Most of our readers know that roughly 40 percent of energy generated in the U.S. is consumed by residential and commercial buildings. And most also know that there are many proven, available ways to increase building energy efficiency, and that many of efforts have a short payback period, making them attractive both to building owners and investors. According to one report, the potential energy efficiency market is vast, valued at approximately $275 billion. Yet currently only about 1 percent of all U.S. investments are made in energy efficiency projects. Why is this?
One primary reason may surprise you. It’s that potential investors are unable to easily and accurately predict loan performance because they don’t have access to payment performance history to properly evaluate energy efficiency projects. As a result, many of these projects have high transaction costs, as well as risk premiums, that increase the cost of capital. This lack of data is not just making energy efficiency loans more expensive, it is also impeding large-scale investment in building retrofits.
In one relatively high profile example, last fall the New York State Energy Research and Development Agency (NYSERDA) wanted to hand out $20 million in residential energy efficiency loans and went to a national rating agency to request the rating of a traditional asset-backed security. (Rating agencies evaluate and assign a rating to such securities that reflect their relative risk to investors.) The rating agency told NYSERDA that there was not enough data on its previous residential loans to receive a rating. NYSERDA came up with an innovative solution by partnering with the Environmental Facilities Corporation, which runs a state revolving fund to provide loans for clean water projects. The two groups approached EPA and asked the agency whether the energy efficiency loans could be included in part of EFC’s clean water programs. EPA agreed and NYSERDA was ultimately able to receive a rating for its loans. This is no doubt an innovative solution, but many other similar loans are continuing to face the same problem.
To help solve this issue, the Environmental Defense Fund’s Investor Confidence Project and several other groups have launched the Energy and Loan Performance Data program. The program is gathering this data and is working with rating agencies, investors and utilities about how to best leverage this data. Initial data partners include NYSERDA, Clean Energy Works Oregon, Clean Energy Finance and Investment Authority in Connecticut, Babylon Long Island Green Homes, and PACENow, among others. The project will collect and analyze the data sets, including how the loans performed, underwriting criteria and deal structure, project attributes, and energy performance data. The project will seek to determine gaps in the current datasets and how this data can be better gathered and analyzed going forward.
We’ll continue to follow the Energy and Loan Performance Data program and other similar programs that are working to scale up the building energy efficiency loan market.