The New Year is off to a good start for energy efficiency financing:
Sustainable Development Capital, a London-based corporate finance and advisory business specializing in sustainable infrastructure assets and services including energy, water, waste, transport, healthcare and education, received a capital infusion from First Eastern, a Hong Kong-based investment group (Download Press release). Over the past few years, SDC has been trying to work out a sound business model to profit from energy efficiency retrofits, and has been moderately successful in pulling off deals. I strongly believe there is a massive market opportunity in China, where even buildings built as recent as 5 years ago can be improved substantially. If the speed in getting properties to market is paramount, building quality may suffer. So basic building optimization (including commissioning of the existing equipment) is a good start, followed by more rigorous retrofits. A (slightly) dated presentation here (Download APG presentation retrofit fund) gives a preview of an institutional investors' view on investment opportunities in retrofits of (commercial) buildings in China (credits to Michael Friedman).
In the US, it seems like PACE is finally taking off. In this recent article in the Huffington Post, Scott Henderson, Finance Director of the buildings program of the CCI/C40, lays out the fundamental challenges in financing energy efficiency retrofits, and, more importantly, the solutions to these problems. Scott is arguably the most knowledgeable person in this field, and his work has been instrumental in many business models that have popped up to profit from the potential of energy efficiency (including the model mentioned above). Scott visited Amsterdam last week, after a C40/CCI meeting on financing infrastructure projects in Basel and it was good to hear what's happening around the world. Australia seems to be the first (again) to have tax-lien financing up and running: the Sustainable Melbourne Fund and Low Carbon Australia are two parties offering low-cost financing for energy efficiency projects, with the possibility of tying a municupal tax lien on a property to the interest and principal repayment. If financing were to be a barrier (I believe it is, but not for the top of the market, rather for the smaller, private investors), this should resolve the market efficiency and lead to many more existing building retrofits.
At a large conference in Istanbul last week, the "International Green Building Summit," I learned more about what happens in green building financing around the world. Romania, of all places, has succeeded in setting up a "green mortgage," backed by the national central bank (for what it's worth...). This mortgage incorporates the lower outgoings for energy, allowing for a higher debt/income ratio, and accounts for the more stable (or even higher) value of energy-efficient homes, allowing for a higher loan-to-value ratio. Now that's forward looking (and ultimately rational, if you believe that energy efficiency is capitalized in home prices, which has been shown previously for a large sample of homes in Europe (see this paper). I was also inspired by a presentation of the Department of Energy's Roland Pfisser, who was previously at PG&E (one of the largest utilities in the US), and has taken an evidence-based approach towards implementing energy efficiency solutions in buildings. Interestingly, DOE now throws in some bait to challenge the industry: $5mln for the manufacturer that can come up with rooftop HVAC systems that at 50% (!) more efficient than current market standards (Carrier and another vendor both came up with models that are price-competitive), $5mln. for the manufacturer that comes up with 50% more efficient lighting, keeping constant lighting quality (my Dutch friends, Philips, won this contest, not surprisingly). These examples reinforce my believe that the market can innovate its way out of the current challenges, provided that demand is really there…. The Massachusetts Green Retrofit Program is another example of a (local) government initiative that is very much market-oriented, and yet so simple.
Yes: it's about benchmarking! That's also what many cities and countries across the world have introduced over the past few years. (NABERS in Australia, the EPCs in Europe, etc). I'm impressed by the work in New York, where all buildings larger than 50,000sq.ft. have to report on (standardized) energy consumption through the Energy Star portfolio manager. Last year's data will remain a well-kept secret (even to academics, other than a selected few at NYU and Penn, shame on you NY!), but this year's data will be made public. Yes, naming and shaming. Full transparency in the energy performance of all (large) buildings should, presumably, inform the market, and trigger landlords to improve the performance of their properties. I made a compilation of some of the slides (credits to the presenters...)