Seattle Trying Innovative Financing Model for Building Efficiency

6/12/13Follow @bromano

Seattle’s municipal utility and the people behind one of the world’s most-efficient commercial buildings are trying to reinvent the business model for financing so-called deep energy efficiency improvements, which could generate hundreds of billions of dollars of construction activity and energy savings, and significantly reduce greenhouse gas emissions.

Seattle City Light and the Bullitt Foundation plan to enter a first-of-its-kind contract that would quantify the energy savings of the Bullitt Center relative to a standard commercial building and pay for them more like utility energy purchases. The goal is to unlock the low-cost capital necessary to do what energy efficiency experts like to call “deep” improvements, projects—far beyond replacing the light bulbs—that can cut a building’s energy use in half.

A pilot project to begin later this year will focus on the 50,000-square-foot Bullitt Center, a new commercial office building meant to showcase and validate the latest in sustainable and efficient designs, technologies, operations, and business models. The building is already distinguished by its solar roof, composting toilets, rainwater harvesting, and other elements.

This latest experiment—which could address flaws in the model for financing deep energy efficiency improvements—”has the potential to be enormously important,” says Denis Hayes, Bullitt Foundation president and CEO. “And it will be one of the most difficult of these elements to push over the many hurdles.”

But it is exactly this sort of ambitious business model innovation that is needed to accelerate deployment of a suite of technologies—many of which are already mature—that could begin to put the brakes on runaway climate change, while also saving money and making people more comfortable.

Hayes, who coordinated the first Earth Day in 1970, says current climate change mitigation efforts amount to “little nibbles around the edges,” unequal to the magnitude of the challenge. “We need to figure out some ways to take some really big bites,” he says.

Buildings offer a full meal. They account for about 74 percent of U.S. electricity consumption, which is itself the source of a third of U.S. greenhouse gas emissions.

While not all buildings are suitable for the deep energy efficiency improvements targeted by this model—which goes by the acronym MEETS for metered energy efficiency transaction structure—backers say this is an opportunity to unlock hundreds of billions of dollars of potential investment, energy savings, and emissions reductions. Buildings accounted for more than $300 billion in U.S. electricity spending in 2010.

Meet MEETS

The concept for MEETS, as well as a key piece of technology underpinning it, is being developed by a Portland company called Energy Resource Management (EnergyRM). It’s headed by Rob Harmon, who a decade ago helped create another novel transaction structure that is at the heart of the renewable energy market: the retail renewable energy credit (REC), which allows the environmental attributes of a unit of renewable power to be tracked and traded separately from the electricity itself.

Harmon

“What I see now, and what I saw more than a decade ago with RECs, was a broken transaction structure, where you couldn’t connect willing buyers and sellers,” Harmon says.

To understand what’s broken about the current market for financing energy efficiency, it’s helpful to review some generalized motivations—or lack thereof—of three key players:

The building owner or operator: Owners may want to upgrade the windows or install a state-of-the-art HVAC system, making their building more comfortable, cheaper to operate, and potentially more valuable. But they don’t really want to delve into the energy business, and it’s hard to justify the expense—even with a utility’s up-front incentives and government tax breaks to defray capital costs—when they can rent out the building as it is. Payback periods may be too long, and financing is scarce. And anyway, owners can pass the utility costs on to the tenants. The tenants, meanwhile, may have some incentive to make efficiency upgrades to lower their bills, but often can’t address the big shared systems, and struggle to justify improving a property they don’t own and might be out of before the upgrades pay for themselves.

The utility: Most utilities have major conservation and efficiency programs. Conservation is Seattle City Light’s first-choice strategy for meeting load growth in its current long-term plan. Utility energy efficiency programs involve incentives for customers or direct capital investments in new equipment, insulation, lighting, and appliances. But once these investments are made, there’s often little follow up to ensure they are properly maintained and continue to provide the efficiency benefits for the long term, Harmon says. Moreover, efficiency improvement programs are often paid for by all ratepayers collectively, even though individual utility customers benefit from them. But perhaps the biggest problem is that energy efficiency—the idea that customers will use less of the utility’s product—runs up against an incentive that is fundamental to the utility business model: every additional kilowatt hour sold contributes to gross income. (Efforts to “decouple” utility profits from unit sales are pending or have been adopted in 25 states.)

The investor: Third-party investors who finance major energy efficiency improvements are few and far between, under the status quo. Investors are typically unwilling to lend money at the low rates and long terms necessary to make significant improvements pencil out. The borrower under the current structure—the building owner—may not be around for the full term of the loan, and may not be seen as a good credit risk.

The MEETS model attempts to reinvent the transaction structure for energy efficiency projects by better aligning the incentives of these three groups. Ultimately, it would create high-quality, quantifiable, and lasting energy efficiency improvements in buildings that, Harmon asserts, could be financed more like power generation projects because the return on the investment would come from a deep-pocketed, creditworthy utility.

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Benjamin Romano is editor of Xconomy Seattle. Email him at bromano [at] xconomy.com. Follow @bromano

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