Energy Efficiency Financing ‘Has $150bn Potential’; Report Compares Commercial Opt-Out Programs

Energy efficiency financing has the potential to jump from $20 billion to $150 billion over the next ten years, according to a report by Capital-E.

Energy Efficiency Financing: Models and Strategies says that investment at this level would save U.S. businesses and households $200 billion a year and create more than one million full time jobs within a decade. Such investment would be one of the most cost-effective ways of reducing energy costs for businesses and households while improving national security and helping to slow the impacts of climate change, Capital-E said.

The report warns, however, that energy efficiency financing now stands at less than a fifth of its cost-effective potential, even after decades of public and private support.

Capital-E said the critical step to close this gap is to make EE financing a mainstream financial asset class with a high degree of standardization, predictability and scale. It said that the vast majority of EE opportunities remain unfinanced because of split incentives, insufficient credit and limited data, among other reasons.

The 2009 stimulus package ploughed billions into energy efficiency, but this funding will peak by the end of this year and disappear completely in 2013, the report said. Meanwhile property assessed clean energy (PACE) programs in many states have been largely suspended for the residential sector due to objections by the Federal Housing finance Agency, among others.

Capital E says it has been working closely with 30 private, public and NGO partners to identify and co-develop the most promising mechanisms to scale efficiency financing over the next three to five years. As part of the May, 2010 annual ACEEE Energy Efficiency Finance Forum, Capital E ran a meeting of 25 leaders from banks, regulatory agencies, project developers and industry organizations to co-design new mechanisms for energy efficiency financing.

This collaboration identified 11 models and seven strategies, both existing and emerging, for applying energy efficiency to the residential, commercial, industrial and the federal/municipalities, universities, schools and hospitals sectors. These are:

Models

1. Energy Savings Performance Contracting (ESPC)
2. Energy Services Agreements
3. State/Municipal Loan Programs
4. Sustainable Energy Utilities
5. Carbon Market Funding
6. Mortgage-Backed EE Financing
7. Preferential Terms for Green/EE Buildings
8. Utility On-bill Financing
9. Property Assessed Clean Energy (PACE) – Commercial
10. Property Assessed Clean Energy (PACE) – Residential
11. Unsecured Consumer Loans

Strategies

1. Intermediary Aggregated Scale Purchasing
2. Revolving Loan Fund
3. Preferential Loans
4. Risk Reallocation
5. E-Loan
6. Point of Purchase Interest Rate Buy-down
7. Re-Align Incentive Structure

Capital-E said it has also identified new financing mechanisms that could potentially drive additional billions of dollars in energy efficiency financing within a three to five year time frame. These mechanisms, which it is co-developing with private and public stakeholders, include:

• Green Ginnie Mortgage Backed Securities (MBS)
• Making Energy Efficiency a Standardized Asset Class
• CO2 to Energy Efficiency (EE)

The report was developed in association with the American Council for an Energy-Efficient Economy (ACEEE), Appraisal Institute, Citigroup, JPMorgan Chase and the National Association of State Energy Officials (NASEO).

In related news, ACEEE has released a research report on state efficiency programs.

Follow the Leaders: Improving Large Customer Self-Direct Programs says that to fund energy efficiency programs, states usually rely on a cost recovery mechanism, with fees often appearing on a customer’s bill. Most states, at the urging of industrial and large commercial customers, have also included an option for these customers to either opt out of paying the cost recovery mechanism fees or to “self-direct” the fees into internal energy efficiency investments.

ACEEE’s research found that out of the 41 states that have CRMs, 23 states have an opt-out or self-direct provision in place. This means that not all energy customers pay for or use energy-efficiency programs in the same way, ACEEE says.

The report says that a few industrial self-direct programs are leading the way in maximizing cost-effective energy efficiency in their target sectors. Well-administered programs include those run by Xcel Energy, Puget Sound Energy, and Rocky Mountain Power, the report said

But ACEEE said that very few of today’s self-drect programs could be described as exemplary.

On the other hand, senior policy analyst Anna Chittum says, self-direct programs are undoubtedly better than opt-out provisions.

According to Chittum, self-direct programs should be able to answer the question: “Is this program yielding the same or better energy efficiency savings than would have been acquired with a traditional CRM-funded efficiency program?” The survey found that few self-direct programs, and no opt-out programs, could adequately answer this question. The programs often don’t collect meaningful data, put energy-savings goals in place, or use cost-effectiveness tests, ACEEE said.