With our $2.6 million investment announcement we described that a portion of these proceeds would fund our CESA (Corporate Energy Services Agreement), our PPA for energy efficiency we began delivering in 2009.
For the background on how we developed our CESA let’s go back to 2007 to 2008, pre-financial market collapse, when solar power purchase agreements (PPAs) were all the rage in cleantech finance.
Cash starved tax-exempt customers with facilities in California (US Air Force, UC San Diego, etc.) were signing PPA contracts, outsourcing the ownership, maintenance and monetization of federal tax credits in exchange for “fixed” long term green electricity performance contracts. A flurry of fund raising in 2007/2008 by Sun Edison, Solar Power Partners, Tioga and Recurrent gave everyone the impression that real money was being made…
At that time retail companies, including BJ Wholesalers, North Face and Wal-Mart, signed PPAs with grand carbon reduction statements. In some cases they even projected saving real money – just consider Wal-Mart’s project in Hawaii where kWh is > $0.25/kWh. But in most cases the actual $ cost savings per year for signing these PPA’s was a non-event. Post the market collapse these corporate solar PPA deals have all but disappeared.
Corporate solar PPAs have been like teen sex. Most companies talk about how they’ve considered them, even negotiated contracts – but very few have closed the deal. Think about it – as a corporate manager, do you want to sign up your employer for a 20-year purchase contract, with kWh rate escalation, where the bulk savings are likely to occur after you’re retired? The evidence says no.
However, the PPA craze did catalyze corporate debate about outsourcing energy projects, be they solar PV or energy efficiency. While managers didn’t like a 20-year contract owned by a solar finance company with whom they’d never done business, they did like the no-cash down performance based services model. Which is where we saw the opportunity for CESA.
Energy efficiency upgrade projects often get mired in the corporate capital budgeting process, taking 1 to 2 years to get approved. Ironically some of these projects have a 1 to 2 year return on capital (causing us to wonder about the real capital efficiency of corporate investing.) Also, as utility incentives change regularly, including them in budget payback calculations for projects to be purchased 18 months from now is an imperfect science to say the least.
In early 2009 we began developing our first CESA with an existing Groom Energy customer who was frustrated with their budgeting process. Unlike their view of a third-party solar PV finance company, they wanted Groom Energy to own it – as a long term service partner. The economic trade was a shared savings model which would eliminate their one to two year budgeting lag, guarantee them energy savings and outsource the maintainance and energy monitoring to someone who was already doing projects inside their facilities. It also allowed us to put our money where our mouth was….we jumped at the opportunity.
By definition we’ve made our CESA structure performance based – priced in flat rate kWh or therms delivered – meaning if we don’t produce the energy (such as from a PV system) or reduce the energy (such as by adding VFDs) the company doesn’t pay anything. And the company doesn’t need to speculate on energy rates 5 years from now in order to get comfortable with the savings opportunity. Today’s low cost metering and software produces utility-like reporting for both our customer and our engineering team.
And while any contract structure can get complicated, our CESA terms are typically 5 years long, which is more consistent with a business plan, not a retirement plan – and means that we celebrate the results during the lifespan of our respective careers.