We're On the Same Page, Part 2: Energy Efficiency Finance

As Liam Pleven’s Wall Street Journal article “Buy Now, Pay Later” rightly points out, upfront costs– present a persistent stumbling block for the realization of energy efficiency retrofits.  He details several business models that are addressing this issue.  Given that capital flows toward new assets classes where it can turn a profit much like water searching for cracks and crevices to form a new tributary, why, then, aren’t the businesses cited in his article overwhelmed by investors?  The answer is that the perception of risk is still very high in this area.  Without a track record in this space, investors become Jerry Maguire caricatures, sitting on the sidelines demanding, “Show me the money!”

EDF’s response: here you go!  EDF Climate Corps fellows have identified $91 million in investments to date that would yield a whopping  $439 million of savings in net operating costs. Another example – our project with KKR has yielded $35 million in energy efficiency savings across 7 of KKR’s companies through no or low cost investments. In return, KKR is now rolling this approach out to its entire portfolio.

But investors are a skittish bunch, especially of late; they want more confidence in the returns.  As a result, EDF is working to address the knowledge gap between building engineers that prescribe the retrofits and the capital providers that fund them.  Although tools and standards exist today, the application can be somewhat discretionary, making it difficult for financial professionals to become comfortable with their track record.  EDF is facilitating the development and adoption of a consensus approach to the application of these tools and standards to help building engineers clearly communicate to finance professionals that projected savings and expected recurring savings are real.

Lastly, the high transaction costs of identifying pipeline have thwarted financial product developers in aggressively developing and offering energy efficiency investment products for institutional investors.  Essentially, EDF is operating as an aggregator in the short-term to identify pipeline through its myriad of relationships.  Once investors and consumers see the mutual benefit of retrofits, the marketplace will develop a system for the two to find each other and take us out of the equation.  In essence, it is a “crowding in” strategy.

Considering the $170 billion per year investment opportunity that the Conference Board and McKinsey predict can provide an average 17% internal rate of return, the energy efficiency asset class is poised to be a lucrative new asset class that will also have significant benefit on cleaning up the air we breathe and stabilizing our climate.  So investors, to borrow another line from Jerry Maguire – “Help me, help you!”