How to Convince Wall Street to Invest in Energy Efficiency
In the depths of the Great Recession three years ago, California’s chief fiscal officer John Chiang gathered his deputies and posed a question: “Is there any way we can put capital on the ground in California to put people back to work in ways that would make sense for the long term?”
After some debate, they settled on what they called “the holy grail” – energy efficiency. Retrofit projects would employ many of the 100,000 construction workers looking for work and put money into the pockets of the state’s cash-strapped residents. But the policymakers soon hit a snag: they realized that to scale up a statewide program, they would need money – lots of it.
“As soon as we started working on this, international investors – Deutsche Bank, Goldman Sachs, Barclays, folks at that level – came in and said: ‘We have, sitting on the sidelines right now, approximately $3tn in assets that we don’t have anywhere to invest.’ We would love to put some of that on the ground in California,’” said Alan Gordon, California’s deputy controller for environmental policy, recounting the story at Greentech Media’s Avant EE conference in San Francisco.
One obstacle was the banks themselves. “All of these smaller projects – even if you’re talking about Donald Trump doing a $5m retrofit – you need 20 of those before you’ll even get Goldman Sachs or Barclays or any of those folks involved,” Gordon said. Banks untroubled by investing billions in mortgage-backed securities were wary of investing millions in energy retrofits. After all, each deal requires bankers’ time, so – from that perspective – smaller deals come with diminishing returns. And the energy efficiency industry wasn’t prepared to supply enough projects to be bundled into a bigger, bankable deal.
The story highlights a problem that policymakers around the country have grappled with for years: how to unlock the flow of cheap capital for energy-efficiency upgrades. Many of these upgrades make financial sense – saving more money, over time, than they cost, at little risk – but they require cash that many are unable or unwilling to pay in one large chunk up front.
Rebates and tax credits aren’t sufficient to break open the market. For many, the upfront costs of a new furnace or deep retrofit are still too steep. Respondents to a recent National Small Business Association survey cited cash flow as the primary barrier to investing in energy efficiency.
A multipronged approach
Efficiency advocates are trying many different approaches to solve this problem. A diverse coalition – including environmental NGOs, policymakers, building owners, contractors, utilities, and lenders – is working together to introduce new financing tools and address investor concerns, hoping to unlock what Deutsche Bank and the Rockefeller Foundation estimate to be a $279bn US market for energy-efficiency retrofits.
Meanwhile, 30 US states have passed legislation authorizing property assessed clean energy (PACE) programs, and utilities in two dozen states offer some form of on-bill repayment (OBR), or on-bill financing, programs. In each case, property owners or tenants pay for the energy efficiency improvements over time via their property taxes (in the case of PACE programs) or their monthly utility bills (in the case on OBR programs). If the property is sold, transferred or foreclosed, the repayment obligation is assumed by the new owner or tenant.
In a pilot OBR program completed last year in South Carolina, 125 low-income, rural households are each saving an average of nearly $300 annually, after loan payments – and will pocket more than $1,100 each year, on average, after they repay the loans.
The South Carolina program was staked with federal funding. But those working to promote OBR or PACE programs agree that access to private capital will determine if energy efficiency reaches its potential. Stakeholders led by the Environmental Defense Fund, collaborating under the Investor Confidence Project, have opened a market for “investment quality” building retrofit loans that can be sold to institutional investors. The group is developing protocols to define how to measure the accuracy of the predicted energy and financial project savings and verify the performance of equipment after installation is complete. The Investor Confidence Project released its first protocol, for large commercial buildings, last year.
Much of the effort involves getting stakeholders to speak the same language. To that end, the US Department of Energy this month released a so-called “energy efficiency data dictionary” that will help contractors, bankers, policymakers, software vendors, and utilities aggregate, share and use energy data.
States are demonstrating early signs of success. In March, the Pennsylvania Treasury sold 4,700 loans made through the Keystone Home Energy Loan Program to a consortium of three banks for $31.3m. On 13 August, the New York State Energy Research & Development Authority announced the sale of $24.3m in bonds to finance residential energy efficiency loans.
What’s next for California
But three years ago, in California, policymakers were tackling these challenges without the benefit of these developments. For them, the question boiled down to how these energy efficiency projects could be aggregated. As Gordon put it: “How do you make public policies that will make these various loans … similar enough that you can securitize the loans, and then sell them into the bond market? Because that’s where the money gets cheaper.”
Bankers are accustomed to packaging mortgage debt, but had yet to be persuaded that energy retrofit loans could be securitized in the same way. Gordon said three impediments prevented this from happening in California in 2010: the lack of common metrics to measure energy savings, the need for state-level certification of workers to provide assurance that installed improvements will deliver the promised energy savings and the absence of standardized loans.
Deutsche Bank, Goldman Sachs, and Barclays approached the state with the idea of a warehouse line of credit that could be used to fund energy efficiency loans. The California Assembly is scheduled to consider a bill authorizing such a program this session.
“Institutional investors would love to see this class of asset,” said Ken Locklin, a managing director at Impax Asset Management, who spoke on the same panel as Gordon at Avant EE. “They won’t reach for it; it has to be on the platter, pre-cut. But when investment banks see serious money like that in demand, they will keep working until you can give them even an inch that they can wiggle through.”
Meanwhile, California is also scheduled to launch an OBR program early next year, which will enable building owners to finance retrofits through their utility bills. Brad Copithorne, another panelist at the San Francisco conference, offered an example of a hurdle this program could overcome. His employer, the Environmental Defense Fund (EDF), rents space in a 28-story tower in San Francisco’s Financial District. The building is fully rented, with a waiting list. Even so, Copithorne said, “They could not borrow a couple of million bucks to do an energy efficiency financing. There is already a very large mortgage on that property and no bank wants to have a second lien position.”
This project is just one of many examples of the vast quantity of retrofits that California’s forthcoming investment vehicles should be able to address, but it’s clear that more is needed. The potential is certainly attractive: Even for Wall Street, $279bn is serious money.
Article by Justin Gerdes, a San Francisco Bay area-based independent journalist specializing in energy and the environment, with a focus on energy and climate policy.
photo: Rev Stan.
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