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

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?

The first real estate and energy investment mashup is here!

The media and web worlds gave us the term ‘mashup’ to describe the combining of different files, songs and other applications into a new piece of work. Now that definition can be extended to a new domain entirely — real estate and energy investing.

Hunt Power has joined forces with TIAA-CREF, John Hancock Insurance and others to create two energy infrastructure companies that are structured as real estate investment trusts.  Initial estimates are that the companies are set to  invest up to $2.1 billion.

Yes, that’s right — electric and gas infrastructure REITS!

The new REITS will provide capital to municipalities, co-ops, utilities and others needing to install electricity and gas infrastructure.  Their initial footprint focuses on Texas, the Great Plains and the desert Southwest regions. In comments to GlobeSt. com, Hunt’s CEO explained how the companies will operate similarly to hospitality REITS:

“they’ll  develop and/or own assets and lease them to regional operators. In some cases, the REITs will acquire distribution and transmission assets from operators, who will then lease back the assets.”

The arrival of these energy infrastructure REITs caught our attention because we’ve been digging into the climate change investment reports being circulated by Goldman Sach’s (GS) and others. We are starting to see early signals of the capital markets trying to assign risk and value based upon a company’s presence in a high-emissions or low-emissions sector.

We are tracking these developments, since our commercial building landlord and lender clients will have to understand whether it makes sense and if so, how to incorporate tenant emissions exposure within their underwriting of major commercial leases.

If you’ve been following that particular strand, then you’ll be able to stay with my ’roundabout’ chain of explanations, which will tie into the significant market opportunity for firms such as the new energy infrastructure REITS.

In a 2009 report titled , “Change is Coming: A framework for climate change - a defining issue for the 21st century”, GS laid out their analysis of how competitive dynamics in several market sectors could change significantly, along the lines of those sectors’ higher or lower emissions exposure.

In a scenario assigning a US$60/t carbon price, they estimate that 15% of the total cash flows generated within the sectors might be transferred from less carbon efficient to more carbon efficient sectors.

90% of those outgoing cash flows transferred would come from the most carbon intensive industries, which includes electric and non-electric utilities. You can click on the graphic below from their report to see their breakdown of the estimated cash flows that could be lost by the utilities and a few other industries, due to emissions costs.

While there is no information available on how Hunt Power evaluates carbon emissions opportunity within its business model, and I’m not suggesting that you should buy into GS’ carbon pricing specifically, but if their  market views are even halfway true, there’s a ripe market for creative investment vehicles like these new infrastructure REITs, since their conventional utility sector brethren will not be in any position to deliver the kind of capital investment needed for the energy infrastructure so badly needed throughout the US.

The REITs arrival on the market also opens up the field of direct green finance and investments to more creative investment mashups that span multiple industries, but I will have to cover that in a future post. For now, we’ll be tracking Hunt’s developments with great interest as we are sure that more investors will be paying !

Troubleshooting multifamily energy efficiency finance

Yesterday I spoke on a panel put together by the California Public Utilities Commission (CPUC) at a  workshop investigating the barriers to and simplifiers needed for energy efficiency financing for the market rate multifamily sector.

Get mind map and video notes

Play the video to run through the highlights in ~7 minutes or download this interactive mind map to read the detailed notes at your own pace.

Synopsis - Every energy efficiency financing decision requires knowing the green building business case

Throughout the session, we drilled down into landlords and lenders problems with energy efficiency financing. It wasn’t hard to name quite a few.

The CPUC can address these issues once they understand their relative impacts on which parties. To find that out, they have to delve into the green building business case for the market rate apartment sector. That’s something that they’ve only recently focused on.

First of all, energy savings were discussed in isolation from other retrofit benefits — similar to what I observed at yesterday’s commercial building workshop, too much silo thinking.

Retrofitting apartments can translate into higher net operating income and cash flow in a variety of ways. In addition to energy savings, more durable systems last longer, need less maintenance and decrease the amount of funds going to capital expenditures over the lifetime of ownership. On top of that, effective gross income can be improved through tenant retention.

Product design received long overdue attention.  My co-panelists echoed gripes by yesterday’s commercial building panelists about the need for simplified transaction processes and lower costs.

Understanding the landlord’s needs and requirements as a customer (and not a “ratepayer”) will help the regulators to bring financial products to market that can help property owners become more proactive about initiating deeper retrofits.

The notes and video contain more details on the topics covered. It was clear that any future products would be greatly helped by understanding the total value-creation picture (yes, systems thinking again). The green building business case helps them to quantify that and make the connection between the goals of owners and lenders as well as their own.

Tell me what you think

What green or energy efficiency finance programs are you watching these days? How well are they working in your market?  Please share your comments.

Interactive Mind Map - Energy Efficiency Finance Barriers and Simplifiers for Commercial Buildings

Today I’m speaking at the California Public Utility Commission’s (CPUC) workshops on energy efficiency finance for the commercial, industrial and residential sectors.

This is the second of a two day event that the CPUC is using to convene stakeholders to understand their views on the “state of energy efficiency finance” and what needs to be done in order to move  it forward.

I’ll be on a panel this afternoon that focuses on energy efficiency financing for market rate multifamily properties.

I sat in on yesterday’s commercial building session and had a great time sharing perspectives on the barriers and simplifiers to commercial building energy efficiency finance.  There were excellent speakers and a spirited crowd of practitioners sharing lots of great ideas (more on those later).

Where’s The Tenant End User in the Energy Efficiency Finance System?

One observation is that, while the various barriers were talked about in great detail and the many issues that landlords have with this new kind of product was analyzed in detail, absolutely no one brought up the connection between tenants looking for green and energy efficient space and how tenant acquisition and retention motivates landlords. Revenue opportunities tend to have that effect on companies.

If the CPUC policy makers and commercial real estate industry want to make real progress on the greening of buildings, they will have to embrace a systems view of how real estate works as an entire industry all the way to the end user tenant and occupant. Treating real estate like a collection of silo’s only assures that there’ll be plenty more workshops about barriers and simplifiers for decades to come.

Gaining a deeper, updated understanding — and innovating — the relationship and roles of landlord and their tenant customers vis a vis green finance will generate massive traction in the fight to reduce building energy.

Get the download on the top energy efficiency finance barriers and simplifiers

For right now, here are my notes for download on the consensus view of the biggest actions needed to make energy efficiency financing work for commercial real estate investors, reduce building energy use and emissions. By the way, this is an interactive mind map — your browser needs a flash player to view it. Email me if it doesn’t work. I’ll send you a static pdf map with all the branches opened up so you can see the notes.

Does the mind map format work for you?

Please comment here and let me know. I’ve been sharing my teaching notes via mind maps with my Presidio graduate finance class this semester and they like it.

What do you think about energy efficiency finance?

Finally, I’d also appreciate hearing  what you think about the state of energy efficiency finance for commercial real estate and its barriers and possible simplifiers. Please pass this along and let others know here what people are saying.

Study: energy efficiency spending is up, incentives less important

Johnson Controls and IFMA are out with their latest survey on the 2010 energy efficiency spending outlook for North America, based on their survey of executives with direct oversight and control of energy budgets.

Aside from the larger conclusion that survey respondents intend to spend more in 2010 on energy efficiency than in prior years, comes a “sub-conclusion” that incentives were not as high a priority among executives as  most of us would think.

Specifically, the answer to the of ‘ how influential are government/utility incentives in the organization’s energy efficiency decisions’ was ranked as “somewhat, very, or extremely” significant by a lower percentage of respondents in the 2010 study than in prior years.

When asked about the ‘significance of greenhouse gas emission reductions on their organization’s energy efficiency decisions’, a greater number indicated that GHG emission reductions were “somewhat, very, or extremely” significant than in 2009.

From there, Johnson Controls and IFMA conclude that incentives have dropped in importance.

There are a couple of related items of note, that remain unexplained by the summary presentation notes.

- in a subsequent question of “which options will  your organization consider to pay for energy efficiency and renewable energy projects over the next 12 months“, the option of grants or tax credits were chosen by 20% answering. It was the number two most selected option. Number one, with 52% answering, was capital budgets.

- large and public organizations (read: those with more cash these days) answered as being most likely to invest in energy efficiency. The retail sector was noted as lagging in this category.

- they note that respondents’ investment criteria, 44% of which answered as being a 3.2 year payback, remains unchanged.

To be sure, this study is definitely not one in advocacy, as the unchanged 3.2 year payback represents a 31.25% return on investment, which is well beyond the returns most investments can deliver.

Also, it appears that most of the respondents were not from the investment real estate community, but mainly the corporate community. So, while its great to hear that more money will be spent on building energy efficiency, one can also see that there is still an intense  focus on the low-hanging fruit.

Even though it appears that the study was directed more towards exciting the Johnson Control customer base, it nonetheless provided some insights into current thinking on investing in energy efficiency in the corporate world. From that standpoint, it is worth a read.

For more fun — and insight, these exact questions should have been asked of institutional real estate investors and managers in a separate group, so that we could compare their answers with those responding to Johnson Controls here. I suspect that there would be quite a divergence in opinion on some of the questions.

For even more perspective, they should also be asked of lenders separately, too, about the projected spending of their borrower clients and loan portfolios on energy efficiency.

Perhaps, next year.

Happy reading!

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