There is a blossoming of innovation in energy efficiency financing that has taken place over the last 10 years as many of the ideas around energy efficiency and how to pay for them have been learned and seeped into the marketplace.
Of course all of these projects are positive NPV. Using the cash flow from energy savings to pay off the upfront capital costs and borrowing costs of the energy efficiency investment, allows these investments to be paid off with no upfront capital costs to the project owner. In an environment with rising energy or electricity utility prices and an environment where the total cost of generation is higher than the costs associated with conservation, incentives are supporting increased investments in energy efficiency.
I worked for a company in the early 1990’s , at that point called Orion Scientific – which may have morphed into Orion Energy Systems. We approached businesses that were operating for close to 24 hours a day and tried to sell them energy efficient lighting systems which at that time consisted of more efficient electronic ballasts, more efficient fluorescent tubes (T4’s instead of T8’s) and replacing potlights with CFL as well as selling a reflector to reflect the light down from the top of the T4. The capital costs were financed through a third party lease to own arrangement where the lease costs were less than the energy savings, so the business still saw some of the savings while paying off the costs of the efficiency investment. The payback was somewhere in the 3-5 year period. There were a whole set of barriers for why businesses said “No”. From my perspective, these were mostly about
- Inertia or laziness
- Resistance to change
- Split incentives (the person operating the business not paying the utility costs)
- Doubt about the savings actually being achieved (and in turn wary about being sold something that did not exist)
When I was selling these energy efficient lighting systems while we would project the actual energy savings based on the historical use patterns, we did not “guarantee” the energy savings. If the use changed, for example the business only ran 12 hours a day rather than 18, then the lease costs would not change even though the energy savings were less.
Granted the total energy costs were also less, since the business was only operating two-thirds of the time. Now however, with the use of energy modelling and legal agreements and ways to account for changes in use of the building as well as accounting for particular cool or hot weather patterns, companies will actually guarantee energy savings though energy performance agreements. If the building does not perform as anticipated, the contractor will pay the client what they should have received for energy savings.
With energy performance agreements, the contractor aslo takes on the responsibility of ensuring that the building or facility is operating optimally. They do this by commissioning the building and monitoring the energy use of the building. Of course it also means that when bidding on an energy efficient contract, the incentive is to bid somewhat lower, design for a better standard and when operating you should be able to hit in the middle most of the time. This will be contrary to an energy efficient retrofit with no energy performance savings agreement where the contractor will promise high and the building may be able to perform as intended or not. There is no financial penalty of the building does not perform as intended.
The energy efficiency sector has moved significantly since then and particularly over the last few years. I will explore those in future posts.