Realizing the Power of Efficiency

Realizing the Power of Efficiency

Barriers,Opportunities&SolutionstoFinancingEnergyEfficiencyforSmalland

Mid‐sizedBusinessesintheNorthwest

March2010

I N P A R T N E R S H I P W I T H

SEATTLE ‐NORTHWEST S ECURIT I ES a ndSHOREBANK ENTERPR ISECASCAD IA

ii RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09

AboutNWEnergyCoalitionTheNWEnergyCoalitionisanallianceofmorethan100environmental,civic,andhumanserviceorganizations,progressiveutilities,andbusinessesinOregon,Washington,Idaho,Montana,Alaska,andBritishColumbia.NWECpromotesdevelopmentofrenewableenergyandenergyconservation,consumerprotection,low‐incomeenergyassistance,andfishandwildliferestorationontheColumbiaandSnakerivers.

AcknowledgmentsThisreportwaspreparedbyCascadiaConsultingGroupwiththesupportofSeattleNorthwestSecuritiesandShorebankEnterpriseCascadia.ChristineGrantservedasprincipalresearcher.AnnGrodnik,aninvestmentbankerwithSeattleNorthwestSecurities,andRachelBrombaugh,alendingspecialistwithShorebank,contributedtheirexpertiseinfinancialmarketsandlendingpracticestosmallerbusinesses,respectively.MarcDaudonservedasPrincipalinChargeforthisproject,withoversightandinputbyNWEnergyCoalitionprojectmanagerJohnHealyandotherCoalitionstaff.

Theprojectteamwouldliketothankallofthebankers,governmentofficials,utilityexecutives,andotherexpertswhocontributedtheirinsightsandexpertisethroughinterviews.Thisreportwouldnothavebeenpossiblewithouttheirtimeandinput.

FundingforthisstudywasprovidedbyagrantfromtheSeaChangeFoundation.

12/7/09 RealizingthePowerofEfficiency:FinancingEnergyEfficiency iii

Contents

ExecutiveSummary.................................................................................................................................1

Introduction............................................................................................................................................5

Methodology .............................................................................................................................................. 6

EnergyEfficiencyProjects .......................................................................................................................... 7

SmallandMedium‐sizedBusinessesintheNorthwest ......................................................................... 10

NorthwestEnergyEfficiencyPlayers....................................................................................................... 11

I. KeyFindingsandBarriers ..............................................................................................................15

II. CurrentPrograms ..........................................................................................................................27

CreditEnhancement................................................................................................................................. 27

DirectSubsidies ........................................................................................................................................ 28

PublicLoanPrograms ............................................................................................................................... 29

AssessmentofCurrentPublicFinancePrograms................................................................................... 30

III. ProposedSolutions .......................................................................................................................32

ImprovementstothePerformanceofFinancingMechanisms............................................................. 35

ImprovementstoExistingSupportServicesandSystems..................................................................... 37

LegislativeandRegulatoryChangestoAltertheMarketplace ............................................................. 40

NewProgramsandInstitutionstoAddCapacity ................................................................................... 42

IV. Recommendations ........................................................................................................................45

ThePreferredFuture................................................................................................................................ 45

RealizingthePreferredFuture:KeyInitiativesandNWEnergyCoalitionLeadership ........................ 46

AppendixA.LiteratureSourcesReviewed ............................................................................................47

AppendixB.AdditionalSupportingData ..............................................................................................48

12/7/09 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 1

Executive Summary

TheNWEnergyCoalitioncommissionedthisstudytoidentifyandfindwaystoovercomebarriers—includinglackofcapital—tofinancingenergyefficiencyprojectsintheNorthwest,specificallythestatesofIdaho,Montana,Oregon,andWashington.Thereportfocusesonunderstandingthefinancingneedsofsmalltomedium‐sizedbusinesseswithfewerthan500employees.Thesebusinessesrepresentamajorshareoftheregionaleconomyandenergyusebutgenerallyhavelowerparticipationratesinexistingenergyefficiencyprogramsthanlargerbusinesses.Asourregionplanstomeetitsgrowingenergyneeds,energyefficiencyconsistentlyrisestothetopasthemostcost‐effectivesolutionfortheNorthwest.AccordingtotheNorthwestPowerandConservationCouncil,thecommercialsectoroffersthepotentialforabout1,400averagemegawattsthroughefficiencygainsoverthenext20years,nearlytwo‐thirdsofwhichwillcomefromimprovedlightingsystems.

Asidefromutilityincentives,financingforenergyefficiencyprojectsforsmalltomedium‐sizedbusinesssectorisextremelylimited.ThisreportexploresthecurrentfinancingmarketplaceintheNorthwest,examiningitsstatus,constraints,andopportunitiesforfinancingcommercial‐sectorenergyefficiencyimprovements.Itidentifiescurrentprogramsthatcanhelpaddressthefinancinggap,anditmakesrecommendationsforfutureenhancementstofosterenergyefficiencylending.Thereportseekstoanswerthiscorequestion:Whatstepsareneededtoincreasetheflowofcommercialcapitalinthesmallandmid‐sizedcommercialmarkettoachieveenergyefficiencyonthescaleenvisionedbyNorthwestutilitiesandpowerplanners?Todoso,thereportexamineskeyfindingsandbarriers,reviewscurrentprograms,identifiespotentialsolutions,andrecommendsapathforward.

Theresearchteaminterviewedandexaminedkeycurrentandpotentialplayersintheenergyefficiencylendingmarketplace,includinglendersandinvestors(banks,creditunions,venturecapitalists,andeconomicdevelopmentorganizations);publicandinvestor‐ownedutilities;policymakersandgovernmentagencies;energyservicecompaniesandothervendors;aswellasnongovernmentalorganizationsandotherregionalenergyefficiencyexperts.

KeyFindingsTheresearchandinterviewsidentifiedthefollowingkeyfindingsregardingthecurrentenergyefficiencyfinancingmarketplaceandmajorindustryplayers.

1. Overalldemandforenergyefficiencyfinancingislimitedatpresent,andaccordingly,demandforenergyefficiencyfinancingfromsmallandmedium‐sizedbusinessesisalsolimited.

2. Bothlendingmarketsandmarketsforenergyefficiencyservicesarehighlycomplexandsegmented.

3. Inthecurrenteconomy,lendingtosmallandmedium‐sizedbusinessesislimitedforanything,includingenergyefficiencyprojects.

4. Financinginstitutionsgenerallyarenotfocusedonenergyefficiencylendingasaspecialorsignificantbusinessopportunity.

5. Lendingforenergyefficiencytothecommercialsectorbringsitsownsetofrisks.

2 RealizingthePowerofEfficiency:FinancingEnergyEfficiency 12/7/09

6. Somefinancialinstitutionsareactivelyseekingopportunitiesinthisfieldandarepioneeringinnovativelendingprograms.

7. ESCOsandrelatedvendorsareleadingthewaytosecurefinancingforenergyefficiencyinvestmentsusingbothprivateequityandconventionallending.

8. Utilitiesprovidesubstantialfundingforenergyefficiency,butgenerallydonotseeissuingandservicingloanstotheircustomersasabusinessopportunity.

9. Tradealliesoccupyacentralplaceinthenetworkthatincludesbusinessowners,contractors,utilities,andlenders,suggestinganimportantroleinpromotingfinancingforenergyefficiency.

10. Effortstocreateasecondarycapitalmarketforenergyefficiencyloansareintheirinfancy.

11. Interestinlegislationthatenablesenergyefficiencyloanstoremainwiththeproperty—ratherthanthepropertyowner—isgrowingintheNorthwest.

KeyBarriersMultiplebarrierslimitenergyefficiencyfinancing,includingtheseverelyweakenedeconomyandfinancialsector,therelativelypoorcreditworthinessofmanysmallerbusinesses,limiteddemandforsuchloansfrombusinesses,andaseriesofspecificchallengesassociatedwithestablishingcollateralforandthenear‐termfinancialviabilityofsomeenergyefficiencyinvestments.Inaddition,manysmallbusinessesshareenergyuseandbillingwithlandlords,splittingcostsandbenefitsandcomplicatingtransactions.Finally,theenvironmentalbenefitsofenergysavingsarenotcurrentlymonetized.Thesebarriersmeanthatformostbusinesses,lendinginstitutions,andinvestors,returnsaretoolowandperceivedrisksaretoohighforenergyefficiencyinvestmentstooccuronascalecommensuratewitheithertheirpotentialortheneed.Accordingly,thismarketplacelacksbothsufficientliquidityandcapital.

CurrentProgramsDespitethesechallenges,financialinstitutions,utilities,energyefficiencyserviceproviders,andgovernmentsareundertakinganumberofinnovativeprogramsandinitiativestoadvanceenergyefficiencylending.Effortsincludecreditenhancementprogramsthatprovideloanguaranteesaswellaspublicloanprogramsthatofferfinancingorcoveraportionofthefinancinginpartnershipwithaprivatelender.Theseinitiativespointthewayforward,providingnewapproachesandsolutionstoincreasecapitalflowsforenergyefficiencyprojects.

OptionsforIncreasingEnergyEfficiencyLendingAportfolioofsolutionswillbeneededtoaddressthebarriersandincreaseenergyefficiencyfinancingacrossthediversespectrumofsmalltomid‐sizedbusinesses.Thefollowingtablesummarizes15potentialsolutionstoincreaseenergyefficiencyfinancingintheNorthwest.Thecheckmarksindicatethattheoptionreducesrisk,increasesdemandandimprovesreturn,orincreasesliquidityandcapitalflowstofinancialinstitutionsorlenders.


SummaryofProposedSolutionstoIncreaseEnergyEfficiencyFinancingintheNorthwest

CATEGORIESANDOPTIONS

MitigatesRiskforLenders

IncreasesDemand/ReturntoLenders

ProvidesLiquidity/Capital

IMPROVEMENTSTOTHEPERFORMANCEOFEXISTINGFINANCEMECHANISMS

1 Encourageutilitiestoadopton‐billrepaymentmechanisms.

2 Encourageutilitiestoprovideprogresspaymentstobusinessesthatqualifyforenergyefficiencyrebatesandincentives.

3 DedicateaportionofexistingSmallBusinessAdministrationlendingtoenergyefficiencyprojects.

4 Acceleratethedevelopmentofsecondarymarketsforenergyefficiencyloanportfolios.

IMPROVEMENTSTOEXISTINGENERGYEFFICIENCYFINANCINGSUPPORTSERVICESANDSYSTEMS

5 Acceleratetheadoptionofcommercialbuildingenergyperformancetrackinganddisclosure.

6 Facilitateinformationsharingamongutilities,financialinstitutions,andcontractorsaboutenergyefficiencyopportunitiesandcostsavings.

7 Createautility‐sponsoredtechnicalassistanceprogramforlenders.

8 Launchaneducationandmarketingcampaigntosmallandmedium‐sizedbusinessestobuilddemandforenergyefficiencyprojectsandassociatedfinancing.

9 Promotetradeallynetworksand“one‐stopshopping”forenergyefficiencyresourcestosmallandmedium‐sizedbusinesses.

LEGISLATIVEANDREGULATORYCHANGESATTHEFEDERALORSTATELEVELTOALTERTHEMARKETPLACE

10 AdvancePropertyAssessedCleanEnergy(PACE)financinginWashington,Idaho,andMontana—similartoOregon’sexistinglaw.

11 Provideutilitieswithmoreincentivesandfewerbarrierstoinvesttheirresourcesindeepenergyefficiencyretrofits.

12 Supportfederallegislationtopermittax‐exemptbondfinancingforcleanenergyandenergyefficiency.

NEWPROGRAMSANDINSTITUTIONSTOADDCAPACITY

13 CreateafederalCleanEnergyDeploymentAdministrationor“GreenBank.”

14 Usemunicipal,state,orfederalbond‐issuingauthoritytoraisefundsforenergyefficiencyprojects.

15 Developandexpandrevolvingloanfundstosupportenergyefficiencyprojects.

16 Expandcreditenhancementandothermechanismsthatleverageprivatecapital.


RecommendationsEachofthesesolutions,ifimplemented,hasthepotentialtostrengthenthemarketplaceforenergyefficiencyfinancing,butwhichoptionsshouldbepursuedandinwhatpriorityordertoincreasefinancingofenergyefficiencyprojectsforsmallandmedium‐sizedbusinessesintheNorthwest?Thereport’sconclusionrecommendsprioritiesforearlyaction.Theserecommendationsareintendedtolaythefoundationforfurtherchangeandhelpthemarketplacefunctionbetteronitsowntodriveenergyefficiencyaction.

Fornear‐termaction,werecommendseveralsolutionsthatstandoutintheirpotentialtoleverageresources,stimulatechangeinthemarketplace,engagelenders,andconsequentlyleadtorapidgrowthinfinancingforenergyefficiency.

Earlyaction#1.Marketexistingenergyefficiencyprogramsmoreeffectivelythroughcoordinatedeffortsofgovernments,utilities,andorganizedtradeallynetworks.Thiseffortincludescollectionanddisseminationofbetterinformationabouttheperformanceandfinancialbenefitsofenergyefficiencyupgradesforbusinesses.Werecommenddoingsothrough1)widespreadadoptionoftheU.S.EnvironmentalProtectionAgency’sEnergyStarportfoliomanageroranalternativestandardizedratingsystemtotrackabuilding’senergyperformanceand2)implementationofautility‐sponsoredEnergyConservationAdvisorprogramforlenders.

Earlyaction#2.AdvancePropertyAssessedCleanEnergy(PACE)financinglegislationwherefeasible,providingthebasisforemergenceofasecondarymarketforenergyefficiencyloans,benefitingbothcommercialandresidentialsectors.

Earlyaction#3.Encourageutilitieswhosebillingsystemshavebeenupgradedtoenableon‐billrepaymenttousethismechanismtofacilitateandincreaselendingforenergyefficiencyprojects,reducingupfrontcapitalcontributionsrequiredfrombusinesses,simplifyingloanrepayment,andmakingadirectconnectionbetweenenergyandcostsavingsforthecustomer.

Earlyaction#4.Provideutilitieswithmoreincentivesandfewerbarrierstoinvesttheircapitalandhumanresourcesincomprehensive,deepenergyefficiencyretrofitsthroughouttheirservicemarkets.

Earlyaction#5.Establishpublicenergyefficiencyfundsdedicatedtoofferingcreditenhancementtoleverageprivatecapitalthroughtheuseofavailablemunicipal,state,andfederalfunds,includingbonds.

Together,thesesolutionscanprovideacatalystforlendersandinvestorstofinanceenergyefficiency.Theycanservetoreducerisksforbanksandinvestors(transferringrisktogovernmentorutilitiesinsomecases),increasingreturnstoborrowersandlenders,boostingliquidityandcapitalflows—andhelpingsecuretheNorthwest’sclean,efficientenergyfuture.


Introduction

TheNWEnergyCoalitioncommissionedthisstudytoidentifyandfindwaystoovercomebarriers—includinglackofcapital—tofinancingenergyefficiencyprojectsbysmallandmedium‐sizedbusinessesintheNorthwest,specificallythestatesofIdaho,Montana,Oregon,andWashington.Thereportfocusesonthissectorbecausewhileitisamajorpartoftheregionaleconomywithsubstantialenergyusage,thesebusinessesgenerallyhavelowerparticipationratesinenergyefficiencyprogramsthanlargerbusinesses.

Thisreportexploresthefinancingmarketplace,examiningthecurrentstatusof,constraintsto,andopportunitiesforfinancingcommercial‐sectorenergyefficiencyimprovementsintheNorthwest.Italsoidentifiescurrentpublicandutilityprogramsthatcanhelpaddressthefinancinggap,anditmakesrecommendationsforfutureenhancementstofosterenergyefficiencylending.Thereportseekstoanswerthiscorequestion:Whatstepsareneededtoincreasetheflowofcommercialcapitalinthesmallandmid‐sizedcommercialmarkettoachieveenergyefficiencyonthescaleenvisionedbyNorthwestutilitiesandpowerplanners?

ThisreportbuildsonapreviousCoalitionstudy,ThePowerofEfficiency,whichdocumentsthecriticalroleofenergyefficiencyinmeetingourregion’sgrowingenergyneedsandreducinggreenhousegasemissions.ThePowerofEfficiencyshowsthatenergyefficiencycanmeetalltypicalnewelectricloadgrowththrough2020atapproximatelyhalfthecostofnewgeneration.Fornaturalgas,efficiencycanmeetabouthalfthenewdemandduringthattimeframeatlesscostandwithlessriskthannewpipelines.

TheCoalitioncommissionedthisfollow‐upstudytoexaminemorecloselytheoften‐citedbarrierthatthelackofupfrontcapitalpresents.Theresearchandanalysissoughttoidentifyworkablestrategiestoovercomethatbarrierandaccelerateefficiencyinvestments.Followingthisintroductorychapter—whichdefinesthestudymethodology,relevantenergyefficiencyprojects,smallandmid‐sizedbusinesses,andkeyindustryplayers—theremainderofthereportincludesthesemajorsections:

I. KeyFindingsandBarriers—thecurrentstateofthemarketplaceforenergyefficiencyfinancing.

II. CurrentPrograms—existinggovernment‐supportedandutilityprogramstosupportfinancingofenergyefficiencyprojects.

III. ProposedSolutions—optionstoincreasetheflowofenergyefficiencyfinancingandspurimplementationofcost‐effectiveprojects.

IV. Recommendations—top‐priorityoptionsandstrategiesrecommendedfornear‐termaction.


MethodologyOurteamconductedin‐depthinterviewswithadiversecross‐sectionofexpertsintheenergyefficiencyfinancingmarketplace.Intervieweesrepresentedthefollowingsectors:

Lendingandinvestmentinstitutions,includingbanks,creditunions,venturecapitalistsandpubliclyfundedeconomicdevelopmentlendingorganizations.

PublicandprivateutilitiesfromallfourNorthweststates.

Northwestenergyservicecompanies(ESCOs).

Localandstatepolicymakersandgovernmententities.

Non‐profitorganizationsandregionalenergyefficiencyexperts,includingrepresentativesoftheNorthwestEnergyEfficiencyCouncil,theNorthwestEnergyEfficiencyAlliance,andtheEnergyTrustofOregon.

Table1liststhe25interviewsconductedforthisstudy,includingindividualsandtheirorganizations.


Table1.ListofIntervieweesandOrganizations

ORGANIZATION CATEGORY CONTACT

AlternativeEnergyResourcesOrganization Nonprofit BenBrouwer

BankofAmerica Lender/investor NeilSkiver

BECU Lender/investor ScottStrand

CityofPortland,OfficeofSustainableDevelopment Government DerekSmith

CityofSeattle,OfficeofEconomicDevelopment Government TinaVlasaty

CommunityCapitalDevelopment Lender/investor RolandChariton

EnergyTrustofOregon Nonprofit SteveLacey

HannonArmstrong Lender/investor JohnChristmas

HomeStreetBank Lender/investor RichardBendix

IdahoDepartmentofCommerce Government LanePackwood

IdahoFallsPower Utility VanAshton

MacDonald‐Miller ESCO PerryEngland

McKinstry ESCO MattWegworth

NationalDevelopmentCouncil Lender/investor ChuckDePew

NorthwestEnergyEfficiencyAlliance Nonprofit JackDavis

NorthwestEnergyEfficiencyCouncil Nonprofit StanPrice

OregonStateRepresentativeJulesKopelBailey Government JulesKopelBailey

PerformanceMechanicalGroup ESCO DannyMiller

PivotalInvestments Lender/investor GreggSemler

PugetSoundEnergy Utility BobStolarski

SeattleCityLight Utility BobBalzar

SmallBusinessAdministration Government MarkCostello

SpokaneNeighborhoodEconomicDevelopmentAlliance Lender/investor ThomasSpeight

UmpquaBank Lender/investor DanWeldon

USDARuralDevelopment Government MaryTraxler

U.S.Representative(Washington)JayInslee Government MauraLittle

Theresearchforthisreportalsoincludedareviewofcurrentpublicationsrelatedtoenergyefficiencyfinancing.Allliteraturereviewedwaspublishedwithinthelasttwoyearsandrepresentedbothpublicandprivateauthorsandsponsorshiporganizations.AppendixAincludesalistoftheliteraturesourcesreviewed.

EnergyEfficiencyProjectsThissectiondescribestypicalenergyefficiencyprojectsinsmallandmedium‐sizedbusinessesinthePacificNorthwestthatarethedesiredendresultofthefinancingrecommendationsinthisreport.Analysesfromprivate,public,andnongovernmentalorganizationshavedocumentedthemajoropportunitythatenergyefficiencypresentsformeetingourenergyneedsandsavingmoney.A2007McKinsey&Companyreport,forexample,foundthat“massmarketready”energy‐savingopportunities


worthapproximately$130billionannuallytotheU.S.economygounrealized.1(AppendixBprovidesadditionalinformationoncost‐effectiveenergyefficiencymeasuresforthecommercialsector.)

TheNorthwest’sofficialpowerplanningagency,theNorthwestPowerandConservationCouncil(NWPCC),assessestheregion’slong‐termelectricityneeds.InitsdraftSixthPowerPlan,releasedinmid‐2009,NWPCCidentifiesthelowestcostandlowestriskpowersourcestomeettheregion’slong‐termneeds.Forthefirsttime,NWPCCforeseesmeetingthevastmajority(about85%)ofnewelectricityneedsoverthenext20yearswithenergyefficiency—anaggressivebutreasonabletargetof5,800averagemegawatts.Thecommercialsectoroffersthepotentialforabout1,400averagemegawattsthroughefficiencygains,includingnearlytwo‐thirdsfromimprovedlightingsystems.Newtechnologieslikelight‐emittingdiodesandimprovedlightingfixturesandcontrolsofferaddedpotentialsavingsinbothoutdoorandindoorlighting.

Asnotedabove,ThePowerofEfficiencyconcludesthatcost‐effectiveenergyefficiencymeasurescancutnewnaturalgasdemandinhalfoverthenextdecade.Inexistingcommercialbuildingsthosesavingswillcomeprimarilyfrommoreefficientequipmentandappliancesaswellasreclaimedheatfromrefrigerationunits.

1McKinsey&Company,ReducingU.S.GreenhouseGasEmissions:HowMuchatWhatCost?2007.


SampleEnergyEfficiencyRetrofitandEquipmentUpgradeCostRangesandBenefits*

UpgradeCommercialDishwashertoEnergyEfficientModel:Commonenergyefficiencyequipmentupgradeforbusinessesinthefoodservice,hospitality,andcare‐givingindustries.

Cost:Approximately$10,000to$15,000 AverageUtilityRebate:$2,000to$3,000 AnnualEnergySavings:Approximately25,000kWh AnnualCostSavingsfromAvoidedEnergyConsumption:$1,900 10‐yearNetPresentValueat7%DiscountRate:$200to$6,000 PaybackPeriod:4to7years

CommercialOfficeBuildingInteriorLightingUpgrades:Replaceabout300incandescentandT12fluorescentfixturesandlampswithT5andcompactfluorescentfixturesandlamps.

Cost:$40,000 AverageUtilityRebate:50to100percentoftotalcosts AnnualEnergySavings:69,000kWh AnnualCostSavingsfromAvoidedEnergyConsumption:$5,000 10‐yearNetPresentValueat7%DiscountRate:$16,000to$36,000 PaybackPeriod:0to4years

FullHeating,Ventilating,andAirConditioning(HVAC)Modernizationfor50,000SFCommercialOfficeBuilding:Updateallexistingequipmentandcontrolsystems.

Cost:$750,000 AverageUtilityRebate:35to50percentoftotalcosts AnnualEnergySavings:400,000kWhand20,000therms AnnualCostSavingsfromAvoidedEnergyConsumption:$70,000 10‐yearNetPresentValueat7%DiscountRate:$6,000to$110,000 PaybackPeriod:5to7years

*Assumes$0.075perkWh—theblendedaveragecostforcommercialelectricityintheNorthweststates.BasedonEnergyInformationAdministration,AverageRetailPriceofElectricitytoUltimateCustomersbyEnd‐UseSector,byState,2009.Notethatwhenautilitycalculatescost‐effectiveness,thecalculationisbasedonwholesaleavoidedcosts(plussomeriskandenvironmentalbenefit),resultinginsmallersavingsvalueandlongerpaybackperiods.


SmallandMedium‐sizedBusinessesintheNorthwestForthepurposesofthisreport,wedefinesmallandmedium‐sizedbusinessesashavingfewerthan500employees.AccordingtotheU.S.CensusBureau,asmallbusinesshasfewerthan100employees,andamedium‐sizedbusinesshasfewerthan500employees.2WehaveexcludedfromouranalysischainbusinesseswithheadquartersoutsidetheNorthwestandenergycustomersthatutilitiesclassifyasindustrial(e.g.,aluminumsmelters,pulpandpapermills,timbermills,anddatacenters).

AsdisplayedinTable2,smallandmedium‐sizedbusinessesaccountfor58percentofthetotalemploymentand49percentofthetotalannualpayrollinourregion.Whilereliabledataontheenergyconsumptionofthediverseuniverseofsmallandmedium‐sizedbusinessesarenotavailable,thefactthatthesefirmsrepresentsuchalargepartofoveralleconomicactivitystronglysuggeststheyofferconsiderablepotentialforenergyconservation.Utilityconservationprogrammanagerssaytheirsmallercommercialcustomersgenerallylaginenergyefficiencyinvestment.

Table2.Businesses,Employment,andAnnualPayrollbyEmploymentSizeintheNorthwest3

DATATYPE TOTALINNORTHWEST <100EMPLOYEES <500EMPLOYEES

#ofBusinesses 688,194 614,697 637,532

Employment 4,771,710 2,025,135 2,744,364

AnnualPayroll($1,000) $184,808,837 $64,405,270 $90,789,470

Inadditiontothesheernumberofsmallandmedium‐sizedbusinesses,researchhasshownthatenergycostsareagrowingconcerntomanyofthesebusinesses.A2008reportcommissionedbytheU.S.SmallBusinessAdministrationshowedthat,inmostcommercialsectors,smallentitieshavehigherenergyexpendituresperdollarofsalesthanlargerentities.Specifically,theenergycostpersalesratioforasmallbusinessis2.7timesthatofalargeentity.4WhileitistruethatenergycostsintheNorthwestarelowerthaninotherpartsofthecountry,thelargerrelativeburdenonsmallerbusinessesremainsconsistentwiththeSBAstudy.

2StatisticsaboutbusinesssizeandsmallbusinessesfromtheU.S.CensusBureau.http://www.census.gov/epcd/www/smallbus.html.3U.S.CensusBureau,2006CountyBusinessPatterns.http://www.census.gov/epcd/susb/introusb.htmandhttp://www.census.gov/csd/susb/defterm.html.4CharacterizationandAnalysisofSmallBusinessEnergyCosts.FortheSmallBusinessAdministrationOfficeofAdvocacy,preparedbyE.H.Pechan&Associates.April,2008


NorthwestEnergyEfficiencyPlayersNumerousorganizationseitherareinvolvedorcouldbeinvolvedinenergyefficiencyintheNorthwest.Eachoftheseplayersintheenergyefficiencymarketperceivestheopportunitiesforandbarrierstoincreasedenergyefficiencyfinancingfromaparticularvantagepointandappliesdifferentmethodsforassessingthemarketplace.Figure1providesgeneralgroupingsforthesedifferentplayersbasedontheircurrent—orpotential—roleswithinthismarket.Theredboxesillustratetheplayersthatarecurrentlymoreactiveinthemarketplace.Astheoptionsdescribedlaterinthisreportindicate,however,furtherinvolvementfromtheseplayersisalsoneededtobolsterthemarketplaceforenergyefficiencylendingintheNorthwest.

Figure1.NorthwestEnergyEfficiencyFinancing:CurrentandPotentialPlayersandRoles

TheremainderofthissectionprovidesabriefoverviewofentitieswithapresenceinthePacificNorthwestthatareeitheractivelyinvolvedinenergyefficiencyfinanceorhavethepotentialtoplayimportantroles.


Risk,Return,andLiquidity

HowFinancingInstitutionsViewLendingOpportunities

Understandinghowlendersmakedecisionsaboutanytypeofloanhelpsexplainhowthefinancialindustryviewsthebusinessopportunityassociatedwithenergyefficiencylending.Risk,return,andliquidityareattheheartofthesedecisions.Knowledgeofthisframeworkprovidesabasisforbothassessingbarriersandidentifyingsolutions.

Riskandreturn.Fundamentally,thebusinessoflendingisamatterofriskandreturn.Lendersmakedecisionsaboutwhomtolendto,howmuch,andonwhattermsbasedontheirassessmentoftherisksassociatedwiththeborrowerandtheprojecttobefinanced,balancedbytheexpectedreturnontheloan.Ifaprojectorborrowerisconsideredriskier,thelenderwilldemandahigherinterestrateandprovideshorterterms.Conversely,thebestcustomerswiththehighestratingswillreceivethelowestrateandbestterms.Similarly,businessesandinvestorsdecidehowtodeploytheirscarcecapitalbasedonriskandreturncalculationswiththegoalofmaximizingreturn.Accordingtofinanceindustryexpertsinterviewedforthisstudy,lendingforenergyefficiencyprojectsisnodifferentinthisregardthananyothercommerciallendingtransaction.

Liquidity.Thesecondimportantconceptinunderstandinganyfinancialmarketplaceisliquidity—readilyavailablecashandcapital.Secondaryfinancingmarkets—suchaswhentheFederalNationalMortgageAssociation(FannieMae)purchasesbundledhomemortgagesfromtheoriginallendingbanks,providingcapitalthebankscanloanagain—helpprovideliquidityinthelendingmarketplace.Liquidityistheessentialingredientforlendingandformarketstogrowintheenergyefficiencyspace.

Utilities.Theregion’snaturalgasandelectricutilitiesplayacentralroleinrealizingenergyefficiency.Formanyyears,theregion’selectricutilitieshaveinvestedinenergyefficiencyastheleast‐costresourcetomeetgrowingdemand;morerecently,naturalgasutilitiesarealsorelyingonenergyefficiencytomeetgrowingenergyuse.Utilitieshavemadethoseinvestmentsprimarilybyofferingcustomersfinancialincentivesintheformofcashassistanceforenergy‐savingmeasuresthroughrebates,effectivelypurchasingenergythroughconservationatcostsfarlowerthanthosefornewpowerplantsorpipelines.In2008,Northwestutilitiesspentatotalof$300milliononenergyconservationprogramsandcashincentivesforefficiencymeasures.5Inrecentyears,manyutilityconservationprogramshaveimprovedprogramresultsbydevelopingvaluablerelationshipswith“tradeallies”—vendorswhosellandinstallenergy‐savingequipmentandretrofits—andlargerenergyservicescompanies(discussedbelow).

Bothpublicandinvestor‐ownedutilitiesthroughouttheregionofferconservationprograms,andtheEnergyTrustofOregon(ETO)isthestate’slargestenergyconservationprogramentity.ETOservescustomersofseveralinvestor‐ownedOregonutilitiesandoffersenergyefficiencyresourcesandincentives.ETOcameintoexistencein2002afterthestatepassedalawrequiringinvestor‐ownedutilitiestocollecta3percentpublicpurposechargetofundenergyconservation.6

GiventhecentralroleutilitiesandETOplayinregionalenergyefficiencyefforts,theirparticipationincreatingwaystobridgethefundinggapforenergyefficiencyprojectsisessential.

EnergyServicesCompanies(ESCOs).ESCOsaretypicallylargerfirmsofferingclientsintegratedenergyservices—technicalandfinancial—oftenthroughasystemknownasperformancecontracting,inwhichtheESCOfinancestheprojectcostandisrepaidovertimefromtheclient’senergycostsavings.Oncethedebtisrepaid,theclient

5MassoudJourabchi,NorthwestPowerandConservationCouncil,personalcommunicationwithChristineGrant,October23,2009.6EnergyTrustofOregon,“WhoWeAre,”accessedNovember9,2009.http://energytrust.org/About/who‐we‐are/


realizestheongoingenergycostsavings.ESCOstendtofavor“patient”clients—institutionsandothersthatownandoperatetheirbuildingsoveralongtimehorizonandwhoseevalueindeeperenergyupgradeswithrelativelyextendedpaybackperiods.ESCOsareexpertsregardingthegovernmentandutilityrebatesandincentivesavailabletohelppayforprojectcosts.

EquipmentandSmallerEnergyServicesVendors.Thiscategoryincludesvendorsofspecificenergy‐efficientequipment(e.g.,heatingandcoolingsystems,energy‐efficientcommercialdishwashers).Equipmentvendorsandotherenergyefficiencyserviceprovidersareoftenhighlyskilledatnavigatingandmaximizingutilityrebates.Northwestutilityrepresentativesreportthatenergyservicesvendorsaretheinformal“salesforce”tothesmallbusinesssectorfortherebatesandincentivestheutilitiesoffer.Energyservicesvendors,alongwithESCOs,arethemosttechnicallysavvyplayersintheindustry,providingbusinessesandlenderswithvaluablecostandenergyexpertisetoinformpurchasingandfinancingdecisions.

PrimaryLenders.Privatelendersrangefromlargenationalbanksthatprovidecommercialloansofupto$100milliontosmallerregionalbankstocommunitydevelopmentfinancialinstitutions(CDFIs)thatprovideloansassmallas$5,000tobusinesses.CDFIsarefinancialinstitutionswhoseprimarymissionistopromoteeconomicdevelopmentinstrugglingcommunities,bothurbanandrural,thatareunderservedbytraditionalfinancialinstitutions.7NumerousregionalbanksintheNorthwestlendtosmallerbusinesses,andloanamountsatregionalbankscanrangefrom$5,000toseveralmilliondollars.Mostnationalbankswillnotconsiderdealsthataresmallerthan$150,000becauseofthestaffandadministrativecostsassociatedwithprocessingaloan.Thoughcreditunionsarealsomission‐drivenfinancialinstitutions,bylawonly12.5percentoftheirtotallendingcangotowardcommercialtransactions.Thisfederalregulationlimitsthediversityofservicescreditunionsarewillingtooffertobusinesses,suchasspecializedcommercialenergyefficiencylendingprograms.OnlyahandfuloflendersintheNorthwesthaveenergyefficiencylendingexpertise.Severalpublicloanandgrantprogramsofferfundstobusinessesexpresslyforenergyefficiency,asdiscussedintheCurrentProgramssection.

SecondaryMarket(Refinancers).Thesecondarymarketconsistsoforganizations—bothinvestmentbanksandpubliclybackedfinancialinstitutions—thatbuyloansfromlendersandthensellthemto7RachelBrombaugh,ShorebankEnterpriseCascadia,personalcommunicationwithChristineGrant,September30,2009.

LenderPerspectivesonEnergyEfficiencyFinancingOpportunities:ALocalExample

ShorebankEnterpriseCascadia,aNorthwestcommunitydevelopmentfinancialinstitution(CDFI),recentlyreceivedareferralfromanationalcommercialbankforalocalfaith‐basedorganization.Theorganizationisplanningtoreplaceitsheating,ventilating,andairconditioning(HVAC)systematacostof$250,000.Theorganizationhas$40,000fortheprojectandwouldneeda$210,000loan.Thoughtheorganizationhashadmanyyearsofpositivecashflow,ithadasmalllossin2008.ThenationalbankwasunabletocalculatetheprojectedenergycostsavingsfromthenewHVACsystem,andthuswasunabletousethosecostsavingsincalculatingtheDebtServiceCoverageRatio(DSCR).TheresultingDSCRdidnotmeetthebank’spolicyforlending.TheCDFI,however,planstocalculatetheDSCRusingbothrevenuesandloweredenergycostprojections;theloaniscurrentlyinpreliminaryunderwriting.

Thiscasestudyillustratesthewillingnessoflargenationalbankstoforgolendingopportunitiesbecausetheylackthecapacitytoanalyzetherisksassociatedwithenergyefficiencylending.Ontheotherhand,banksthataredevelopingenergyefficiencyexpertisestandtogaininthesetypesoflendingscenarios.


otherinvestorswhoexpectthebundledloanstoyieldanacceptablefinancialreturn.Thepurchaseofloansaddsliquiditythatallowsprimarylenderstomakeadditionalloanstoborrowers.Whilepotentialexistsforasecondarymarkettoexpandtheamountofcapitalavailableforenergyefficiencyprojects,nosuchmarketexiststoday.Thelackofasecondarymarketislargelyduetothechallengesassociatedwithdevelopingarobustprimarymarketofloansspecificallyforenergyefficiency.

Investorswillbeattractedtoenergyefficiencyproductsonthesecondarymarketonceenergyefficiencytransactionsareratedandshowatrackrecordofsuccessontheprimarymarket,accordingtoaninvestmentbankerinterviewed.8Inaddition,nogovernmentagencyexiststohelpfacilitateanddrivethisdemandforcommercialloans,ascurrentlyoccursintheresidentialhousingmarketwithenergyefficiencyloans.Forexample,theFederalNationalMortgageAssociation(FannieMae)purchasesresidentialenergyefficiencyloansfromlenders,whichsubsequentlyenableslenderstoissuemoreresidentialenergyefficiencyloanswiththecapitaltheyreceivefromFannieMae.Todate,FannieMaehaspurchased$225millionworthofresidentialenergyefficiencyloansnationwide.

Investors.Atpresent,littlemarketexistsfordirectinvestmentinfinancialproductstiedtoenergyefficiency.Onceasecondarymarketdevelops,keyinvestorgroupswilllikelyincludepensionfunds,privateequity,individualinvestors,andmutualfunds.SteveLacey,DirectorofEnergyEfficiencyProgramsattheEnergyTrustofOregon,predictsthatinvestmentsinbundledenergyefficiencyloanprogramswillbehighlyattractiveto“patientcapital”—suchaspensionfundswithlonginvestmenthorizons—becauseinvestorswilllikelyseeasteady4to5percentannualreturnoninvestment.

8JohnChristmas,HannonArmstrong,personalcommunicationwithChristineGrant,October13,2009.


Findings, Barriers, and Current Programs for Energy Efficiency Financing


I. Key Findings and Barriers

Fromourresearchandinterviews,weidentifiedthefollowingkeyfindingsregardingthecurrentenergyefficiencyfinancingmarketplaceandmajorindustryplayers.

1. Overalldemandforenergyefficiencyfinancingislimitedatpresent,andaccordingly,demandforenergyefficiencyfinancingfromsmallandmedium‐sizedbusinessesisalsolimited.

2. Bothlendingmarketsandmarketsforenergyefficiencyservicesarehighlycomplexandsegmented.

3. Inthecurrenteconomy,lendingtosmallandmedium‐sizedbusinessesislimitedforanything,includingenergyefficiencyprojects.

4. Financinginstitutionsgenerallyarenotfocusedonenergyefficiencylendingasaspecialorsignificantbusinessopportunity.

5. Lendingforenergyefficiencytothecommercialsectorbringsitsownsetofrisks.

6. Somefinancialinstitutionsareactivelyseekingopportunitiesinthisfieldandarepioneeringinnovativelendingprograms.

7. ESCOsandrelatedvendorsareleadingthewaytosecurefinancingforenergyefficiencyinvestmentsusingbothprivateequityandconventionallending.

8. Utilitiesprovidesubstantialfundingforenergyefficiency,buttheygenerallydonotseeissuingandservicingloanstotheircustomersasabusinessopportunity.

9. Tradealliesoccupyacentralplaceinthenetworkthatincludesbusinessowners,contractors,utilities,andlenders,suggestinganimportantroleinpromotingfinancingforenergyefficiency.

10. Effortstocreateasecondarycapitalmarketforenergyefficiencyloansareintheirinfancy.

11. Interestinlegislationthatenablesenergyefficiencyloanstoremainwiththeproperty—ratherthanthepropertyowner—isgrowingintheNorthwest.

Theremainderofthissectionprovidesadditionalinformationanddiscussiononthesefindingsregardingtheenergyefficiencyfinancingmarketplace.


Finding1. Givenscarcecapitalanddebtcapacity,overalldemandforenergyefficiencyfinancingislimitedatpresent;accordingly,demandforenergyefficiencyfinancingfromsmallandmedium‐sizedbusinessesisalsolimited.

Finding2. Demandforenergyefficiencyfinancingismixed.Nineintervieweesinvolvedinbusinesslendingcitedlowdemandfrombusinessownerstoborrowmoneyforenergyefficiencyprojectsatthistime.Lendersreportthatsomeprojectsthatincorporateaspectsofenergyefficiencyareoccurring,however,buttheyoftenarenotcalled“energyefficiencyprojects”becausetheyarepartofalargerremodelorconstructionproject.

Businessesappearconcernedabouttheopportunitycostofinvestinginenergyefficiencyupgrades.Manybuildingownershaveconcernsabouttheopportunitycostofinvestingcapitalinenergyefficiencyupgradeswhenthosefundscouldbeusedforanotherinvestmentwithagreaterreturn,suchasnewproductioncapacitiesthatwouldincreaserevenue.Interviewsindicatethatintoday’scapital‐constrainedeconomy,businessesarecautiousaboutborrowingforallbutthemostessentialprojectsorthosewiththequickestreturn.

TheNorthwest’srelativelylow‐costelectricityprovideslesseconomicincentiveforenergyefficiencyupgrades.Whilesmallerbusinessesbearanenergycost‐per‐salesratiothatisnearlytriplethatoflargefirms,theNorthwest’selectricratesmeanenergyremainsarelativelysmallpartofoperatingexpensesformostbusinesses.Thisfactcomplicateseffortstospurgreateractivityinthemarketplacebecausepaybackforefficiencyupgradestakelonger.AccordingtotheEnergyInformationAdministration,WashingtonandIdahorankedsecondandthirdrespectivelyfortheleastexpensivecommercialelectricityinthenation.TheaveragecostofcommercialelectricityinthefourNorthweststatesin2009was7.5centsperkWh,comparedtoanationalaverageof10.5centsperkWhandasmuchas16.2centsperkWhintheNewEnglandregion.9

Finding3. Bothlendingmarketsandmarketsforenergyefficiencyservicesarehighlycomplexandsegmented.Themarketplaceforenergyefficiencyservicesandassociatedfinancingtosmallandmedium‐sizedbusinessesisfragmentedandcomplicated.Businessesvaryinsizesandtype,withmyriadenergyefficiencyprojectneeds,balancesheets,cashflowrequirements,ownershipstructures,energycosts,locations,andbusinesspriorities.Similarly,manydifferenttypesoffinancialinstitutions,investors,andotherplayershavethepotentialtooperateinthemarketplace.ItisimportanttounderstandthiscomplexityandrecognizethatavarietyofsolutionsultimatelywillbeneededtoaddressthemanydifferenttypesofbusinessesandfinancialinstitutionsintheNorthwest.

9EnergyInformationAdministration,AverageRetailPriceofElectricitytoUltimateCustomersbyEnd‐UseSector,byState,June2009and2008,releasedSeptember11,2009.


Finding4. Inthecurrenteconomy,lendingtosmallandmedium‐sizedbusinessesislimitedforanything,includingenergyefficiencyprojects.Commercialbankshavealowappetiteforriskandarelendingonlytotheirbestcustomersandtothosewiththestrongestbalancesheets.Financialinstitutionscurrentlyarehesitanttoconsidernewlendingopportunitiessuchasthoseassociatedwithenergyefficiency.

Overalllendingtosmallandmedium‐sizedbusinessesisdown.BothlendersandESCOsreportthat,asaresultofthecreditcrisis,lesslendingisavailabletosmallerbusinessesthattendtobelesscreditworthythanlargerbusinesses.Asaresult,manybusinessesarehavingdifficultysecuringafixed,lowrateloanforanytypeofproject.

Abusiness’slackofcreditworthinessisakeyobstacleforlenderswhentheyareconsideringmakingaloanforanenergyefficiencyproject.AnintervieweefromMcKinstry,amajorESCO,estimatedthatpoorcreditworthinesscauses90percentofthefinancingfailuresforpotentialcommercialenergyefficiencyprojects.AnotherintervieweefromtheESCOMacDonald‐Milleremphasizedthatmanyoftheircommercialcustomers’balancesheetswerestressedatthistime,andthosecustomersareunabletotakeonmoredebt.

Mostbusinessesdonotborrowmoneyfromlargenationalbanksforenergyefficiencyupgrades.Anintervieweefromonemajornationalbankreportedthatmedium‐sizedbusinessestypicallymakeenergyefficiencyupgradesonanas‐neededbasis(e.g.,whentheagingboilerbreaks)andpayforthoseupgradesoutoftheircapitalbudgets.10Smallerbusinessesareconstrainedintheamountmoneytheycanborrow.Largenationalbanksobservethatwhenasmallerbusinessdoesborrow,itwillinvestinprojectsthatresultinthequickestpaybackandimmediatelyimprovequarterlyearnings.Forexample,businesseswillinvestinmachinerythatautomatesaprocessorincreaseslaborproductivity.

Finding5. Financinginstitutionsgenerallyarenotfocusedonenergyefficiencylendingasaspecialorsignificantbusinessopportunity.Mostlendersassessenergyefficiencyprojectsastheywouldanyothertypeofloan—comparingreturnandriskwhileconsideringcollateral,creditworthinessofthebusiness,andcashflowtomeetrepaymentterms.

Lendinginstitutionsareloyaltotheirtraditionallendingmodels.Althoughahandfuloflendersareconsideringandevendevelopingcustomizedenergyefficiencylendingtoolsandservices,thisfieldisstillinthe“earlyadopter”stage.Mostcommerciallendersarenotcognizantofenergyefficiencyasadistinctmarket.

Lendersareonlybeginningtounderstandtheimpactofenergyefficiencyupgradesontheassetvalueofaholding.Energyefficiencyupgradescanaddvaluetopropertiesandprojects,primarilythroughloweroperatingcosts.Lendershavehaddifficultyportrayingthisvalue‐addinfinancialtermsuntilrecently.ESCOrepresentativesandenergypolicyexpertsnotedthatthegrowthofsystemsinwhichbuildingsreceivepublishedenergyefficiencyscoreswillmoveenergyefficiencyvaluationmoreintothemainstream.Furthermore,asmorebuildingsobtainenergyefficiencyratings,moredatawillbecomeavailabletodemonstratethatthenet

10NeilSkiver,BankofAmerica,personalcommunicationwithChristineGrant,October13,2009.


operatingincomeofabuildingincreasesafterupgradesaremade.AccordingtoaninterviewwithMcKinstry,agrowingnumberofinsurancecompaniesandrealestateprofessionalsarenowconsideringenergyefficiencywhenappraisingabuilding.11Lendersmaybegintofavorfinancingforenergyefficientprojectsonthebasisofimprovedcash‐flowandcollateralassetvaluationasitbecomesmorecommontoincludeenergyefficiencyratingsinfinancialanalyses.

Mostlendersinterviewedcitedalackofstandardized,financialdataonenergyefficiencyoutcomes,meaningtheycannotincludeoperatingsavingscalculationsintheirevaluationoftheviabilityofenergyefficiencylending.A2009policybriefingfromtheNaturalResourcesDefenseCouncilalsofoundthatalackofdatademonstratingthefinancialbenefitsofenergyefficiencyinvestmentsisakeybarriertotheparticipationofprivatelendersinthismarket.12

Venturecapitalfirmsdonotinvestinsmalltomedium‐sizedbusinessenergyefficiencyprojects.Eventhoughventurecapitalfirmshaveagrowinginterestinthecleanenergyeconomy,Northwestventurecapitalrepresentativesstatedthatfirmsusuallylookforlarge‐scaleprojectsthataremoretechnology‐based,particularlyinrenewableenergy.Also,venturecapitalfirmstypicallyseekreturnsbetween20to35percent.

Longpaybackperiodof“deep”energyefficiencyretrofitslimitslenderinterest.SeveralESCOrepresentativesnotedthatlendersarefrequentlyuncomfortablewiththelongpaybackperiodsassociatedwith“deeper”commercialenergyefficiencyprojects—suchasbuildingshellimprovements.Manylendersdonotwanttoofferaloantermthatmatchesthepaybackperiodoftheretrofit,whichinturnmakesshorter‐termfinancingpackagesunattractivetopotentialborrowers.

Finding6. Lendingforenergyefficiencytothecommercialsectorbringsitsownsetofrisks.Risksandreturnsassociatedwithenergyefficiencyprojectsvarywidelyanddifferinimportantwaysfromothertypesofequipmentorprojectinvestment.Theserisksareinadditiontothegenericrisksoflendingtosmallandmedium‐sizedbusinessesandcomplicatethedevelopmentofnewprogramsandinitiativestoexpandlendingforenergyefficiency.

Manyenergyefficiencyinvestmentsarecharacterizedbyhighinitialcostsandlongrepaymentperiods.Thiscombinationrequireslenderstotakeonmorerisk.Althoughthelifecyclecostsofenergyefficiencyarenearlyalwayspositive,theinitialoutlayofcapitalcanbeastumblingblockforlendersandbusinessesalike.Inaddition,thesimplepayback—nottobeconfusedwithloanrepaymentperiods—forenergyefficiencyupgradesfrequentlycanexceed10years.ArecentMcKinseyreportfoundthattheaveragepaybackperiodexpectedbycommercialcustomersconsideringenergyefficiencyinvestmentsisonly3.6years.13Thelongerthepaybackperiod,theriskiertheinvestmentfromalender’sperspective.Notsurprisingly,demandislimitedforenergyefficiencyprojectsthathavealongerpaybackthanbusinessesexpect.

11MattWegworth,McKinstry,personalcommunicationwithChristineGrant,October15,2009.12NaturalResourcesDefenseCouncil,ScalingupInvestmentinEnergyEfficiencywithaFederalEnergyEfficiencyFinancingFacility,April2009.13McKinsey&Company,UnlockingEnergyEfficiencyintheU.S.Economy,July2009.


Theownershipstructureofbuildingsfrequentlyresultsinsplitincentives.Commercialbuildingownerswholeasetheirbuildingsandrequiretenantstopaytheutilitybillshavelessincentivetoinstallconservationmeasures,asenergysavingsbenefitsaccruetothetenantsratherthanowners.Ownersofsmalltomedium‐sizedbusinessescanbefoundamongbothtenantsandbuildingowners.

Collateralisakeybarriertoincreasedfinancing.Lendershavelimitedrecourseintheeventofnonpaymentoncertainenergyefficiencyloans.Manyenergyefficiencyretrofitsareconsideredfixtures(permanentlyattachedtotheproperty)andthereforeareconsideredrealpropertyandthushavelimitedvalueascollateral.Ontheotherhand,certaintypesofequipmentandappliancescanberemovedIntheeventofnon‐paymentand,therefore,canbeusedascollateral.14

Finding7. Somefinancialinstitutionsareactivelyseekingopportunitiesinthisfieldandarepioneeringinnovativelendingprograms.

Basedoninterviews,CDFIsarepresentlythemostactivelyengagedentitiesinenergyefficiencylendingtosmallandmedium‐sizedbusinesses.CDFIsreceivegrantsfromprivatefoundationsandgovernmentprograms,whichallowthemtoprovidealowercostofcapitaltobusinessesmakingenergyefficiencyupgrades(orothertypesoftargetedinvestments).Recently,manyCDFIshavestartedtoseeincreasedinterestinenergyefficiencyfromtheirpublicandprivatefundersandhavethereforestartedtotransitionmorequicklyintoenergyefficiencylendingthanlargercommercialbanks.Asaresult,CDFIstendtobesomewhatsavvieraboutenergyefficiencylending;forthemostpart,however,CDFIscontinuetoevaluateloansforenergyefficiencyprojectsinthesamewayasmostotherloanrequests.

Someregionalbanksseeenergyefficiencylendingasanichemarket.Inthecourseofourresearch,weidentifiedoneregionalbankoperatingacommercial‐sectorenergyefficiencylendingprogram.In2008,UmpquaBanklauncheditsGreenStreetLendingprogramincollaborationwiththeEnergyTrustofOregon(ETO).Thisprogramprovideslow‐interestfinancingofupto$500,000forsmallbusinessestoimplementenergyefficiencyprojectsthatareeligibleforETOincentives.Theseloansareequipment‐secured,ortheyhaveaseniorlienontheproperty.ThebenefitofthiscollaborationforUmpquaBankisthatETO’sTradeAlliesserveasasalesforceforGreenStreetwhiletheyaresellingtheirownproductsandservicestocustomers.DanWeldon,Umpqua’sEco‐bankingManagerexplainedthattheGreenStreetprogramhashelpedUmpquareachnewcustomersandreinforceitsvalues‐drivenbankingphilosophy.

UmpquaBankisstayingtruetoitstriple‐bottomlinephilosophyofenvironmental,economic,andcommunitybenefits,thoughitisforgoingsomerevenuebyoperatingtheGreenStreetprogram.ToleveragetheETOTradeAllynetwork,UmpquaagreedtowaiveallclosingfeesforGreenStreetloans(typically1to2percentofthetotalloanamount),andUmpquaalsooffers

14U.S.DepartmentofEnergy,EnergyEfficiencyandRenewableEnergy,InnovativeEnergyEfficiencyFinancingApproaches,June2009.


interestratesforGreenStreetloansthatareabout50basispointslowerthantheirtypicalcommercialloans—approximately6.5percent.

Innovativelendersareincorporatingenergyefficiencyintotheirstandardlendingscreeningprocess.Forexample,theNationalDevelopmentCouncil(NDC),oneoftheCDFIsinterviewed,reportedthatitwillnotapprovealoanforacapitalorconstructionprojectunlesstheborrowerdemonstratesawarenessofallapplicableutilityrebatesandincentives.Thoughitinquiresabouttheuseofutilityrebatesandincentives,NDCwillnotmodifyloantermsbasedontheuseofrebatesorincentivesbecauseitalreadyoffersverylowratestoitscustomers.NDCseesthispolicyasaneducationalstep,ratherthanapartofdeterminingtheloanpackage.

Finding8. ESCOsandrelatedvendorsareleadingthewaytosecurefinancingforenergyefficiencyinvestmentsusingbothprivateequityandconventionallending.Thesefirmstypicallyworkwithlargerbusinesses,however,alongwithpublicandnon‐profitinstitutions.Generally,smallercompaniesoffewerthan100employeesarenotattractiveclientsforESCOsbecauseadministrativecostsarehighrelativetothetypicalrevenuesofsmallbusinessenergyefficiencyprojects.

ESCOspredominantlyfinanceenergyefficiencyprojectsintheMunicipal–University–School–Hospital(MUSH)marketandatthefederallevel.Publicclientslikeschools,citiesandcountieshavelongerinvestmenthorizonsandinmanycasesarepoliticallyandsociallyobligedtoactas“earlyadopters.”ManylargenationalbanksandESCOswillnotofferlong‐termfinancingtoprivatebusinessesforenergyefficiencyprojectsbutwilldosoforMUSHmarketandfederalgovernmententitiesbecausetheyareconsideredlowerlong‐termrisks.

OnelocalESCOhasforgedrelationshipswithlendinginstitutionstofacilitatestreamlinedfinancingforenergyefficiencyprojects.McKinstryCapital,apracticegroupwithinMcKinstry,issuesrequeststoabroadrangeoflenderstoidentifypossiblefinancingpartners.Thecompanyleveragestheselenderpartnershipsasitproposesservicestopotentialclients.

AnotherESCOhascreatedaninvestmentvehiclethatisattractingpublicandprivateinvestors.MacDonald‐Miller’scustomerbaseisbusinesseswith250to500employees.Manyofthesebusinessesareconservingcapitalforotherprojects,andtheyarecautiousaboutaddingmoredebt.ThecompanycreateditsEnergyFund,whichbehavesmuchlikeatypicalESCOperformancecontract:thebusinessagreestoamonthlychargetopayfortheupgradesbasedonamonthlyenergysavingsguaranteeresultingfromtheinstalledupgrades.Businessesdonothavealoanontheirbooksanddonotneedupfrontcapital.ThissystemhasessentiallymadeMacDonald‐Milleranaggregatorofsmallenergyefficiencyprojects,andthecompanyiscurrentlyseeinginterestfrompublicandprivateinstitutionalinvestorsinexpandingthismodelbecauseofthesubstantialcost‐savingopportunitiesavailableinthissector.Forexample,arecentanalysiscompletedbyMacDonald‐Millerfoundapproximately$9millionworthofannualenergyefficiencysavingsamong70commercialfacilitiesindowntownSeattle.15MacDonald‐Millerrecentlyreceiveda$1.5millionloanfromtheWashingtonStateDepartmentofCommercetohelpfueltheexpansionofitsEnergyFund.

15PerryEngland,MacDonald‐MillerFacilitiesSolutions,personalcommunicationwithChristineGrant,October5,2009.


Finding9. Utilitiesprovidesubstantialfundingforenergyefficiency,buttheygenerallydonotseeissuingandservicingloanstotheircustomersasabusinessopportunity.

Energyprovidersarepromotersandfundersofenergyefficiency.Utilitiesfundmillionsofdollarsworthofenergyefficiencyupgradesinthecommercialsectoreachyear.In2007,theBonnevillePowerAdministrationalonespentover$7milliononcommercialenergyconservationprogramsthroughouttheNorthwest.16

Rulesandregulationslimitutilityinvestmentsinenergyefficiencytowhatiscost‐effective.Incalculatingcost‐effectiveness,utilitiesweighallenergyefficiencyprogramcosts—marketing,administrationandthefullcostoftheconservationmeasureorproject—againsttheprojectedlifetimeenergy‐savingbenefits.Thefinancialincentiveautilityoffersacustomerisbasedonthatcost‐effectivenesstest;rarelydoutilityconservationprogramspay100percentofthecostofanenergyefficiencymeasureorproject.Ifutilitieschoosetooffertheircustomersfinancing,itaddsanadditionalcosttothemeasure,reducingthepercentageofprojectcostpaidbytheutility.Inthepast,whenutilitieshaveofferedachoicebetweenloansorrebatestocustomersforenergyconservationprojects,customersnearlyalwayschoserebatesbecauseitwasabetterfinancial“deal”forthem.

On‐billfinancingismoreattractivetoutilities,butstart‐upcostsarehigh.On‐billfinancingfacilitatestherepaymentofloansforefficiencyupgradesonutilitybills.ManyNorthwestutilitieshavewitnessedthesuccessofon‐billfinancinginotherpartsofthecountryandarepotentiallyamenabletoprocessingloansinpartnershipwithafinancialentitythatwouldassessthecreditworthinessofborrowersandtakeonthefinancialrisk.Oneutilityrepresentativeexplainedthaton‐billfinancingsystemscouldbecomeawidespreadenergyefficiencyfinancingrepaymentmechanism,butatthistimehisutility,likemanyothersintheNorthwest,lacksthebudgetorstafftostartanon‐billfinancingprogram.17

Tradealliesoccupyacentralplaceinthenetworkthatincludesbusinessowners,contractors,utilities,andlenders,suggestinganimportantroleinpromotingfinancingforenergyefficiency.

Tradeallynetworkscanhelpensureeffectiveservicedeliveryandenhancedmarketingforallinvolvedplayers.TheGreenStreetLendingprogramofferedbyUmpquaBankwiththeEnergyTrustofOregonisanexampleofhowtradeallynetworksusethestrengthsofallinvolvedpartners.ETO’sTradeAllyNetworkofcontractors,realestateprofessionals,distributors,andotherprofessionalssupporttheprogram.ThetradealliespromoteETOprograms,provideenergyefficiencyandrenewableenergyservices,andassistcustomerswithnecessarypaperwork.Inreturn,ETOstaffmembersrefercustomerstoTradeAllies,providetrainingandassistance,anddirectcustomerstoUmpqua’sGreenStreetLendingprogramforprojectfinancing.18

16BonnevillePowerAdministration,ConservationResourceEnergyData—FiscalYear2007,released2008.http://www.bpa.gov/energy/n/pdf/RED_Book_FY07_FINAL.pdf17VanAshton,IdahoFallsPower,personalcommunicationwithChristineGrant,October21,2009.18DanWeldon,UmpquaBank,personalcommunicationwithChristineGrantandJohnHealy,October19,2009.


Contractorsandotherenergyservicesvendorsprovideaneffectivesalesforceforenergyefficiency.Contractorsandenergyservicesvendorsplayasignificantroleinprogramdeliverybecausetheyoftenhaveestablishedrelationshipswithsmallbusinessesintheircommunities.ArecentreportbytheSouthwestEnergyEfficiencyProjectonfinancingcleanenergyprojectsfoundthatthemostsuccessfulenergyefficiencyprogramsempowercontractorsandretailerstosellnotonlyenergyefficiencyproducts,buttoalsoconnectcustomerstoavailablefinancing.19

Finding10. Effortstocreateasecondarycapitalmarketforenergyefficiencyloansareintheirinfancy.

Currently,noestablishedsecondarymarketexistsforcommercialenergyefficiencyloans.Creatingdemandforenergyefficiencyloansonthesecondarymarketwillprovideliquiditytolendinginstitutions—allowinglenderstoissueandservicemoreloansforenergyefficiencyprojects.Manyenergyefficiencyfinancingexpertsandpolicymakersrecognizetheimportanceofasecondarymarketforcommercialenergyefficiencyloans,buttheyarefocusingtheirpresenteffortsoncreatingaprimarylendingmarketforenergyefficiencyloans.Whenaskedaboutthecreationofasecondarymarketforenergyefficiencyloans,OregonHouseRepresentativeandeconomicconsultant,JulesKopel‐Bailey,remarkedthat“investorsstillneedabettersenseofriskandreturn.Weneedadatabanktoproveconcepttoinvestors.”20

Asmallsecondarymarketexistsforresidentialenergyefficiencyloans,whichcouldindicatehowthesecondarymarketforcommercialloansmightdevelop.Residentialenergyefficiencyloanshavemadealegitimatedebutonthesecondarymarket,thoughthedemandfromprivateinvestorsfortheseloansremainstenuous.Todate,FannieMaehaspurchasedapproximately$225millioninenergyefficiencyloansfromahandfuloflendersinCalifornia,NewYork,Pennsylvania,andWisconsin.FannieMaeischarginglendersarelativelyhighinterestrate(12to14percent)—despitethatdefaultratesarelowontheseloans.Tocontinuetheselendingtransactionsdespitehighrates,thefourhoststatesarecoveringaportionoftheinterest(upto8percent)tobuydownratesforborrowers.LendersalsohaveanincentivetocontinueprovidingtheenergyefficiencyloansbecauseFannieMaepaysthelendersanoriginationfeeandaservicingfee.21

EarlyeffortsareunderwaytoexpandthesecondarymarketforenergyefficiencyloansintheNorthwest.Forexample,oneregionalfinancialinstitution,Seattle‐NorthwestSecurities,isactivelyworkingwithutilities,municipalgovernments,andstateagenciestocreatemechanismsthatprovideasecondarymarketforenergyefficiencyloans.

Finding11. Interestinlegislationthatenablesenergyefficiencyloanstoremainwiththeproperty—ratherthanthepropertyowner—isgrowingintheNorthwest.

PropertyAssessedCleanEnergy(PACE)bondsofferapromisingmodel.WithamorethanadozenprogramsnowoperatingintheUnitedStates,PACEbondfinancingisgainingtractionasaninnovationthatcanaddresstheupfrontcapitalbarrier.Inthismodel,PACEbondproceeds

19SouthwestEnergyEfficiencyProject,RecentInnovationsinFinancingforCleanEnergy,October2009.20Kopel‐Bailey,Jules,OregonStateHouseofRepresentatives,personalcommunicationwithChristineGrant,October20,2009.21HowardBanker,EnergyProgramsConsortium,personalcommunicationwithAnnGrodnik,October1,2009.


arelenttocommercialandresidentialpropertyownerstofinanceenergyefficiencyretrofits.Theownersthenrepaytheloansthroughannualassessmentsontheirpropertytaxbillsorinsomecasesthroughtheirutilitybills.PACEfinancingisavailableeitherthroughmunicipalbondissue(asisfrequentlydoneformunicipalcapitalinvestmentprojects)orthroughanalternativefunder,suchasthefederalgovernmentoraprivateinvestmentbank.WithPACEfinancing,theriskoflossisminimizedaspropertytaxlienscanbemadeseniortomortgagedebt.22OneinvestmentbankerexplainedthatPACE“willprovidelenderswiththestrongestcollateralavailableincommercialenergyefficiencytransactions:thebuildingitself.Thiswillreduceratesandextendlendingperiods,allowingdeepandcomprehensiveretrofitstobeperformed.”23PACEfinancingdoesraiseconcernfromcommercialbanksthattheirmortgageswouldbesubordinatedbytheseniorpositionofanenergyefficiencyloanandfromutilitiesworriedthatlocalgovernmentscouldcompetewiththeminthedeliveryofenergyefficiencyservices.

OregonhasadopteditsversionofPACE.InJuly2009,theGovernorofOregonsignedHB2626,theEnergyEfficiencyandSustainableTechnologyActof2009(EEAST).AresidentialpilotprogramcalledCleanEnergyWorks:PortlandusingtheEEASTfinancingmechanismisscheduledtobegininPortlandlaterthisyearandwillbefundedinitiallywithfederalstimulusdollars.Acommercialpilotisalsoscheduledtobeintroducedlaterin2010andislikelytobefundedwithfederalstimulusdollars,aswell.OregonStateRep.JulesKopel‐Bailey,aprimarysponsorofthelaw,reportedthatEEASTisa“hugefirststepinallowingforstatebondingcapacityandprovidinglow‐costenergyefficiencyloansacrossbuildingtypes.”24

Washington’sconstitutionalprohibitionagainstthelendingofcreditcreateschallengesforproponentsofPACE.AlternativeapproachessuchasestablishingConservationUtilityDistrictsrunbymunicipalitiescreateaseparatesetofissues.UtilitiesraiseconcernsthatmunicipallyrunConservationUtilityDistrictswouldoverlapwithexistingutilityenergyconservationprograms,creatingconfusionforconsumersandpotentiallymakeprogramdeliverymoreexpensive.

IdahoisconsideringitsownversionofPACEfinancing—IdahoEnergyIndependenceDistricts.Thesedistrictswouldprovideinterestedpropertyownerswithfinancingforrenewableenergygenerationequipmentandenergyefficiencyimprovementsthatwouldberepaidthroughaspecialpropertytaxassessment.Idahopolicymakershavebeenstymiedbyregulationsthatlimitthelendingofpublicmoneyforprivatepurposes.LanePackwood,AdministratorofEconomicDevelopmentfortheIdahoDepartmentofCommerce,reportsthatIdaholawmakersandenergyadvocatesareconsideringavarietyofsolutionstoovercomingthisbarrier.Packwoodisnotoptimisticthatelectedofficialswillamendthestate’sconstitutionintheneartermtoallowformunicipalfinancing,buthedoesbelievethatthePACErepaymentmethodcouldbeaviableoptionifloanfundsoriginatedfromstatebondissue,federalfunds,orprivatefunds.

Inearly2009,MontanaStateRepresentativeBradyWisemansponsoredPACElegislation—HB361:EnergyImprovementsDistricts.Thebillfailed,butgarneredsupportfromthebuildingindustry,cleanenergyadvocates,andotherMontanapoliticians.SimilartoPACEframeworksinotherstates,thebill

22PACENOW.http://www.pacenow.org/23JohnChristmas,HannonArmstrong,personalcommunicationwithChristineGrant,October13,2009.24Kopel‐Bailey,Jules,OregonStateHouseofRepresentatives,personalcommunicationwithChristineGrant,October20,2009.


wouldhaveauthorizedcitiesandcountiesinMontanatocreateEnergyImprovementDistrictsandissuespecialassessmentrevenuebonds.BondproceedswouldbeusedtomakeloanstopropertyownerswithinanEnergyImprovementDistrictforthepurposesofinstallingrenewableenergysystemsorenergyefficiencyimprovementstoresidential,commercial,orindustrialproperties.ThoughthebillfacedstrongoppositionfromutilitiesandtheMontanaBankingAssociationforthereasonsstatedearlier,proponentsareconsideringintroducingasimilarmeasureinthe2011legislativesession.

Table3summarizesthemostimportant—andmostpersistent—barrierstoenergyefficiencyfinancing.


Table2.SummaryofKeyBarrierstoEnergyEfficiencyFinancing

ENERGYEFFICIENCYFINANCINGBARRIERS

Lowenergycosts Thelowcostofenergytobusinesses,relativetootheroperatingexpensesand/orrevenueopportunities.Thissituationtranslatesintoahighopportunitycostforabusinesstousescarcecapitaland/orlendingcapitalforenergyefficiencyratherthansomeothertypeofinvestment.Lowenergycostsgenerallyreducebusinessinterestinenergyefficiencymeasures.

Longerpaybackperiods

Investmentswithlongerpaybacks,asisthecasewithsomeenergyefficiencyprojects,areinherentlyrisky.Lendersdemandacommensuratelyhigherrateofreturn,whichinturn,reducesthefinancialviabilityoftheprojecttothebusiness.Thisbarrierwasreferredtobysomeintervieweesasthe“expectationshurdle.”

Poorcreditratings Theunderlyingpoorcreditworthinessofmanysmallerbusinesses,especiallyintoday’srecessionaryeconomymakesthembadrisks.Thesmallbusinesssectorhasanotoriouslylimitedborrowingcapacity.

Lackofcollateral Thelackofcollateralassociatedwithmanytypesofenergyefficiencyprojectsmakeslendingforsuchprojectsunattractivetomanyfinancialinstitutions.

Hurdlestoon‐billorpropertytaxfinancing

Therearelegal,institutional,andpoliticalchallengesassociatedwithcreatingon‐billorPACEfinancingschemesinIdaho,Montana,andWashington.

Lackofdataonfinancialbenefits

The“DataGap”—thatis,thelackofdataavailablethatcandemonstratetheactualfinancialbenefitsofenergyefficiencylending.Manylendersinterviewedcitedthislackofinformationasakeybarrier,translatingintoaninabilitytoincludeoperatingsavingscalculationsintheirevaluationoftheviabilityofenergyefficiencylending.

Lackofstandardizedfinancialproductsforenergyefficiency

Thecosts,time,andeffortassociatedwithdevelopingstandardizedenergyefficiencyproductsandassociatedenergyefficiencyloanportfolios.Timeandresourcesarerequiredtoassessopportunitiesandtodevelopappropriatefinancingproductsacrossfinancialinstitutionsforenergyefficiencylendingspecifically.Inleantimes,itisunlikelythatcommercialbankswillinvestthetimeandresourcestounderstandingthisemergingmarket.

Insufficienttrackrecordofloanperformance

Thelackofanyrealtrackrecordassociatedwithenergyefficiencyloanperformancemakesmanylendershesitanttogetintothismarket.Issuesandconcernsthatlendershaverelativetothislackofperformanceincludepre‐existingliens,difficultysecuringactionableliens,termconstraints,andlimitationsofmanyrealestateownershiparrangements.25

Delayedtimingofutilityincentives

Inmostcases,utilitiesdonotprovidetheirincentivesupfront,andmostlendersareunwillingtoconsiderutilityrebatesortaxcreditsasdirectequityinunderwritingloans.Consequently,businesseshavetoassemblemoreinitialcapital,whichincreasesrisksandfinancingcostsandreducesthefeasibilityofsuchprojectsforpoorlycapitalizedbusinesses.

25NaturalResourcesDefenseCouncil,ScalingUpInvestmentinEnergyEfficiencywithaFederalEnergyEfficiencyFinancingFacility,April2009.


II. Current Programs

Manynewgovernment‐backedprogramsandinitiativesareunderwayintheNorthwestandelsewheretostimulatelendingandcapitalflowsforenergyefficiencyprojects.Severalpubliclysponsoredprogramsintheregionprovidecreditenhancementanddirectsubsidiesthatcanhelpattractandleverageprivatecapitaltofinancecommercialenergyefficiencyprojects.Publicloanprogramsforgotheparticipationofprivatelendersalltogetherorcoveraportionofthefinancinginpartnershipwithaprivatelender.

TheprogramshighlightedbelowarenotanexhaustivelistofthepubliclysupportedenergyefficiencyfinancingprogramsavailabletoNorthwestbusinesses.Rather,theprogramslistedbelowrepresentasubsetofprogramsthatarethemostfrequentlycitedfortheirhighparticipationrates,uniquestructure,orabilitytochangehowlendersperceivetherisk,return,andliquidityequation.

CreditEnhancement WashingtonStateDepartmentofCommerce:CreditEnhancementProgram

TheDepartmentofCommercedesigneda$5millionrevolvingloanprogramcomprisedofStateEnergyProgramfundstoprovidecreditenhancement—mitigatingriskthroughloanlossreserves,loanguaranteesorotherfinancialcommitments—forlendersandfinancialinstitutionsthatparticipateinenergyefficiencyfinancing.Theloanprogramspansresidentialandcommercialsegmentsandisprimarilyfocusedonleveragingprivatecapitaltowardenergyefficiencylending.Fundingwillbedistributedinearly2010.WashingtonisthefirststatetodesignsuchaprogramwithfederalstimulusfundingundertheAmericanRecoveryandReinvestmentAct(ARRA)of2009.

SmallBusinessAdministration7(a)LoanGuaranteeProgram

Underthe7(a)loanprogram,theSmallBusinessAdministration(SBA)itselfdoesnotprovideloans;instead,theSBAguaranteesallorpartofloansmadebybanksandotherlenders.The7(a)programoffersseveralindividualtypesofloanguarantees.Aspartofthe7(a)program,theSBAcreatedtheSBAExpressProgramwhichoffersa50percentSBA‐backedguaranty,andanaverageloanof$35,000withamaximumloansizeof$350,000.RecentlytheSBAandtheU.S.EPAhavecollaboratedtopromotetheuseoftheSBAExpressProgramtohelpsmallbusinessesadoptmoreenergy‐efficientpractices.SBAExpressloanfundscanbeusedforthepurchaseofenergy‐efficientappliances,high‐efficiencyHVACandheatpumpunits,lightingretrofits,andmore.OverthelasttwoyearstherehasbeenasubstantialdeclineinSBAlendingbecausethesecondarymarketforSBAguaranteeshasbeenfrozen.Lendershavenotbeenabletomaintainliquidityandsubsequentlystoppedmakingloanstosmallbusinesses.AccordingtoMarkCostello,anSBALenderRelationsSpecialist,thesecondarymarketisnowmakingaslightrecoveryandlendersarebeginningtosellSBAguaranteesagain.26

26MarkCostello,SmallBusinessAdministration,personalcommunicationwithChristineGrant,October1,2009.


DepartmentofAgriculture’sRuralEnergyforAmericaProgram(REAP)—LoanGuarantee

TheUnitedStatesDepartmentofAgriculture(USDA)providesloanguaranteesforrenewableenergyandenergyefficiencyprojectsforagriculturalproducersandruralsmallbusinessesthroughitsREAPprogram.TheREAPguaranteedprogramislender‐driven.USDAguaranteestheloanratherthanlendingdirectly.Acommerciallenderseekstheguarantee,and,ifapproved,itmakes(andservices)theloan.Thefederalguaranteeforlendersisbetween60and80percentofthetotalloanamount.ThebenefittolendersisthatthereisanactivesecondarymarketforREAPguaranteesandtheguaranteedportionoftheloanisprotectedagainstlossbyafederalguarantee.MaryTraxler,aWashingtonStateBusinessProgramsSpecialistforUSDA,remarkedthatUSDAstaffhasmetwithoractivelymarketedtheprogramtoallWashingtonStatelenders.Since2003,onlytwoloanguaranteesinWashingtonStatehavebeenprocessedthroughthisprogram—bothforrenewableenergyprojects.

DirectSubsidies UtilityRebateandIncentivePrograms

Asnotedpreviously,utilitiesthroughouttheNorthwestsponsornumerousrebateandincentiveprogramsforbusinesses.Typically,utilitiesprovideincentivescoveringapproximately50percentoftotalprojectcostsforcommercialenergyefficiencyupgradesorappliances.Insomeinstances,utilitieswillcovertheentirecostofthemeasure.Forexample,SeattleCityLightcoversthefullcostofT8lightfixturereplacementandinstallationforbusinessesthroughtheirQuickLightingUpgradeInitiative.Innovativelendersarebeginningtoconsidertherebatesandincentivesofferedbyutilitiesasequitythatcanhelpincreasethecreditworthinessofpotentialcustomers.ChuckDePew,theSeattledirectoroftheNationalDevelopmentCouncil(NDC)—anationalnon‐profiteconomicdevelopmentorganization—reportedthatnearlyallutilitieshaveenergyefficiencyrebatesandincentivesthatlendersshouldbeawareofAnybusinessborrowingfromNDCforacapitalorconstructionprojectisaskedabouttheenergyefficiencyaspectsoftheirprojects.Typically,loanswillnotbeapproveduntiltheborrowerdemonstratesthattheyaretakingfulladvantageofallapplicableutilityrebatesandincentives.

Oregon’sBusinessEnergyTaxCredit(BETC)

Oregonofferstaxcreditsforenergyefficiencymeasures.Thetaxcreditisequalto35percentofeligibleprojectcosts,generallymeaningtheextracostassociatedwithenergyefficiencyaboveandbeyondthecostofstandard,code‐compliantsystemsorequipment.Eligibleconservationprojectsincludebutarenotlimitedtoinsulation,HVAC,commercialsystems,andindustrialprocessupgradesthatreduceenergyuse.Mostprojectsmustsaveatleast10percentofenergyabovethebaselinelevel,butlightingretrofitsmustsave25percentofenergyabovetheexistinginstallation.In2007and2008,theBusinessEnergyTaxCreditfundedover3,600conservationprojects.

MontanaEnergyConservationTaxCreditforBusiness


Businessescandeductupto$3,600fromgrosscorporateincomeforacapitalinvestmentinacommercialbuildingforenergyconservationpurposesthatisnotfinancedbystate,federal,orprivategrantfundsforenergyconservation.Toqualifyforthiscredit,thetaxpayerhastoshowthattheinvestmentwillreducethewasteofenergyorreducetheamountofenergyrequiredtoaccomplishagivenamountofwork.27

PublicLoanPrograms Oregon’sDepartmentofEnergy:EnergyLoanProgram

Oregon’sEnergyLoanProgram(knownasSELP)offerslow‐interestloanstobusinessestohelpfundenergyefficiencyandrenewableenergyprojects.Ratesarebetween6and7percentwithtermsbetween5and15years.In2008,theprogramdisbursed$15.5millionfor31conservationprojects,oranaverageofabout$500,000perproject.Theloanprogramisself‐supporting,withfundsraisedthroughthesaleofOregongeneralobligationbonds.CommercialSELPloansmustbefullysecured.Afirstorsecondmortgageontheproject´sland,buildings,andequipmentisusuallypledged.TheSELPprogramhasseenonlyonedefault,producingadefaultrateofaround0.3percent.

IdahoEnergyEfficiencyBusinessLoanProgram

TheIdahoOfficeofEnergyResourcesofferslow‐interestloansrangingfrom$1,000to$100,000tobusinessesforenergyefficiencyandrenewableenergyprojects.Eligibleefficiencyprojectsinnewbuildingsarelimitedtolightingsystems,occupancyordaylightsensors,andbuildingcommissioning.Eligibleefficiencyprojectsinexistingbuildingsincludeupgradinglighting,heatingsystems,windowsanddoors,andinsulation.Projectsmustuseexisting,reliabletechnologyandpayforthemselvesthroughenergysavingswithin15years.Loanshavea4percentinterestrateandmustberepaidwithin5years.

SmallBusinessAdministrationCertifiedDevelopmentCompany504Loans

TheSBA’s504CertifiedDevelopmentCompany(CDC)loanprogramforsmallbusinessesfundsrealestatetransactions,construction,renovation,andequipmentpurchases,includingenergyefficiencyupgrades.Projectsthatincorporateefficiencyfeaturesthatreduceenergyusebyatleast10percentqualifyforuptoa$4millionloan.TheSBAwillfundupto40percentofthetotalprojectcost,asecondlendermustprovideupto50percentofthecost,andthebusinessownermustfundthedifferencewithadownpayment.Businessesthatreceivefundsgenerallymustcreateorretainonejobforevery$35,000providedbytheSBA.In2008,the504CDCprogramfunded430loanstotalingover$235millioninIdaho,Oregon,andWashington.

DepartmentofAgriculture’sRuralEnergyforAmericaProgram(REAP)Loans

27StateofMontana,DepartmentofRevenue,EnergyRelatedTaxRelief:EnergyConservationInstallationCredit,http://mt.gov/REVENUE/energyconservation.asp


LoansandgrantsforenergyefficiencyandrenewableenergyprojectsareavailablethroughtheRuralEnergyforAmericaPrograminadditiontoloanguarantees.REAPwillprovidefundstoconductenergyauditsandinstallenergyefficiencymeasuressuchaslightingandinsulationretrofits.In2009,$60millionwasmadeavailablenationwide.Statesreceiveaformula‐basedallocation,forexample,WashingtonStatereceivedapproximately$3.8milliontodisburse—$3millioninloansandapproximately$800,000ingrants.AllagriculturalproducersandsmallbusinessesinaruralareameetingtheSBAsizestandardsareeligibletoapply.Grantsrangefrom$1,500to$250,000,upto25percentoftotaleligibleprojectcosts.Startingin2009,eligibleentitiescanalsoapplyforgrantsthatarelessthan$20,000directlytotheUSDA—theseawardedgrantmonieswillnotbedrawfromthestateallocationoffunds.Loansrangefrom$5,000to$25million,butcanprovidenomorethan75percentoftotaleligibleprojectcosts.WashingtonStatehasawardedfiveREAPgrantsin2009totaling$755,000.AllocatedfundsthatarenotawardedmustbereturnedtotheUSDAforreallocationtootherstates.

ImpactofCurrentPublicFinanceProgramsPublicfinanceprogramsfillafundinggap,buttheyhavehadlimitedsuccesstodateleveragingprivatecapitalorachievinghighparticipateratesinthecommercialsector.Somegovernmentprogramsintendedtohelpbusinessesfinanceenergyefficiencyprojectsdonotalwaysreachtargetmarkets,however.Forsomeprograms,applicationandreportingrequirementsmayposesignificanthurdlesforsmallerbusinesses.

Creditenhancementprogramsthatprovideloanguarantees,suchastheSBA7(a)LoanGuaranteeprogram,areattractivetocommerciallendersandresultinthemostleverageofprivatecapital,butparticipationintheseprogramsremainslimited.Forexample,the7(a)LoanGuaranteeProgramhasbeenextremelypopularwithlendersandborrowers,howevertheuseofloanguaranteesforenergyefficiencyprojectsisanewadditiontotheprogramandisnotmarketedwidely.TheDepartmentofAgriculture’sRuralEnergyforAmericaProgramalsohasverylowparticipationrates,despitetheattractivecreditenhancementoptions.

Publicloanprogramsmustadheretomanyofthesamelendingprinciplesthatcommerciallendersdo.Consequently,publicloanprogramsdonotofferloantermsorratesthataresubstantiallybetterthanaloanfromabank.

OptionsandRecommendationsforIncreasingEnergyEfficiencyLendingTheprevioussectionsofthisreportdescribedanddocumentedcurrentprivate‐sectorpractices,barriers,andgovernment‐sponsoredprogramsrelatedtofinancingenergyefficiencyforsmalltomedium‐sizedbusinessesintheNorthwest.Thekeyconclusionsfromthisresearchareasfollows:

Financingforenergyefficiencyprojectsforsmalltomedium‐sizedbusinesssectorisextremelylimitedatthecurrenttime.

Multiplebarrierslimitenergyefficiencyfinancing,includingthestrugglingeconomyandfinancialsector,therelativelypoorcreditworthinessofmanysmallerbusinesses,limiteddemandforsuchloansfrombusinesses,thefailureoflendinginstitutionstoattributevalueto


energyefficiency,insufficientcollateral,andextendedpaybackperiodsforsomeenergyefficiencyinvestments.

Thesebarriersmeanthatformostbusinesses,lendinginstitutionsandinvestors,returnsaretoolowandperceivedrisksaretoohighforenergyefficiencyinvestmentstooccuronascalecommensuratewitheithertheirpotentialortheneed.Accordingly,thismarketplacelacksbothsufficientliquidityandcapital.

Despitethesechallenges,financialinstitutions,utilities,energyefficiencyserviceproviders,andgovernmentsareundertakinganumberofinnovativeprogramsandinitiativestoadvanceenergyefficiencyprojects.Theseinitiativespointthewayforward,providingnewapproachesandsolutionstoincreasecapitalflows.


III. Proposed Solutions

Thissectionofthisreportidentifiesandcharacterizestheseoptionsandsolutions,withafocusonunderstandinghoweachalternativeservestoreducerisk,improvereturn,orincreaseliquidityandcapitalflows.Anadditionalkeyconsiderationistheextenttowhichsolutionsleveragecapital.Whilealloftheseoptionscouldstrengthenthemarketplaceforenergyefficiencyfinancing,inthefinalsection,werecommendprioritiesforearlyaction.Theserecommendationsforearlyactionareintendedtolaythefoundationforfurtherchangeandhelpthemarketplacefunctionbetteronitsowntodriveenergyefficiencyaction.

Table3providesanoverviewof15optionsthatindustryexpertsandtheprojectteamidentifiedaspotentialsolutionstoincreaseenergyefficiencyfinancingintheNorthwest.Theseproposedsolutionsaredescribedinmoredetailbelow.Pleasenotethatthepresenceofacheckmarkindicatesthattheoptionreducesrisk,increasesdemandandimprovesreturn,orincreasesliquidityandcapitalflowstofinancialinstitutionsorlenders.

Importantly,theexpertsweinterviewedandtheliteraturewereviewedemphasizedthatmultiplesolutionswillbeneededtoaddressthebarriersandincreasecapitalflows.Intervieweesstressedthatno“silverbullet”exists,andaportfolioofsolutionsistheonlypracticalstrategytoincreaseenergyefficiencyfinancingacrossthediversespectrumofsmalltomid‐sizedbusinesses.Tothatend,wehaveorganizedthealternativeoptionsintothefollowingfourcategories:

Improvementstotheperformanceofexistingfinancemechanisms.Thesesolutionsaimtoimprovehowcurrentfinancingmechanismsandprogramswork,todeliverbetteroutcomeswithexistinglevelsofcapitalinvestment.

Improvementstoexistingsupportservicesandsystems.Theseoptionsfocusonhowtoimprovetheservicesandactivitiesessentialforeffectiveandefficientlending,includingeducation,informationsharing,standards,technicalassistance,andprogramdelivery.

Legislativeandregulatorychangestoalterthemarketplace.Thesesolutionswouldrequirepoliticalactionatthestateandfederalleveltomodifythecurrentpolicyandregulatoryframeworktofacilitateenergyefficiencyfinancingofferings.(Someoptionsinothercategoriesalsoincludelegislativeandregulatorymodifications,buttheylargelyinvolvealterationstoexistingprogramsandmechanisms,ratherthanentirelynewpolicyinitiatives.)

Newprogramsandinstitutionstoaddcapacity.Theseoptionsincludenewgovernmentprogramsorinstitutionsthatcouldresultinasignificantinfusionofnewcapitalorcreditenhancementtoexpandenergyefficiencyfinancing.


Table3.ProposedSolutionstoIncreaseEnergyEfficiencyFinancingintheNorthwest





KeyOutcome,Benefit,orBarrierAddressed

IMPROVEMENTSTOTHEPERFORMANCEOFEXISTINGFINANCEMECHANISMS

1 Encourageutilitiestoadopton‐billrepaymentmechanisms.

Reducesriskofnon‐payment.

2 Encourageutilitiestoprovideprogresspaymentstobusinessesthatqualifyforenergyefficiencyrebatesandincentives.

Reducesequityrequiredfrombusinesses;increasesriskstoutilities.

3 DedicateaportionofexistingSmallBusinessAdministrationlendingtoenergyefficiencyprojects.

Increasesfundsdedicatedforenergyefficiencylending;stimulatesbankstoloanforenergyefficiency.

4 Acceleratethedevelopmentofsecondarymarketsforenergyefficiencyloanportfolios.

Increasesliquidityandreduceslenderrisks.

IMPROVEMENTSTOEXISTINGENERGYEFFICIENCYFINANCINGSUPPORTSERVICESANDSYSTEMS

5 Acceleratetheadoptionofcommercialbuildingenergyperformancetrackinganddisclosure.

Providesbetterinformationforlenderstoassessperformance,risk,andreturn.

6 Facilitateinformationsharingamongutilities,financialinstitutions,andcontractorsaboutenergyefficiencyopportunitiesandcostsavings.

Providesbetterinformationforlenders,especiallytoincorporatetheeffectofrebatesandincentivesonenergyefficiencyprojectfinancialperformance.

7 Createautility‐sponsoredtechnicalassistanceprogramforlenders.

Providesbetterinformationforlenders,especiallytoincorporatetheeffectofrebatesandincentivesonenergyefficiencyprojectfinancialperformance.

8 Launchaneducationandmarketingcampaigntosmallandmedium‐sizedbusinessestobuilddemandforenergyefficiencyprojectsandassociatedfinancing.

Increasesdemandforenergyefficiencyprojectsandfinancing.






KeyOutcome,Benefit,orBarrierAddressed

9 Promotetradeallynetworksand“one‐stopshopping”forenergyefficiencyresourcestosmallandmedium‐sizedbusinesses.

Increasesdemandforenergyefficiencyprojectsandfinancing.

LEGISLATIVE/REGULATORYCHANGESTOALTERTHEMARKETPLACE

10 AdvancePropertyAssessedCleanEnergy(PACE)financinginWashington,Idaho,andMontana—similartoOregon’sexistinglaw.

Enablesexpansionofthesecondarymarket;reducesriskforlenderbyprovidingaseniorlienonproperty;increasesreturnbyallowingforlowercostfinancing.

11 Provideutilitieswithmoreincentivesandfewerbarrierstoinvesttheirresourcesindeepenergyefficiencyretrofits.

Lowerseffectiveinterestratestoborrowers.

12 Supportfederallegislationtopermittax‐exemptbondfinancingforcleanenergyandenergyefficiency.

Providesnewsourceofcapitalandlow‐costfinancing.

NEWPROGRAMS&INSTITUTIONSTOADDCAPACITY

13 CreateafederalCleanEnergyDeploymentAdministrationor“GreenBank.”

Providesnewsourceofcapital;lowersrisktolendersandinvestors.

14 Usemunicipal,state,orfederalbond‐issuingauthoritytoraisefundsforenergyefficiencyprojects.

Providesnewsourceofcapital.

15 Developandexpandrevolvingloanfundstosupportenergyefficiencyprojects.


16 Expandcreditenhancementeffortsthatleverageprivatecapital.



ImprovementstothePerformanceofFinancingMechanismsExperts,lenders,andvendorsinterviewedofferedavarietyofsuggestionsonhowtoincreaseenergyefficiencylendingusingexistingmechanismsor“toolsinthetoolbox.”Thefouroptionspresentedbelowdonotinvolvemajornewgovernmentprogramsbut,ifimplemented,wouldservetoincreasecapitalflowsforcommercialenergyefficiencyprojects.

Option1. Encourageutilitiestoadopton‐billrepaymentmechanisms.

Bothutilityrepresentativesandenergyefficiencypolicyexpertsproposedthisoptionasawayofsimplifyingloanrepaymentandreducingupfrontcapitaloutlaysneededfrompropertyowners.Inaddition,somemodelsofon‐billfinancingwouldallowfortheloantoremainwiththeproperty,evenifsoldbythecurrentowner,effectivelysharingthecostofupgradeswithfuturebeneficiaries.Implementingon‐billfinancingwouldrequirevaryingdegreesofeffortandinvestmentfromutilities,dependingonthecapabilitiesoftheircurrentbillingsystems.Passedin2009,Oregon’sEnergyEfficiencyandSustainableTechnologyActcallsforonbillfinancingifaninvestor‐andconsumer‐ownedutilityalreadyhason‐billfinancingcapability.28Accordingly,PortlandGeneralElectricwillsoonbeofferingon‐billrepaymentfortheCleanEnergyWorksPortlandpilotprogramfor500homes.NorthwestutilitiesoutsideofOregondonotfacethissamelegislativedriver,however,andmaybereluctanttoinvestinthesoftwareandsystemchangesneededtoupgradetheirbillingsystems.

Theintendedoutcomesofon‐billrepaymentsystemsaretoprovideameanstofinanceenergyefficiencyprojectsoffoftheborrower’sregularbalancesheet,reducetransactioncosts,reducetheupfrontcapitalcontributionsrequiredfrombusinesses,facilitateloanrepayment,andmakeadirectconnectionbetweenenergyandcostsavingsforthecustomer.Thesechangesshouldincreaselendingforenergyefficiencyprojectsfrombothbanksand,potentially,utilities.On‐billrepaymentreducesrisksforbanks,butthoserisksmaybeshiftedtoutilities,dependingonhowthesystemisstructured.

Sinceutilitybillrepaymentisessentiallyattachedtotheproperty’selectricorgasmeter,thisapproach,unlikepropertytaxrepaymentmethods,doesnotrequirealienontheproperty.Asaconsequence,theabilityofbankstopackagetheseloansandselltheminthesecondarymarketremainsanissuewithon‐billfinancing.Questionsalsoremainabouttheabilityofautilitytodisconnectserviceifacustomerhaspaidforitsenergybutnotfortherepaymentonitsloan.

Option2. Encourageutilitiestoprovideprogresspaymentstobusinessesthatqualifyforenergyefficiencyrebatesandincentives.

Currently,mostutilitiesdonotproviderebateorincentivedollarstocustomersuntilmeasuresaresuccessfullyinstalled,ensuringthatutilitiesavoidtheriskofpayingforprojectsthatdonotgetcompleted.Progresspaymentswouldallowforsomeofthosedollarstobeusedasequitywhenacustomerisseekingaloanfromacommerciallendertofinancetheremainderofanenergyefficiencyproject.Theideaisthatsomepercentageofthetotalexpectedrebateorincentivecould

28OregonLegislativeAssembly2009,EnergyEfficiencyandSustainableTechnologyAct,HouseBill2626,Sections32and33.http://www.leg.state.or.us/09reg/measpdf/hb2600.dir/hb2626.c.pdf


beappliedtotheequityportionofacustomer’sloanpackage,withthegoalofresultinginabetterloanrateandterm.

Forexample,supposeabusinessisconductingalightingandHVACretrofitcosting$500,000anditslocalutilitywillofferatotalof$150,000inrebatesandincentives.Thebusinesshas$50,000availablefortheproject,butitneedstoprovidea20percentdownpaymenttoobtainadesirablerateandtermfromacommerciallender.Throughaprogresspayment,theutilityoffersathirdofthetotalrebateandincentivedollarsupfront.Withthe$50,000progresspayment,thebusinessisabletosecureanattractiveloanpackage.Afterallmeasuresareinstalledproperly,theutilityawardstheremaining$100,000.Thiseffortwouldhelpborrowersuseutilityrebatesandincentivesaspartoftheirequity,allowingthemtoleveragemoreprivatecapitalthantheywouldotherwise.

Severalutilitiesreportedthattheydohavesomeflexibilitywithintheirrebateandincentiveprogramstoofferprogresspayments.Customersandlendersgenerallyareunawareofthisoption,however,andrequesttheminfrequently.Utilityrepresentativesinterviewedstatedthattheywouldconsiderofferingtheircustomersprogresspayments,especiallyforlargerprojects.BobStolarski,DirectorofCustomerEnergyManagementatPugetSoundEnergy,alsonotedthatinadditiontoprogresspayments,PSEwouldbewillingtoworkmorecloselywithlenders,“sothattheywouldhavemorefaithintheincentiveandrebatedocuments.”

Implementingthiseffortwouldrequireinternalpolicychangesonthepartofutilitiesandsupportfromregulators.BonnevillePowerAdministrationrecognizesthevalueofprogresspaymentsandtheirbenefitstobusinesses.Moreadvocacymaybeneeded,however,toincreasetheavailabilityandmarketingofprogresspayments.Onelendernotedthatanyutilitytoolthatprovidesmoreequityupfront—likeprogresspayments—wouldmakeprojectslessriskyforlenders.29Theintendedoutcomeofthiseffortwouldbetoleveragemoreprivatecapitalforenergyefficiencyinvestmentsbyshowinglendersthatrebateandincentivedollarsarelow‐riskequity.

Option3. DedicateaportionofexistingSmallBusinessAdministrationlendingtoenergyefficiencyprojects.

ThepurposeofthisinitiativewouldbetoincreasethevolumeofenergyefficiencyloansbymandatingthatacertainpercentageofSBAloansfinanceenergyefficiencyprojects.SBAholdsaportfolioofroughly219,000loansworthmorethan$45billion,makingitthelargestsinglefinancialbackerofsmalltomedium‐sizedbusinessesintheUnitedStates.30DedicatingapercentageofSBAlendingtoenergyefficiencywouldserveasawaytoeducateandintroducebankstoenergyefficiencylending.Thisinitiativewouldalsohelpspurthedevelopmentofinternalenergyefficiencyexpertisewithinbanks,particularlynationalcommercialbanksthatgeneratethebulkofSBAloans.

ImplementingthisinitiativewouldrequireSBAtochangeitspoliciesfortheloansitguarantees.AccordingtoSBALenderRelationsSpecialistMarkCostello,“EnergyefficiencyisanewspacefortheSBA.”PresentingcompellingevidencetoSBAadministratorsaboutthepositiveimpactssuchan

29RachelBrombaugh,ShorebankEnterpriseCascadia.30U.S.SmallBusinessAdministration,“OverviewandHistory.”http://www.sba.gov/aboutsba/history/index.html


initiativewouldhaveonsmallbusinesseswouldbeessentialtobuildingsupportforthispolicychange.

Option4. Acceleratethedevelopmentofsecondarymarketsforenergyefficiencyloanportfolios.

Toincreaseaccesstocapitalforenergyefficiencylending,severalstatesareworkingtogethertoexpandleveragingopportunitiesinthesecondarymarket.Currently,FannieMaepurchasesunsecuredresidentialenergyefficiencyloanportfoliosinthesecondarymarketatinterestratesofapproximately12percent.Thispricingishighanddoesnotreflectthelowdefaultratesassociatedwiththeloans,below2percent.Notsurprisingly,giventhehighinterestrates,thisprogramhasbeenunderutilized.Somestatesinvolvedwiththisprogramusetheirownfundstobuydowntheinterestratesforconsumers,insomecasesaslowas4percent.

TheNationalAssociationofStateEnergyOfficials(NASEO)andtheEnergyProgramsConsortium(EPC)areorganizingstatestoincreasethevolumeofstandardizedenergyefficiencyloanportfoliosinthesecondarymarkettoattractnewbuyers,establishaportfolioperformancetrackrecord,anddrivedowninterestrates.Throughthisinitiative,NASEOandEPCareaskingstatestointroducestandardizedunderwritingcriteriaforenergyefficiencylendingprograms.Statesarealsoaskedtocontributecashtoenergyefficiencyloanportfoliosasadditionalcollateraltoincreasetheattractivenessofthesecuritizedportfolio,homogenizetheportfoliosacrossthecountry,andattractnewinvestorsintothemarket.Thisarrangementcreatesanincentiveforlenderstomakeenergyefficiencyloansbyguaranteeingtheywillhavebuyersfortheloans.Whiletheprogramisintheearlydesignprocessandcurrentlyfocusedonlyonunsecuredresidentialloans,theplanistoexpandtoothertypesofloans,includingcommercial.NorthweststatescouldalsoparticipateintheNASEOprogramasawayofsupportingtheexpansionofsecondarymarketsforenergyefficiencyloans.

ImprovementstoExistingSupportServicesandSystemsThefiveoptionspresentedbelowprovidenewandbetterwaystoinformandeducatebusinessesandlendersaboutthefinancialperformanceandeconomicbenefitsassociatedwithenergyefficiencyinvesting.Theseoptionsaimtoincreaseboththedemandforandsupplyofenergyefficiencyloans.Forbusinesses,theseproposalsaredesignedtostimulatethemtoprioritizeenergyefficiencyprojects.Forlenders,theserecommendationswillhelpprovidethemwiththedatatheyneedtoevaluateenergyefficiencyprojectsproperly,consideringallfactors,includingtheavailabilityofutilityrebatesandincentives.

Option5. Acceleratetheadoptionofcommercialbuildingenergyperformancetrackinganddisclosure.

Formanybuildingownersaswellaslenders,themarketvalueofhavingahighlyefficientbuildingisunknown.Ratingabuilding’senergyperformanceeffectivelyservestocreateamechanismformarketdifferentiationandvaluation.Widespreaduseofastandardizedperformanceratingsystemwouldalsoprovidelenderswithvaluableinformationonoperatingcostsavingsassociatedwithenergy‐efficientbuildings,whichwouldaffectthecapitalizationrateofthepropertyandultimatelycouldresultinmorefavorablelendingterms.


ThisefforthassomemomentumintheNorthwest.In2009,Washingtonadoptedalawrequiringcommercialbuildingsof10,000squarefeetorlargertodiscloseEnergyStarPortfolioManagerbenchmarkingdataandratingstoprospectivebuyers,lessees,orlenders.TheCityofSeattlehaspassedadisclosuremandatetorequireannualenergyperformancedataforallcommercialandmultifamilybuildingsoveracertainsize.TheCityofPortlandisconsideringarequirementforcommercialbuildingownerstousetheEnergyStarPortfolioManagerratingsystemforbuildingsover20,000squarefeet.

Option6. Facilitateinformationsharingamongutilities,financialinstitutions,andcontractorsaboutenergyefficiencyopportunitiesandcostsavings.

Teamingutilitiesandcontractorstogethertoprovideprospectiveborrowersandlendingofficerswithmoreinformationontheopportunitiesforandbenefitsofenergyefficiencyinvestmentscanstimulateactivity.Severaloftheexpertsinterviewedadvancedthisproposal.Itaddressestwoofthekeybarriersidentifiedinthisstudy:thelackofknowledgeonthepartofsmallandmid‐sizedbusinessesandfinancialinstitutionsaboutenergyefficiencyandthelimitedcoordinationbetweenthefinance,utility,andenergyservicessectors.

Astateorregionaleconomicdevelopmententity—oralternatively,afinancialindustrytradeassociation—couldorganizeaconferenceorseriesofworkshopsconveningfinancialprofessionalsandutilityexecutivesalongwithESCOs,contractors,andotherexpertstofocusonenergyefficiencyinvestmentsforsmalltomedium‐sizedbusinesses.

Acomplementaryinitiativewouldbetoestablishaclearinghousetotrackanddisseminateinformationontheoperatingandfinancialperformanceofdifferenttypesofenergyefficiencyinvestmentsinthecommercialsector.Grantmoniesthatinvolvecreditenhancementforenergyefficiencylendingmaycreateincentivesforcollaborationbetweenlendersandcontractors.Forexample,theWashingtonStateCreditEnhancementprogramrequireslendersandcontractorstoworktogethertocreatemeasurementandverificationprotocolfortheenergyefficiencyprojectsthatarefundedthroughtheprogram.

Theidealoutcomeofthiscollaborationandinformationsharingwouldbeamuchhigherlevelofknowledge,leadingtoincreasedlendingbyfinancingentitiesandperhapseventhecreationofinnovativenewfinancingmechanisms.

Option7. Createautility‐sponsoredtechnicalassistanceprogramforlenders.

Thisoptiontargetsthebarriermanyfinancialinstitutionsfacewhentryingtounderstandenergyefficiencyprojectsinfinancialterms.Withoutstandardizedvaluationmetricsorenergyefficiencyexpertsonstaff,manylendinginstitutionsarehesitanttoincludethecostsavingsresultingfromenergyefficiencyprojectsintheirloancalculations.Inaddition,lendersdonotnecessarilyincorporatethevalueofutilityrebatesintotheirloandecisions.Accordingly,utility‐sponsored“energyconservationadvisors”couldworkwithfinancialinstitutionstoassessthevalueofdifferentenergyefficiencyprojects,facilitatetheuseofrebatesandincentives,andprovidevitaltechnicalassistancewhenevaluatingdifferentprojects.


AnEnergyConservationAdvisorprogramwouldlikelybeginasapilotprojectbetweenautilityandaregionallender.Ifsuccessful,thismodelcouldleadtoimprovedlendingtermsforprojectsthatcandemonstrateenergyandassociatedfinancialsavings,increaseduseofutilityincentivesandrebates,andaheightenedawarenessofthenetpresentvalueofenergyefficiencymeasures,forbothlendersandtheircustomers.

Option8. Launchaneducationandmarketingcampaigntosmallandmedium‐sizedbusinessestobuilddemandforenergyefficiencyprojectsandassociatedfinancing.

Demandfromsmalltomid‐sizedbusinessesforenergyefficiencyprojectsisclearlylacking.Thereasonsarenumerous,butoneexplanationthatexpertsinterviewedputforthisalackofmarketingandeducationtargetedatsmallbusinesses.Forexample,TinaVlasatyfromtheCityofSeattle’sOfficeofEconomicDevelopmenthasfoundthatlow‐costfinancingisnottheonlykeybarriertoincreasedenergyefficiency.Shehasobservedthat“marketingandeducationareasimportantaslow‐costfinancing.Smallbusinessownersneedmoneyandinformationwavedinfrontoftheminordertomakeenergyefficiencyupgrades.”

Suchacampaign—runbyutility,government,ESCOtradeassociations,oracombination—wouldinvolvetrainedenergyefficiencyspecialistsconductingoutreachtobusinessesincommercialsectorswithahighpotentialforsavingsandthefinancialinstitutionsthatservethem.Forexample,theCityofSeattlehasfoundthatenergy‐intensivesmallbusinessestendtobethosethatusemultiplerefrigerators,dishwashers,orpneumatictoolsintheiroperations,suchasfoodserviceestablishments,grocers,ormanufacturers.Outreacheffortswouldallowspecialiststodemonstratethecost‐savingpotentialandcompetitiveedgethatcustomizedenergyefficiencymeasurescouldbringtoindividualbusinesses.Inadditiontodirectoutreach,implementationofthiscampaigncouldinvolvecreationofauser‐friendlywebsite,thedistributionofinformativeprintmediamaterials,promotionalevents,andarecognitionprogramforbusinessesthatachievedaspecifiedlevelofenergysavings.

Theresultofthiscampaignwouldnotjustbeanincreaseddemandforenergyefficiencyprojectsandassociatedsupplyoffinancing,butitwouldimprovethebottomlineformanysmallbusinessesthatpreviouslyconsideredhighenergybillsasfixedcosts.

Option9. Promotetradeallynetworksand“one‐stopshopping”forenergyefficiencyresourcestosmallandmedium‐sizedbusinesses.

Recognizingthatsmallandmid‐sizedbusinesseshavelimitedtimeandresources,thisoptionproposestobundleallnecessaryenergyefficiencyservicesintooneofferingthroughthetradeallynetwork.Thebenefitof“one‐stop‐shopping”isthatbusinesseswouldonlyneedtoworkwithoneserviceprovidertogainaccesstoenergyauditing,installation,andfinancingservices.Approvedcontractorswouldbethesalesforcefortheprogramandwouldhelparrangeutilityrebatesandfinancingfromapprovedlenders.Thelocalutilitylikelywouldbethefacilitatorofthisprogram.

ThisoptionissimilartotheservicesthatESCOscurrentlyprovidetolargerbusinesses,butbecauseoftherelativelyhighadministrativecostsrelativetothesizeandrevenuesassociatedwithsmallerbusinessenergyefficiencyprojects,ESCOsgenerallydonotpursuethismarket.


Asimilarapproachimplementedthroughpartnershipsoflocalgovernments,CDFIs,andnonprofitorganizationsisintheearlystagesofdevelopmentinBellingham,Seattle,andSpokaneinWashington.Theseprogramsappeartorequirepublicorfoundationfundingtobeeconomicallyviable.

LegislativeandRegulatoryChangestoAltertheMarketplaceThekeyfindingssectionofthisreportidentifiedseveralareaswherelegalandregulatorybarriersarehinderingenergyefficiencyfinancingintheNorthwestandelsewhere.Thissectionpresentsthreeenergyefficiency‐focusedlegislativeproposalsthat,ifenacted,could“changethegame”andmakeinvestinginenergyefficiencymuchmorecompellingforlenders,investors,smallbusinesses,andutilitiesalike.Someoptionsintheprevioussectionsincludelegislativeandregulatorymodifications,buttheylargelyinvolvealterationstoexistingprogramsandmechanisms;thenewpolicyinitiativesinthissectionareintendedtoproducebroaderchangestoadvanceenergyefficiency.

Option10. AdvancePropertyAssessedCleanEnergy(PACE)financinginWashington,Idaho,andMontana—similartoOregon’sexistinglaw.

PACEfinancingreferstoprogramsinwhichlocalgovernmentsprovidefundingforprivate‐sectorenergyprojectsthatprovideapublicbenefit(energysavings)andarepaidbackthroughanassessmentonthepropertyowner’staxbillor,insomecases,theutilitybill.Asimplementedinahandfulofjurisdictionsinrecentyears,PACEinvolvesplacingaseniorlienonthepropertysothattheloanissecuredbythepropertyandstayswiththepropertyevenifsold.PACEfinancingistiedtotheproperty,nottheborrower,anditcansubstantiallyreducethetransactioncoststypicallyassociatedwithmakinganenergyefficiencyloantoabusinessorresident.WithPACEfinancing,municipalitiesissuebondsatfavorableratessecuredbytheseniorlientoraisemoneyforenergyefficiencyorothertypesofcleanenergyinvestments.

Thekeytoobtaininglegislativesupportforsuchamechanismisthattheprogramsmustindeedprovidepublicbenefits,inthiscasedefinedasincreasedenergyefficiencyandreducedgreenhousegasemissions.

PACEfinancinghasmanyadvocatesacrosstheNorthwest,mostnotablyinOregon,wherethemodelisbeingimplementedthroughutilitybillrepayment.AdvocatesinIdaho,Montana,andWashingtonhavebeenexploringdifferentlegislativepathwaysthatwouldallowforsomeformofPACEfinancing.

PACEisnotaone‐size‐fits‐allpolicysolution,however,andregulatoryinnovationwillbeneededtodevelopcustomized,workablestrategies.ManylegalandfinancialquestionshavebeenraisedabouthowaPACEfinancingsystemwouldwork,andadvocatesinallthreestatesareworkingtoaddressthosequestions.InbothWashingtonandIdaho,forexample,stateconstitutionsrestrictgovernmentsfromthe“lendingofcredit”toprivateentities.Waystocomplywithconstitutionalrequirementsandfinanceenergyefficiencyexist,buttheyarecomplexandrequirecreativityandkeystakeholdersupport.Accordingly,manyarelookingtolearnfromtheearlyadopters—likeBoulderCounty,Colorado,andthecityofPalmDesertandSonomaCountyinCalifornia—toseehowtheirsuccessescanbetransplantedtotheNorthwest.


Option11. Provideutilitieswithmoreincentivesandfewerbarrierstoinvesttheirresourcesindeepenergyefficiencyretrofitsthroughouttheirservicemarkets.

Currently,utilitiesintheNorthwesthavevaryinglevelsofincentivesanddisincentivestoinvestinenergyefficiency.Ingeneral,utilitiesareeitherrequiredorencouragedtoimplementcost‐effectiveconservationmeasures.Utilities,regulatorsandstakeholderstypicallynegotiatethelevelofconservationandassociatedannualexpendituresonefficiencymeasures.Thisprocessisintendedtoresultinutilitiesacquiringallofthecost‐effectiveenergyefficiencyopportunitiesavailableintheirserviceterritories(i.e.,opportunitieswhosecostsarelessthanorequaltocomparablesupply‐sideresources).However,thisisnotalwaysthecaseduetotwosignificantdisincentivesinherentintheratemakingprocess.

Thefirstdisincentiveisthatincreasedenergyefficiencyreducesutilityrevenuesbecausetheutilityissellinglessofitsproduct.Whiletheutilitysavessomemoneyfromnothavingtogeneratetheelectricityorpurchasenaturalgas,othercosts—powerpolesandlines,trucks,offices,computers,etc.—remain“fixed.”Thismeansforautilitywithanaggressiveenergyconservationprogramtoremain“whole”iteitherneedstogetmoremoneyperunitofenergysoldortorecoverthesefixedcostsinanothermanner.Otherwisetherewon’tbeenoughrevenuetomaintainprofitsand/ortocoverfixedcosts.Regulatorymechanismsshould,ataminimum,makeutilitiesneutraltoincreasesordecreasesintheenergyuseoftheircustomers.

Investor‐ownedutilitiesfaceaseconddisincentivebecauseofthewayregulatoryproceduresestablishafairrateofreturnonutilityinvestments.Ingeneral,regulatorssetratesthatincludearateofreturn–profit–basedontheutility'stotal“capital”investments(theseassetsarecalledthe“ratebase”).Thismechanismallowsutilitiestoraisethecapitalusedforinvestmentsthroughborrowingandstocksales.However,mostNorthwestutilitieschooseto“expense"ratherthancapitalizetheirenergyefficiencyinvestments,whichdoesnotaddtotheratebaseuponwhichthefairrateofreturniscalculated.So,whiletheutilitycanrecoverenergyefficiencyexpensesfrombillpayers,itdoesnotearnaprofitonthoseinvestments.(Someutilitiesaresubjecttoincentivesforhittingorpenaltiesformissingagreed‐uponenergyefficiencytargets.Someobjectthatthesizeoftherewarddoesnotadequatelycompensateforlostrevenueandthattheincentivesfallshortoftherateofreturnallowedforotherinvestments.)Asaresult,utilitiesmaybehesitanttosupportasignificantscale‐upinenergyefficiencyspendingbecausethisisprovidingenergyservicetoitscustomerswithoutafinancialbenefittothecompanyshareholders.

Regulatorymechanismsshouldideallyaligntheinterestoftheutilityanditsshareholderswiththoseofitscustomersbymakingthebenefittotheutilitythesameregardlessofwhethertheutilityinvestsingenerationresourcesorenergyefficiency.Manysuggestthatautilityshouldseegreaterbenefitsorreceiveanincentiveformoreinvestmentsinenergyefficiencyratherthanpowergeneration.Whilethereisnosinglemechanismtoreducedisincentivesorcreateincentives,theneedfornewregulatorystrategiestomotivateutilitiestopursueandsupportallcost‐effectiveenergyefficiencyisclear.


Option12. Supportfederallegislationtopermittax‐exemptbondfinancingforcleanenergyandenergyefficiency.

Atthefederallevel,U.S.RepresentativeMikeThompsonofCaliforniarecentlyintroducedH.R.3525,thePrivateActivityBondsforCleanEnergyProjectsbill.Ifpassed,thisbillwouldamendtheInternalRevenueCodetoaddadditionalcategoriesoftax‐exemptprivateactivitybondstofinanceenergyefficiencyandothercleanenergyprojects.Additionally,thelegislationwouldallowprivatecompaniestousebothtax‐exemptbondsandfederaltaxcreditsforthesenewcategories.Tax‐exemptbonds’interestpaymentsarenotsubjecttofederalincometaxes,andinterestratesarethereforelowerthanratesforcomparabletaxablebondsorcommercialloans.Bygrantingprivateentitiesaccesstothislow‐costfinancing,thebillwouldhelpstimulateinvestmentincleanenergyprojects.Thebillhasreceivedminimalattention.

NewProgramsandInstitutionstoAddCapacityTheprojectteamconsideredarangeofoptionsproposedbyexpertsandreferencedintheliteraturetoestablishsignificantnewprogramsandinstitutionstoprovideadditionalpublic‐sectorcapitalforenergyefficiencyinvestmentsintheNorthwestandbeyond.Threeoptionsthatappeartoofferthegreatestpromiseandprovideforthebestleverageofpublicfundswithprivatecapitalarepresentedbelow.OtheroptionsthatwereconsideredbutwerenotdeemedaspromisingfortheNorthwestincludeissuing“victorybonds,”issuingtax‐creditbonds,andstand‐alonefederalloanguarantees.

Option13. CreateafederalCleanEnergyDeploymentAdministrationor“GreenBank.”

PendingfederalclimatelegislationincludesproposalstoestablishaCleanEnergyDeploymentAdministration(CEDA),frequentlyreferredtoasthe“GreenBank,”whichwouldbefederallyfundedwithupto$10billion.CEDAwouldprovideafederalguaranteeofrepaymentforcertaincommercialenergyefficiencyloansthatcouldbesoldonthesecondarymarket,thusprovidingliquiditytolenders.AnalystsbelievethatCEDAcouldpotentiallyguaranteeupto$200billioninprivateinvestment.31CEDA’sfederalbackingwouldalsoresultinimprovedtermsforborrowersandenableinvestmentinefficiencymeasuresthatotherwisewouldnotoccur.AccordingtotheNaturalResourcesDefenseCouncil,thegoalofafederalinstitutionlikeCEDAwouldbetoprovideafinancingframeworkforlenderssothattheirorganizationscouldgreatlyexpandlendingprogramsforenergyefficiencyretrofits.32Forexample,CEDAcouldhelpsetunderwritingstandardsandgatheranddisseminatedatarelatedtotheperformanceofenergyefficiencyprojectsandloansforprojectsofallsizes.

Currently,boththeU.S.HouseandSenateversionsoftheclimatebillincludeprovisionsforCEDA,thoughmuchdebateremainsabouttheclimatebillitselfandCEDA’sauthority.Onemajorissueofcontentionconcernstheallocationoffundsfordifferenttechnologies.TheHouseversionofthebill

31CoalitionfortheGreenBank.http://www.coalitionforthegreenbank.com/in‐the‐news.html32NaturalResourcesDefenseCouncil,ScalingupInvestmentinEnergyEfficiencywithaFederalEnergyEfficiencyFinancingFacility,April2009.


mandatesthatnosingletechnology—suchaswind,nuclear,orconservation—couldreceivemorethan30percentofCEDA’sbacking,whiletheSenatebilldoesnotsetsuchacap.33

Option14. Usemunicipal,state,orfederalbond‐issuingauthoritytoraisefundsforenergyefficiencyprojects.

Whereconstitutionallypermitted,issuingstateormunicipalbondsrepresentsanattractivemethodforraisingcapitaltofundenergyefficiencyprojects.Bondscouldbeissuedeitheragainstastateormunicipalgovernment’sgeneralobligationtaxingauthorityortiedspecificallytotheperformanceandenergycostsavingsoftheenergyefficiencyportfolio.(Thetaxstatusofthebondswoulddependoneachstate’slimitationsonlendingofcredit.)

Inaddition,the2009AmericanRecoveryandReinvestmentActintroducedtaxcreditbondsknownasQualifiedEnergyConservationBonds(QECBs)toofferreducedinterestratesformunicipalitiesfinancingenergyefficiencyandothergreenhousegasreductionprojects.Oregoncurrentlyissuesbondsbackedbythestate’sgeneralobligationtofunditsSmall‐ScaleEnergyLoanProgram,andthestateisauthorizedtoissuetax‐exemptdebttofinancerenewableenergydevelopment.

Option15. Developandexpandrevolvingloanfundstosupportenergyefficiencyprojects.

Revolvingloanfunds(RLFs)offeramechanismtofinanceenergyefficiencyprojectsatsmallandmedium‐sizedbusinesses,oftenwithsubsidizedlow‐interestloans.Followingtheirinitiationwithseedfunding,RLFsaredesignedtobeself‐replenishing,withtheprincipalandinterestpaymentsonexistingloansprovidingcapitaltomakenewloans.RLFsofferanadditionalpooloffundsforsmallandmid‐sizedbusinessesastheypursuefinancingforenergyefficiencyprojects,andtheycanbeusedinconjunctionwithotherfinancingoptions.Forseedfunding,revolvingloanfundscandrawonbothpublicandprivatecapital,includingfoundationfundingandsourcesof“patientcapital.”

Anumberofjurisdictionsarecreatingnewloanfundstofinanceenergyefficiency,relyinginlargepartonfederalstimulusfunds.BothPortlandandSeattle,forexample,areusingfederalblockgrantfundingasseedmoneyfortheirresidentialenergyefficiencyloanprograms.Seattle’sOfficeofEconomicDevelopmentisseekingcompetitiveARRAfundingforasimilarfundfocusedonsmallcommercialproperties.

Option16. Expandcreditenhancementandothermechanismsthatleverageprivatecapital.

Riskmanagementandcreditenhancementarecriticaltoleveragingprivatecapitalforenergyefficiency.Theexistingpublicloanprograms,forthemostpart,lacktheabilitytoleverageprivatecapital.Thisrestrictionsignificantlylimitsthetotalnumberandsizeofloansthatcanbeissuedeachyear,sincetheloanprogramscanonlyrevolvewhenloansarepaidback.Loanprogramsthat

33PeterBehr,“GreenBankProposalsProbetheHostileFrontierofPoliticsandFinance,”NewYorkTimes,October2,2009.http://www.nytimes.com/cwire/2009/10/02/02climatewire‐green‐bank‐proposals‐probe‐the‐hostile‐front‐86440.html


incorporatecreditenhancement,propertytaxassessments,orothermechanismsthatincreasethesecurityofrevenuesforloanrepaymentaregenerallybestpositionedtogainaccesstoprivatecapitalinthesecondarymarketfortake‐outfinancing.Despitethatdefaultratesonenergyefficiencyloanshavebeenverylow,energyefficiencylendingdoesnothavealongenoughcredithistorytoattractsignificantamountsofprivatecapitalwithoutcreditenhancement.WashingtonState’sDepartmentofCommercesoonwillbedirecting$5millioninARRAfundstowardcreditenhancementmechanismstoleveragepublicinvestmentsinenergyefficiency.


IV. Recommendations

Consideringthemultipleoptionspresentedaboveraisesthequestion:whichoptionsshouldbepursuedandinwhatpriorityordertoincreasefinancingofenergyefficiencyprojectsforsmallandmedium‐sizedbusinessesintheNorthwest?Thisconcludingsectionofthereportbrieflydescribesthepreferrednear‐termfutureforenergyefficiencylendingintheNorthwestandtheactionsnecessarytohelprealizethisfuture.

ThePreferredFutureIdeally,withintwotofiveyears—withoureconomyrecoveredfromrecessionandthefinancialsectorfullybackinthebusinessofprudentlending—theNorthwestwillcontinuetoleadthenation,takingenergyefficiencyinvestmenttothenextlevel.TheNorthwestwillmeetallitstypical(thatis,non‐transportation)electricloadgrowthandhalfitsnewnaturalgasdemandby2020withenergyefficiency.

Commercialbankswillbeofferingstandardizedloanproductstoqualifiedcommercialcustomerstoinvestinenergyefficiencyupgrades.ThesebankswillhavefollowedtheleadoftheCDFIsthatestablishedastrongtrackrecordofsuccessfullendingandrepaymentforsuchprojects.Bankswillfullyunderstandtheeconomicsofefficiencyloanstotheircustomersandwillincludeutility‐sponsoredrebatesandincentivesintheircalculationsofcapitalrequirementsandcashflows.

Thesebankswillbesellingtheirloansintoarapidlygrowingsecondarymarket,whereloanswillbepackagedandsoldtoinvestorsseekinglonger‐termstablereturnsandthoseinterestedinfundingthecleaneconomy’sgrowth.

Loanswillbereadilyavailabletoqualifiedcommercialcustomersat2to3percentbelowmarketrates,andtheloanprocessisstreamlinedandeasytoaccess.

Utilitieswillhavestrongerincentivesandfewerbarrierstoincreasetheirinvestmentsinenergyefficiency.

On‐billpaymentschemesandpropertytax‐basedfinancingofenergyefficiencyprojectswillbewidespread.

Public‐sectorinvestmentwillbeusedprimarilyforcreditenhancementandtoseedrevolvingloanfunds.Thesefundswillbeleveragedtothemaximumextentpossiblewithprivate‐sectorfunds.


RealizingthePreferredFuture:KeyInitiativesAlloftheoptionspresentedwould,ifimplemented,helptorealizethispreferredfuture.Severalsolutionsstandout,however,intheirabilitytoleverageresources,stimulatechangeinthemarketplace,engagelenders,andconsequentlyleadtorapidgrowthinfinancingforenergyefficiency.Thesesolutionsarerecommendedfornear‐termaction:

Earlyaction#1.Marketexistingenergyefficiencyprogramsmoreeffectivelythroughcoordinatedeffortsofgovernments,utilities,andorganizedtradeallynetworks.Thiseffortincludescollectionanddisseminationofbetterinformationabouttheperformanceandfinancialbenefitsofenergyefficiencyupgradesforbusinesses.Werecommenddoingsothrough1)widespreadadoptionoftheU.S.EnvironmentalProtectionAgency’sEnergyStarportfoliomanageroranalternativestandardizedratingsystemtotrackabuilding’senergyperformanceand2)implementationofautility‐sponsoredEnergyConservationAdvisorprogramforlenders.(ThisactiondrawsonOptions5,6,8,and9discussedintheprevioussection.)

Earlyaction#2.AdvancePropertyAssessedCleanEnergy(PACE)financingorasimilarapproach,wherefeasible,providingthebasisforemergenceofasecondarymarketforenergyefficiencyloans,benefitingbothcommercialandresidentialsectors.(Option10)

Earlyaction#3.Encourageutilitiestoadopton‐billrepaymentmechanisms,wherefeasibleandcosteffective,tosimplifyloanrepayment,reducetheupfrontcapitalcontributionsrequiredfrombusinesses,makeadirectconnectionbetweenenergyandcostsavingsforthecustomer,andincreaselendingforenergyefficiencyprojects.(Option1)

Earlyaction#4.Provideutilitieswithmoreincentivesandfewerbarrierstoinvestincosteffectiveenergyefficiency.(Option11)

Earlyaction#5.Establishpublicenergyefficiencyfundsdedicatedtoofferingcreditenhancementtoleverageprivatecapitalthroughtheuseofavailablemunicipal,state,andfederalfunds,includingbonds.(ThisactioncombineselementsofOptions14and16.)

Together,thesesolutionscanprovidethecatalystforlendinginstitutionsandinvestorstofinanceenergyefficiency.Facilitatingmorelow‐costfinancingaddsanothertoolinthetoolboxtohelpbusinessesreducetheirenergybillsandkeepmoredollarsinthelocaleconomy.


V. Appendix A. Literature Sources Reviewed

TITLE SOURCE DATE

CharacterizationandAnalysisofSmallBusinessEnergyCosts

SmallBusinessAdministration,OfficeofAdvocacy,preparedbyE.H.Pechan&Associates

April2008

EnergyEfficiencyandtheFinanceSector:ASurveyonLendingActivitiesandPolicyIssues

UNEPFinanceInitiative’sClimateChangeWorkingGroup

Jan.2009

FifthNorthwestElectricPowerandConservationPlan NorthwestPowerandConservationCouncil

2005

FinancingEnergyEfficiency:LessonsfromBrazil,China,India,andBeyond

WorldBank,InternationalBankforReconstructionandDevelopment

2008

FiveEmergingU.S.PublicFinanceModels:PoweringClean‐TechEconomicGrowthandJobCreation

CleanEdge,Inc. Oct.2009

InnovativeEnergyEfficiencyFinancingApproaches U.S.DepartmentofEnergy,EnergyEfficiencyandRenewableEnergy

June2009

PolicyFrameworkforPACEFinancing CouncilonEnvironmentalQuality Oct.2009

PortlandCleanEnergyInvestmentFundandBuildingRetrofitProgram

TaoStrategies Nov.2008

ProcessEvaluationBestPracticesResearch:NewYorkEnergy$martsLoanFundandFinancingProgram

NewYorkStateEnergyResearchandDevelopmentAuthority,preparedbyResearchIntoAction

May2008

PropertyAssessedCleanEnergy(PACE)Bonds:InnovativeFundingtoAcceleratetheRetrofittingofAmerica’sBuildingsforEnergyIndependence

PACENowWebsite(www.pacenow.org)

2009

RecentInnovationsinFinancingforCleanEnergy SouthwestEnergyEfficiencyProject Oct.2009

RecoveryThroughRetrofit MiddleClassTaskForce,CouncilonEnvironmentalQuality

Oct.2009

ScalingupInvestmentinEnergyEfficiencywithaFederalEnergyEfficiencyFinancingFacility

NaturalResourcesDefenseCouncil April2009

StateEnergyEfficiencyPolicies:OptionsandLessonsLearned—EnergyEfficiencyLoanPrograms

AlliancetoSaveEnergy Jan.2009

TaxLienFinancingforthePurposeofFacilitatingEnergyEfficiencyInvestmentsinCommercialRealEstate

ClintonClimateInitiative July2009

UnlockingEnergyEfficiencyintheU.S.Economy McKinsey&Company July2009

WashingtonState’sGreenEconomy:AStrategicFramework

WashingtonStateDepartmentofCommerce

Jan.2009


VI. Appendix B. Additional Supporting Data

TheNorthwestPowerandConservationCouncil’sFifthPowerPlanidentifiedenergyefficiencymeasureswithapositivebenefit/costratio—thatis,theywouldsavemoremoneythantheywouldcostovera20‐yearperiod.Table4showscost‐effectivemeasuresforcommercialsector.

Table4.CommercialEnergyEfficiencyMeasureswithPositiveBenefit/CostRatios

COMMERCIALEND‐USEMEASURES

Cost‐EffectiveSavingsPotential

(MWain2025)*

AverageLevelizedCost

(Cents/kWh)Benefit/Cost

Ratio**

New&ReplacementLighting 245 1.2 9.1

New&ReplacementInfrastructure 11 1.4 2.4

New&ReplacementShell 13 1.6 2.0

RetrofitLighting 114 1.8 2.2

New&ReplacementEquipment 84 2.2 1.8

RetrofitInfrastructure 105 2.2 1.8

RetrofitShell 9 2.9 1.3

New&ReplacementHVAC 148 3.0 1.5

RetrofitEquipment 109 3.4 2.1

RetrofitHVAC 117 3.4 1.3

Total 955 2.3 2.6

Source:NorthwestPowerandConservationCouncil,FifthPowerPlan.

*Thiscolumnshowsthetotalamountofconservationestimatedtobecost‐effectiveandachievable,givensufficienteconomicandpoliticalresources,overa20‐yearperiodunderthemid‐rangeforecastofloads,fuelprices,waterconditions,andresourcedevelopment.

**Benefit/cost(B/C)ratiosarederivedbydividingthepresentvaluebenefitsofeachmeasure’senergy,capacity,transmissionanddistribution,andnon‐energycostsavingsbytheincrementalpresentvaluecost(includingprogramadministration)ofinstallingthemeasure.

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