A vast gap exists between the detailed information financial institutions need to support energy efficiency financing and the limited data they currently have. Several examples suggest these loan programs can succeed, but there are no large datasets supporting investment in energy efficiency.
Providing energy efficiency loans could give financial institutions new market opportunities. Unfortunately, their underwriters don’t have enough loan performance information to finance large volumes of energy efficiency projects yet. This lack of information inhibits the scaling up of energy efficiency retrofits in the residential and commercial sectors.
The small size of the market for energy efficiency loans inhibits market growth, said John Joshi, Managing Director and Business Strategist at Capital Fusion Partners. Investors seek liquidity; they want to be able to move their assets within a market. As the energy efficiency loan market grows, this lack of liquidity will no longer be an issue. Right now, “it’s a Catch-22,” Joshi said.
“We need strong political and regulatory support to make the market more viable,” Joshi said. “If it’s left to capital markets’ intervention, it will be a much slower process.” He said government financial support for renewable energy programs is key to opening this market.
“Investors want to compare apples to apples within transactions,” Joshi said. “They also want analytics so they can do scenario modeling.” Investors also ask third parties to participate in the analysis, so data needs to be accessible to a range of stakeholders.
When approving loans, underwriters need reliable data on the expected energy savings from energy improvements so they can factor this into their credit risk analysis. To consider an energy efficiency loan a safe investment, investors and rating agencies need reliable data on expected energy savings from efficiency installations in similar buildings in similar locations. They also need statistics on loan repayment. Much of this information is currently missing.
Kerry O’Neill, Senior Advisor at the Clean Energy Finance Center, said we need a national database where energy programs can share performance information for energy improvements in buildings. Many programs have done small evaluation, measurement and verification studies, but these are hard to generalize. The energy data needs to be combined with performance data on efficiency loans to provide a complete picture. O’Neill suggested that a third-party nonprofit or nonprofit co-op model might work well, with foundation support.
O’Neill said that a recent study commissioned by the Deutsche Bank Americas Foundation compared energy savings estimates to actual savings in 21,000 multi-family rental units in New York City. The results showed that the savings estimates were overstated by 40 percent. These findings suggest that underwriters can expect a large difference between estimated and actual savings. Because this study covered multifamily buildings in New York City, its numbers aren’t transferable to single-family homes or commercial properties.
John Byrne, Director of the Center for Energy and Environmental Policy at the University of Delaware, said a bond initiated by the Delaware Sustainable Energy Utility earned an AA+ rating from Standard and Poor’s (S&P) in large part because the program developers collected data from a variety of buildings. They used these data to develop financial savings estimates for the energy efficiency projects. As a result, energy service companies (ESCOs) were able to guarantee financial savings – not just energy savings. This financial guarantee changed the underwriters’ perspectives.
Byrne said the S&P underwriters asked for very specific data. They were interested in variables such as climate, the local economy, building type, and energy savings over time.
O’Neill said data from Pennsylvania’s Keystone Home Energy Loan Program shows energy efficiency loans are outperforming other unsecured debt. However, some investors raise the question of whether program participants are a self-selected group and are skeptical about generalizing these numbers. With larger data sets and analytics on performance, programs can address these investor concerns.
Byrne recommended organizing “education days” to bring the financial industry and the energy efficiency industry together. He has organized events like this before in Delaware and believes they are a successful way to explain the importance of collaboration and encourage organizations to share data.
“Until the industry addresses this issue of scarce data on energy savings and financial performance, it will continue to meet resistance from the financial community,” said O’Neill. “This will impact the rates and terms that can be secured, as well as the size of investment.”
Article by Kat Friedrich, appearing courtesy Energy Efficient Markets.