March 08, 2010
Ken Silverstein
EnergyBiz Insider
Editor-in-Chief
Money is tight. But not necessarily for projects involved with increasing energy efficiency. Some innovative financing techniques are emerging to allow customers to make improvements without incurring initial out-of-pocket costs.
Energy efficiency has emerged as the most palpable and least controversial way to make environmental changes. And even though time to earn a return-on-investment is often short, such projects are often sidelined until homeowners or companies figure out ways to pay for them. Policymakers and businesses are therefore joining forces so as to enable the cost-effective implementation of energy-saving techniques.
"It's the best of times and the worst of times for energy efficiency," says Bob Hinkle, president and chief executive of Metrus Energy in San Francisco that performs energy efficiency retrofits. "It is the best of times because it is now well accepted as the right thing to do from an economic and environmental perspective. But it remains difficult to implement projects because capital is still constrained."
In the case of Metrus, after auditing the premises of large industrial and commercial customers, it will discuss the work that can be done and where the savings can be had. It will then fine-tune its ideas based upon what those businesses hope to achieve.
So, for example, it may suggest simple solutions ranging from the installation of modern lighting and automatic controls to more complicated ones that involve the replacing of furnaces and boilers. After, it estimates both the costs and the potential savings. Metrus, which is working with BAE Systems and Siemens, is paid on a per-units-of-electricity-avoided basis -- a formula that is derived in advance of any work.
Innovative financing strategies are also available for smaller commercial businesses and for homeowners. San Diego Gas & Electric, for example, offers full financing to those operations that install energy efficiency measures and one that allows them to repay the loans over five years through their regular utility bills.
While the energy savings are expected to exceed the ultimate loan repayments, the process is a challenging one. That's because utilities are generally reluctant to use shareholder money to make loans or involve regulators in these transactions.
Residential customers have other opportunities, although they typically have to be authorized through legislation. Take Palm Springs, Calif.: It has a program that offers tax lien financing that extends 10 to 20 years. As such, property owners can then get full financing -- money that is repaid through their regular tax bill. Again, the energy savings is expected to be greater than that assessment. If the home should change hands during this time, the government would still have a lien on the property.
Bright Spot
While such creative financing can serve a useful purpose, customers will oftentimes still need access to loans from commercial banks. That remains problematic.
Energy efficiency programs, however, are a bright spot. Some lending institutions as well as venture capitalists understand the potential. The former, for example, may realize that companies taking such steps will reduce their overhead and become more profitable. The latter, meanwhile, understands the potential for growth.
"Energy efficiency is in the sweet spot of many venture capital investors in terms of skill sets and funding parameters, particularly given its basis in information technology," says John de Yonge, Americas Research Director of Cleantech for Ernst & Young. "Consequently, we may see investor participation in clean-tech broaden."
The global consulting firm says that venture capitalists funding grew by 11 percent to 61 rounds in the energy efficiency category in 2009. Such a grouping, which entails investments in the intelligent utility, amounts to more than any other segment in the cleantech area. Altogether, such ventures raised nearly $600 million in 2009 with $252 million of that coming in the fourth quarter when the economy really turned.
As a percentage of all such clean energy deals, energy efficiency financing grew from 24 percent in 2008 to 32 percent in 2009. By comparison, other clean-tech segments saw their ability to attract capital fall by 16 percent from the year before.
Tough lending policies along with an environmental awareness are prompting some states to actively promote energy efficiency. Consider the California Energy Commission, which provides financing for schools, hospitals and local governments through low-interest loans for both feasibility studies and the actual installation. It has made about $40 million available and in some cases, the entities can earn 100 percent financing.
Some utilities, meanwhile, recognize the potential, although they would typically get regulatory relief if they have to go out of pocket. Xcel Energy in Colorado, for example, was required to spend $63 million in 2009 and must spend another $80 million this year. The expansion in its energy efficiency program had come in response to state law and policies adopted by its utility commissioners. While energy efficiency projects are running into fewer policy hurdles than other ecologically-minded efforts, financing remains an issue. That's where some creative ideas espoused by both the public and private sectors alike are coming into play. Some of those are winning market acceptance and may begin serving as national models.
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