DOE WebinarNational Renewable Energy Laboratory

Financing Energy Efficiency for the Commercial Market Sector

Presented by Harcourt Brown & CareyJune 29, 2011

U.S. Commercial Building Sector Metrics

• Commercial Sector:– 80 billion square feet – Typically consume $2.00 per square foot per year– Represent 46% of US building energy use– Consumes $120 billion per year

• A $120 billion EE investment:– Reduce consumption by 25% – Save $30 billion per year– Representing a 4 year payback (McKinsey Report)

Why Does the Commercial Sector Waste Energy?

• Energy typically represents only 2% – 4% of operating costs• Buying EE is complex and risky, buying energy is simple and

risk free• EE generally requires a capital investment• Commercial enterprises have limited access to capital and use

it to achieve their core mission• Use of capital for non-core projects such as EE requires “C”

level support• 50% of commercial space is leased and tenant pays for energy• Leased space has very restrictive mortgage covenants

The Opportunity

• Offer EE as a service, not a capital investment, so that it can compete with the risk-free simplicity of buying energy

• Modify the ESCo business model typically offered to government clients which:1. Maximizes capital investment2. Decouples savings performance from compensation (provides a fixed

amount guarantee based mostly on stipulated savings)3. Generally requires user to balance sheet the investment

• The new ESCo model would:1. Minimize the capital investment2. Pay the ESCo based on actual savings ($/kWh, therm)3. Provide EE as a service w/ no impact the balance sheet

The Roadmap

• The following models describe steps to incrementally transform the Commercial EE market

• Model #1 proposes conventional bank financing with a separation of credit risk and energy saving performance risk

• Model #3 pays the ESCo on actual savings but shifts the credit risk to a public entity

• Model #4 uses bond financing as the source of capital• Model #5 a Utility procures DSM from an ESCo franchise

Bank

Property Owner

3. $

Model #1: Bank Loan Financing

3. $

1. $

Contractor Installed

E

2. $

Key:$ = Cash FlowE = Energy Efficient Installation

Performance RiskAssumed by:•ESCos•State guarantee fund•Third-party insurer

Credit Risk Assumed by:•Bank•State guarantee fund•Bank/State loss share

ESCo

Ongoing Servicing:•Measure savings•Continuously invest in improvements•Continuously recommission facility•Perform maintenance

Initial Installation:•Installs improvements•Recommissions facility•Trains staff•Sets up M & V process

Property Owner

3.E

Model #2: Energy Services with Savings Based Compensation

3.E

4.$

4.$

Capital Source

Compensation:•Calculate savings•Adjust for operation, weather, loads, and price•Invoice based on units of energy saved at predetermined price

5.$

1.$State or Utility Subsidy• Loan loss reserve• Interest rate buy-down• Balance sheet support

Key:$ = Cash FlowE = Energy Efficient Installation

2.$

Bond Purchaser

ESCo

Trustee & Conduit Issuer

Special Purpose

Entity

Program Administrator

Property Owner

5.$

3.$ C

1.$C

Model #3: Leveraged Bond Financing for ESCos

4.$

Key:$ = Cash FlowC = Contract

2.$

Utility

ESCo #1

Model #4: ESCo “City Block” DSM Facility

Utility

ESCo #2 ESCo #3

Block A•2 million SF•$500k savings•100 kW dispatchable

Block B•2 million SF•$500k savings

Block C•2 million SF•$500k savings

Block D•2 million SF•$500k savings •100 kW dispatchable

Block E•2 million SF•$500k savings

Block F•2 million SF•$500k savings