Energy Efficiency and Finance: Opportunities and Issues
Energy Efficiency and Finance: Opportunities and Issues
Steven Nadel, Executive Director American Council for an Energy-Efficient Economy September 2010
U.S. Energy Use in Relation to GDP 1970-2008 250.0
200.0
Energy Service Demand Adjusted for Imports
150.0
Actual Energy Supply 100.0
50.0
1970 Energy Demand
Year
20 08
20 06
20 04
20 02
20 00
19 98
19 96
19 94
19 92
19 90
19 88
19 86
19 84
19 82
19 80
19 78
19 76
19 74
19 72
0.0 19 70
Quads of Total Primary Energy
Energy Service Demand
McKinsey Global’s Analysis of Carbon Reduction Potential
Residential Economic Energy Efficiency Potential in Virginia 26% of Projected Electricity Consumption in 2025 Electricity Use Feedback, 376 GWh, 3%
New Homes Savings, 949 GWh, 7%
Plug Loads, 900 GWh, 6% HVAC equipment and load reduction savings, 5,940 GWh, 41%
Furnace Fans, 1,005 GWh, 7% Appliances, 76 GWh, 0.5% Refrigeration, 447 GWh, 3%
Lighting, 2,939 GWh, 21% Water Heating, 1,695 GWh, 12%
Source: ACEEE, 2008
Commercial Economic Energy Efficiency Potential in Virginia 28% of Projected Electricity Consumption in 2025
Source: ACEEE, 2008
Industrial Economic Energy Efficiency Potential in Virginia 18% of Projected Electricity Consumption in 2025
Measures Sensors & Controls Energy Information Systems Duct/Pipe insulation Electric Supply Lighting Total Motors Total Compressed Air Pumps Fans Refrigeration Total
Weighted Levelized Cost of Saved Energy ($/kWh)
Savings Potential in 2025 (GWh)
Savings Potential in 2025 (%)
% of Efficiency Resource Potential
75 199 663 618 310 866 311 468 133 84
0.4% 1.0% 3.2% 3.0% 1.5% 4.2% 1.5% 2.3% 0.6% 0.4%
2% 5% 18% 17% 8% 23% 8% 13% 4% 2%
$0.01 $0.06 $0.05 $0.01 $0.02 $0.03 $0.00 $0.01 $0.02 $0.00
3,726
18%
100%
$0.02
Source: ACEEE, 2008
Energy Efficiency Policy Recommendations for Ohio
22% savings
Source: ACEEE, 2009
Macroeconomic Impacts -- Ohio
Macroeconomic Impacts Jobs (Actual) Wages (Million $2006) GSP (Million $2006)
2015 7,928 300 444
2025 32,061 1,615 2,559
Energy Productivity Shifts Spending To Greater Labor and GDP Impacts Energy Efficiency ^ ^
Source: 2007 IMPLAN data set for the U.S. economy (2009).
Role of Efficiency in Addressing Climate Change in the U.S.
Note: This graph is stylized and is not exact.
Investments in Energy Supply and Energy Efficiency, 2004 350
$ billion
300 250 200
Total EfficiencyRelated Investments
Energy Supply Investments
150
Base
257
100 50
100 43
0 Energy Supply
Premium
Energy Efficiency
Source: Ehrhardt-Martinez and Laitner, 2008, ACEEE.
U.S. Electric and Gas Utility Budgets for Energy Efficiency & Load Management
Source: Consortium for Energy Efficiency
Levelized Utility Cost of Electricity Resources 16
Range of Levelized Costs (cents per kWh)
Note: The green bars represent the lower end while the blue bars reflect the upper end of costs. 14 12 10 8 6 4
average = 2.5¢
2
---------------
0 Energy Efficiency
Wind
Biomass
Natural Gas Combined Cycle
Pulverized Coal
Nuclear
Sources: ACEEE 2009 for EE, Lazard 2008 for others
Coal IGCC
LBL Estimate of Future Utility EE Spending
Source: Barbose, Goldman and Schlegel 2009
Major Stimulus Bill EE-Related Items • $5 billion for low-income weatherization • $3.1 billion for State Energy Program + $300 million for appliance rebates • $3.2 billion for EE&C Block Grants to municipalities • $8.8 billion for efficient federal buildings and vehicles • ~$2 billion for residential retrofit tax credit • ~$1 billion low/moderate income housing targeting EE • $4.5 billion for Smart Grid • $2.5 billion for DOE EERE research, $2 billion advanced batteries, $400 million ARPA-E • $2.3 billion for tax credits for investments to produce EE and clean energy products • $17.7 billion for public transportation • $500 million for job training
CleanTech Investment Trends
Federal Energy Efficiency Tax Incentives • Commercial building tax deduction -- $1.80/sf for 50% savings • Residential retrofits and equipment tax credits – 30% up to $1500 (expires 12/31/10, could be renewed) • New home tax credit -- $2000 for a home that saves 50% (expired, renewal pending) • C&I CHP, fuel cell and microturbine tax credits – 1030% • Appliance manufacturer tax credits for “superefficient” appliances (expires 12/31/10, renewal pending)
Energy Efficiency Finance Combines: • Technical expertise – what works, how to do it, what technical risks are and how to manage them • Finance expertise – sources of capital, ways to structure deal, manage risks and earn decent return
Types of Energy Efficiency Finance Product Development (venture capital)
Project Finance
New Technologies
Project Finance Options • • • • •
Direct loans to end-users Invest in energy service companies On-bill finance PACE financing Get creative
Efficiency Investments: Low Risk, High Return
Average Annual Return
Efficiency Investment Risks and Returns 40% 30% Energy Efficiency
Small Company Stocks
20%
Common Stocks Long-term Corp Bonds U.S. T-Bills
10% 0% 0%
10%
20%
30%
40%
Risk Index (year-to-year volatility) Source: ACEEE estimates adapted from the U.S. EPA and the Vanguard Group
Direct Loans to End-Users •Given high returns, some customers prefer to self-finance •Often need large projects to justify project development costs •Some end-users prefer off-balance-sheet financing •Some customers who need project finance may not meet credit criteria •Interest growing in loan guarantees
Energy Service Companies ESCo’s) •ESCo’s identify projects, do project engineering, arrange/provide financing and sometimes guarantee savings •In exchange receive share of savings or preset payments •ESCo’s commonly receive their financing from institutional investors
On-Bill Finance • Utility provides/arranges for capital and puts monthly payment on utility bill • Utility knows bill payment history plus perceived threat of disconnection • Can be structured to provide immediate positive cash-flow • Can be structured to stay with the meter • But few utilities want to provide capital; instead will seek to raise from market
Example – California Small Business Program
PACE Financing (Property Assessed Clean Energy)
•Special voluntary taxing district that covers a particular property •Used to provide upfront capital to owner and payments made on tax bill •Municipality packages many projects into a single bond offering •Payments continue, even when ownership changes •More than a dozen states have authorized •Taxes are senior to mortgage => lower rates • For this reason, Federal regulators are objecting to PACE; solutions now being explored
Conclusions • Energy efficiency is a plentiful, modest-cost resource with returns greater than most investments. • Being successful with EE finance requires availability of both finance and technical expertise. • Many viable routes for both product and project finance • Need for continued attention on ways to address outstanding issues
Contact Info Steven Nadel [email protected] 202-507-4000 www.aceee.org
Steven Nadel, Executive Director American Council for an Energy-Efficient Economy September 2010
U.S. Energy Use in Relation to GDP 1970-2008 250.0
200.0
Energy Service Demand Adjusted for Imports
150.0
Actual Energy Supply 100.0
50.0
1970 Energy Demand
Year
20 08
20 06
20 04
20 02
20 00
19 98
19 96
19 94
19 92
19 90
19 88
19 86
19 84
19 82
19 80
19 78
19 76
19 74
19 72
0.0 19 70
Quads of Total Primary Energy
Energy Service Demand
McKinsey Global’s Analysis of Carbon Reduction Potential
Residential Economic Energy Efficiency Potential in Virginia 26% of Projected Electricity Consumption in 2025 Electricity Use Feedback, 376 GWh, 3%
New Homes Savings, 949 GWh, 7%
Plug Loads, 900 GWh, 6% HVAC equipment and load reduction savings, 5,940 GWh, 41%
Furnace Fans, 1,005 GWh, 7% Appliances, 76 GWh, 0.5% Refrigeration, 447 GWh, 3%
Lighting, 2,939 GWh, 21% Water Heating, 1,695 GWh, 12%
Source: ACEEE, 2008
Commercial Economic Energy Efficiency Potential in Virginia 28% of Projected Electricity Consumption in 2025
Source: ACEEE, 2008
Industrial Economic Energy Efficiency Potential in Virginia 18% of Projected Electricity Consumption in 2025
Measures Sensors & Controls Energy Information Systems Duct/Pipe insulation Electric Supply Lighting Total Motors Total Compressed Air Pumps Fans Refrigeration Total
Weighted Levelized Cost of Saved Energy ($/kWh)
Savings Potential in 2025 (GWh)
Savings Potential in 2025 (%)
% of Efficiency Resource Potential
75 199 663 618 310 866 311 468 133 84
0.4% 1.0% 3.2% 3.0% 1.5% 4.2% 1.5% 2.3% 0.6% 0.4%
2% 5% 18% 17% 8% 23% 8% 13% 4% 2%
$0.01 $0.06 $0.05 $0.01 $0.02 $0.03 $0.00 $0.01 $0.02 $0.00
3,726
18%
100%
$0.02
Source: ACEEE, 2008
Energy Efficiency Policy Recommendations for Ohio
22% savings
Source: ACEEE, 2009
Macroeconomic Impacts -- Ohio
Macroeconomic Impacts Jobs (Actual) Wages (Million $2006) GSP (Million $2006)
2015 7,928 300 444
2025 32,061 1,615 2,559
Energy Productivity Shifts Spending To Greater Labor and GDP Impacts Energy Efficiency ^ ^
Source: 2007 IMPLAN data set for the U.S. economy (2009).
Role of Efficiency in Addressing Climate Change in the U.S.
Note: This graph is stylized and is not exact.
Investments in Energy Supply and Energy Efficiency, 2004 350
$ billion
300 250 200
Total EfficiencyRelated Investments
Energy Supply Investments
150
Base
257
100 50
100 43
0 Energy Supply
Premium
Energy Efficiency
Source: Ehrhardt-Martinez and Laitner, 2008, ACEEE.
U.S. Electric and Gas Utility Budgets for Energy Efficiency & Load Management
Source: Consortium for Energy Efficiency
Levelized Utility Cost of Electricity Resources 16
Range of Levelized Costs (cents per kWh)
Note: The green bars represent the lower end while the blue bars reflect the upper end of costs. 14 12 10 8 6 4
average = 2.5¢
2
---------------
0 Energy Efficiency
Wind
Biomass
Natural Gas Combined Cycle
Pulverized Coal
Nuclear
Sources: ACEEE 2009 for EE, Lazard 2008 for others
Coal IGCC
LBL Estimate of Future Utility EE Spending
Source: Barbose, Goldman and Schlegel 2009
Major Stimulus Bill EE-Related Items • $5 billion for low-income weatherization • $3.1 billion for State Energy Program + $300 million for appliance rebates • $3.2 billion for EE&C Block Grants to municipalities • $8.8 billion for efficient federal buildings and vehicles • ~$2 billion for residential retrofit tax credit • ~$1 billion low/moderate income housing targeting EE • $4.5 billion for Smart Grid • $2.5 billion for DOE EERE research, $2 billion advanced batteries, $400 million ARPA-E • $2.3 billion for tax credits for investments to produce EE and clean energy products • $17.7 billion for public transportation • $500 million for job training
CleanTech Investment Trends
Federal Energy Efficiency Tax Incentives • Commercial building tax deduction -- $1.80/sf for 50% savings • Residential retrofits and equipment tax credits – 30% up to $1500 (expires 12/31/10, could be renewed) • New home tax credit -- $2000 for a home that saves 50% (expired, renewal pending) • C&I CHP, fuel cell and microturbine tax credits – 1030% • Appliance manufacturer tax credits for “superefficient” appliances (expires 12/31/10, renewal pending)
Energy Efficiency Finance Combines: • Technical expertise – what works, how to do it, what technical risks are and how to manage them • Finance expertise – sources of capital, ways to structure deal, manage risks and earn decent return
Types of Energy Efficiency Finance Product Development (venture capital)
Project Finance
New Technologies
Project Finance Options • • • • •
Direct loans to end-users Invest in energy service companies On-bill finance PACE financing Get creative
Efficiency Investments: Low Risk, High Return
Average Annual Return
Efficiency Investment Risks and Returns 40% 30% Energy Efficiency
Small Company Stocks
20%
Common Stocks Long-term Corp Bonds U.S. T-Bills
10% 0% 0%
10%
20%
30%
40%
Risk Index (year-to-year volatility) Source: ACEEE estimates adapted from the U.S. EPA and the Vanguard Group
Direct Loans to End-Users •Given high returns, some customers prefer to self-finance •Often need large projects to justify project development costs •Some end-users prefer off-balance-sheet financing •Some customers who need project finance may not meet credit criteria •Interest growing in loan guarantees
Energy Service Companies ESCo’s) •ESCo’s identify projects, do project engineering, arrange/provide financing and sometimes guarantee savings •In exchange receive share of savings or preset payments •ESCo’s commonly receive their financing from institutional investors
On-Bill Finance • Utility provides/arranges for capital and puts monthly payment on utility bill • Utility knows bill payment history plus perceived threat of disconnection • Can be structured to provide immediate positive cash-flow • Can be structured to stay with the meter • But few utilities want to provide capital; instead will seek to raise from market
Example – California Small Business Program
PACE Financing (Property Assessed Clean Energy)
•Special voluntary taxing district that covers a particular property •Used to provide upfront capital to owner and payments made on tax bill •Municipality packages many projects into a single bond offering •Payments continue, even when ownership changes •More than a dozen states have authorized •Taxes are senior to mortgage => lower rates • For this reason, Federal regulators are objecting to PACE; solutions now being explored
Conclusions • Energy efficiency is a plentiful, modest-cost resource with returns greater than most investments. • Being successful with EE finance requires availability of both finance and technical expertise. • Many viable routes for both product and project finance • Need for continued attention on ways to address outstanding issues
Contact Info Steven Nadel [email protected] 202-507-4000 www.aceee.org
