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24 March 2012
Environmental-Finance: Commercial building retrofits need better financing models
Source:
www.environmental-finance.com
New or enhanced models for financing energy efficiency retrofits are paramount to truly propel these projects forward in the commercial sector, experts said.
In the US, the total value of energy efficiency investments in 2010 was $12.3 billion, the majority of which can be attributed to government stimulus and regulation, compared to $45 billion in renewable energy assets, Tom Rowlands-Rees, Bloomberg New Energy Finance’s (BNEF’s) UK-based clean energy industry analyst said at the BNEF Summit in New York this week.
“To me that puts in perspective this idea that we're pinning so much hope on efficiency when already the investment that's going into renewables is massively outstripping what's happening with efficiency,” he said. “There's an awful lot of potential that's untapped and really it's a question of why aren't we getting to the rest of that potential.”
A major untapped area for energy efficiency is commercial buildings, particularly those that are owned by investors, partly because financing models have not been effective in the commercial sector, experts said.
A retrofit of the Empire State Building to reduce its energy use by 38% (Photocredit)
“We've been diligently working for years to try to crack that market,” said Clay Nesler, vice-president of Milwaukee, Wisconsin-based automobile and energy technology provider Johnson Controls.
The company oversaw the retrofit of the Empire State Building in New York that will reduce its energy use by 38% per year and save about $4.4 million annually. The owner of the Empire State Building said it would be “fiscally irresponsible” not to do the retrofit, Nesler said.
“It went from being a good thing to do for the planet to he would be a terrible business person if he hadn’t made the investment,” he said. “We’ve got to get more and more people to think about that.”
Nesler is a “big fan” of the Property Assessed Clean Energy (PACE) financing model, which enables property owners to accept a voluntary tax assessment as a way of repaying the upfront cost of improving energy efficiency or installing renewable energy. Although residential PACE programmes have mostly been blocked by opposition from US federal housing agencies, the mechanism could function well in the commercial sector.
Australian officials studied PACE programmes in California and adopted a similar model that is “incredibly successful”, Nesler said. The country has legislation that allows private commercial building owners to engage in such projects and an agency that provides funding.
“No-one told them it didn’t work here,” he said. “They’ve aligned the carrots and the sticks, the incentives as well as the financial mechanisms to actually get some of it done. It’s a great model and one that I think will be replicable.”
Tokyo also has an interesting model, with 1,100 of its largest buildings subject to a cap-and-trade programme that allows property owners to invest in reductions at other buildings to offset their emissions, Nesler said.
But there are numerous challenges to energy efficiency taking hold in the commercial sector, including that some properties are owned by investors, who may plan to quickly sell them and are often uninterested in financing projects that have more than a three-year payback, he said.
California is examining the potential for on-bill repayment of efficiency retrofits, which could help open up the investor-owned commercial real estate market, said Bob Hinkle, CEO of San Francisco-based energy efficiency financier Metrus Energy.
“That might not be as strong a security as something like PACE, which is tied to a property tax bill, but could also be a way forward,” he said.
Another challenge for commercial retrofits is the emergence of international accounting standards that will essentially force public corporations to account for every lease on its balance sheet, which makes debt financing for these projects much more challenging, said Jeff Eckel, CEO of Hannon Armstrong, a financier of infrastructure technology upgrades based in Annapolis, Maryland.
“I think the only solution is to shift risk so it’s not debt,” he said. “The only way that we see this working in the commercial sector is just straight-out equity.”
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Sustainable Investment Research Platform
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