Poor project aggregation and a lack of data standardization are among the factors keeping the energy efficiency marketplace from fulfilling its potential, according to a report by the Environmental Defense Fund.
The report, Show Me the Money: Energy Efficiency Barriers and Opportunities (pdf), said that although investors stand to gain about $130 billion in annual savings from energy efficiency initiatives, a number of barriers stand in the way of those savings being realized. These include high upfront capital costs, high development costs, long payback periods, uncertainty over savings and risk, split incentives and limited capital availability.
Budgets do not tend to prioritize energy efficiency because it is not generally part of a company’s core mission, the report said. What’s more, there are few external financing products available, and most mortgage lenders prohibit commercial and industrial buildings from taking on additional debt on equipment and systems.
Industrial facilities face the additional barrier of operational interruption, because retrofitting or replacing inefficient equipment generally requires a temporary shut-down of part of the company’s operations, the report said.
EDF said that while energy service companies (ESCOs) are active in the municipal, schools and hospital sectors, a robust group of project aggregators have yet to emerge for the commercial and industrial markets. A strategy for attracting aggregators to these markets will be key for the success of energy efficiency financing, the report said. This needs to be complemented by greater awareness among property owners of energy efficiency’s value creation abilities, EDF said.
It said that investors do not have a high degree of confidence in projects’ projected energy savings, because there is no common, dependable method of collecting and assuring this data. The EDF says it is working with the engineering and financial sectors to create common measurement methodologies. It is also introducing investors to staff at the Department of Energy and the Environmental Protection Agency, who either have or can provide access to a wide range of benchmarking data.
EDF said a substantial barrier to energy efficiency upgrades in commercial buildings is the traditional owner-tenant structure, and recommended the creation of a new hybrid model of commercial building ownership. This model would include expanding DOE’s loan guarantee program under Title XVII into the commercial sector, to protect against default risk.
And the report said the development of instruments and a marketplace for resale are important to create exit opportunities for the investor, injecting liquidity into the energy efficiency marketplace.
Pictured: The report illustrates the structure of a managed energy service agreement, one type of currently available external financing strategy for efficiency projects.