Better Buildings Challenge Boosts ESCOs

In late 2011 President Obama announced the Better Buildings Challenge, a $4 billion program sponsored by the DOE with the support of a number of public and private sector partners. The program aims to make American buildings 20% more energy efficient by 2020 by directing federal agencies to engage in performance contracts (driving efficiency with zero taxpayer funds) as well as mobilizing major companies to invest in efficiency upgrades to their own buildings and plants.

The list of partners in the Better Buildings Challenge is impressive, including major building service providers such as Schneider Electric and Transwestern, as well as industrials with large building portfolios such as Saint-Gobain and General Electric. To date, 1.6 billion square feet of space have been committed to the program, and that figure will grow as more companies, government agencies, and other organizations get involved.

But is it enough to reach the 20% goal by 2020? Four billion dollars may sound like a lot, but some studies have indicated that reducing energy consumption in U.S. buildings will take much more than that. A 2009 study from McKinsey found that a potential $1.2 trillion in gross energy savings sit latent in the U.S building stock – but it would take $520 billion in upfront investment to unlock those savings and reduce projected energy demand by 23%. The amount of capital directly engaged for the Better Buildings Challenge is less than 1% of the $520 billion McKinsey believes is needed. So the 20% reduction by 2020 may be a stretch with these funds alone.

However, the announcement could have a ripple effect on the energy service company (ESCO) market and in energy efficiency investment more broadly. In the federal sector alone, President Obama has ordered federal agencies to invest $2 billion in energy efficiency. That money will likely be spread out over the next few years and will go to energy performance contracts with the 53 ESCOs qualified to do federal work. That, in turn, will put ESCOs in a better cash position to build new capacity and reach more customers.

Other emerging trends in building efficiency policy might help the U.S. chip away at the funding gap. Regulations such as PACE financing are starting to lower the bar for commercial building owners to engage in efficiency upgrades in cities from Los Angeles to Washington D.C. And commercial benchmarking laws in cities like New York and San Francisco will soon make energy efficiency even more of a differentiator in commercial real estate markets.

The Better Buildings Challenge follows shortly after the announcement of a major zero energy building initiative by the General Services Administration, the federal government’s real estate manager. GSA will launch zero energy retrofits of 30 federal buildings around the United States over the next few years. The federal government has long adopted a “lead by example” approach to efficiency in commercial buildings, and these two major federal energy efficiency initiatives will help accelerate investment in efficiency not only in the public sector, but also in the private sector.