We have a new financial order – but what about a new energy order?

Money supposedly makes the world go round – or doesn't, as we have seen in the last few months. But it does make a big difference to the rate of advance of energy efficiency. So I was in New York recently at a 2-day workshop on finance and energy efficiency organized by the EEB.

The two days of discussions reinforced the EEB's initial conclusions. First, there is no easy answer to how finance can stimulate energy efficiency. Second, innovative financing mechanisms and a change to valuation models will not be enough to drive the necessary market transformation. Externalities must be priced and a value put on energy use, public/private partnerships are critical, solutions must be tailored to the specific context and building sector, and government has a significant role to play.

Regular readers will know that the EEB's first report concluded that business could influence the development of energy efficiency in buildings through three levers: a holistic approach, behavior changes, and financing. In the meeting with our Assurance Group in July, they recommended that we drill further down on finance.

We organized the workshop together with Molly McCabe of the sustainability consultancy HaydenTanner, on October 6-7, inviting around 40 stakeholders. The first day concentrated on commercial buildings, the second on residential.

The venue was very impressive: the New York Academy of Science overlooking Ground Zero, downtown Manhattan and the Federal Reserve. The building (7 World Trade Center) has a LEED Gold rating and is billed as New York City's first green office tower. Sustainable design features include plenty of natural light, individual power meters for tenants to encourage them to conserve energy, the reuse of heating steam to generate some of the building's power, and the use of recycled materials for insulation and interior materials.

Impact of the current economic turmoil

Finance has dried up so there are virtually no market-driven real estate transactions being done at this time. Real estate investors must reevaluate the nature of the risks inherent in property investing - including tenant mix and durability - including an assessment of the impacts of future regulation, energy availability and pricing.

US housing starts were off 31% in the past year and down 64% from their peak in early 2006. Economists are predicting another 5-10% drop through the beginning of 2009. Hopefully, this will help switch the focus to energy efficiency in existing properties rather than new construction.

Government stakes in major financial institutions and large mortgage portfolios may point to an opportunity for sweeping policy changes.

An economic stimulus in the form of an energy efficiency retrofit program with a focus on job creation and retention would result in reduced dependence on fossil fuels along with local capital maintenance and reinvestment. Retrofitting 5 million US homes per year at US$ 10,000 per home could result in US$ 50 billion in economic stimulus each year.

Hurdles

The workshop highlighted many familiar challenges: the low priority of energy issues, inadequate education, inertia, difficulties in accessing capital, limited comprehensive and reliable financial data, and principal-agent problems (including split incentives).

Challenges on the financial side are daunting: initial costs, long payback periods, capital vs. operating budgets, risk exposure, the low ratio of energy costs to total operating expenses, high transaction costs, discount factor issues, and the continued inadequacy of traditional financing mechanisms for energy efficiency projects.

Timescales are critical. Many participants said payback periods were much longer than they had initially anticipated, suggesting that energy efficiency measures had an unacceptable return on investment. In that case regulation and/or incentives were seen as necessary to drive investment.

Opportunities

But it's not all doom and gloom. Many participants highlighted the opportunity provided by the current economic conditions. Other opportunities include education and training, monetization of energy efficiency through cap and trade, new investment vehicles, increasing awareness around climate change and risks associated with energy price and availability. Municipalities and utilities are seen as having an opportunity to take center stage through new regulation and new financial mechanisms such as on-bill pay and property tax financing.

Market linkage and behavior

There is a need to link energy efficiency to the costs and risks of energy use. We need an agreed baseline methodology to measure energy use and a means to consistently track performance. Greater certainty and transparency are needed before private actors will be willing to engage further. Investors, owners, tenants, brokers and appraisers are pivotal to the market's development. An international protocol for measurement and verification would be useful. Energy Performance Certificates provide a vehicle to measure, compare, track and enforce efficiency.

Many discussions have made clear that most market participants believe energy efficiency and sustainability are important. Many of the workshop participants consider energy efficiency and broader sustainability skills a competitive advantage in the marketplace. However, energy efficiency has currently taken a back seat in the face of basic survival - tenant retention and paying the mortgage. The price of energy and its perceived risk are modest compared to other financial levers.

There was general consensus at the workshop around the need to reframe the discussion. Reframing the language and concept of energy efficiency to correlate with accepted real estate mores - such as health and safety issues ‑ has the potential for traction. It is necessary to move away from narrow financial calculations and make energy efficiency an accepted and expected part of the regular building inspection process.

Comments

[Kyle Stuart]

I'd like to provide an additional resource to help move this dialogue forward - as it is paramount to address the energy issue. The website www.betterbricks.com is a terrific resource for commercial building professionals and would be a helpful guide in this conversation. Thanks and keep up the good work!

Best,

Kyle Stuart

[Nathan Shetterley]

An international protocol for measurement and verification would be useful. Energy Performance Certificates provide a vehicle to measure, compare, track and enforce efficiency.

You mean the International Performance Measurement and Verification Protocol(IPMVP)?

Come check us out at EVO-blog.com or EVO-world.org

[Hal Hardy]

A new energy order requires we get "physical" and technical. But with a measurable value for the use of energy...use the total physical amount of energy that reaches the Earth in a year...used as a baseline comparable to available "operating cost", we will be able to level the playing field with regards to externalities as well as give businesses (especially energy efficient businesses) a way to determine future returns. It may be a shift we can't afford to make but eventually we won't be able to afford to not make it. Thanks for the forum!