Energy Efficiency and Finance:

Opportunities and Issues

Steven Nadel, Executive Director American Council for an Energy-Efficient Economy July 31, 2012

U.S. Energy Use in Relation to GDP

1970-2012

0

50

100

150

200

250

Qu

ad

s o

f To

tal P

rim

ary

En

erg

y

1970 Energy Consumption

Actual Energy Consumption

Energy Consumption if Energy Intensity

were the same as in 1970 (adjusted for imports)

Note: Energy intensity is

measured as Quads per $ GDP

Reduction in Energy

Consumption as a result of

Energy Efficiency

McKinsey Global’s Analysis of

Carbon Reduction Potential

Ohio Residential Electric Efficiency

Potential in 2025 by End-Use

HVAC equipment and

load recuction savings

8,259 GWh, 37%

Water Heating,

2,864 GWh, 13%

Lighting,

4,774 GWh, 22%Refrigeration,

536 GWh, 2%

Appliances,

139 GWh, 1%

Furnace Fans,

1,945 GWh, 9%

Plug Loads,

1,060 GWh, 5%

Electricity Use Feedback,

1,460 GWh, 7%

New Homes Savings,

1,036 GWh, 5%

Economic Potential:

34% savings

Ohio Commercial Electric Efficiency

Potential in 2025 by End-Use

HVAC,

3,900 GWh, 23%

New Buildings,

660 GWh, 8%

Office Equipment,

3,360 GWh, 20% Refrigeration,6

90 GWh, 4%

Lighting,

8,300 GWh, 48%

Water Heating,

210 GWh, 1%

Appliances and

Other, 20 GWh,

<1%

Economic Potential:

27% savings

Ohio Industrial Electric Efficiency

Potential in 2025 by End-Use

Measures

Savings Potential

in 2025 (GWh)

Savings Potential

in 2025 (% )

% of Efficiency

Resource Potential

Weighted Levelized

Cost of Saved Energy

($/kWh)

Sensors & Controls 249 0.4% 2% $0.014

EIS 91 0.1% 1% $0.061

Duct/Pipe insulation 2,029 3.2% 20% $0.052

Electric Supply 1,911 3.0% 19% $0.010

Lighting 732 1.1% 7% $0.020

Advanced Efficient Motors 1,644 2.6% 16% $0.035

Motor Management 282 0.4% 3% $0.018

Lubricants 243 0.4% 2% $0.000

Motor Sys Optimization 183 0.3% 2% $0.009

Compressed Air Management 969 1.5% 10% $0.000

Compressed Air - Advanced 46 0.1% 0% $0.000

Pumps 1,432 2.2% 14% $0.008

Fans 241 0.4% 2% $0.024

Refrigeration 137 0.2% 1% $0.003

Total 10,191 16% 100% $0.023

Combined Heat and Power

Achievable Potential in Ohio

2010 2015 2020

2025

Total

Savings in

2025 (%)*

GWh Potential

87 1,072 2,366 3,238 2.1%

MW Potential 7 162 381 530 7.5%

Energy Efficiency Policy

Recommendations for Ohio

Source: ACEEE, 2009

22% savings

Estimated Reductions in Summer Peak

Demand through Energy Efficiency and

Demand Response in Ohio

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2007 2011 2015 2019 2023

Pea

k D

em

an

d (

MW

)

18%

11%

Efficiency

Demand Response

Adjusted Peak Load`

Net Job Impacts for Ohio (2008-2025)

(5,000)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2008 2010 2012 2014 2016 2018 2020 2022 2024

Energy Productivity Shifts Spending To

Greater Labor and GDP Impacts

Source: 2007 IMPLAN data set for the U.S. economy (2009).

Energy Efficiency

^ ^

Role of Efficiency in Addressing

Climate Change in the U.S.

Note: This graph is stylized and is not exact.

Players in the Energy Efficiency Market

• Federal government – sets national standards, provides guidance and technical/financial assistance

• State governments (some more than others) – implement programs and policies, assist municipalities

• Local governments (only some involved for long-term)

• Utilities – majority offer energy efficiency programs; oversight by regulators

• Contractors/suppliers – identify, manufacture, install and maintain EE measures

• Venture capital and equity investors – develop new products

• End-users – make investment decisions; operational decisions

Federal Energy Efficiency Tax

Incentives

• Commercial building tax deduction -- $1.80/sf for 50% savings (scheduled to expire 12/31/13)

• C&I CHP, fuel cell and microturbine tax credits – 10-30% (extends through 2016)

• Credits for efficient appliances, new homes and home retrofits expired 12/31/11 but could be renewed for 2013

Efficiency is the Least-Cost Resource: Levelized Utility Cost of New Electricity Resources

0

5

10

15

20

25

EnergyEfficiency*

Wind Biomass Natural GasCombined

Cycle

PulverizedCoal*

Nuclear Coal IGCC Solar PV

Ran

ge

of

Leve

lize

d C

osts

(ce

nts

pe

r k

Wh

)

*Notes: Energy efficiency average program portfolio data from Friedrich et al. 2009 (ACEEE); All other data from Lazard 2011. High-end range of advanced pulverized coal includes 90% carbon capture and compression.

Trends in Utility-Sector EE

Program Spending/Budgets

From 1993-2008, values represent actual program spending (including rate-payer funded

programs); from 2009 on, they represent program budgets. Natural gas spending is not

available for the years 1993-2004. Sources: Nadel et al. (2000); York and Kushler (2002, 2005);

Eldridge (Molina) et al. (2008, 2009, 2010); Sciortino et al. (2011).

Energy Efficiency Program Spending

Projected to Increase to ~$10.8B

Electric EE funding projected to more than double to $9.5B in the Medium Case (Low = $6.1, High = $13.6B)

Gas EE funding projected to stay relatively flat at $1.3B in the Medium Case (Low = $0.9, High = $3.2B)

18

CleanTech Investment Trends

Energy Efficiency Finance

Combines:

• Technical expertise – what works, how to

do it, what technical risks are and how to

manage them

• Finance expertise – sources of capital,

ways to structure deal, manage risks and

earn decent return

Types of Energy Efficiency Finance

Product Development

(venture capital)

Project Finance

New Technologies

Some Project Finance Options

• Direct loans to end-users (e.g. revolving loan

funds)

• Leverage private capital (loan-loss reserves,

guarantees, interest-rate buy-downs)

• Invest in energy service companies

• On-bill finance

• PACE financing

• Get creative

Efficiency Investments:

Low Risk, High Return

Efficiency Investment Risks and Returns

0%

10%

20%

30%

40%

0% 10% 20% 30% 40%

Risk Index (year-to-year volatility)

Av

erag

e A

nn

ual

Ret

urn

Energy Efficiency

U.S. T-Bills

Long-term Corp Bonds

Common Stocks

Small Company

Stocks

Source: ACEEE estimates adapted from the U.S. EPA and the Vanguard Group

Direct Loans to End-Users

•Given high returns, some customers prefer to self-finance

•Often need large projects to justify project development costs

•Some end-users prefer off-balance-sheet financing

•Some customers who need project finance may not meet credit criteria

•Many states established revolving loan funds with initial capital from ARRA

Leverage Private Capital

• Quite a few EE finance programs that leverage capital from Credit Unions and local banks • Big banks not interested until sizable cash needs

• Limited data on default rates on EE loans so some banks charge a risk premium • ACEEE study finds 0-3% from about a dozen programs

(see http://www.aceee.org/research-report/u115 )

• Establishing loan loss reserves or guarantees can reduce risks and interest rates

• Some programs write down interest rates, but this can get expensive • Qualified energy conservation bonds another route for lower

interest rates

Energy Service

Companies ESCo’s)

•ESCo’s identify projects,

do project engineering,

arrange/provide financing

and sometimes guarantee savings

•In exchange receive share of savings or preset

payments

•ESCo’s commonly receive their financing from

institutional investors

On-Bill Finance

• Utility provides/arranges for capital and puts monthly payment on utility bill

• Utility knows bill payment history plus perceived threat of disconnection

• Can be structured to provide immediate positive cash-flow

• Can be structured to stay with the meter

• But few utilities want to provide capital; instead will seek to raise from market

• ACEEE on-bill financing report: http://www.aceee.org/research-report/e118

Example – California Small Business

Program

PACE Financing (Property Assessed Clean Energy)

•Special voluntary taxing district that covers a particular property

•Used to provide upfront capital to owner and payments made on tax bill

•Municipality packages many projects into a single bond offering

•Payments continue, even when ownership changes

•More than a dozen states have authorized

•Taxes are senior to mortgage => lower rates • Federal regulators are objecting to residential

PACE; commercial PACE proceeding but may need assent of mortgage holder

Conclusions

• Energy efficiency is a plentiful, modest-cost

resource with returns greater than most

investments.

• Being successful with EE finance requires

availability of both finance and technical

expertise.

• Many viable routes for both product and

project finance

• Need for continued attention on ways to

address outstanding issues

Contact Info

Steven Nadel

snadel@aceee.org

202-507-4000

www.aceee.org