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8/17/2019 AEP - C2 - Week 3 Slides
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CERTIFICATE PROGRAM
Developed by:
With generous support from:
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WEEK 3
PROJECT FINANCE INSTRUMENTS
COURSE INSTRUCTOR: Jack S. NymanExecutive Director, The Steven L. Newman Real Estate InstituteZicklin School of Business, Baruch College, The City University of New York
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WEEK 3: LEARNING OBJECTIVES
Explain the various sources of funding for retrofit projects alongwith the benefits and drawbacks of each
Compare the specialized energy finance instruments
Describe project metrics and their use in retrofit projects
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WEEK 3: REQUIRED READINGS
The Energy Management Handbo
ok, Chapter 25: Financing Energy
Management Projects
“Energy Star’s Building Upgrade Manual, Chapter 4: Financing,” US EPA.
“Property Assessed Clean Energy Financing: The Ohio Story,” Headen,et al. The Electricity Journal , 1-2/2011.
“GE Dumps Primestar: Sustainability Needs to be Economically Sound,”The New Republic, 12/2013.
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A 2012 Rockefeller Foundation-DB Climate Change Advisors reportfound historical financing sources for retrofits have included :
Direct investment (equity) from balance sheet / cash flows
Parent-company debt
Asset-secured debt
Energy services company (ESCO) agreements
Rebates, subsidized loans/capital
Unfortunately, each of these approaches has built-in obstacles.
Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,” March 2012 (Pages 35-36).Rockefeller Foundation / DB Climate Change Advisors.
HISTORICAL SOURCES OF FINANCING:FUNDING RETROFIT UPGRADES
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Purchase Lease Other
Cash Loan Bond Operating Capital MunicipalPerformance
Contract
Down Payment (%) 100 20 to 25 0 0 0 0 0
Transaction Cost --- Medium High --- Low Low Medium
Balance Sheet AssetAsset and
Liability
Asset and
Liability---
Asset and
Liability--- ---
Tax Deductions DepreciationDepreciation
and Interest
Depreciation
and Interest
Lease
PaymentsDepreciation --- ---
Interest Rate --- Medium Low --- High Low ---
Financing Term --- 3 Years 10 to 20 Years --- 3 to 5 Years Project Life Project Life
Approval Process Internal Bank Referendum Internal Lessor Lessor Internal
Approval Time Short Medium Very Long Short Short Short Short
FlexibilityUsually Small
Projects
Limited to
Equipment
Value
Large
Projects Only
Usually
Small
Projects
Equipment
Cost + 20 to
40 Percent
100 Percent
of Project
Cost
100 Percent
of Project
Cost
Capital or Operating Budget Either Capital Capital Operating Capital Operating Operating
Evaluation
Factor
Source: Energy Star Building Manual Chapter 4 - Table 4.2 “Comparing Financing Options”
COMPARING FINANCING OPTIONS:FUNDING RETROFIT UPGRADES
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Example of Purchase
Under a retrofit upgrade purchase, the entire cost of theretrofit is paid out at the onset of the project. These high upfront costs are then recovered over the life of the upgrades.
Efficiency Retrofit Lease
Lease payments are designed to be less than the costsavings created by the project, thereby providing customers
with cash flow savings in addition to avoiding upfrontcapital costs.
Efficiency Retrofit Lease Source: http://ecoassetsolutions.com/services-2/sustainability-financing-solutions/efficiency-retrofit-lease/
COMPARING FINANCING OPTIONS:FUNDING RETROFIT UPGRADES
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COMPARING FINANCING OPTIONS:LEASING VS. PURCHASING
Year 1 2 3 4 5 6 7
Purchase:
Down Payment $5,000
Repairs $1,000 $1,500 $2,500 $3,000 $3,500 $4,000 $4,500
Loan Repayment $10,564 $10,564 $10,564 $10,564 $10,564 $10,564 $10,564
Tax Reduction $3,912 $3,914 $4,045 $4,024 $3,990 $3,942 $3,879
Salvage Value $31,000
Net Cost $12,652 $8,150 $9,019 $9,540 $10,074 $10,622 ($19,815)NPV of Cost $34,862
Economic: Year 1 2 3 4 5 6 7
Repairs $1,000 $1,500 $2,500 $3,000 $3,500 $4,000 $4,500
Tax Reduction $3,912 $3,914 $4,045 $4,024 $3,990 $3,942 $3,879
Actual Depreciation $10,000 $4,000 $3,000 $3,000 $3,000 $3,000 $3,000
Capi tal Cost $4,400 $3,907 $3,374 $2,799 $2,178 $1,507 $783
Net Cost $11,488 $5,493 $4,829 $4,775 $4,688 $4,565 $4,404
NPV of Cost $31,327
Lease: Year 1 2 3 4 5 6 7
Up Front Charges $3,000 $3,000 $3,000
Lease Cost $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500
Tax Reduction $2,940 $2,100 $2,380 $2,940 $2,100 $2,380 $2,940
Lease Penalty $1,000 $1,000
Net Cost $7,560 $5,400 $5,120 $7,560 $5,400 $5,120 $7,560
NPV of Cost $32,564
CashFlo
CashFlo
CashFlo
Source: Energy Star Building Manual Chapter 4 - Table 4.2 “Comparing Financing Options”
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Purchasing Equipment and
Services
• Cash
• Loans
• Bonds Leasing
• Operating Leases
• Capital Leases
• Municipal Leases
Performance Contracting
Unconventional Opportunities• Utility Incentives
• State Assistance
• Foundations and NonprofitOrganizations
Source: Energy Star Building Manual Chapter 4 – (Pages 41-46)
FINANCING OPTIONS: EXAMPLES
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MUSH: Municipal and State Governments, Universities, Schools, Hospitals
SEU: Sustainable Energy UtilitySource: Marshal Salant - Energy Finance: Where We Are Market Update - 3.1-marshal-salant (Slide 4)
ENERGY EFFICIENCY FINANCING SOLUTIONS
MUSH Residential Commercial R/ECorporate /
Industrial
Large Single ProjectYes N/A Difficult
Yes
• Various
Pooled Asset Deal
Yes
• Green Campus
Yes
• RenewableFunding
Difficult Yes
ESCO/ESA/Two Factor Credit
Yes N/A
Yes?
• Credit
Enhancement
Yes
• Accounting
Treatment
SEU
Yes
• DelawareN/A N/A N/A
PACEN/A Yes - On Hold
Yes
• With Consent• Various
Yes?
On-Bill Finance
Yes?
Yes
• Pari Passu
• Various
Yes Yes?
Energy Efficiency Sector
S
olution
/ProductType
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ENERGY EFFICIENCY FINANCING:FINANCING PROGRAMS
Property-Assessed Clean Energy (PACE)
On-Bill Tariff
On-Bill Loan
Equipment Lease Financing
ESCO Performance Contracting
Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,” March 2012 (Pages 35-36).Rockefeller Foundation / DB Climate Change Advisors.
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Evaluation Factor ESA PACE On-Bill Tariff On-Bill Loan
Description
Lender funds cost of improvements
& ass umes responsibility for
payment of energy bill.
Emerging integrated developer /
investor fir ms s eeking to us e PACE
structure to fund retrofits
Utility funds upgrades. Customers
repay through monthly charge tied
to the meter
Util ity programs funded via rate
pay proceeds, government funds,
and/or private loans and repaid
through monthly util ity cha rges
Financing Source Private Public and/or Private Public Public and/or Private
Project Size $250,000 to $10 Mil lion $2,000 to $2.5 Mill ion $5,000 to $350,000 $5,000 to $250,000
Upgrade Scope Extensive Retrofit Extensive Retrofit Selective Interventions Selective Interventions
Source of Repayment Energy Savings
Property Tax Pa ss -Through of
Energy Savings or Tenant Recovery Energy Savings Energy Savings
Recipient of Energy Savings Lender Owner / Tenant Owner / Tenant Owner / Tenant
Collateral / SecurityEquipment, UCC1 Financing
StatementTax Lien
Equipment; UCC1 Financing
Statement
Equipment; UCC1 Financing
Statement
Recourse / Guarantee
None in US / In Austral ia - Low
Carbon Trust loan loss reserve of 3
yrs P&I
Remedy for Non-Payment
Non-payment of utili ty bill ;
dis continued service and tenant
disruption
ForeclosureReferral to c oll ection agency
and/or utility disconnection
Referral to col lection agency
and/or utility disconnection
Incremental Cost to Borrower None Higher tax ass essment less energysavings and any recoveries
Financing Costs (P&I) funded
through utility bill less energy
savings
Loan appli cation fee, payments tofinanci ng entity, less energy savi ngs
Typical Term Average 10 years Typically 5-10 Years 5 to 10 Years 2 to 10 Years
Underwriting Cri teria / Data
Required
1. Property Due Diligence (DD)
2. Market DD
3. Borrower DD/Credit Qual ity
4. Audits & Engineering models (i nc
savings calcs)
5. Construction contractor DD
6. His toric data re: energy effici ency
projects
1. Property Due Diligence (DD)
2. Market DD
3. Borrower DD/Credit Qual ity
4. Audits & Engineering models (inc
savings calcs)
5. Construction contractor DD
6. His toric da ta re: energy effici ency
projects
1. Customer payment history -
Customer for 2 years, no
disconnections in past year
2. Energy Audit
1. Strong customer payment history
2. Good customer credit qual ity
3. Energy audi t
Measurement & Verification
Requirements
Active energy management via
continuous remote monitoring and
diagnostics
Specific to each program /
governmental guidelines and
requirements
Pre / Post Inspection Pre / Post Inspection
Sale RestrictionNone. Ca n be trans ferred or
terminated
None. Obli gations remain with
propertyTariff s tays wi th the property
Must payoff loan pr ior to property
sale
Geographic Availability USA 20 US States 34 US States 7 US States
Barriers Addressed SI, LC SI, D SI, D, LC, ST SI, D, LC, ST
**SI = Split Incentive; D = Data; U = Underwriting; LC = Lack of Collateral; L = Legal; UTC = Uncertainty of Tax Credits / Incentives; ST = Small Ticket Item
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Description: Municipal governments offer a specific bond toinvestors and then turn around and loan themoney to consumers and businesses to puttowards an energy retrofit. The loans arerepaid over the assigned term via an annualassessment on the property tax bill. The loan
is attached to the property rather than anindividual.
Project Size: $2,000 to $2.5 million
Typical Term: Typically 5-10 years; Generally does notexceed expected useful life of theimprovements
Geographic Availability: Enabling legislation in Australia;28 US States + DC have authorized PACE(27 states have passed legislation, whileHawaii permits it based on existing law)
Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,” March 2012 (Page 38).
Rockefeller Foundation / DB Climate Change Advisors.
FINANCING MODELS:PROPERTY ASSESSED CLEAN ENERGY (PACE)
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FINANCING MODELS:PROPERTY ASSESSED CLEAN ENERGY (PACE)
Graphic Source:
https://financere.nrel.gov/finance/content/funding-sources-property-assessed-clean-energy-pace-programs
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BENEFITS OF PACE FINANCING FORCOMMERCIAL REAL ESTATE OWNERS
There are several benefits of PACE financing for commercial landlords:
No up-front costs
Immediate benefit to cash flow raises Net Operating Income
Increases value & efficiency of the property
Treated like other property taxes and assessments
No additional debt load
Source: PACE Now http://pacenow.org/about-pace/commercial-pace-programs/
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PACE: THREE TYPES OF BONDS
Framework Description
Pooled Bonds Multiple PACE applications are bundled, and a singlebond indenture is used to fund all of the projects inthat pool
Stand-Alone Bonds Large projects are funded by the capital raised throughan exclusive bond indenture
Owner-ArrangedBonds
An organization establishes a direct relationship witha lender, and a PACE arrangement is worked out onterms that are acceptable to both parties
Source: U.S. Department of Energy, PACE Primer.
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PACE: AVAILABILITY IN THE UNITED STATES
*The Federal Housing Financing Agency (FHFA) issued a statement in July 2010 concerning the seniorlien status associated with most PACE programs. In response to the FHFA statement, most local PACE
programs have been suspended until further clarification is provided.
http://www.fhfa.gov/webfiles/15884/PACESTMT7610.pdfhttp://www.fhfa.gov/webfiles/15884/PACESTMT7610.pdf
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FINANCING MODELS:ENERGY SERVICES AGREEMENT (ESA)
Description:
Pay-for-performance financing solution thatallows customers to implement energyefficiency projects without upfront capitalexpenditure.
Project Size: $250,000 to $10 million
Typical Term:Typically 5-10 years; Generally does notexceed expected useful life of theimprovements
Geographic Availability: Nationwide (United States)
Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,”
March 2012 (Page 38). Rockefeller Foundation / DB Climate Change Advisors.
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FINANCING MODELS:ENERGY SERVICES AGREEMENT (ESA)
Source: http://www.energyrealplay.com/?page_id=96
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ESA PROVIDERS: METRUS ENERGY
Source: www.metrusengery.com
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FINANCING MODELS:ON-BILL TARIFF
Description:
On-bill tariffs are actually attached to the meter, sothat when a customer moves, the next customer atthat meter continues to repay the financing. On-billtariffs are significantly more complicated to set up,
but they allow a longer financing term.
Project Size:$5,000 to $350,000 (depending on size of bill,nature of customer, etc.)
Typical Term: 5 to 10 years
Geographic Availability: Available in up to 34 US States
Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,”
March 2012. Rockefeller Foundation / DB Climate Change Advisors.
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FINANCING MODELS: ON-BILL TARIFF
Government /Utility Regulator
Energy EfficiencyLender / Investor
Energy
Contractor Prequalified by utility
Property Owner
• No upfront cost
• Tariff stays with meter
Utility
Company
Gov’t or rate
payerssubsidize loan
Enablingutility
legislation
Payment for building upgrade
Retrofit Productsand Services
EnergySavings
Repays Loan on Utility Bill (P&I)
Optional:Principal and
InterestRepayment
Optional:Loan toUtility
UtilityDisconnectUCC Filing
Money Flow
Services/Agreements
Security/Remedy
Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,” March 2012. Rockefeller
Foundation / DB Climate Change Advisors.
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Advantages
Savings are paired directly withrepayment on the same bill
Capital may be raised from avariety of sources;
Agreements can be structuredto meet the needs of differentmarkets;
The repayment is effectively asecured revenue stream, as
failure to pay can result inutility disconnection; Past bill repayment can be used
as a proxy for credit; and
On-bill tariffs allow for longer-term investments
Disadvantages
Utilities may be reluctant totake on the role of financingentity
Exposure to consumerlending laws and changes tobilling systems may berequired when companiesdo
Complexity
Source: http://www1.eere.ener gy.gov/wip/solutioncenter/financialproducts/onbillrepayment.html
The US Department of Energy describes some pros and cons of On-Bill Tariffs:
BENEFITS OF ON-BILL TARIFFS
http://www1.eere.energy.gov/wip/solutioncenter/financialproducts/onbillrepayment.htmlhttp://www1.eere.energy.gov/wip/solutioncenter/financialproducts/onbillrepayment.htmlhttp://www1.eere.energy.gov/wip/solutioncenter/financialproducts/onbillrepayment.htmlhttp://www1.eere.energy.gov/wip/solutioncenter/financialproducts/onbillrepayment.html
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FINANCING MODELS: ON-BILL LOAN
Government /Utility Regulator
Energy EfficiencyLender / Investor
Energy Contractor • Prequalified by utility
Property Owner
• No upfront cost
• Loan repaid if property sold
Utility
Company
Gov’t or rate
payerssubsidize loan
Enablingutility
legislation
Payment for building upgrade
RetrofitProducts
AndServices
EnergySavings
Repays Loan on Utility Bill (P&I)
Optional:Principal and
InterestRepayment
Arrange dealfor lender,terms, etc.
UtilityDisconnectUCC Filing
Loan
Repayment
Payment for building upgrade
Money Flow
Services/Agreements
Security/Remedy
Alternative Funding Path
Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,” March 2012 (Page 45). Rockefeller Foundation / DB Climate Change Advisors.
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BENEFITS OF ON-BILL LOANS
Very similar to personal or business loans -- when the customermoves, it must repay the full loan.
Offers one of the most practical solutions to energy financing: thesavings are seen on the same bill as the repayment.
The model has proven to be a good fit for programs serving thesmall commercial and MUSH markets.
MUSH: Municipal and State Governments, Universities, Schools, Hospitals
Source: http://www1.eere.energy.gov/wip/solutioncenter/financialproducts/onbillrepayment.html
http://www1.eere.energy.gov/wip/solutioncenter/financialproducts/onbillrepayment.htmlhttp://www1.eere.energy.gov/wip/solutioncenter/financialproducts/onbillrepayment.html
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FINANCING MODELS:EQUIPMENT LEASE FINANCE
Description: Bank backed by governmentguarantee borrows at favorablerates in capital markets to lend to
commercial banks at favorablerates.
Project Size: Unlimited
Typical Term: 7 to 10 years
Geographic Availability: International
Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,” March 2012 (Page 39).Rockefeller Foundation / DB Climate Change Advisors.
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FINANCING MODELS:EQUIPMENT LEASE FINANCE
Corporate and
Investment Bank
Energy efficient or
production
equipment SPV
Energy efficiency
service provider
(e.g. utility)
End-use
IndividualLease
AggregatedLease
EquipmentCost ($)
Secondary Market
PotentialSecuritization of
Asset-secured termLoans into green
bonds
Principal andinterest
payments ($)
Asset-secured termloan ($)
Leasepayments ($)
Aggregate leasepayments ($)
EquipmentProvision
EquipmentOEM
Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,” March 2012 (Page 46).Rockefeller Foundation / DB Climate Change Advisors.
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EnergyCost
(Paid to Utility)
$100
ESCO
$15
Organization$15
EnergyCost
(Paid to Utility)
$70
Energy Efficiency Upgradesare put into place
Guaranteed Savings fromPerformance Contract are
split between the ESCO andthe Organization
Annual Energy Costs arereduced from $100 to $70
after the upgrades
After EnergyEfficiency Upgrade
Before EnergyEfficiency Upgrade
EnergySavings
Source: Energy Star Building Manual, Chapter 4
ENERGY PERFORMANCE CONTRACT
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Description:
3rd party capital to fund upgradesdesignated by turnkey providers,generally backed by performance
guarantee. Payments tied tosavings.
Project Size: Unlimited
Typical Term: 7 to 20 years
Geographic Availability: International
Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,” March 2012 (Page 39).Rockefeller Foundation / DB Climate Change Advisors.
ENERGY PERFORMANCE CONTRACT:(ESCO MODEL)
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THREE MAJOR BARRIERS
What can prevent quality projects from being implemented?
There are a variety of reasons, including three very common barriers:
1. Insufficient Marketing (Under-marketing a project’s value)
2. Insufficient Education and Collaboration (Not expanding the valueof a project)
3. Insufficient Funds (Not having a positive cash flow solution)
If a project can not overcome any of these three barriers, then it probablywon’t be implemented. Focus on the projects that will.
Source: Energy Project Financing – Resources and Strategies for Success. Thumann and Woodroof
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BARRIERS TO ENERGY EFFICIENCYFINANCING (MUSH)
1. Agency or institutional policiesthat fail to incentivize energy-efficiency investments
2. Inefficient agency or institutional
responses to market incentivesthat require change
3. Limited human resources todevote to projects, including eventhose that are already known to
be cost-effective
MUSH: Municipal and State Governments,
Universities, Schools, Hospitals
Photo: Citrus Zest, via Wikipedia.
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PAYBACK PERIODS FOR TYPICALENERGY CONSERVATION MEASURES (ECMs)
Source: Payback source DBCCA and Transcend Equity analysis, 2011. EIA and DOE Build ing Data Book, 2010; DBCCA A nalysis 2011. Paybacks are pre
subsidy and reflect a simple return of capital invested wi thout add itio nal return. Payback periods are estimates and t here are no assurances that st ated
payback periods will be achieved.
3-4
2-4
1-3
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LED Exit
Signs
CFL Lighting
Variable Flow
Systems
Variable Speed
AHUs
Lighting Control
Controls
Retrofit
T8 Lighting
VAV Technology
Boiler Conversion
High Efficiency Fully
Condensing Boiler
New Chiller
Simple Payback in Years
Source: US Building Energy Efficiency Retrofits (Page 8)
PAYBACK PERIODS: BY ECM
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WHAT IS A PERFORMANCE METRIC?
A metric is a standard definition of any measurable quantity, and aperformance metric is a standard definition of a measurablequantity that indicates some aspect of performance.
A “valuable and practical” performance metric should:
Be measurable (or determinable from other measurements) Have a clear definition, including boundaries of measurements
Indicate progress towards a performance goal
Answer specific questions about the performance
Source: National Renewable Energy Laboratory, http://www.nrel.gov/docs/fy06osti/38700.pdf
http://www.nrel.gov/docs/fy06osti/38700.pdfhttp://www.nrel.gov/docs/fy06osti/38700.pdfhttp://www.nrel.gov/docs/fy06osti/38700.pdf
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WHO USES PERFORMANCE METRICS?
Policy makers
Owners
Designers
Operators
Researchers
Source: National Renewable Energy Laboratory, http://www.nrel.gov/docs/fy06osti/38700.pdf
Photo: Ejay, via Wikimedia Commons
http://www.nrel.gov/docs/fy06osti/38700.pdfhttp://www.nrel.gov/docs/fy06osti/38700.pdfhttp://www.nrel.gov/docs/fy06osti/38700.pdf
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THE USE OF PERFORMANCE METRICS?
Begin with goals and objectives in mind
Metrics should be a good fit for the data being analyzed
Existing buildings may offer less flexibility – Focus on what’s there
Source: National Renewable Energy Laboratory, http://www.nrel.gov/docs/fy06osti/38700.pdf Photo: Brocken Inaglory, via Wikimedia Commons.
http://www.nrel.gov/docs/fy06osti/38700.pdfhttp://www.nrel.gov/docs/fy06osti/38700.pdfhttp://www.nrel.gov/docs/fy06osti/38700.pdf
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WEEK 3: HOMEWORK
Consider the Imperial Building from the AEP portfolio. In a 1-2page write-up, propose an energy-saving improvement project,and presume that any of the financing frameworks covered by thisweek’s materials are available in the Imperial’s jurisdiction.
Choose one of the energy-efficiency financing programs to finance
your proposal.Explain why this financing program would be an effective way todefray the costs of your proposed project. Note that the Imperial isone of the oldest buildings in the portfolio, and consider how thismight influence the types of projects that may be warranted. Detail
why you chose your project and your financing approach.