Last week I attended EDF/Citibank’s 3rd Energy Efficiency Financeconference in NYC. Since their inaugural event a few years ago this conference has always provided a good gauge on the market’s rate of progress.
Brad Copithorne‘s (EDF) opening summarized the overall mood, providing statistics confirming we’re broadly headed in the right direction, but acknowledging the disappointment that deal volume hasn’t developed more quickly. Brad reminded us that at the first event speakers joked that we “needed to do more deals than conferences.” Thankfully we’ve probably passed that point.
The room was filled with finance oriented folks, one step removed from customer’s decision making, all wondering why the market isn’t moving faster. Bankers, sitting between project developers and lenders, describe a weird disconnect where investors say they are “anxious” to put money to work and project developers say all they need is financing and their projects will start closing. No one could explain why these two willing players aren’t connecting.
Richard Kauffmann, Chairman of Energy and Finance for NY and NYSERDA, reflected that a few years ago we had all hoped the Federal Government would “give us a hand” by putting a cost on carbon or introducing a National Clean Energy Standard. But with no policy out of Washington, individual states have been forced to address things on their own and NY is leading with a bunch of new programs.
Yet Richard reminded all that financing programs must satisfy the market’s naturally developing demand, not precede it. He suggests NY is trying to walk the fine line between funding what policy makers find interesting and catalyzing existing market activity which can later be financed by the private markets. As an example NY isn’t rushing to introduce a solar thermal financing offering, even though solar hot water is three times as efficient as solar PV. There is currently no obvious customer or developer demand.
So from the day’s talks three key themes emerged:
Green Banking is happening
PACE and On-Bill continue to make bumpy progress
Solar PV financing dwarfs energy efficiency
One part of NY’s effort is the launch of the NY Green Bank, a public/private partnership run by Alfred Griffin, which is now “open for business.” In December the State of NY funded it with $200+ million of initial capital, with a promise of more to come if successful. It’s mission is to address a market gap, not provide a subsidy, and it’s been granted a broad charter to offer a variety of specialty financings, be they subordinated, mezzanine, senior debt or credit enhancements. Like other banks, the goal is to participate in investment grade projects while earning a fee. The expectation is that over time the private markets will step into the markets that the bank helps initially develop by de-risking the early phases. As a result, they clearly are not looking to do projects without some private market participation or that won’t have scaled impact over time.
Bryan Garcia from CT’s Green Bank described how their model has shifted from a few years ago when their targets were to fund solar leases and loans with seed equity investments. Today they’ve restructured as a public/private partnership, acting as a quasi-public clean energy finance company focused on clean energy and energy efficiency, as well as clean vehicles. The group already has $100 million in assets and is supported by a $30 million operating budget, all coming through a $0.001/kWh rate-payer contribution and proceeds from the RGGI auctions. They too are determined to spur the market with the state’s money.
2. PACE and On-Bill
On the consumer front, residential PACE is coming back.
Originally stalled in 2010, today residential PACE focused companies are raising capital and putting it to work. Renovate America has just completed their first securitization for California PACE projects (having completed 10,000 projects costing $185 million.) Renewable Funding and Kleiner Perkins-funded Kilowatt Financial have both recently announced closings of their own credit facilities, both with our conference host Citibank. Citi is really leading this space, having funded Green Campus Partners a few years ago as well.
Cisco DeVries from Renewable Funding described how CA’s recently introduced loan loss insurance reserve will reduce the perceived risk of lending and his firm is now revisiting 160+ counties who have been waiting for the PACE opportunity.
Jessica Bailey from CT-PACE described their latest activities in the C&I market, which include $20 million in projects currently being packaged and sold off. Their pipeline has 120 projects valued at $60 million. Afterwards Jessica told me that roughly 50% of the projects involved solar while most of the energy efficiency projects included a boiler or chiller upgrade or replacement.
John Hayes (AFC First Financial Corporation) described Hawaii’s recently launched OBR and OBF programs, where OBF has a focus on solar thermal, and OBR includes energy efficiency and solar PV. Initially funded with $25 million of debt and tax equity, the OBF program will support 10 to 12 year borrowing terms with repayments tied to the premise through the meter and repaid as tariff on the utility bill. The program has lots of support from over 100 solar thermal and 450 solar PV developers already operating in HI.
With local electricity costs at $0.34 per kWh (three times the US national average) John noted that in HI “solar sells itself.” Almost 20% of all single family homes already have solar installed, most coming in the last few years. But to keep it moving, the next wave of homeowners will likely need financing assistance. To address this Renewable Funding is helping with the development of GEMS (Green Energy Market Securitization) which uses rate reduction bonds backed by rate-payers to create a $150 million funding pool, which funds projects and gets repaid through customer on-bill financing payments.
Interestingly in coming months the HI program is also expected to adopt an open-source model where various lenders, leasing companies and other investors compete to win each property owner’s business. Various financing models including loans, leases, PPAs and ESAs would all be eligible and larger commercial properties may be added to the program within a few months of launch.
3. Solar lending
Clearly solar lending is the large growth market.
The recent numbers suggest over $3 billion has been raised in 2013. As one speaker noted Solar City’s $250 million new credit facility (announced two days before) makes it the poster child for the “resy rooftop” financing market.
Clean Power Finance (CPF) is betting that large brand service companies like utilities, banks and phone companies will see opportunity to upsell their customer relationships, offering solar as a service. CPF offers them a third party white label service which assists with all aspects of the service offering, acquisition, installation, billing, etc. They raised a bunch of money last year to push this value proposition and just announced an offering with the Midwest based utility Integrys that will do exactly this.
But with the solar PV wave a potentially thorny issue is looming: what happens to the Federal investment tax credit (ITC) which is set to expire at the end of 2016?
Until now solar finance players have been addressing the complexity (and therefore opportunity) to apply tax equity to pass through the ITC value for solar as a service. Yet again the market is stuck waiting until the Federal government provides some leadership to signal longer term plans to support or not support this key program. With 55% of the entire US market for solar in California, the assumption is that CA will have to use its leverage in solving this problem.
Some other interesting speaker observations?
Scott Harmon, CEO of Noesis noted that in listening to the presentations he had lost count of the use of the phrase “deal flow” at 22. His software company is focused on helping to solve this problem by streamlining deal flow for energy efficiency projects, standardizing the process and providing contractors selling tools so they can generate their own deals with their customers. Many of the projects they facilitate are good candidates for energy efficiency financing so Noesis has lined up five financing lending partners and just announced their own $30 million shared savings fund.
Riggs Kubiak, founder of Honest Buildings (HB), described how his company has shifted its founding three years ago. Riggs’ described that his original idea was to deliver a portal for rating buildings and their condition, but once launched the site was overwhelmed with interest from the sell side (contractors) trying to find new prospective projects and customers. Now a few years later HB has built a marketplace (Connection Engine) which connects building and real estate manager to these contractors, facilitating a bidding portal with other value added services alongside. If you are a NY building manager looking to do a building retrofit (energy related or not) the platform is a great way to get bids from new web-friendly contractors. In 2013 HB facilitated $55 million in projects in areas like architecture, windows, HVAC and BMS systems. In the last three months they’ve already done $90 million.
Jody Clark, from Hannon Armstrong (HA) described how their success in gaining a private letter ruling to operate as a REIT helped their growth. Unlike other REITs which own the building, HA can use the REIT structure for the energy efficiency assets inside the building. This structure allowed them to raise $200 million through IPO last year, and then lever the proceeds with $700 million in debt. Their target has been the Federal market with typical ESPC financings of $10 million per project, along with more traditional solar PV financings.
So back to the question about why are things are developing more slowly for energy efficiency finance than everyone expects?
There’s lots of money waiting at the table and policy makers have been focused on offering market incentives which help it take off.
Solar is having success.
What’s the issue with energy efficiency?
Could it be that project developers are off in their assertion that customers are soclose to doing projects, if only the financing capital was made available? I can confirm when Groom Energy is asked by a customer to offer a financed/shared savings proposal, 90% of the time it is used purely to justify the capital expenditure request.
Could it be that borrowing money to fund a $250k boiler upgrade doesn’t get the same management attention (isn’t as sexy) as funding a $20 million Federal, state or municipal owned solar installation?
Or could it be that where Solar City brings collective enthusiasm to a whole town driving solar PV adoption that this emotional excitement doesn’t translate to energy efficiency upgrades?
A few speakers postulated that it may be based most on changing managers’ and customers’ psychology and orientation – a real marketing challenge – and this sort of thing can sometimes take a long while to affect.
Maybe the 4th Energy Efficiency Finance conference will tell us all how fast this all plays out.