© Oliver Wyman

ENERGY & UTILITIES

Financing “Negawatts”

Southeast Energy Efficiency Alliance

October 29, 2015

Arun Mani, Partner

arun.mani@oliverwyman.com

832 648 8513

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Copyright © Oliver Wyman

22© Oliver Wyman

Utility Sector DisruptionCord cutting and changing regulation are coming together in the utilities sector, forming a powerful cocktail of issues and potential challenges

This confluence is giving rise to utilities having to evaluate how to balance product

and service needs of various customers

“Off Grid”

Generation“Negawatts”

Machine to

MachineCost Plus or

Revenue Minus

Net Metering, Electric

Vehicles, Energy

Storage

Energy Efficiency,

Peak Management,

Demand Response

Smart Meters, Smart

Phones, Smart

Devices

Rate and Bill

Redesign, Energy

Analytics

Growth Innovation Customers Performance Cost reduction Turnaround Distributed

Generation

Safety and

Security

Industry

Issues

33© Oliver Wyman

Energy Efficiency Addressable MarketThere are approximately 326 billion of squared feet of buildings with potential for the application of energy efficiency solutionsTotal building footage in the US in 2013

Residential, Commercial and Institutional [billion ft2]

5,5%

15,6%

78,8%

Buildings Area (billion ft2)

Residential 257

Commercial 51

Institutional 18

Total 326

Residential257

(78,8%)226 (88,0%)

8 (3,0%)

15 (6,0%)

8 (3,0%)Mobile Home5+ Unit Building2 – 4 Unit BuildingSingle Family

4 (8,0%)

4 (8,0%)10 (20,0%)

2 (3,0%)

51

(15,6%)

1 (2,0%)

2 (3,0%)

5 (10,0%)11 (22,0%)12 (24,0%)Commercial

Other

Warehouse / Storage

Service (other than retail and food)

Public Assembly

Office

Mercantile

Lodging

Food Service

Food Sales

Institutional18

(5,5%)10 (55,0%)

3 (18,0%)

1 (6,0%)4 (21,0%)

Healthcare WorshipPublic Order & SafetyEducation

Source: Deutsche Bank Report: United States Building Energy Efficiency – Retrofits Market Sizing and Financing Models - March 2012; OW Analysis

44© Oliver Wyman

Potential Financial SavingsSignificant amounts of money can be saved through investing in energy efficiency programs across all market segments

“In the United States alone, more than $279 billion

could be invested across the residential, commercial,

and institutional market segments. This investment

could yield more than $1 trillion of energy savings over

10 years, equivalent to savings of approximately

30 percent of the annual electricity spend in the US” 1

848

4.000

3.000

2.000

1.000

0

Institutional

293

CommercialResidential

1.892

Total

3.033

72

279

182

0

100

200

30025

CommercialResidential TotalInstitutional

Energy Savings (Tbtu) 1

Total Investment ($ billions) 1

Source: 1 Deutsche Bank Report: United States Building Energy Efficiency – Retrofits Market Sizing and Financing Models - March 2012; OW Analysis

Deutsche Bank Analysis

Category SegmentTotal Investment

($ million)

Residential

Single Family 144,000

2 – 4 Unit Building 17,000

5+ Unit Building 17,000

Mobile Home 5,000

Commercial

Food Sales 4,000

Food Service 6,100

Lodging 7,500

Mercantile 18,000

Office 17,000

Public Assembly 6,000

Service (non retail / food) 4,500

Warehouse / Storage 4,400

Other 4,000

Institutional

Education 13,000

Healthcare 7,300

Public Order and Safety 2,000

Worship 3,000

Potential Impact by Market Category

55© Oliver Wyman

Financing ModelsThere are five fundamental financing options available to customers today

Source: Deutsche Bank Report: United States Building Energy Efficiency – Retrofits Market Sizing and Financing Models - March 2012; OW Analysis

Financing

Source

Repayment

Source

Savings

Recipient

Collateral Incremental

Cost

Sale

Restrictions

Energy

Performance

Contracts

Private Built cash flow Owner / TenantMortgage,

General recourse

Loan payments

less energy

savings

Credit-worthy

buyer or pay out

remaining value of

contract

Energy

Service

Agreements

Private Energy savingsInvestor and

customer

Equipment,

Financing

Statement

None

None. Can be

transferred or

terminated

Property

Assessed

Clean

Energy

Public or Private

Property tax pass-

through of energy

savings or

recovery

Owner / Tenant Tax Lien

Higher tax

assessment less

energy savings

and recoveries

Obligations remain

with property

On-bill EE

Tariffs &

Loans

Public Energy Savings Owner / Tenant

Equipment,

Financing

Statement

Utility bill less

energy savings

Tariff stays with

the Property

Credit Cards Personal CreditPersonal

Guarantee

Individual

(Owner)

NoneCredit card

payments less

energy savings

None

66© Oliver Wyman

Energy Efficiency As An Asset Investment Class Institutional investors now consider energy efficiency to be a robust asset class with proven and predictable returns

Key drivers

• Funds seeking new asset

classes within remits as

traditional renewable assets

(wind, solar, biomass)

become less attractive

• Significant potential demand

for capital for EE

investments in commercial

sector over next five years

• Specialist fund managers

aggregating packages of

smaller projects to generate

right size levels of

investment

• Government-backed models

in Europe have

demonstrated bankability of

managed services income

streams based on savings

• Emergence of secondary

market through specialist

funds

Energy Service

Company (ESCO)

End user

e.g.. hospital, factories

Financing partner

Service fee (depending

on savings)• Provision of

assets

• Installation

• Maintenance

Capital

Business Model Overview Energy Service Company

• Provides finance,

infrastructure and expertise

to deliver a managed

service to large energy

users

• Uses proven technologies to drive significant energy savings

• ESCO fee model:

o Shared savings: flexible fee based on the energy savings the ESCO services bring; assets typically on ESCO’s balance sheet

o Guaranteed savings: fixed fee; assets typically remain on end user’s balance sheets sheet

Revenue

Stream

77© Oliver Wyman

Community Based ProgramsUtilities can facilitate community based programs for residential and small commercial and industrial (C&I) customers

Vision

• The local utility company and an ESCO jointly establish a Community Program for residential and small C&I customers, providing energy efficiency services (can be expanded into other areas as well, such as Distributed Generation and Demand Response)

• The power supplier relies upon energy efficiency savings according to a pre-agreed energy capacity arrangement guaranteed by the ESCO and facilitated by the local utility

• Customers pay a service fee to the ESCO. ESCO shares any additional energy savings at the aggregated program level with its customers

• A third party financier provides the upfront capital. ESCO aggregates and rewires the Principal and Interest (P&I)

• The power supplier provides additional guarantee to financiers through a financial back-stop.

Power

Supplier

ESCO Op

Co

Tech.

Supplier

Financier

Community Program

Energy

Efficiency

Services

Fixed Energy

Service Fee

Shared

savings

Up-front

capitalP&I

Guaranteed

Energy Capacity

Agreement

…Technology

agreement

Residential and Small C&I Customers

Energy

savings

Cash flow

Financial

Back-Stop

Energy services

Ratepayer funds

Business Model Overview

Local UtilityEnergy

Savings

Require greater

security in supply

planning

Want guarantee

of energy costs /

energy savings

Like to see predictable

revenues backed by a

utility’s balance sheet

Local Utility

aggregates

individual

projects

ESCO runs the program

as a managed services

entity along with a

technology supplier

8© Oliver Wyman 8

• In the US, the total addressable market for energy efficiency is approximately 326 billion

square feet and nearly 80% of that area corresponds to residential buildings

• A more diverse range of financial models for energy efficiency are available nowadays. These

models differ from each other in the sources for financing and repayment, who the recipients

are, the collateral and incremental cost, and the associated sale restrictions

• Additional emerging models that have proven successful in foreign markets, such as energy

investment as an asset class, may be adopted in the US in the near future

• Projections from several sources anticipate large amount of savings coming from the

implementation of energy efficiency programs through diverse financial models

• The single family segment within the residential category represents 50% of the total energy

savings and is also estimated to require 50% of the total investments

ConclusionsEnergy Efficiency financing at the residential and small C&I level presents a large opportunity but also has challenges with customer acquisition which is where a partnership with the local utility could make sense

www.governorsenergychallenge.org

Loan Program July 2010-

June 2012

Loan Amount Minimum Rate Term:

$1,000 – $5,500 0% APR1,2 36 months

$5,501 - $7,500 7.50% APR1 Up to 48 months

$7,501 - $10,000 7.50% APR1 Up to 60 months

$10,001 - $15,000 7.50% APR1 Up to 72 months

Consumers can finance:

Energy Star Rated Heating and Cooling Systems

Energy Star Rated Windows

Insulation for home attics, walls, crawl

spaces and basements

Weatherization items – weather-stripping,

caulking, duct work sealing and insulation

Rates and Available Loan Amounts:

What were the results?

2,748 Loans were funded and closed

During the 2 year program, $13,477,194 in loans were

made in Georgia.

THE PUBLIC PURPOSE ESCO MODEL

Presented by: Laura Capps

Southface

Photo: Jonathan Hillyer, 2009

ADVANCED COMMERCIAL BUILDINGS INITIATIVE

Research Demonstrate Deploy

PARTNERSHIPS

PARTNERSHIPS

SMALL COMMERCIAL MARKET BARRIERS

EXIT

PUBLIC PURPOSE ESCO MODEL

POSITIVE CASH FLOW

SOUTHFACE GOALS

• Markets• Non-profits

• Schools

• Rural municipalities

• Projects• $20k - $300k+

• 20-40% savings

• Partnerships• Portfolio development

• Finance & loan management

SAMPLE RESULTS

• 12 small commercial buildings

• 8-9 months of savings:

• $83,813, 24% cost savings, 11% ROI

• 297 MTCO2e

NEXT STEPS

• Business model refinement

• Simulation project(s)

• Additional partnerships

• Industry engagement

Stay in touch:

Laura Capps

laura@southface.org

404-604-3621