Seattle Trying Innovative Financing Model for Building Efficiency

6/12/13Follow @bromano

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Investor ROI

Framing an energy efficiency contract more like a utility power purchase contract—in which a deep-pocketed, creditworthy utility is responsible for paying over 20 years rather than a building owner—will attract a new category of investor, able to put more capital to work at lower rates for longer periods of time, Harmon says. This, in turn, unlocks energy efficiency technologies—such as improvements to the building envelope and HVAC system upgrades—that are precluded by the short-term payback periods required of today’s investors and lenders.

“If you have inexpensive money for 20 years, you can get a whole lot deeper into a building than you can if you have expensive money for five years,” Harmon says.

EnergyRM is backed by Equilibrium Capital, which manages a family of sustainability-driven real asset funds tailored for institutional investors. Harmon says he has received lots of interest from large institutional investors who want to put more money to work in energy efficiency.

What sort of return might investors in deep energy efficiency expect under MEETS?

Harmon says it’s too early to discuss it, but investor returns would vary considerably from project to project.

The environmentally-focused foundation behind the Bullitt Center aims to be an open book for others considering deep energy efficiency improvements, but it may prove an awkward example on this specific question.

“This is a great building to prove the concept, but it’s not a great building to calculate a rate of return” on the MEEPA contract, Hayes says.

Hayes

The Bullitt Center was built to meet the Living Building Challenge, among the most stringent building performance standards on the planet.

With features such as computer-controlled, 4-foot-by-10-foot windows that open and close to respond to environmental conditions inside and outside the building, the center is a paragon of energy efficiency—indeed, to satisfy the Living Building Challenge it must achieve “net zero energy, waste, and water, over a minimum of 12 months of continuous occupancy.” But the building is also an integrated unit whose elements serve multiple end goals.

“It’s hard to tell whether the investments that we made in super-efficient windows are part of our day-lighting strategy or part of our fresh air strategy,” Hayes says. “… I don’t know what fraction of the overall cost of this building you can say is the incremental cost of the energy efficiency.”

Which makes it difficult to calculate the Bullitt Foundation’s potential return on investment through the MEEPA. (The calculation is further complicated by the fact that the third party in the transaction—the building operator, which pays the bills to City Light and receives “rent” for the energy efficiency improvements from the Bullitt Foundation—is a foundation subsidiary, BF Blocker. Also, the energy generation from the Bullitt Center’s high-profile solar roof is not included in this transaction for the sake of simplicity.)

Work remains to calculate the baseline to which the Bullitt Center’s actual energy usage—still unknown, since it just opened this spring—will be compared, and thereby the amount of saved energy for which the foundation will be paid by SCL. The baseline will be set by measuring energy usage of a portfolio of buildings built to Seattle’s new energy codes.

Hayes says the foundation’s models suggest an annual payment of roughly $40,000 a year for 20 years, provided, of course, that the efficiency improvements are sustained throughout the contract term. That’s far more than the building could have received in up-front energy efficiency incentives from the utility, Hayes says.

A utility spokesman says that if the pilot project is successful, the intention is to open it up the MEETS to other building owners and investors.

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

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