Energy efficiency should be the low-hanging fruit of carbon-reduction schemes, with clear and reliable paybacks. Instead, the bountiful harvest has been tantalizingly out of reach, for lack of sufficient upfront capital.
Now a new financing structure may finally get the players lined up and the dollars flowing. The premise of the so-far only deal done: Treat and finance the non-use of energy — some call it “non-energy” — the same as energy generation.
That twist sets MEETS (Metered Energy Efficiency Transaction Structure) contracts apart from other flavors of energy efficiency financing. Even innovative approaches like PACE (Property Assessed Clean Energy), which is being used in several states to finance retrofits of commercial buildings after being blocked from the residential market, ultimately cut utility revenues by lowering demand.
“Everything up to now has been a subtraction on the bill. Now what we have done is made the delivery of non-energy a form of generation, and therefore a revenue,” says David Chen, head of Equilibrium Capital in Portland, which helped bring the structure to market. The first MEETS agreement, a 20-year power purchase agreement for the non-use of energy, was struck in June between Seattle City Light and the Bullitt Foundation, a Seattle philanthropy that recently completed its new headquarters building.
“Because it's now revenue, it's now generation, it can be part of an energy plan for the utility. More significantly to the financial marketplaces, when it is a revenue line, that's financeable,” Chen continues. You can see the twinkle in his eye (at about 2:53 in the accompanying video interview) when he explains, “It’s hard to finance an expense line. It’s much easier to finance a revenue line.”
The Seattle announcement attracted attention from the New York Times to the Environmental Defense Fund. To be sure, a single deal on a state-of-the-art headquarters for a well-endowed foundation does not a green revolution make. (For a very enjoyable talk about the project, watch the Bullitt Foundation's Dennis Hayes at Equilibrium's recent investor conference.)
But a structure that aligns utilities' interest with “deep” energy retrofits could generate huge benefits. Back in 2009, McKinsey estimated that energy-efficiency retrofits in 100 million buildings could reduce non-transportation energy consumption by nearly one-quarter by 2020, resulting in non-use of 9.1 quadrillion BTUs of energy and abatement of 1.1 gigatons of greenhouse gas emissions each year — as much as taking off the road the entire U.S. fleet of cars and light trucks.
What's more, McKinsey found the required investment of $520 billion (through 2020) would save more than $1.2 trillion in wasted energy spending. Nonetheless, energy efficiency spending peaked at about $14 billion in 2010, including $3 billion in federal stimulus money.
The “Seattle Plan” relies on a new “DeltaMeter” that establishes a baseline of historic energy use sans improvements and, importantly, adjusts that baseline for occupancy, weather and other matters to leave only legitimate non-use of energy. From this baseline is subtracted the actual use as measured by a conventional meter. The non-use is then “sold” to the utility under a standard power purchase agreement. The building owner gets the equivalent of a rent check from the project developer.
EnergyRM, a Portland company backed by Equilibrium, is developing both the meter and the MEETS structure. CEO Rob Harmon 15 years ago developed an earlier financing structure called Renewable Energy Credits, which unlocked clean energy financing by creating tradeable certificates that track environmental attributes of clean-energy projects separate from the energy itself.
Likewise, MEETS will create new opportunities for investors. As in a wind project, there are opportunities for investors both in the development phase, and as a stable asset in the “generation” phase, with different risk-adjusted rates of returns. “Both of those have huge value — very different values — to investors,” Chen said.
That capital will launch projects, create jobs, save energy and cut carbon, he says. “Much the same way we have energy developers, wind developers, solar developers, we're now going to have energy-efficiency developers, that will buy the opportunity from a building owner to develop their non-energy.”