How to make energy efficiency affordable

Energy efficiency is a tortoise in the green energy race. Not glamorous like solar, wind or smart grid, it tends to plod along in the back of the pack, attracting little media attention. But being last can be a good thing; you learn from the frontrunners.

Such is the case when it comes to financing. EE is beginning to borrow from strategies that have spurred tremendous growth for solar and other energy resources. These include customer aggregation and a kind of power purchase agreement with a twist. The idea is to make it easier for businesses to install efficient motors, chillers, pumps, lighting, windows and other improvements in today’s tough economic climate.

Consider the transaction that Metrus Energy, an EE developer and financer, announced in December with defense manufacturer BAE Systems, Siemens Industry and Bank of America. Under the deal, BAE Systems’ facility in Greenlawn, New York will install $2 million in energy efficiency with no upfront payment or capital investment.

This may sound like a traditional energy service performance contract, which also spares the customer from an upfront capital investment. But Bob Hinkle, Metrus Energy CEO, explained that the deal is quite different. Called an energy services agreement, or ESA, it is more akin to a solar power purchase agreement (SPPA), except there is no power to be purchased. What’s monetized is energy saved.

“Customers do not have to use their own capital. It is like a power purchase agreement where the customer is charged only for the output,” Hinkle said. “But in energy efficiency, the output is not a kilowatt-hour generated; it is a kilowatt-hour saved, or a therm saved.”

When it was introduced in the last decade, the SPPA helped spur a dramatic increase in solar installations, particularly among businesses and institutions, in part because it took away the need by the customer to make the hefty upfront payment for solar panels.  Also called third-party contracts, such deals typically have three main parties: the customer who receives the solar panel, the energy company that installs and maintains it, and the investor that finances the deal.

The ESA is similar except it runs about 10 years, while the SPPA typically extends to 20 years. The three parties are the customer, the energy services company and the ESA provider. The energy services company installs and maintains the efficiency equipment, which is owned and financed by the ESA provider. The customer pays the ESA a regularly scheduled bill, much like it does its electric or gas utility. But the payment is based on the cost of avoided energy ($/avoided cost of kWh) or share of energy savings.

And like an energy services performance contract (a financial mechanism that has been around since the 1970s), an ESA spares the customer from coming up with money to pay for the new equipment. The two types of contracts, however, differ significantly from there.

The performance contract works under a shared, guaranteed savings model. The energy services company guarantees a certain amount of savings from the system. If the savings do not materialize, the energy service company pays the difference. But the customer must still secure financing (although the energy services company may help them do this). In contrast, financing is an integral part of an ESA.

In addition, performance contracts are used heavily by government. Metrus Energy sees the ESA as a contract more likely to appeal to commercial and industrial energy users.

BAE Systems expects to achieve $300,000 in savings annually through its ESA. The company will install a range of energy efficiency measures to reduce electric and natural gas consumption, including heating and cooling system upgrades, high-efficiency pumps, motors and controls.

The California Clean Energy Fund (CalCEF), a $30 million venture fund that invests in clean technology, is pursuing a sophisticated use of the ESA model that involves aggregating customers into a kind of purchasing pool. Other segments of the energy industry have used the aggregation model for quite some time. For example, retail energy suppliers often pool customers to create advantage of scale. Pooled, the customers have more clout in the marketplace to achieve favorable price and terms for their power and natural gas.

Recently, a major foundation approached CalCEF because it had received an application for funds from a business chamber of commerce, the kind of group that often joins forces to purchase energy. But this time they were looking to purchase efficiency installations as a group. The foundation liked the proposal but was unable to provide funds to the chamber because it is prohibited from directly serving for-profit entities. It asked CalCEF for help.

“The solution we’ve come up with is to use our nonprofit investment to hold capital and deploy the capital with the [chamber] members,” said Paul Frankel, CalCEF managing director. “A company like Metrus can manage the project on our behalf. This is a nice way to channel a lot of foundation money into the world of private industry.”

The non-profit fund could serve as the third-party owner of the energy efficiency installations, collecting payment from the shared savings achieved by the businesses. The fund could then recycle the profits to pay for other clean technology projects.

Frankel sees the model working, not only for chambers of commerce, but also other types of business trade associations.

“Energy efficiency is where we would like to spend a lot more time and effort and money. It is highly cost effective,” he said.

However, energy efficiency suffers a handicap not shouldered by renewable energy. It is unclear if efficiency projects can take the kind of federal tax deductions that make third-party contracts particularly attractive for solar investors. In addition, efficiency is denied an accelerated depreciation schedule available to solar projects under the federal tax code.

CalCEF and others are working on persuading the federal government to rethink these policies and put efficiency on equal footing with solar energy. If that happens, watch out hare, the tortoise is coming.

Views: 19


You need to be a member of Home Energy Pros to add comments!

Join Home Energy Pros

Home Energy Pros

Home Energy Pros was founded by the developers of Home Energy Saver Pro (sponsored by the U.S. Department of Energy,) and brought to you in partnership with Home Energy magazine.

Latest Activity

Brian Clavette added a discussion to the group Energy Auditing Equipment for Sale, Trade or to Purchase

FLIR i-7 thermal imaging camera

Hi,I have a very lightly used FLIR 1-7 for sale.   i-7, serial # 60101-4267.  Full hard case and…See More
2 hours ago
Don Fitchett commented on Home Energy Magazine's blog post At Home with the Internet of Annoying Things
"True, for the smart consumer, the power savings should offset the additional power usage. For the…"
4 hours ago
Michael Dunseith posted an event

BPI Exams - All at Green Jobs Training Center

March 2, 2015 at 10am to March 31, 2015 at 2pm
Green Jobs Training Center is currently providing written and field exams for all of BPI…See More
5 hours ago
Michael Dunseith posted photos
5 hours ago
Dennis Heidner commented on Home Energy Magazine's blog post At Home with the Internet of Annoying Things
"Nice article. I am an electrical engineer, creating sensors for data collection and "possibly…"
6 hours ago
Chris Hunt commented on Home Energy Magazine's blog post At Home with the Internet of Annoying Things
"Hi Alan, You correctly identified a lot of the potential issues coming with the IOT or the…"
6 hours ago
Nicole Miller joined James Sayers's group

Marketing Energy Efficiency

Sharing ideas, tools and examples of promoting energy efficiency to consumersSee More
8 hours ago
Avi Yashchin posted a video

CleanEdison: BPI Training

Avi Yashchin's former company, CleanEdison, provided education and training for those seeking clean jobs, These services included Exam Prep for Leadership in...
9 hours ago

© 2015   Created by Lawrence Berkeley National Laboratory.

Badges  |  Report an Issue  |  Terms of Service