Real Impact of New Energy Efficiency Funding Protocol Is Financial
Part 2 of a 3-part article on EDF's Investor Confidence Project to standardize the process of performing energy efficiency upgrades.
Although ICP protocols are full of engineering standards, its real impact is expected to be financial, as its name suggests. “It really elevates the standards of the industry overall, and creates a more sophisticated financial product, which has been an Achilles’ heel,” says Maria Fields, managing director of investor relations at Joule Assets, an energy efficiency financing company that is a member of the ICP ally network.
Developers or financiers who don’t care about the label can still use ICP protocols to guide the project without going through the paperwork to get the project certified, says Brenna Walraven, CEO of Corporate Sustainability Strategies Inc., who was involved with a BOMA committee that produced financial guidelines to go along with the ICP engineering.
From the perspective of facility managers, using the protocols without actually getting the Investor Ready Energy Efficiency label could make sense, says Ellen Franconi, a principal at Rocky Mountain Institute, in the same way that some projects meet LEED standards but don’t go through steps required for certification.
From an investor’s perspective, however, the third-party audit offers an important assurance. “Energy efficiency, generally speaking, is fairly low-risk,” says Walraven, but investors want assurance that they aren’t putting money into “scams or bad projects,” and memories are still fresh of the residential mortgage collapse in 2007 and 2008.
At the moment, “there’s gobs of money” on the sidelines, Gossett says. But he agrees that investors are wary of the “Wild West factor that exists in the absence of standards,” not wanting to get caught owning bonds based on an unreliable underlying product.
“There should be orders of magnitude more investment than there is,” Fields says, but “it will never happen if the industry stays fragmented and choppy.” In the future, instead of looking for rebates or applying for individual loans, facility managers may be able to document that they meet the ICP standards and then have access to a large pool of investment funds.
Once enough standardized building upgrades are underway, financing organizations might bundle the projects and sell them as bonds. Securitization is already happening in the field of solar energy, Fields says, and several states have set up “green banks” to make loans to projects that might not currently get commercial funding, and leverage private investment.
Fields points out that 98 percent of buildings in the United States are small or medium size. Those facilities tend to resemble each other much more than very large facilities, which are all essentially custom-made.
“A small commercial building has a very predictable set of things,” Field says, and if an inspector can walk in with an iPad and a list of 10 things to audit, the site could quickly be in line for a standardized retrofit.
ICP is part of “an ecosystem that represents the way the industry is moving,” Fields says, and the Environmental Defense Fund is “the perfect kind of entity to play this role.”
Value of ICP Standards
A program that sets uniform standards will be useful in Texas, which allows its thousands of local governments to create and run their own energy efficiency programs. Dub Taylor, director of the Texas State Energy Conservation Office, says that ICP, as “a repackaging of some standards out there,” meets state recommendations and has been adopted by many localities.
Many energy retrofits could take 10 years or more to pay off, particularly in Texas, where energy costs are low. But when the program spreads to more localities in the state, Taylor says, firms with buildings in many cities may set up uniform upgrades to their buildings using ICP standards that their local governments recognize.
ICP can also be a valuable part of property-assessed clean energy, or PACE, programs, in which upgrades are financed and repaid via a lien on the property, meaning that commercial landlords no longer need to worry about making back their investment in their short window to own a particular building. That assurance of payback also results in lower interest rates, and the upgrade can increase the building’s resale value and rental rates.
Mansoor Ghori, CEO of Petros Partners, a private lender that is in the ICP ally network, followed ICP standards for internal purposes when funding a PACE project to upgrade Congregation Beth Israel in Austin, Texas. The synagogue is now saving $35,000 a year because of the $450,000 project, he says, and the PACE funding will be paid over 20 years.
Ghori’s firm does only PACE projects, but he says ICP will be “a good thing for everyone involved in the food chain of clean energy in general.” For now, he says, his firm does its own due diligence on every project, but he looks forward to the day when the ICP label will be sufficient by itself.
Two years ago, SCIenergy used ICP standards for the second phase of an office condominium retrofit in New York City, and being compliant made the funding easier to line up. The project is expected to pay for itself in seven years, but the debt partner is being repaid on a 10-year schedule to ensure cash flow.
The project is performing almost exactly to projections “without spending a penny of landlord capital,” Gossett says. “It’s off-the-shelf technology, but we developed it the right way and funded it the right way.”
ICP “is not making a difference yet,” Gossett says. “It’s going to, though.” He drew a parallel with ISO standards, which require clear documentation but not an actual assurance that the underlying process works. The transparency involved, and the knowledge that third parties will be watching, encourages better work.
Making an Impact
Not everyone is convinced of the slam-dunk promise of ICP. Verification standards have been around for years, says Douglas Nordham, an engineering associate principal at Arup, another member of the ICP ally network, but ICP focuses more on financing. “The fact that it’s a standard and everyone’s using it the same way is probably the main benefit here,” he says.
But, Nordham continues, financing is not generally the main problem for efficiency upgrades. Big building-controls firms can get their own capital, and projects that can’t are “a subset of the entire universe that is relatively small.” For a project of under $1 million, he says, the cost of evaluating the specific site is significant, and he doesn’t expect ICP to change that — someone will still have to analyze an individual building’s data.
Although Nordham likes the standards, “I’m somewhat skeptical of the premise that ICP is going to cure all the ills of the financial side.” He says he recently worked with a major bank that wanted to invest $100 million in energy efficiency but couldn’t find projects that needed outside funding. “There are a lot of different ways to finance projects,” he says, and two interests do not exactly align: The building owner cares most about the performance of the upgrade, but the investor cares most about being repaid.
For securitization, a uniform set of standards is “necessary but not sufficient” says Curtis Probst, who leads sustainable finance practice at the Rocky Mountain Institute. ICP is “an important step on the way to securitization, but it’s one step.” There will need to be a large pipeline of similar projects in order to package and sell bonds, and in that field, building efficiency currently lags behind solar. But, he says, “it’s a case of when, not if.” Like solar, he says, robust markets may develop in some regions but not others, depending on building stock, energy costs, and other factors.
On a PACE project, in which the building owner assumes the risk, meeting the standards internally might be enough, Probst says. An outside investor is far more likely to need full documentation. And large lenders may develop their own internal standards that would be higher, but going forward, Probst says, “having a standard is a huge benefit over having no standard.”
David Lewellen is a freelance writer who covers facility issues.
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