectsinnewbuildingsarelimitedtolightingsystems,occupancyordaylightsensors,andbuildingcommissioning.Eligibleefficiencyprojectsinexistingbuildingsincludeupgradinglighting,heatingsystems,windowsanddoors,andinsulation.Projectsmustuseexisting,reliabletechnologyandpayforthemselvesthroughenergysavingswithin15years.Loanshavea4percentinterestrateandmustberepaidwithin5years.
SmallBusinessAdministrationCertifiedDevelopmentCompany504Loans
TheSBA’s504CertifiedDevelopmentCompany(CDC)loanprogramforsmallbusinessesfundsrealestatetransactions,construction,renovation,andequipmentpurchases,includingenergyefficiencyupgrades.Projectsthatincorporateefficiencyfeaturesthatreduceenergyusebyatleast10percentqualifyforuptoa$4millionloan.TheSBAwillfundupto40percentofthetotalprojectcost,asecondlendermustprovideupto50percentofthecost,andthebusinessownermustfundthedifferencewithadownpayment.Businessesthatreceivefundsgenerallymustcreateorretainonejobforevery$35,000providedbytheSBA.In2008,the504CDCprogramfunded430loanstotalingover$235millioninIdaho,Oregon,andWashington.
DepartmentofAgriculture’sRuralEnergyforAmericaProgram(REAP)Loans
27StateofMontana,DepartmentofRevenue,EnergyRelatedTaxRelief:EnergyConservationInstallationCredit,http://mt.gov/REVENUE/energyconservation.asp
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LoansandgrantsforenergyefficiencyandrenewableenergyprojectsareavailablethroughtheRuralEnergyforAmericaPrograminadditiontoloanguarantees.REAPwillprovidefundstoconductenergyauditsandinstallenergyefficiencymeasuressuchaslightingandinsulationretrofits.In2009,$60millionwasmadeavailablenationwide.Statesreceiveaformula‐basedallocation,forexample,WashingtonStatereceivedapproximately$3.8milliontodisburse—$3millioninloansandapproximately$800,000ingrants.AllagriculturalproducersandsmallbusinessesinaruralareameetingtheSBAsizestandardsareeligibletoapply.Grantsrangefrom$1,500to$250,000,upto25percentoftotaleligibleprojectcosts.Startingin2009,eligibleentitiescanalsoapplyforgrantsthatarelessthan$20,000directlytotheUSDA—theseawardedgrantmonieswillnotbedrawfromthestateallocationoffunds.Loansrangefrom$5,000to$25million,butcanprovidenomorethan75percentoftotaleligibleprojectcosts.WashingtonStatehasawardedfiveREAPgrantsin2009totaling$755,000.AllocatedfundsthatarenotawardedmustbereturnedtotheUSDAforreallocationtootherstates.
ImpactofCurrentPublicFinanceProgramsPublicfinanceprogramsfillafundinggap,buttheyhavehadlimitedsuccesstodateleveragingprivatecapitalorachievinghighparticipateratesinthecommercialsector.Somegovernmentprogramsintendedtohelpbusinessesfinanceenergyefficiencyprojectsdonotalwaysreachtargetmarkets,however.Forsomeprograms,applicationandreportingrequirementsmayposesignificanthurdlesforsmallerbusinesses.
Creditenhancementprogramsthatprovideloanguarantees,suchastheSBA7(a)LoanGuaranteeprogram,areattractivetocommerciallendersandresultinthemostleverageofprivatecapital,butparticipationintheseprogramsremainslimited.Forexample,the7(a)LoanGuaranteeProgramhasbeenextremelypopularwithlendersandborrowers,howevertheuseofloanguaranteesforenergyefficiencyprojectsisanewadditiontotheprogramandisnotmarketedwidely.TheDepartmentofAgriculture’sRuralEnergyforAmericaProgramalsohasverylowparticipationrates,despitetheattractivecreditenhancementoptions.
Publicloanprogramsmustadheretomanyofthesamelendingprinciplesthatcommerciallendersdo.Consequently,publicloanprogramsdonotofferloantermsorratesthataresubstantiallybetterthanaloanfromabank.
OptionsandRecommendationsforIncreasingEnergyEfficiencyLendingTheprevioussectionsofthisreportdescribedanddocumentedcurrentprivate‐sectorpractices,barriers,andgovernment‐sponsoredprogramsrelatedtofinancingenergyefficiencyforsmalltomedium‐sizedbusinessesintheNorthwest.Thekeyconclusionsfromthisresearchareasfollows:
Financingforenergyefficiencyprojectsforsmalltomedium‐sizedbusinesssectorisextremelylimitedatthecurrenttime.
Multiplebarrierslimitenergyefficiencyfinancing,includingthestrugglingeconomyandfinancialsector,therelativelypoorcreditworthinessofmanysmallerbusinesses,limiteddemandforsuchloansfrombusinesses,thefailureoflendinginstitutionstoattributevalueto
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energyefficiency,insufficientcollateral,andextendedpaybackperiodsforsomeenergyefficiencyinvestments.
Thesebarriersmeanthatformostbusinesses,lendinginstitutionsandinvestors,returnsaretoolowandperceivedrisksaretoohighforenergyefficiencyinvestmentstooccuronascalecommensuratewitheithertheirpotentialortheneed.Accordingly,thismarketplacelacksbothsufficientliquidityandcapital.
Despitethesechallenges,financialinstitutions,utilities,energyefficiencyserviceproviders,andgovernmentsareundertakinganumberofinnovativeprogramsandinitiativestoadvanceenergyefficiencyprojects.Theseinitiativespointthewayforward,providingnewapproachesandsolutionstoincreasecapitalflows.
32 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09
III. Proposed Solutions
Thissectionofthisreportidentifiesandcharacterizestheseoptionsandsolutions,withafocusonunderstandinghoweachalternativeservestoreducerisk,improvereturn,orincreaseliquidityandcapitalflows.Anadditionalkeyconsiderationistheextenttowhichsolutionsleveragecapital.Whilealloftheseoptionscouldstrengthenthemarketplaceforenergyefficiencyfinancing,inthefinalsection,werecommendprioritiesforearlyaction.Theserecommendationsforearlyactionareintendedtolaythefoundationforfurtherchangeandhelpthemarketplacefunctionbetteronitsowntodriveenergyefficiencyaction.
Table3providesanoverviewof15optionsthatindustryexpertsandtheprojectteamidentifiedaspotentialsolutionstoincreaseenergyefficiencyfinancingintheNorthwest.Theseproposedsolutionsaredescribedinmoredetailbelow.Pleasenotethatthepresenceofacheckmarkindicatesthattheoptionreducesrisk,increasesdemandandimprovesreturn,orincreasesliquidityandcapitalflowstofinancialinstitutionsorlenders.
Importantly,theexpertsweinterviewedandtheliteraturewereviewedemphasizedthatmultiplesolutionswillbeneededtoaddressthebarriersandincreasecapitalflows.Intervieweesstressedthatno“silverbullet”exists,andaportfolioofsolutionsistheonlypracticalstrategytoincreaseenergyefficiencyfinancingacrossthediversespectrumofsmalltomid‐sizedbusinesses.Tothatend,wehaveorganizedthealternativeoptionsintothefollowingfourcategories:
Improvementstotheperformanceofexistingfinancemechanisms.Thesesolutionsaimtoimprovehowcurrentfinancingmechanismsandprogramswork,todeliverbetteroutcomeswithexistinglevelsofcapitalinvestment.
Improvementstoexistingsupportservicesandsystems.Theseoptionsfocusonhowtoimprovetheservicesandactivitiesessentialforeffectiveandefficientlending,includingeducation,informationsharing,standards,technicalassistance,andprogramdelivery.
Legislativeandregulatorychangestoalterthemarketplace.Thesesolutionswouldrequirepoliticalactionatthestateandfederalleveltomodifythecurrentpolicyandregulatoryframeworktofacilitateenergyefficiencyfinancingofferings.(Someoptionsinothercategoriesalsoincludelegislativeandregulatorymodifications,buttheylargelyinvolvealterationstoexistingprogramsandmechanisms,ratherthanentirelynewpolicyinitiatives.)
Newprogramsandinstitutionstoaddcapacity.Theseoptionsincludenewgovernmentprogramsorinstitutionsthatcouldresultinasignificantinfusionofnewcapitalorcreditenhancementtoexpandenergyefficiencyfinancing.
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Table3.ProposedSolutionstoIncreaseEnergyEfficiencyFinancingintheNorthwest
CATEGORIESANDOPTIONS
MitigatesRiskforLenders
IncreasesDemand/ReturntoLenders
ProvidesLiquidity/Capital
KeyOutcome,Benefit,orBarrierAddressed
IMPROVEMENTSTOTHEPERFORMANCEOFEXISTINGFINANCEMECHANISMS
1 Encourageutilitiestoadopton‐billrepaymentmechanisms.
Reducesriskofnon‐payment.
2 Encourageutilitiestoprovideprogresspaymentstobusinessesthatqualifyforenergyefficiencyrebatesandincentives.
Reducesequityrequiredfrombusinesses;increasesriskstoutilities.
3 DedicateaportionofexistingSmallBusinessAdministrationlendingtoenergyefficiencyprojects.
Increasesfundsdedicatedforenergyefficiencylending;stimulatesbankstoloanforenergyefficiency.
4 Acceleratethedevelopmentofsecondarymarketsforenergyefficiencyloanportfolios.
Increasesliquidityandreduceslenderrisks.
IMPROVEMENTSTOEXISTINGENERGYEFFICIENCYFINANCINGSUPPORTSERVICESANDSYSTEMS
5 Acceleratetheadoptionofcommercialbuildingenergyperformancetrackinganddisclosure.
Providesbetterinformationforlenderstoassessperformance,risk,andreturn.
6 Facilitateinformationsharingamongutilities,financialinstitutions,andcontractorsaboutenergyefficiencyopportunitiesandcostsavings.
Providesbetterinformationforlenders,especiallytoincorporatetheeffectofrebatesandincentivesonenergyefficiencyprojectfinancialperformance.
7 Createautility‐sponsoredtechnicalassistanceprogramforlenders.
Providesbetterinformationforlenders,especiallytoincorporatetheeffectofrebatesandincentivesonenergyefficiencyprojectfinancialperformance.
8 Launchaneducationandmarketingcampaigntosmallandmedium‐sizedbusinessestobuilddemandforenergyefficiencyprojectsandassociatedfinancing.
Increasesdemandforenergyefficiencyprojectsandfinancing.
34 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09
CATEGORIESANDOPTIONS
MitigatesRiskforLenders
IncreasesDemand/ReturntoLenders
ProvidesLiquidity/Capital
KeyOutcome,Benefit,orBarrierAddressed
9 Promotetradeallynetworksand“one‐stopshopping”forenergyefficiencyresourcestosmallandmedium‐sizedbusinesses.
Increasesdemandforenergyefficiencyprojectsandfinancing.
LEGISLATIVE/REGULATORYCHANGESTOALTERTHEMARKETPLACE
10 AdvancePropertyAssessedCleanEnergy(PACE)financinginWashington,Idaho,andMontana—similartoOregon’sexistinglaw.
Enablesexpansionofthesecondarymarket;reducesriskforlenderbyprovidingaseniorlienonproperty;increasesreturnbyallowingforlowercostfinancing.
11 Provideutilitieswithmoreincentivesandfewerbarrierstoinvesttheirresourcesindeepenergyefficiencyretrofits.
Lowerseffectiveinterestratestoborrowers.
12 Supportfederallegislationtopermittax‐exemptbondfinancingforcleanenergyandenergyefficiency.
Providesnewsourceofcapitalandlow‐costfinancing.
NEWPROGRAMS&INSTITUTIONSTOADDCAPACITY
13 CreateafederalCleanEnergyDeploymentAdministrationor“GreenBank.”
Providesnewsourceofcapital;lowersrisktolendersandinvestors.
14 Usemunicipal,state,orfederalbond‐issuingauthoritytoraisefundsforenergyefficiencyprojects.
Providesnewsourceofcapital.
15 Developandexpandrevolvingloanfundstosupportenergyefficiencyprojects.
Providesnewsourceofcapital;lowersrisktolendersandinvestors.
16 Expandcreditenhancementeffortsthatleverageprivatecapital.
Providesnewsourceofcapital;lowersrisktolendersandinvestors.
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ImprovementstothePerformanceofFinancingMechanismsExperts,lenders,andvendorsinterviewedofferedavarietyofsuggestionsonhowtoincreaseenergyefficiencylendingusingexistingmechanismsor“toolsinthetoolbox.”Thefouroptionspresentedbelowdonotinvolvemajornewgovernmentprogramsbut,ifimplemented,wouldservetoincreasecapitalflowsforcommercialenergyefficiencyprojects.
Option1. Encourageutilitiestoadopton‐billrepaymentmechanisms.
Bothutilityrepresentativesandenergyefficiencypolicyexpertsproposedthisoptionasawayofsimplifyingloanrepaymentandreducingupfrontcapitaloutlaysneededfrompropertyowners.Inaddition,somemodelsofon‐billfinancingwouldallowfortheloantoremainwiththeproperty,evenifsoldbythecurrentowner,effectivelysharingthecostofupgradeswithfuturebeneficiaries.Implementingon‐billfinancingwouldrequirevaryingdegreesofeffortandinvestmentfromutilities,dependingonthecapabilitiesoftheircurrentbillingsystems.Passedin2009,Oregon’sEnergyEfficiencyandSustainableTechnologyActcallsforonbillfinancingifaninvestor‐andconsumer‐ownedutilityalreadyhason‐billfinancingcapability.28Accordingly,PortlandGeneralElectricwillsoonbeofferingon‐billrepaymentfortheCleanEnergyWorksPortlandpilotprogramfor500homes.NorthwestutilitiesoutsideofOregondonotfacethissamelegislativedriver,however,andmaybereluctanttoinvestinthesoftwareandsystemchangesneededtoupgradetheirbillingsystems.
Theintendedoutcomesofon‐billrepaymentsystemsaretoprovideameanstofinanceenergyefficiencyprojectsoffoftheborrower’sregularbalancesheet,reducetransactioncosts,reducetheupfrontcapitalcontributionsrequiredfrombusinesses,facilitateloanrepayment,andmakeadirectconnectionbetweenenergyandcostsavingsforthecustomer.Thesechangesshouldincreaselendingforenergyefficiencyprojectsfrombothbanksand,potentially,utilities.On‐billrepaymentreducesrisksforbanks,butthoserisksmaybeshiftedtoutilities,dependingonhowthesystemisstructured.
Sinceutilitybillrepaymentisessentiallyattachedtotheproperty’selectricorgasmeter,thisapproach,unlikepropertytaxrepaymentmethods,doesnotrequirealienontheproperty.Asaconsequence,theabilityofbankstopackagetheseloansandselltheminthesecondarymarketremainsanissuewithon‐billfinancing.Questionsalsoremainabouttheabilityofautilitytodisconnectserviceifacustomerhaspaidforitsenergybutnotfortherepaymentonitsloan.
Option2. Encourageutilitiestoprovideprogresspaymentstobusinessesthatqualifyforenergyefficiencyrebatesandincentives.
Currently,mostutilitiesdonotproviderebateorincentivedollarstocustomersuntilmeasuresaresuccessfullyinstalled,ensuringthatutilitiesavoidtheriskofpayingforprojectsthatdonotgetcompleted.Progresspaymentswouldallowforsomeofthosedollarstobeusedasequitywhenacustomerisseekingaloanfromacommerciallendertofinancetheremainderofanenergyefficiencyproject.Theideaisthatsomepercentageofthetotalexpectedrebateorincentivecould
28OregonLegislativeAssembly2009,EnergyEfficiencyandSustainableTechnologyAct,HouseBill2626,Sections32and33.http://www.leg.state.or.us/09reg/measpdf/hb2600.dir/hb2626.c.pdf
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beappliedtotheequityportionofacustomer’sloanpackage,withthegoalofresultinginabetterloanrateandterm.
Forexample,supposeabusinessisconductingalightingandHVACretrofitcosting$500,000anditslocalutilitywillofferatotalof$150,000inrebatesandincentives.Thebusinesshas$50,000availablefortheproject,butitneedstoprovidea20percentdownpaymenttoobtainadesirablerateandtermfromacommerciallender.Throughaprogresspayment,theutilityoffersathirdofthetotalrebateandincentivedollarsupfront.Withthe$50,000progresspayment,thebusinessisabletosecureanattractiveloanpackage.Afterallmeasuresareinstalledproperly,theutilityawardstheremaining$100,000.Thiseffortwouldhelpborrowersuseutilityrebatesandincentivesaspartoftheirequity,allowingthemtoleveragemoreprivatecapitalthantheywouldotherwise.
Severalutilitiesreportedthattheydohavesomeflexibilitywithintheirrebateandincentiveprogramstoofferprogresspayments.Customersandlendersgenerallyareunawareofthisoption,however,andrequesttheminfrequently.Utilityrepresentativesinterviewedstatedthattheywouldconsiderofferingtheircustomersprogresspayments,especiallyforlargerprojects.BobStolarski,DirectorofCustomerEnergyManagementatPugetSoundEnergy,alsonotedthatinadditiontoprogresspayments,PSEwouldbewillingtoworkmorecloselywithlenders,“sothattheywouldhavemorefaithintheincentiveandrebatedocuments.”
Implementingthiseffortwouldrequireinternalpolicychangesonthepartofutilitiesandsupportfromregulators.BonnevillePowerAdministrationrecognizesthevalueofprogresspaymentsandtheirbenefitstobusinesses.Moreadvocacymaybeneeded,however,toincreasetheavailabilityandmarketingofprogresspayments.Onelendernotedthatanyutilitytoolthatprovidesmoreequityupfront—likeprogresspayments—wouldmakeprojectslessriskyforlenders.29Theintendedoutcomeofthiseffortwouldbetoleveragemoreprivatecapitalforenergyefficiencyinvestmentsbyshowinglendersthatrebateandincentivedollarsarelow‐riskequity.
Option3. DedicateaportionofexistingSmallBusinessAdministrationlendingtoenergyefficiencyprojects.
ThepurposeofthisinitiativewouldbetoincreasethevolumeofenergyefficiencyloansbymandatingthatacertainpercentageofSBAloansfinanceenergyefficiencyprojects.SBAholdsaportfolioofroughly219,000loansworthmorethan$45billion,makingitthelargestsinglefinancialbackerofsmalltomedium‐sizedbusinessesintheUnitedStates.30DedicatingapercentageofSBAlendingtoenergyefficiencywouldserveasawaytoeducateandintroducebankstoenergyefficiencylending.Thisinitiativewouldalsohelpspurthedevelopmentofinternalenergyefficiencyexpertisewithinbanks,particularlynationalcommercialbanksthatgeneratethebulkofSBAloans.
ImplementingthisinitiativewouldrequireSBAtochangeitspoliciesfortheloansitguarantees.AccordingtoSBALenderRelationsSpecialistMarkCostello,“EnergyefficiencyisanewspacefortheSBA.”PresentingcompellingevidencetoSBAadministratorsaboutthepositiveimpactssuchan
29RachelBrombaugh,ShorebankEnterpriseCascadia.30U.S.SmallBusinessAdministration,“OverviewandHistory.”http://www.sba.gov/aboutsba/history/index.html
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initiativewouldhaveonsmallbusinesseswouldbeessentialtobuildingsupportforthispolicychange.
Option4. Acceleratethedevelopmentofsecondarymarketsforenergyefficiencyloanportfolios.
Toincreaseaccesstocapitalforenergyefficiencylending,severalstatesareworkingtogethertoexpandleveragingopportunitiesinthesecondarymarket.Currently,FannieMaepurchasesunsecuredresidentialenergyefficiencyloanportfoliosinthesecondarymarketatinterestratesofapproximately12percent.Thispricingishighanddoesnotreflectthelowdefaultratesassociatedwiththeloans,below2percent.Notsurprisingly,giventhehighinterestrates,thisprogramhasbeenunderutilized.Somestatesinvolvedwiththisprogramusetheirownfundstobuydowntheinterestratesforconsumers,insomecasesaslowas4percent.
TheNationalAssociationofStateEnergyOfficials(NASEO)andtheEnergyProgramsConsortium(EPC)areorganizingstatestoincreasethevolumeofstandardizedenergyefficiencyloanportfoliosinthesecondarymarkettoattractnewbuyers,establishaportfolioperformancetrackrecord,anddrivedowninterestrates.Throughthisinitiative,NASEOandEPCareaskingstatestointroducestandardizedunderwritingcriteriaforenergyefficiencylendingprograms.Statesarealsoaskedtocontributecashtoenergyefficiencyloanportfoliosasadditionalcollateraltoincreasetheattractivenessofthesecuritizedportfolio,homogenizetheportfoliosacrossthecountry,andattractnewinvestorsintothemarket.Thisarrangementcreatesanincentiveforlenderstomakeenergyefficiencyloansbyguaranteeingtheywillhavebuyersfortheloans.Whiletheprogramisintheearlydesignprocessandcurrentlyfocusedonlyonunsecuredresidentialloans,theplanistoexpandtoothertypesofloans,includingcommercial.NorthweststatescouldalsoparticipateintheNASEOprogramasawayofsupportingtheexpansionofsecondarymarketsforenergyefficiencyloans.
ImprovementstoExistingSupportServicesandSystemsThefiveoptionspresentedbelowprovidenewandbetterwaystoinformandeducatebusinessesandlendersaboutthefinancialperformanceandeconomicbenefitsassociatedwithenergyefficiencyinvesting.Theseoptionsaimtoincreaseboththedemandforandsupplyofenergyefficiencyloans.Forbusinesses,theseproposalsaredesignedtostimulatethemtoprioritizeenergyefficiencyprojects.Forlenders,theserecommendationswillhelpprovidethemwiththedatatheyneedtoevaluateenergyefficiencyprojectsproperly,consideringallfactors,includingtheavailabilityofutilityrebatesandincentives.
Option5. Acceleratetheadoptionofcommercialbuildingenergyperformancetrackinganddisclosure.
Formanybuildingownersaswellaslenders,themarketvalueofhavingahighlyefficientbuildingisunknown.Ratingabuilding’senergyperformanceeffectivelyservestocreateamechanismformarketdifferentiationandvaluation.Widespreaduseofastandardizedperformanceratingsystemwouldalsoprovidelenderswithvaluableinformationonoperatingcostsavingsassociatedwithenergy‐efficientbuildings,whichwouldaffectthecapitalizationrateofthepropertyandultimatelycouldresultinmorefavorablelendingterms.
38 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09
ThisefforthassomemomentumintheNorthwest.In2009,Washingtonadoptedalawrequiringcommercialbuildingsof10,000squarefeetorlargertodiscloseEnergyStarPortfolioManagerbenchmarkingdataandratingstoprospectivebuyers,lessees,orlenders.TheCityofSeattlehaspassedadisclosuremandatetorequireannualenergyperformancedataforallcommercialandmultifamilybuildingsoveracertainsize.TheCityofPortlandisconsideringarequirementforcommercialbuildingownerstousetheEnergyStarPortfolioManagerratingsystemforbuildingsover20,000squarefeet.
Option6. Facilitateinformationsharingamongutilities,financialinstitutions,andcontractorsaboutenergyefficiencyopportunitiesandcostsavings.
Teamingutilitiesandcontractorstogethertoprovideprospectiveborrowersandlendingofficerswithmoreinformationontheopportunitiesforandbenefitsofenergyefficiencyinvestmentscanstimulateactivity.Severaloftheexpertsinterviewedadvancedthisproposal.Itaddressestwoofthekeybarriersidentifiedinthisstudy:thelackofknowledgeonthepartofsmallandmid‐sizedbusinessesandfinancialinstitutionsaboutenergyefficiencyandthelimitedcoordinationbetweenthefinance,utility,andenergyservicessectors.
Astateorregionaleconomicdevelopmententity—oralternatively,afinancialindustrytradeassociation—couldorganizeaconferenceorseriesofworkshopsconveningfinancialprofessionalsandutilityexecutivesalongwithESCOs,contractors,andotherexpertstofocusonenergyefficiencyinvestmentsforsmalltomedium‐sizedbusinesses.
Acomplementaryinitiativewouldbetoestablishaclearinghousetotrackanddisseminateinformationontheoperatingandfinancialperformanceofdifferenttypesofenergyefficiencyinvestmentsinthecommercialsector.Grantmoniesthatinvolvecreditenhancementforenergyefficiencylendingmaycreateincentivesforcollaborationbetweenlendersandcontractors.Forexample,theWashingtonStateCreditEnhancementprogramrequireslendersandcontractorstoworktogethertocreatemeasurementandverificationprotocolfortheenergyefficiencyprojectsthatarefundedthroughtheprogram.
Theidealoutcomeofthiscollaborationandinformationsharingwouldbeamuchhigherlevelofknowledge,leadingtoincreasedlendingbyfinancingentitiesandperhapseventhecreationofinnovativenewfinancingmechanisms.
Option7. Createautility‐sponsoredtechnicalassistanceprogramforlenders.
Thisoptiontargetsthebarriermanyfinancialinstitutionsfacewhentryingtounderstandenergyefficiencyprojectsinfinancialterms.Withoutstandardizedvaluationmetricsorenergyefficiencyexpertsonstaff,manylendinginstitutionsarehesitanttoincludethecostsavingsresultingfromenergyefficiencyprojectsintheirloancalculations.Inaddition,lendersdonotnecessarilyincorporatethevalueofutilityrebatesintotheirloandecisions.Accordingly,utility‐sponsored“energyconservationadvisors”couldworkwithfinancialinstitutionstoassessthevalueofdifferentenergyefficiencyprojects,facilitatetheuseofrebatesandincentives,andprovidevitaltechnicalassistancewhenevaluatingdifferentprojects.
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AnEnergyConservationAdvisorprogramwouldlikelybeginasapilotprojectbetweenautilityandaregionallender.Ifsuccessful,thismodelcouldleadtoimprovedlendingtermsforprojectsthatcandemonstrateenergyandassociatedfinancialsavings,increaseduseofutilityincentivesandrebates,andaheightenedawarenessofthenetpresentvalueofenergyefficiencymeasures,forbothlendersandtheircustomers.
Option8. Launchaneducationandmarketingcampaigntosmallandmedium‐sizedbusinessestobuilddemandforenergyefficiencyprojectsandassociatedfinancing.
Demandfromsmalltomid‐sizedbusinessesforenergyefficiencyprojectsisclearlylacking.Thereasonsarenumerous,butoneexplanationthatexpertsinterviewedputforthisalackofmarketingandeducationtargetedatsmallbusinesses.Forexample,TinaVlasatyfromtheCityofSeattle’sOfficeofEconomicDevelopmenthasfoundthatlow‐costfinancingisnottheonlykeybarriertoincreasedenergyefficiency.Shehasobservedthat“marketingandeducationareasimportantaslow‐costfinancing.Smallbusinessownersneedmoneyandinformationwavedinfrontoftheminordertomakeenergyefficiencyupgrades.”
Suchacampaign—runbyutility,government,ESCOtradeassociations,oracombination—wouldinvolvetrainedenergyefficiencyspecialistsconductingoutreachtobusinessesincommercialsectorswithahighpotentialforsavingsandthefinancialinstitutionsthatservethem.Forexample,theCityofSeattlehasfoundthatenergy‐intensivesmallbusinessestendtobethosethatusemultiplerefrigerators,dishwashers,orpneumatictoolsintheiroperations,suchasfoodserviceestablishments,grocers,ormanufacturers.Outreacheffortswouldallowspecialiststodemonstratethecost‐savingpotentialandcompetitiveedgethatcustomizedenergyefficiencymeasurescouldbringtoindividualbusinesses.Inadditiontodirectoutreach,implementationofthiscampaigncouldinvolvecreationofauser‐friendlywebsite,thedistributionofinformativeprintmediamaterials,promotionalevents,andarecognitionprogramforbusinessesthatachievedaspecifiedlevelofenergysavings.
Theresultofthiscampaignwouldnotjustbeanincreaseddemandforenergyefficiencyprojectsandassociatedsupplyoffinancing,butitwouldimprovethebottomlineformanysmallbusinessesthatpreviouslyconsideredhighenergybillsasfixedcosts.
Option9. Promotetradeallynetworksand“one‐stopshopping”forenergyefficiencyresourcestosmallandmedium‐sizedbusinesses.
Recognizingthatsmallandmid‐sizedbusinesseshavelimitedtimeandresources,thisoptionproposestobundleallnecessaryenergyefficiencyservicesintooneofferingthroughthetradeallynetwork.Thebenefitof“one‐stop‐shopping”isthatbusinesseswouldonlyneedtoworkwithoneserviceprovidertogainaccesstoenergyauditing,installation,andfinancingservices.Approvedcontractorswouldbethesalesforcefortheprogramandwouldhelparrangeutilityrebatesandfinancingfromapprovedlenders.Thelocalutilitylikelywouldbethefacilitatorofthisprogram.
ThisoptionissimilartotheservicesthatESCOscurrentlyprovidetolargerbusinesses,butbecauseoftherelativelyhighadministrativecostsrelativetothesizeandrevenuesassociatedwithsmallerbusinessenergyefficiencyprojects,ESCOsgenerallydonotpursuethismarket.
40 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09
Asimilarapproachimplementedthroughpartnershipsoflocalgovernments,CDFIs,andnonprofitorganizationsisintheearlystagesofdevelopmentinBellingham,Seattle,andSpokaneinWashington.Theseprogramsappeartorequirepublicorfoundationfundingtobeeconomicallyviable.
LegislativeandRegulatoryChangestoAltertheMarketplaceThekeyfindingssectionofthisreportidentifiedseveralareaswherelegalandregulatorybarriersarehinderingenergyefficiencyfinancingintheNorthwestandelsewhere.Thissectionpresentsthreeenergyefficiency‐focusedlegislativeproposalsthat,ifenacted,could“changethegame”andmakeinvestinginenergyefficiencymuchmorecompellingforlenders,investors,smallbusinesses,andutilitiesalike.Someoptionsintheprevioussectionsincludelegislativeandregulatorymodifications,buttheylargelyinvolvealterationstoexistingprogramsandmechanisms;thenewpolicyinitiativesinthissectionareintendedtoproducebroaderchangestoadvanceenergyefficiency.
Option10. AdvancePropertyAssessedCleanEnergy(PACE)financinginWashington,Idaho,andMontana—similartoOregon’sexistinglaw.
PACEfinancingreferstoprogramsinwhichlocalgovernmentsprovidefundingforprivate‐sectorenergyprojectsthatprovideapublicbenefit(energysavings)andarepaidbackthroughanassessmentonthepropertyowner’staxbillor,insomecases,theutilitybill.Asimplementedinahandfulofjurisdictionsinrecentyears,PACEinvolvesplacingaseniorlienonthepropertysothattheloanissecuredbythepropertyandstayswiththepropertyevenifsold.PACEfinancingistiedtotheproperty,nottheborrower,anditcansubstantiallyreducethetransactioncoststypicallyassociatedwithmakinganenergyefficiencyloantoabusinessorresident.WithPACEfinancing,municipalitiesissuebondsatfavorableratessecuredbytheseniorlientoraisemoneyforenergyefficiencyorothertypesofcleanenergyinvestments.
Thekeytoobtaininglegislativesupportforsuchamechanismisthattheprogramsmustindeedprovidepublicbenefits,inthiscasedefinedasincreasedenergyefficiencyandreducedgreenhousegasemissions.
PACEfinancinghasmanyadvocatesacrosstheNorthwest,mostnotablyinOregon,wherethemodelisbeingimplementedthroughutilitybillrepayment.AdvocatesinIdaho,Montana,andWashingtonhavebeenexploringdifferentlegislativepathwaysthatwouldallowforsomeformofPACEfinancing.
PACEisnotaone‐size‐fits‐allpolicysolution,however,andregulatoryinnovationwillbeneededtodevelopcustomized,workablestrategies.ManylegalandfinancialquestionshavebeenraisedabouthowaPACEfinancingsystemwouldwork,andadvocatesinallthreestatesareworkingtoaddressthosequestions.InbothWashingtonandIdaho,forexample,stateconstitutionsrestrictgovernmentsfromthe“lendingofcredit”toprivateentities.Waystocomplywithconstitutionalrequirementsandfinanceenergyefficiencyexist,buttheyarecomplexandrequirecreativityandkeystakeholdersupport.Accordingly,manyarelookingtolearnfromtheearlyadopters—likeBoulderCounty,Colorado,andthecityofPalmDesertandSonomaCountyinCalifornia—toseehowtheirsuccessescanbetransplantedtotheNorthwest.
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Option11. Provideutilitieswithmoreincentivesandfewerbarrierstoinvesttheirresourcesindeepenergyefficiencyretrofitsthroughouttheirservicemarkets.
Currently,utilitiesintheNorthwesthavevaryinglevelsofincentivesanddisincentivestoinvestinenergyefficiency.Ingeneral,utilitiesareeitherrequiredorencouragedtoimplementcost‐effectiveconservationmeasures.Utilities,regulatorsandstakeholderstypicallynegotiatethelevelofconservationandassociatedannualexpendituresonefficiencymeasures.Thisprocessisintendedtoresultinutilitiesacquiringallofthecost‐effectiveenergyefficiencyopportunitiesavailableintheirserviceterritories(i.e.,opportunitieswhosecostsarelessthanorequaltocomparablesupply‐sideresources).However,thisisnotalwaysthecaseduetotwosignificantdisincentivesinherentintheratemakingprocess.
Thefirstdisincentiveisthatincreasedenergyefficiencyreducesutilityrevenuesbecausetheutilityissellinglessofitsproduct.Whiletheutilitysavessomemoneyfromnothavingtogeneratetheelectricityorpurchasenaturalgas,othercosts—powerpolesandlines,trucks,offices,computers,etc.—remain“fixed.”Thismeansforautilitywithanaggressiveenergyconservationprogramtoremain“whole”iteitherneedstogetmoremoneyperunitofenergysoldortorecoverthesefixedcostsinanothermanner.Otherwisetherewon’tbeenoughrevenuetomaintainprofitsand/ortocoverfixedcosts.Regulatorymechanismsshould,ataminimum,makeutilitiesneutraltoincreasesordecreasesintheenergyuseoftheircustomers.
Investor‐ownedutilitiesfaceaseconddisincentivebecauseofthewayregulatoryproceduresestablishafairrateofreturnonutilityinvestments.Ingeneral,regulatorssetratesthatincludearateofreturn–profit–basedontheutility'stotal“capital”investments(theseassetsarecalledthe“ratebase”).Thismechanismallowsutilitiestoraisethecapitalusedforinvestmentsthroughborrowingandstocksales.However,mostNorthwestutilitieschooseto“expense"ratherthancapitalizetheirenergyefficiencyinvestments,whichdoesnotaddtotheratebaseuponwhichthefairrateofreturniscalculated.So,whiletheutilitycanrecoverenergyefficiencyexpensesfrombillpayers,itdoesnotearnaprofitonthoseinvestments.(Someutilitiesaresubjecttoincentivesforhittingorpenaltiesformissingagreed‐uponenergyefficiencytargets.Someobjectthatthesizeoftherewarddoesnotadequatelycompensateforlostrevenueandthattheincentivesfallshortoftherateofreturnallowedforotherinvestments.)Asaresult,utilitiesmaybehesitanttosupportasignificantscale‐upinenergyefficiencyspendingbecausethisisprovidingenergyservicetoitscustomerswithoutafinancialbenefittothecompanyshareholders.
Regulatorymechanismsshouldideallyaligntheinterestoftheutilityanditsshareholderswiththoseofitscustomersbymakingthebenefittotheutilitythesameregardlessofwhethertheutilityinvestsingenerationresourcesorenergyefficiency.Manysuggestthatautilityshouldseegreaterbenefitsorreceiveanincentiveformoreinvestmentsinenergyefficiencyratherthanpowergeneration.Whilethereisnosinglemechanismtoreducedisincentivesorcreateincentives,theneedfornewregulatorystrategiestomotivateutilitiestopursueandsupportallcost‐effectiveenergyefficiencyisclear.
42 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09
Option12. Supportfederallegislationtopermittax‐exemptbondfinancingforcleanenergyandenergyefficiency.
Atthefederallevel,U.S.RepresentativeMikeThompsonofCaliforniarecentlyintroducedH.R.3525,thePrivateActivityBondsforCleanEnergyProjectsbill.Ifpassed,thisbillwouldamendtheInternalRevenueCodetoaddadditionalcategoriesoftax‐exemptprivateactivitybondstofinanceenergyefficiencyandothercleanenergyprojects.Additionally,thelegislationwouldallowprivatecompaniestousebothtax‐exemptbondsandfederaltaxcreditsforthesenewcategories.Tax‐exemptbonds’interestpaymentsarenotsubjecttofederalincometaxes,andinterestratesarethereforelowerthanratesforcomparabletaxablebondsorcommercialloans.Bygrantingprivateentitiesaccesstothislow‐costfinancing,thebillwouldhelpstimulateinvestmentincleanenergyprojects.Thebillhasreceivedminimalattention.
NewProgramsandInstitutionstoAddCapacityTheprojectteamconsideredarangeofoptionsproposedbyexpertsandreferencedintheliteraturetoestablishsignificantnewprogramsandinstitutionstoprovideadditionalpublic‐sectorcapitalforenergyefficiencyinvestmentsintheNorthwestandbeyond.Threeoptionsthatappeartoofferthegreatestpromiseandprovideforthebestleverageofpublicfundswithprivatecapitalarepresentedbelow.OtheroptionsthatwereconsideredbutwerenotdeemedaspromisingfortheNorthwestincludeissuing“victorybonds,”issuingtax‐creditbonds,andstand‐alonefederalloanguarantees.
Option13. CreateafederalCleanEnergyDeploymentAdministrationor“GreenBank.”
PendingfederalclimatelegislationincludesproposalstoestablishaCleanEnergyDeploymentAdministration(CEDA),frequentlyreferredtoasthe“GreenBank,”whichwouldbefederallyfundedwithupto$10billion.CEDAwouldprovideafederalguaranteeofrepaymentforcertaincommercialenergyefficiencyloansthatcouldbesoldonthesecondarymarket,thusprovidingliquiditytolenders.AnalystsbelievethatCEDAcouldpotentiallyguaranteeupto$200billioninprivateinvestment.31CEDA’sfederalbackingwouldalsoresultinimprovedtermsforborrowersandenableinvestmentinefficiencymeasuresthatotherwisewouldnotoccur.AccordingtotheNaturalResourcesDefenseCouncil,thegoalofafederalinstitutionlikeCEDAwouldbetoprovideafinancingframeworkforlenderssothattheirorganizationscouldgreatlyexpandlendingprogramsforenergyefficiencyretrofits.32Forexample,CEDAcouldhelpsetunderwritingstandardsandgatheranddisseminatedatarelatedtotheperformanceofenergyefficiencyprojectsandloansforprojectsofallsizes.
Currently,boththeU.S.HouseandSenateversionsoftheclimatebillincludeprovisionsforCEDA,thoughmuchdebateremainsabouttheclimatebillitselfandCEDA’sauthority.Onemajorissueofcontentionconcernstheallocationoffundsfordifferenttechnologies.TheHouseversionofthebill
31CoalitionfortheGreenBank.http://www.coalitionforthegreenbank.com/in‐the‐news.html32NaturalResourcesDefenseCouncil,ScalingupInvestmentinEnergyEfficiencywithaFederalEnergyEfficiencyFinancingFacility,April2009.
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mandatesthatnosingletechnology—suchaswind,nuclear,orconservation—couldreceivemorethan30percentofCEDA’sbacking,whiletheSenatebilldoesnotsetsuchacap.33
Option14. Usemunicipal,state,orfederalbond‐issuingauthoritytoraisefundsforenergyefficiencyprojects.
Whereconstitutionallypermitted,issuingstateormunicipalbondsrepresentsanattractivemethodforraisingcapitaltofundenergyefficiencyprojects.Bondscouldbeissuedeitheragainstastateormunicipalgovernment’sgeneralobligationtaxingauthorityortiedspecificallytotheperformanceandenergycostsavingsoftheenergyefficiencyportfolio.(Thetaxstatusofthebondswoulddependoneachstate’slimitationsonlendingofcredit.)
Inaddition,the2009AmericanRecoveryandReinvestmentActintroducedtaxcreditbondsknownasQualifiedEnergyConservationBonds(QECBs)toofferreducedinterestratesformunicipalitiesfinancingenergyefficiencyandothergreenhousegasreductionprojects.Oregoncurrentlyissuesbondsbackedbythestate’sgeneralobligationtofunditsSmall‐ScaleEnergyLoanProgram,andthestateisauthorizedtoissuetax‐exemptdebttofinancerenewableenergydevelopment.
Option15. Developandexpandrevolvingloanfundstosupportenergyefficiencyprojects.
Revolvingloanfunds(RLFs)offeramechanismtofinanceenergyefficiencyprojectsatsmallandmedium‐sizedbusinesses,oftenwithsubsidizedlow‐interestloans.Followingtheirinitiationwithseedfunding,RLFsaredesignedtobeself‐replenishing,withtheprincipalandinterestpaymentsonexistingloansprovidingcapitaltomakenewloans.RLFsofferanadditionalpooloffundsforsmallandmid‐sizedbusinessesastheypursuefinancingforenergyefficiencyprojects,andtheycanbeusedinconjunctionwithotherfinancingoptions.Forseedfunding,revolvingloanfundscandrawonbothpublicandprivatecapital,includingfoundationfundingandsourcesof“patientcapital.”
Anumberofjurisdictionsarecreatingnewloanfundstofinanceenergyefficiency,relyinginlargepartonfederalstimulusfunds.BothPortlandandSeattle,forexample,areusingfederalblockgrantfundingasseedmoneyfortheirresidentialenergyefficiencyloanprograms.Seattle’sOfficeofEconomicDevelopmentisseekingcompetitiveARRAfundingforasimilarfundfocusedonsmallcommercialproperties.
Option16. Expandcreditenhancementandothermechanismsthatleverageprivatecapital.
Riskmanagementandcreditenhancementarecriticaltoleveragingprivatecapitalforenergyefficiency.Theexistingpublicloanprograms,forthemostpart,lacktheabilitytoleverageprivatecapital.Thisrestrictionsignificantlylimitsthetotalnumberandsizeofloansthatcanbeissuedeachyear,sincetheloanprogramscanonlyrevolvewhenloansarepaidback.Loanprogramsthat
33PeterBehr,“GreenBankProposalsProbetheHostileFrontierofPoliticsandFinance,”NewYorkTimes,October2,2009.http://www.nytimes.com/cwire/2009/10/02/02climatewire‐green‐bank‐proposals‐probe‐the‐hostile‐front‐86440.html
44 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09
incorporatecreditenhancement,propertytaxassessments,orothermechanismsthatincreasethesecurityofrevenuesforloanrepaymentaregenerallybestpositionedtogainaccesstoprivatecapitalinthesecondarymarketfortake‐outfinancing.Despitethatdefaultratesonenergyefficiencyloanshavebeenverylow,energyefficiencylendingdoesnothavealongenoughcredithistorytoattractsignificantamountsofprivatecapitalwithoutcreditenhancement.WashingtonState’sDepartmentofCommercesoonwillbedirecting$5millioninARRAfundstowardcreditenhancementmechanismstoleveragepublicinvestmentsinenergyefficiency.
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IV. Recommendations
Consideringthemultipleoptionspresentedaboveraisesthequestion:whichoptionsshouldbepursuedandinwhatpriorityordertoincreasefinancingofenergyefficiencyprojectsforsmallandmedium‐sizedbusinessesintheNorthwest?Thisconcludingsectionofthereportbrieflydescribesthepreferrednear‐termfutureforenergyefficiencylendingintheNorthwestandtheactionsnecessarytohelprealizethisfuture.
ThePreferredFutureIdeally,withintwotofiveyears—withoureconomyrecoveredfromrecessionandthefinancialsectorfullybackinthebusinessofprudentlending—theNorthwestwillcontinuetoleadthenation,takingenergyefficiencyinvestmenttothenextlevel.TheNorthwestwillmeetallitstypical(thatis,non‐transportation)electricloadgrowthandhalfitsnewnaturalgasdemandby2020withenergyefficiency.
Commercialbankswillbeofferingstandardizedloanproductstoqualifiedcommercialcustomerstoinvestinenergyefficiencyupgrades.ThesebankswillhavefollowedtheleadoftheCDFIsthatestablishedastrongtrackrecordofsuccessfullendingandrepaymentforsuchprojects.Bankswillfullyunderstandtheeconomicsofefficiencyloanstotheircustomersandwillincludeutility‐sponsoredrebatesandincentivesintheircalculationsofcapitalrequirementsandcashflows.
Thesebankswillbesellingtheirloansintoarapidlygrowingsecondarymarket,whereloanswillbepackagedandsoldtoinvestorsseekinglonger‐termstablereturnsandthoseinterestedinfundingthecleaneconomy’sgrowth.
Loanswillbereadilyavailabletoqualifiedcommercialcustomersat2to3percentbelowmarketrates,andtheloanprocessisstreamlinedandeasytoaccess.
Utilitieswillhavestrongerincentivesandfewerbarrierstoincreasetheirinvestmentsinenergyefficiency.
On‐billpaymentschemesandpropertytax‐basedfinancingofenergyefficiencyprojectswillbewidespread.
Public‐sectorinvestmentwillbeusedprimarilyforcreditenhancementandtoseedrevolvingloanfunds.Thesefundswillbeleveragedtothemaximumextentpossiblewithprivate‐sectorfunds.
46 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09
RealizingthePreferredFuture:KeyInitiativesAlloftheoptionspresentedwould,ifimplemented,helptorealizethispreferredfuture.Severalsolutionsstandout,however,intheirabilitytoleverageresources,stimulatechangeinthemarketplace,engagelenders,andconsequentlyleadtorapidgrowthinfinancingforenergyefficiency.Thesesolutionsarerecommendedfornear‐termaction:
Earlyaction#1.Marketexistingenergyefficiencyprogramsmoreeffectivelythroughcoordinatedeffortsofgovernments,utilities,andorganizedtradeallynetworks.Thiseffortincludescollectionanddisseminationofbetterinformationabouttheperformanceandfinancialbenefitsofenergyefficiencyupgradesforbusinesses.Werecommenddoingsothrough1)widespreadadoptionoftheU.S.EnvironmentalProtectionAgency’sEnergyStarportfoliomanageroranalternativestandardizedratingsystemtotrackabuilding’senergyperformanceand2)implementationofautility‐sponsoredEnergyConservationAdvisorprogramforlenders.(ThisactiondrawsonOptions5,6,8,and9discussedintheprevioussection.)
Earlyaction#2.AdvancePropertyAssessedCleanEnergy(PACE)financingorasimilarapproach,wherefeasible,providingthebasisforemergenceofasecondarymarketforenergyefficiencyloans,benefitingbothcommercialandresidentialsectors.(Option10)
Earlyaction#3.Encourageutilitiestoadopton‐billrepaymentmechanisms,wherefeasibleandcosteffective,tosimplifyloanrepayment,reducetheupfrontcapitalcontributionsrequiredfrombusinesses,makeadirectconnectionbetweenenergyandcostsavingsforthecustomer,andincreaselendingforenergyefficiencyprojects.(Option1)
Earlyaction#4.Provideutilitieswithmoreincentivesandfewerbarrierstoinvestincosteffectiveenergyefficiency.(Option11)
Earlyaction#5.Establishpublicenergyefficiencyfundsdedicatedtoofferingcreditenhancementtoleverageprivatecapitalthroughtheuseofavailablemunicipal,state,andfederalfunds,includingbonds.(ThisactioncombineselementsofOptions14and16.)
Together,thesesolutionscanprovidethecatalystforlendinginstitutionsandinvestorstofinanceenergyefficiency.Facilitatingmorelow‐costfinancingaddsanothertoolinthetoolboxtohelpbusinessesreducetheirenergybillsandkeepmoredollarsinthelocaleconomy.
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V. Appendix A. Literature Sources Reviewed
TITLE SOURCE DATE
CharacterizationandAnalysisofSmallBusinessEnergyCosts
SmallBusinessAdministration,OfficeofAdvocacy,preparedbyE.H.Pechan&Associates
April2008
EnergyEfficiencyandtheFinanceSector:ASurveyonLendingActivitiesandPolicyIssues
UNEPFinanceInitiative’sClimateChangeWorkingGroup
Jan.2009
FifthNorthwestElectricPowerandConservationPlan NorthwestPowerandConservationCouncil
2005
FinancingEnergyEfficiency:LessonsfromBrazil,China,India,andBeyond
WorldBank,InternationalBankforReconstructionandDevelopment
2008
FiveEmergingU.S.PublicFinanceModels:PoweringClean‐TechEconomicGrowthandJobCreation
CleanEdge,Inc. Oct.2009
InnovativeEnergyEfficiencyFinancingApproaches U.S.DepartmentofEnergy,EnergyEfficiencyandRenewableEnergy
June2009
PolicyFrameworkforPACEFinancing CouncilonEnvironmentalQuality Oct.2009
PortlandCleanEnergyInvestmentFundandBuildingRetrofitProgram
TaoStrategies Nov.2008
ProcessEvaluationBestPracticesResearch:NewYorkEnergy$martsLoanFundandFinancingProgram
NewYorkStateEnergyResearchandDevelopmentAuthority,preparedbyResearchIntoAction
May2008
PropertyAssessedCleanEnergy(PACE)Bonds:InnovativeFundingtoAcceleratetheRetrofittingofAmerica’sBuildingsforEnergyIndependence
PACENowWebsite(www.pacenow.org)
2009
RecentInnovationsinFinancingforCleanEnergy SouthwestEnergyEfficiencyProject Oct.2009
RecoveryThroughRetrofit MiddleClassTaskForce,CouncilonEnvironmentalQuality
Oct.2009
ScalingupInvestmentinEnergyEfficiencywithaFederalEnergyEfficiencyFinancingFacility
NaturalResourcesDefenseCouncil April2009
StateEnergyEfficiencyPolicies:OptionsandLessonsLearned—EnergyEfficiencyLoanPrograms
AlliancetoSaveEnergy Jan.2009
TaxLienFinancingforthePurposeofFacilitatingEnergyEfficiencyInvestmentsinCommercialRealEstate
ClintonClimateInitiative July2009
UnlockingEnergyEfficiencyintheU.S.Economy McKinsey&Company July2009
WashingtonState’sGreenEconomy:AStrategicFramework
WashingtonStateDepartmentofCommerce
Jan.2009
48 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09
VI. Appendix B. Additional Supporting Data
TheNorthwestPowerandConservationCouncil’sFifthPowerPlanidentifiedenergyefficiencymeasureswithapositivebenefit/costratio—thatis,theywouldsavemoremoneythantheywouldcostovera20‐yearperiod.Table4showscost‐effectivemeasuresforcommercialsector.
Table4.CommercialEnergyEfficiencyMeasureswithPositiveBenefit/CostRatios
COMMERCIALEND‐USEMEASURES
Cost‐EffectiveSavingsPotential
(MWain2025)*
AverageLevelizedCost
(Cents/kWh)Benefit/Cost
Ratio**
New&ReplacementLighting 245 1.2 9.1
New&ReplacementInfrastructure 11 1.4 2.4
New&ReplacementShell 13 1.6 2.0
RetrofitLighting 114 1.8 2.2
New&ReplacementEquipment 84 2.2 1.8
RetrofitInfrastructure 105 2.2 1.8
RetrofitShell 9 2.9 1.3
New&ReplacementHVAC 148 3.0 1.5
RetrofitEquipment 109 3.4 2.1
RetrofitHVAC 117 3.4 1.3
Total 955 2.3 2.6
Source:NorthwestPowerandConservationCouncil,FifthPowerPlan.
*Thiscolumnshowsthetotalamountofconservationestimatedtobecost‐effectiveandachievable,givensufficienteconomicandpoliticalresources,overa20‐yearperiodunderthemid‐rangeforecastofloads,fuelprices,waterconditions,andresourcedevelopment.
**Benefit/cost(B/C)ratiosarederivedbydividingthepresentvaluebenefitsofeachmeasure’senergy,capacity,transmissionanddistribution,andnon‐energycostsavingsbytheincrementalpresentvaluecost(includingprogramadministration)ofinstallingthemeasure.