What’s the right way to grow energy efficiency finance?

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In the last issue of Pacesetter, I talked about how we need to identify the right underwriting behaviors that need to accompany our evaluation of green properties.  Pacesetter Nancy Anderson, Executive Director of the Sallan Foundation, replied with a link to a panel session she’d moderated that focused on the same issue, but from a variety of perspectives.

Called Reimagining the Metropolis — No Joke, the session featured three panelists with different areas of energy efficiency finance expertise sharing their perspective on the approaches they saw as being critical for growing a liquid market for energy efficiency financial products and services.

Which idea will have the most impact?

The three big ideas boiled down to:

More data and best practices for lenders - Sam Marks, from Deutsche Bank Americas Foundation, talked about how their Living Cities project was in the process of studying and aggregating  benchmarking data on housing energy efficiency performance. That benchmarking data, should cover 12,000 multifamily units. It will eventually identify best practices for lenders.

More data, particularly for the multifamily market is desperately needed. I have to add, though, that any such project should ultimately focus on satisfying the needs of appraisers, since any regulated financial institution ultimately relies on an appraisal in order to estimate how much they will lend on the property.

Teach lenders how to incorporate energy efficiency within underwriting - The Community Preservation Corporation’s Sadie McKeown showed how underwriting for energy efficiency finance is not as hard as it seems, plus pointed how how scarce incentives really are. Their approach included training their own staff in the benchmarking process.

Both of these comments are very close to what we cover in our Competitive Edge Green Finance Workshops, where we teach how to develop a green building business case. I also think that, given the level of  inefficiency “trapped” in so many of our buildings, the upside in energy efficiency is actually in retrofitting the building and obtaining better performance and higher value, as opposed to cashing in incentives.

Tougher regulations - Attorney Lawrence Schnapf talked about a pathway of tougher policy and regulation, such as tougher building codes and ordinances, which will simply force investors and financiers to deal with lower energy assets, “like it or not”.

This scenario has already been presumed by so many green building advocates, that you might be tempted to skip it, but don’t. It’s still significant because you cannot simply assume one particular market action in isolation. My investment and lending experience has shown me that most surprises come in two’s or three’s. That is, you have to be able to think about the impact of tougher building energy regulations happening at the same time as other tough scenarios, such as a long-term lack of credit and/or even greater water shortages.

Or, all of the above

Actually, the above approaches should not be viewed as an “either / or” type of choice. Based upon our view of the market, all of the above will have to be interacting together for a sufficient duration, in order for us to see a liquid, fairly-priced market for energy efficiency financial products supporting U.S. real estate.

Your thoughts?