Commercial, Energy Efficiency, Industrial - November 2, 2016 - By Bob Hinkle
Energy efficiency is dead. Long live energy efficiency.
All market indicators point to a prosperous new reign of energy efficiency. However, in order to keep its crown, the efficiency market must include financing solutions that sell efficiency as a service for commercial and industrial corporations. This will enable large businesses to buy negawatts in the same way they buy kilowatts.
According to a new report by Navigant Research, energy efficiency represents a $100 billion global market. The American Council for an Energy Efficiency Economy reported this year that energy efficiency is now the third largest resource in the U.S. power sector. Further, major corporations —including 600 firms worth more than $12 trillion in the We Mean Business coalition — recognize that energy efficiency is essential to hitting aggressive near-term sustainability targets. To actually achieve these bullish expectations, the efficiency market needs to capitalize on the same forces that opened up the market for solar photovoltaic systems for C&I customers.
If we look back at the growth of the solar market in the C&I space, it was not demand alone that fueled expansion. Power purchase agreements that financed and sold solar power and not solar panels were critical to the C&I solar market's expansion. The same "as-a-service" principles that underlie solar PPAs need to be extended to energy efficiency.
In an effort to create a path for funding energy upgrades and selling energy reductions as an output in the same way that kilowatts are sold as an output in PPAs, Metrus Energy created the efficiency services agreement, or ESA, in 2009. In the seven years since, we have been developing, financing and operating ESA projects with Fortune 500 firms and institutional energy customers and have learned valuable lessons to help unlock the full potential of the energy efficiency market. Among them:
- Trade kilowatts for negawatts – Truly selling efficiency-as-a-service requires pricing that service for C&I customers on the basis of pay-for-performance, per unit of realized savings. Otherwise, you are selling efficiency as a lease through an on-balance sheet, fixed payment structure that doesn’t map to realized savings.
- Monitor and measure – Selling negawatts requires accurate project monitoring and data collection. Having financing mechanisms link directly to ongoing project performance and savings is becoming a customer prerequisite to doing projects in the efficiency marketplace (groups like the Investor Confidence Project are helping streamline industrywide protocols).
- Provide a flexible platform – The ESA is an open platform for customers whereby projects incorporate a range of different technologies, manufacturers and contractors. Not being limited to a specific technology solution provides C&I customers with operational flexibility.
- Bundle upgrades, listen to customers – ESAs bundle electric and thermal efficiency upgrades into a single project. This is achieved by using a $/kilowatt-hour savings rate (or $/therm of natural gas savings, etc.) that distills savings from diverse types of energy efficiency equipment. In this way, projects actually include the efficiency improvements that are most valuable to customers, like upgrading key mechanical equipment to improve the resiliency of operations.
- Mitigate risks – By charging only for realized savings, customers are insulated from performance risk. Further, the risks associated with equipment downtime are reduced by third party owners and asset managers who provide ongoing maintenance.
- Finance, save & repeat – Scale in efficiency investments is achieved by rolling out multiple ESA projects across customer portfolios. A key attribute of ESAs is that they are not a single point-in-time financing solution since efficiency measures can be added or substituted to existing projects. This benefits C&I customers by adding flexibility and deepening savings over time.
- Look beyond energy savings – Valuing efficiency means increasingly developing projects that include not only energy savings but also water efficiency improvements, operational savings and renewable energy generation. ESAs are a cost avoidance mechanism. They fund a diversity of upgrades that save both utility cost and facility operating expenses.
In this year of expanded commitment to climate change initiatives and global corporate sustainability targets, resources need to be properly valued. Selling efficiency-as-a-service does just that. The benefits that financing solutions bring to C&I customers will drive demand and expand the opportunities that energy (and water) efficiency present for the built environment.
Bob Hinkle is president and CEO of Metrus Energy. His company develops and finances energy efficiency retrofit and building upgrade projects at commercial, industrial and institutional facilities. Through its comprehensive financing solutions, Metrus pays for all upfront project costs, providing facilities with the immediate operational and environmental benefits of large-scale energy efficiency measures without the capital expense.
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