Galley Eco Capital helps Helsinki to reduce carbon emissions

San Francisco-based sustainable finance consultancy Galley Eco Capital was announced as part of a winning team for the redevelopment of the Jatkasaari district in Helsinki, Finland, which will be an urban zone with low or no carbon emissions.

Sitra, the innovation agency of the Finnish government, revealed today that the winning team for their “Low2No” development design competition was made up of Arup, Saurbruch Hutton, Experientia and Galley Eco Capital. The multi-national team was selected out of 74 initial entries, for their “C_life – City as Living Factory of Ecology” project.

Galley Eco Capital  brings their unique perspective as an international sustainable finance consultancy with a focus on creating green and socially responsible finance and investment programs.  Galley Eco Capital’s work complemented the architectural and consumer behavioral aspects of Jatkasaari by contributing new ways for finance to transform both the district and Helsinki market, to positively impact people’s lives.

The competition jury stated that the innovative monetary/economic model presented contributed significantly to the team’s clear top-down as well as a bottom-up strategy for leveraging the Jätkäsaari opportunity, in the spirit of the Low2No challenge.

Sustainable finance for Jatkasaari and Helsinki

While other team members devised the design, energy and consumer behavioral strategies for the project, Galley Eco Capital’s responsibility was to create an economic and funding model, which would support the project by integrating traditional and socially-responsible capital sources and products at a regional market level and set the right incentives to achieve maximum effect in terms of emissions reduction, energy efficiency and resource savings.

Starting with a thorough analysis of Sitra’s environmental and socially-responsible real estate objectives, the Finnish climate change agenda, and Finland’s participation within the global environmental finance markets, Galley Eco Capital developed ways to create a reliable pipeline of green mortgage, environmental, energy and carbon finance capital for Jatkasaari.

These products would all seamlessly connect with the traditional Finnish financial network to form a holistic financial system. Delicate synthesis was also required to create a flexible market structure, which would monetize available sustainability benefits while adequately funding the Jatkasaari project throughout construction and operation.

About Galley Eco Capital

Using their expertise in designing and implementing sustainable finance and investment programs, Galley Eco Capital’s strategies help investors, lenders and regional governments to bridge traditional with green finance and efficiently monetize the available sustainability benefits embedded within their real estate and renewable energy initiatives.

Galley Eco Capital’s unique approach assures more successful solutions through the application of interaction design principles, driven by culturally-aware, user-centric perspectives and underpinned by long years of international real estate and capital markets experience.

The strategies help drive positive change by:

• developing debt and equity financing structures based upon the value-add contributed by sustainability and energy efficiency,
• synthesizing traditional with emerging green financial products into holistic financial solutions,
• sourcing and structuring incentives and government subsidies to offset program costs,
• designing and monitoring sustainable investment performance measurement to assure positive program impact

Over the next 6 years, the Jatkasaari district will be designed, constructed and opened to the public. From there, the sustainable ideals that govern its day-to-day life will act as a model and example for the rest of Helsinki, Finland and the world. Through Galley Eco Capital, San Francisco will be a vital part of this journey.

For more information on the Low2No project, or on Galley Eco Capital, contact Lisa Michelle Galley, Managing Principal, at +1 415 655 6668, or via email at “lisa at galleyecocapital dot com”.

So Why Aren’t Commercial Banks Lending on Energy Efficiency?

With all the talk about the strong business case of energy efficiency retrofits, why aren’t we seeing private sector commercial banks committing significant capital to the energy efficiency retrofits of buildings?

UNEP-FI thinks that they know the reasons why. Energy efficiency (EE) has been widely documented as the ultimate low-hanging fruit — yet commercial banks are leaving it dying on the vine. The famous McKinsey report, for example, indicates that energy efficiency should generate returns close to 17 percent. In the US, McKinsey calculated that  EE could deliver close to 60% of all cost-effective emissions reductions in a scenario aiming for a 60-80% cut in emissions by 2050. The size of the untapped US energy service market is estimated at $160 billion. UNEP-FI has just published a report of its findings on this and related questions, based upon a survey conducted last year with its financial institution (FI) members. So you’ll get a more global view of bank perspectives on the topic, as opposed to just domestic US. Download report –>energy_efficiency-unep-fi (11) The responding FI’s attributed their lack of action on EE to problems with capital efficiency — how much it costs internally to lend on the often many small projects which typify energy efficiency measures. That’s typically a very expensive business process for large institutions, making them shy away from such business strategies. Then there are the knotty, interrelated problems of adequately identifying, mitigating and pricing the credit risks associated with the energy efficiency savings, which are more serious problems, in my view — and definitely worthy of a fuller discussion on a different blog post in the future. Here are explanatory excerpts from the report:

• Scale – individual projects are considered to be too small to be commercially ‘interesting’ for mainstream private-sector FIs…

• The “asset” problem – energy savings, which underpin the usual ESCO business proposition, are not a conventional ‘asset’ against which a bank will lend. In other words, cash-flow from energy savings is not a familiar form of revenue or collateral to back lending (although clearly any additional equipment provided would be an asset). This means that FIs, particularly local FIs, need to become familiar with the nature, as well as the performance and credit risks of energy savings financed projects in order to be comfortable with providing debt. Despite not being uniformly available, partial-risk loan guarantees aimed at reducing these risks and facilitating finance, particularly in developing countries, represent an effective approach.

• Lack of loan/credit guarantee mechanisms – linked to the above, loan/credit guarantee mechanisms can play a key role in facilitating finance, particularly for smaller scale ESCOs. Experience from some actors, however, indicates that the guarantee schemes that exist today are for larger amounts and involve a “tedious and long process for approval”. Developing lean credit guarantee mechanisms tailored to smaller-scale projects would help address this deterrent to energy efficiency lending activities.

At the end of the day, this report calls for more product development and sponsor education: banks should work to resolve the technical EE credit quandries along with raising EE to a board level action item.  Board member education about the untapped market for energy efficiency for FI’s was strongly urged. That said, my view is that the issues regarding reliably assessing credit risk of EE savings and the development of adequate credit guarantee mechanisms for EE retrofit projects are two significant, hard-boiled issues that can’t be whisked away.

Take a look at the report and let us know here if you see it differently.

Talkback on Transwestern’s Energy Efficiency Program

I didn’t want this week to end without acknowledging a couple of comments from Green Journey readers on last week’s post about Transwestern’s energy efficiency retrofit program.

Turns out that there were some who had differing opinions than I on whether Transwestern’s efforts were worthy of the industry pacesetter designation that we’re so fond of around here. They backed up their opinions with some fair points worth noting. I like authentic exchange, so I’m printing their comments here.

Alex Brennan, Cannon Equities wrote:

I did want to point out one objection, and that is your equation of low first cost to short payback.

The issue Transwestern (and most other building owners) have right now is that they have to operate within a pre-established budget.  Right now owners are seeing falling revenue as tenants vacate, downsize, or demand rent concessions, which leaves less money for capital improvements.  Because of this lack of liquid capital, they are targeting the low cost points.  Often times these low cost points do not provide ANY tangible increase to NOI, and therefor have the longest payback possible.

Often times the “dogs” that need the most work done (and thus the most upfront capital) will realize savings that far exceed the better run buildings, giving these improvements a shorter payback.  The problem is, the first costs (I know most LEED consultants hate to consider first costs, but it is a real and very valid concern for those of us having to come up with the cash within tightening budgets) are prohibitive in these scenarios.  One of the better options if this is the situation is to go to Pay on Performance type contracts and let the savings pay for the improvements over time (thus eliminating or reducing the first cost concern). I wonder if Transwestern considered this type of contracting before deciding to forgo the dogs?

Paul Maenner, JMW Development wrote:

You are slightly (but not by much) unfair to the guys at Transwestern.  At the end of the day, if sustainability initiatives don’t pencil, most developer/investors aren’t likely to adopt.  Keep in mind, when we attend conferences like this, the crowd is mostly self-selecting, all usually singing from the same hymnal.  We all think/believe that we ‘get it’…

With all of this said, the Transwestern guys are hard-boiled, old-school real estate types who are seeing the value (MAI speak) of sustainability.  That they have come this far is admirable and impressive.  I think you could classify them as Pacesetters in that they have come to their conclusions based on solid, no-nonsense, practical analysis and implementation.

So Now It’s My Turn

Ok, guys, I see your points — and they are fair. My comments about Transwestern were driven by them explicitly telling the ULI audience that they didn’t want to be leaders [at energy efficiency retrofitting], which was frankly disappointing — commercial real estate, particularly value-add investing with its famous short-term horizon, needs lots of leadership around energy efficiency right now. Add to that the impression I got, that they seemed intensely focused on fulfilling the LEED-Silver checklist, but not particularly able to talk about sustainability efforts in any dimensions beyond that.

That said, they are in fact still ahead of the overwhelming majority of commercial real estate landlords when it comes to successfully applying portfolio wide energy efficiency programming, and that we would all be in a better place on energy efficiency if most landlords would just take the good advice they were dishing out at ULI last week.

Alex and Paul are right to bring up the realities of today’s value-added landlord and manager. And I think Green Journey readers like you should keep writing us to present that pragmatic perspective as they see fit.

Thanks to both of you for contributing.

Sonoma County Funds First AB 811 Loan

Last night, Sonoma County sent us some good news that we are happy to share — it has funded its first clean energy loan secured by a lien on property taxes.  As we have posted before, the Sonoma County Energy Independence Program is California’s first county wide energy efficiency financing district, authorized by AB 811.

The loan of $25,500 went to homeowners and paid for a 5 kilowatt photovoltaic system, net of an $8,200 California Solar Initiative rebate, and 30% tax credit on the remaining system cost.  What’s more they report in their press release (download here-> sceip-dekay-release (1)) that there is already $6 million worth of applications for more loans from the programs.

During the ULI Developing Green Conference last week, there was much buzz about the power of energy efficiency financing districts as being a true game changer for energy efficiency and carbon emissions reduction.  I’ve included one of my slides discussing it in my presentation on energy efficiency financing. ULI drew its typical smart crowd, who talked seriously about the critical milestones that would affect the success of this funding mechanism:

-     The additional property tax liens created by these loans might disturb some commercial real estate lenders who might see them as a threat to the priority of their loan.

Several folks felt that lenders might become more relaxed about this when they compared the actual loan size to their own mortgage loans (very small), as well as the fact that the loan might accomplish energy efficiency retrofits which upgrade the property – and possibly even its cash flow and value. Note that Sonoma County’s program tells commercial property owners to get the approval of their lenders before applying for their loans.

-    We’re all still waiting to see that the bond markets will buy paper based on these types of loans, their terms, pricing and conditions. That acceptance is needed to bring increased secondary market liquidity to these funding mechanisms. Without it, these size programs will remain too limited to have much environmental impact and potentially just wither on the vine.

Get to Know One Block Off the Grid

Of course, no innovative program can exist without attracting smart folks who can commercialize it and ramp up its scale   We were just recently contacted by  One Block Off the Grid, which essentially runs a Costco for solar shoppers. Consumers join them in towns where they’ve set up shop, joining a big pool of like-minded consumers they’ve organized – to be able to bulk buy solar systems and share the discounts. Organizing and scaling up around energy efficiency loans is very impressive. The fact that they showed us some love yesterday warmed our hearts as well. We’re keeping an eye on them and hope to report more good things on their progress.

So Can Easy Green Finance Affect Home Pricing?

Homebuilders and homeowners should think for a second –> what does it mean for home prices in those areas where homeowners have direct access to easy credit for clean energy systems, energy efficiency retrofits, not to mention some pretty good rebates and tax credits?

Do you think that easy access to this type of green financing (and the benefits of the retrofits that it enables) makes it harder for other property owners to sell their unretrofitted properties at market rates? Will more homebuilders have to build green homes to compete?

Yes, AB 811’s gonna keep things interesting — and good — for a while.

$100 Million Energy Efficiency & Water Conservation Loan Program for Sonoma County

The Sonoma County Board of Supervisors and Water Agency will kick off a new $100 million energy efficiency and water conservation loan program, called the “Sonoma County Energy Independence Program”.

The program is one of the early fruits of the innovative AB 811, which provide green finance via the creation of energy efficiency financing districts - something that we’re quite passionate about.

FACT: Sonoma County is the very first public body in California using AB 811 to create an energy efficiency and water conservation financing program for the entire county.

AB 811 plays a key role here (we’ve posted about it before, here and here) because it allows California counties and cities to form “contractual assessment programs” to provide loans for the installation of solar panels and other energy efficiency improvements to property owners. The loans are repaid via an assessment on the owner’s property tax bills over time — up to 20 years.

Since these loans facilitate energy reduction and with that greenhouse gas reductions across the entire jurisdiction, AB 811 is a key policy tool that cities and counties can use to comply with climate change commitments required of them.

Add to that the green jobs bonus –> they also hope that funding $100 million in loans over the next few years will translate into a big economic boost to Sonoma County’s green building industry.

Energy Efficiency Financing Districts - Pro’s & “Issues to Watch”

Pro’s

• Helps cities and counties directly reduce greenhouse gas emissions in their jurisdictions.
• Low capital, relatively “painless” way for property owners to pay for upgrades to obtain desired energy reductions and water conservation on their properties.
• Very competitive source of capital: Sonoma County, for example, may charge 400 bps over like term US Treasuries + 50 bps. A full 20 year term would result in an all-in interest rate of 7.5-8 percent, which is not bad compared to typical commercial banking rates for the similar improvements.
• Actual credit terms for property owners are easier than traditional bank debt: no credit checks or income requirements are needed to qualify for the loans.
• Green jobs bonus –> Sonoma County hopes that $100 million in loans over the next few years will translate into a big economic boost to Sonoma County’s green building industry.

Issues to Watch

• No one knows for sure what the true loan volume will be. Sonoma County and water agency officials are reporting that earlier surveys of property owners indicated a high level of interest in this program, so they are expecting brisk business.
• “Warehousing” and bond market risk: Sonoma County is funding initial loans and costs out of pocket. It is relying on the bond market to become the eventual source of capital for follow on loans. The success of their program is tied to achieving bond market at rates that are feasible given the lending rates to the property owners. The bond market has no experience with these types of loans, so their eventual pricing remains “open”. If the bond market demands much higher pricing for these loans than projected when original loans were funded (meaning that it doesn’t like these deals), that would make a bond offering unsuccessful, forcing the County to hold these loans on its own books and restricting capital meant for other obligations.
• Already overleveraged property owners can possibly get further into debt, due to the easy credit terms of these loans.
• No one knows if the total amount of these programs is really enough to achieve the required emissions reduction targets.

Despite some of the open issues, this type of program is still, in our view, quite innovative. Given the a) generally tough state of traditional finance markets, b) the need to use financial tools to reduce energy, water and greenhouse gas emissions as well as c) the easier credit terms the property owner could obtain with county and water district funds anyway — this type of green financing is not only timely but compelling.

Congratulations and good luck, Sonoma County!

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