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.
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.
Tags: Building Innovations, Energy Efficiency, Energy Efficient Buildings, Finance & Investing
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