Navigant Research Blog

Investors Search for Returns from Energy Efficiency

— March 9, 2015

The U.S. Federal Reserve is poised to raise interest rates this year, ending an unprecedented period of prolonged low rates. Though the suppression of interest rates has cushioned the effects of a severely damaged economy, it has also forced investors to search for higher yields. With bond yields so low, money has been flowing into different and sometimes new assets. While energy-efficiency improvements can generate a strong return on investment, the investment has generally only been made by building owners (or, in some markets, energy service companies). The unique investment environment created by monetary policy seems to be facilitating a broader financing of energy-efficiency improvements. However, it is unclear if a successful model can be established in time to survive a return to historically normal interest rates.

Financing Energy Efficiency

New models of financing energy-efficiency improvements demonstrate the flow of money into the space. The general model is for investors to finance equipment upgrades, commissioning, and the installation of advanced controls. Then, the savings in operating costs for the building owner are used to compensate the investors. Building owners reap the cost savings without capital investment, while investors get the returns. An interesting new twist on this model is Alodyne, which focuses exclusively on boilers. In the residential market, the expanding opportunity to lease solar panels represents investors trying to capitalize on renewable energy generation in much the same way.

Social Responsibility

Financially, energy-efficiency investments have demonstrated strong returns that, for the most part, are uncorrelated with overall market gyrations. Outside of money, energy-efficiency investment has many benefits. Lower electricity demand can strengthen the electrical grid and reduce carbon emissions. Unfortunately, doing well by doing good may leave investors doing not so well. The Credit Suisse Global Investment Returns Yearbook 2015 examined the performance of sin stocks, based on companies involved in tobacco, alcoholic beverages, gaming, and defense/aerospace industries, and found them to have outperformed socially responsible portfolios over the past 15 years. Indeed, investments in vice, namely alcohol and tobacco, have outperformed all other industries since 1900. If normalized monetary policy does create an environment less conducive for energy-efficiency investors, improving building performance may return to being an area only of interest to building owners.

 

Energy Efficiency: Overcoming Financing Hurdles

— March 4, 2015

With little hope for meaningful near-term legislative action to drive national shifts in energy and resource consumption to tackle climate change, energy efficiency offers an impactful avenue for climate mitigation. But the enabling technologies often require capital investment that are hard to justify in constrained corporate budgets. As a result, a growing number of major banking institutions are making new commitments to financing projects with direct climate impacts, including those that deliver results via energy efficiency.

A recent GreenBiz article highlighted Citi’s updated climate and sustainability commitment of $100 billion to “lending, investing and facilitating” conservation and efficiency projects. Expanding on its 2007 $50 billion commitment focused on alternative and clean energy technologies, Citi has recognized the need for transparency and guidelines alongside the funding to ensure that the investments result in the kind of sustainable and climate change benefits intended. Citi, Bank of America Merrill Lynch, Crédit Agricole Corporate and Investment Banking, and JPMorgan Chase made up the drafting committee for the Green Bond Principals, which were released in January 2013.

Quality Control

Anne Paugam, CEO of the French Development Agency (AFD) recently published an article discussing the importance of transparency and accountability in Green Bond issuance as a model for success. “These instruments have all the characteristics of conventional bonds, but they are backed by investments that contribute to sustainable development or the fight against climate change … In September, the AFD issued €1 billion ($1.2 billion) in climate bonds, with one goal being to contribute to the development of concrete quality standards.”

The World Bank is also on board, and looking to shape investments that fuel sustainability, tackle climate change, and generate strong financial returns. According to a recent article in Barrons, the World Bank has sold more than $7 billion green bonds since 2008, and now officials hope to create a market for green growth bonds, starting with clients in Hong Kong and Singapore.  The World Bank says it is aiming for $225 million in bond sales in the next 6 months.

Green bonds, if offered with transparency and accountability, represent an important source of financing to expand energy efficiency investments and generate large-scale improvements that will have direct and quantifiable climate change and sustainability impacts.

 

Into the Wild, with Clean Technology

— February 2, 2015

Yosemite National Park remains among the largest preserved wild spaces in the world, but with over 4 million visitors annually, it’s becoming more and more difficult to find solitude there. This month, Yosemite was thrust into the media as the United States became aware of (and potentially a little obsessed with) two rock climbers trying successfully to free-climb the Dawn Wall, which is the most difficult route on one of Yosemite’s iconic rock faces, El Capitan.  Through mobile phones and hotspots, climbers Tommy Caldwell and Kevin Jorgeson shared and received real-time updates (including photos and streaming videos) with friends, family, and of course the media.

The climbers spent 19 days off the ground, much longer than the typical iPhone battery could ever last. So, they hauled solar powered chargers up the wall with them to power their phones, lights, cameras, computers, and other gadgets.  Their solar gear came from Goal Zero, one of a few companies that fill the niche for mobile/recreational solar power kits for athletes and travelers.

All the Mod Cons

These devices, although they lower demand for energy infrastructure in wilderness areas, are among many new technologies that are allowing visitors to enjoy modern niceties while enhancing preservation efforts in the face of record numbers of visitors.  Over the years, the park has had to develop strategies for transportation, sanitation, power, and communications that support preservation.

Another big issue is constant, full bandwidth connectivity.  On the Dawn Wall, the climbers enjoyed a relatively strong cellular connection.  But for areas without such access, the connectivity problem can be solved with a two-way satellite phone, an old technology that can now carry enough bandwidth to upload and send photos and videos.  A couple of years ago, these climbers remotely produced and shared a short film from a peak in Nepal.  Edmund Hillary would be astounded, not to say depressed.

The Waste Issue

Aside from managing new demands for connectivity and power, one of the biggest issues for the national parks and other preservation bureaus is human waste.  As the number of visitors grows, so does the need to deal with their … leftovers.  There are basically two ways to deal with human waste in areas without sewage systems.  The first is to carry it away and put it somewhere else. Most commonly, companies are contracted to collect and transport the waste, which is expensive.  In British Columbia, Bugaboo Provincial Park uses a helicopter to transport waste out of the park.

The second method, much less common, is to deal with it on site.  A park in Colorado began constructing an evaporative system for human waste in 2001, with reported successful outcomes.  Organizations like the Bill and Melinda Gates foundation have recently poured money into research for developing isolated toilet systems for rural developing communities, which could also be appropriate for public outdoor spaces (I wrote a blog about the Gates program in 2013).

Caldwell and Jorgeson stored their waste and disposed of it offsite, which is common practice for mountaineers and climbers. This system, made by a company called Metolius Gear, comes highly recommended.

In any case, the Dawn Wall ascent and the worldwide interest it generated, highlighted a keen interest in natural spaces and human activity therein.  More than ever, companies in various markets have begun to realize how their technologies can support this growing wave of outdoor enthusiasts who desire to visit these spaces in comfort and with a good connections.  That’s a good thing, because these spaces are now able to support more visitors with heightened needs while retaining the beauty that makes them so special.

 

What It Will Take To Transform Buildings in Large Cities

— January 22, 2015

From New York to Los Angeles, a growing number of the largest U.S. cities are recognizing that tackling building efficiency translates into progress toward climate resilience.  The underlying assumption is that better information leads to action.  As these cities compile baselines on commercial building energy use and educate the public on the cost-effective opportunities for energy reductions, the next question that arises is whether building owners will take action.

New York State of Mind

New York City was the first to launch a comprehensive strategy to tackle energy waste in commercial buildings through four local laws under the Greener, Greater Buildings Plan.  The complementary laws not only mandate energy benchmarking, but also require performance upgrades to meet local energy codes for citywide renovations, major retrofits in buildings over 50,000 SF to meet lighting efficiency standards, and the installation of submeters by 2025.  Mayor Bill de Blasio has continued the commitment to improving the city’s climate readiness and, in September, announced a new goal for a citywide 80% reduction in greenhouse gas emissions by 2050.   According to a recent article in The New York Times, the mayor’s office estimates that the energy efficiency advances in buildings deliver tremendous economic benefits.  According to the director of the Mayor’s Office of Recovery and Resiliency, the city spends $800 million a year to run its facilities, and energy efficiency retrofits could generate $180 million in annual savings by 2025.

Best Practices

The City Energy Project (CEP), a national initiative directed by the Institute for Market Transformation (IMT) and the Natural Resources Defense Council (NRDC), aims to help 10 cities design energy efficiency plans and share best practices for promoting change in their largest commercial buildings.   Atlanta, Boston, Chicago, Denver, Houston, Kansas City (Missouri), Los Angeles, Orlando, Philadelphia, and Salt Lake City have each joined the project, according to the CEP fact sheet. As outlined on the CEP website, in 3 to 5 years, the initiative will create transparency on building energy use and create financial vehicles for investment in energy efficiency.

New financing channels are a critical element in the mission to tackle commercial building energy efficiency.  While many of the most attainable energy efficiency improvements can be low-cost or no-cost improvements through scheduling and procedures, transformational changes require capital investment.  The challenge is how to engage building owners with financing mechanisms that enable those investments.

Opening the Purse

At the 2014 World Energy Engineering Conference, held in October in Washington, D.C., several sessions honed in on the challenge of financing energy efficiency.  The market recognizes the opportunity and benefits associated with energy efficiency, but the reality is that capital budgets are tight.  Former President Bill Clinton, the keynote speaker, declared, “Financing is holding back the energy revolution.”

In Navigant Research’s view, the challenge is two-fold.  On one hand, there is the opportunity to adjust perspectives on energy efficiency investment.  Advocacy efforts, such as the CEP, could help building owners broaden their views from a focus on payback to a longer-term view of how energy efficiency and intelligent building investments enhance the value of their facilities.  On the other hand, our research suggests that a change is underway in the performance contracting and shared savings models that have helped fuel investment in energy efficiency historically.   Watch for a new report on energy service companies and the transformation of intelligent buildings financing in 2015 as a part of our Building Innovations Service.

 

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