Unlocking Energy Efficiency: The Investor Perspective

May 29, 2013 | Cliff Majersik

A couple of months ago I met with institutional investors, ranging from banks to pension funds. These folks are some of the largest investors in the country, in some cases managing hundreds of billions of dollars. It’s institutions like theirs that can help unlock the massive investment opportunity in energy efficiency that is spread across countless buildings and industrial facilities.

However, while these investors have put money into everything from home mortgages to credit cards (and made the cost of using them cheaper for home and business owners), such a mutually beneficial relationship doesn’t exist between these investors and energy efficiency projects. The interest is there – and investors are finding ways to take advantage of energy efficiency – but to truly unlock the opportunity, public policy must level the playing field for efficiency in utility regulations, catalyze demand for retrofit projects, and adopt finance-enabling measures.

It’s something we all hear repeatedly: the cheapest kilowatt is the one you don’t use. We know efficiency can save homeowners, building owners, and industrial facilities substantial money. And we know that there is a massive opportunity to invest in these efficiency solutions. One study by Deutsche Bank last year showed that in buildings alone there was a $279 billion investment opportunity that could save in excess of $1 trillion.

A new report that came out of this group of investors (and energy efficiency professionals like me) showed that investors are doing much to harness the benefits of energy efficiency: they’re investing in companies that provide energy efficiency services and products; they’re working with companies they own to improve energy performance and the bottom line; they’re cutting wasted electricity and dollars in real estate they own.

We know, however, that we’re only getting a fraction of the investment potential that is out there. To put money into financing retrofits, these folks need big investments: $100 million or more at a time. This means we need to pool many smaller, standardized loans together and make them investment-grade. The solutions this group identifies can tackle both the barriers to building these loan pools and the familiar barriers to doing more energy efficiency work, such as utility disincentives and “split incentive” between landlords and tenants. (The authors of the report will be holding a webinar on June 6th; you can register here.)

I was happy to see that the investors supported many of the things we have advocated for at the Institute for Market Transformation. Investors need ample information to make wise investments, so not surprisingly they’re interested in policies that increase transparency about energy use. Eight major U.S. cities have now passed regulations requiring owners of large buildings to measure and report their properties’ annual energy use. In six of those cities, information on the buildings’ energy performance will be made public. This is great news for investors: gauging the energy efficiency of a building can become part of their due diligence. Numerous studies show that efficient buildings have higher rental and occupancy rates, and higher sales prices.

As the report authors note, investors say mortgage underwriting in particular would see value from increased energy transparency. Energy costs for a home are usually higher than interest payments or property taxes, both of which are considered by lenders – but energy isn’t. Incorporating energy costs into the mortgage lending process, as proposed in the bipartisan SAVE Act, would yield less risky home loans and incentivize energy efficiency.

The message is clear: investors are moving forward on energy efficiency across their portfolios. With some smart changes to make energy policy fairer, help improve the performance of our buildings and make energy use more transparent, we can put more of their capital to work. What are we waiting for?

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