It’s been quiet for a while, but finally there’s some (good) news from the energy efficiency finance front. The hard-pushed PACE program (what’s in a name, let’s rebrand this tarnished initiative), almost up and running in Los Angeles, San Francisco and some other large cities (Sonoma has continued their residential PACE program, ignoring the heated national debate) forms the basis for a recently announced “deal.” But…don’t open the champagne yet…this is just an announcement. Let’s first explore the details (an open interpretation from this article in the NY Times):
A business consortium that includes Lockheed Martin and Barclays bank plans to invest as much as $650 million over the next few years to slash the energy consumption of buildings. The consortium is led by a company called Ygrene Energy Fund of Santa Rosa, Calif., which has already won an exclusive contract to manage a retrofit program for a half-dozen communities in the Miami area, with the city expected to join in a few weeks. It is in the late stages of completing a contract with Sacramento, and is seeking deals in other cities. Ygrene and its partners will gain exclusive rights for five years to offer this type of energy upgrade to businesses in a particular community. Lockheed Martin is expected to do the engineering work on many larger projects.
The retrofits might include new windows and doors, insulation, and more efficient lights and mechanical systems. In some cases, solar panels or other renewable power might be included. For factories, the retrofits might include new motors or other gear.
Short-term loans provided by Barclays Capital will be used to pay for the upgrades. Contractors will offer a warranty that the utility savings they have promised will actually materialize, and an insurance underwriter, Energi, of Peabody, Mass., will back up that warranty. Those insurance contracts, in turn, will be backed by Hannover Re, one of the world's largest reinsurance companies.
Of course, this is a great concept. And it resolves the barrier to energy efficiency upgrades posed by the large upfront capital cost. It opens up access to the capital market by not only providing creditworthy tax liens as monthly payments (the default rates on municipal tax payments are extremely low), but also by enhancing this by a warranty from the constructors (basically an ESCO model) AND an insurance from Hannover Re to back up that warranty. Of course, all of this might be quite costly. I’m curious what kind of retrofits will be feasible in the end, i.e., what will the effective rate charged to building owners be? 7%? 9%? If you apply these rates of return to the infamous McKinsey curve (the basis for many statements on the “massive” opportunities for NPV-positive energy efficiency investments), you might end up doing some quick wins (lighting, optimization) and stop there.
But the scheme also ignores a maybe more important issue in commercial and residential building retrofits: the transaction cost for building owners. The problem of construction work in a building while it’s fully occupied, or having contractors in your home for a week or two. It also ignores the fact that only a very small minority of homeowners as well as commercial landlords will go for a building upgrade without directly receiving some of the savings. If the savings-to-cost ratio is exactly one, a building will certainly become more efficient following an upgrade, but the only reason for an owner to upgrade a building would then be to increase its competitiveness. Or maybe to improve indoor air quality. Convincing landlords and homeowners of “the increased attractiveness” of their building is a difficult play. Ultimately, if energy efficiently is appropriately priced in the market (which I strongly believe), a building upgrade that is fully offset by the cost will not increase the value of the building. Unless other factors of “green” are priced (which I, by the way, also believe…) So, savings in the hands of landlords are needed. And then you’ll still have to do substantial marketing. Luckily, “[Ygrene] will market the plan aggressively, helping property owners figure out what kinds of upgrades make sense for them.”
I hope the marketing budget allows for long and aggressive marketing indeed. As Matt Golden of Recurve Inc. recently noted at a conference organized by the Berkeley Program on Housing and Urban Policy, there is sometimes a reality disconnect between what we think building owners should do, and what owners think they should do. In Matt's "sober view" of the residential market for energy efficiency retrofits, "capucinno-sized savings" will be ultimately be reaped in an efficient market, but only if the hurdle is low enough. (Admittedly, I'm currently drowning my energy savings at a Starbucks in Toronto.) The Prius-driving and iPhone-using consumers that value energy efficiency beyond the dollar value makes for a good niche to target first, but for the average consumer to embrace constructors drilling holes in the wall to blow in insulation, we need more!