According to Bill Campbell of Equilibrium Capital Group at a recent meeting of the Oregon Energy Forum, most forms of energy are generated with large capital investments, and sold to consumers who buy only what they need, when they need it. This financial structure is quite common, from stored energy delivered as gasoline or AA batteries, to real-time energy delivered over the electric or natural gas grids. Investors are accustomed to making large, safe, long term investments in energy. Consumers are accustomed to making small purchases, which in aggregate support hundreds of billions of dollars in transactions.

A Feed-In-Tariff (FIT) fits this business model very well. For instance, a business can make a large capital investment in solar PV (photovoltaic) equipment, sell electricity on a long term (e.g. 20 year) contract at a guaranteed price to a utility, and pay individual building owners regular royalty fees for the use of their rooftops. In short, a FIT provides a very bankable investment in PV. In the present economic downturn, a business that sends building owners monthly checks, is likely to find more clients than a business that charges building owners for new PV systems—even PV systems with partial subsidies and tax credits.

In comparison, a program that provides first-cost incentives plus net metering is incongruent with the conventional energy business model. In many cases, the investment decisions are made by individual building owners who have minimal investment capital on hand. If large investors enter the market, they often receive low electricity prices.

FITs are popular in Europe to promote renewable energy, and are gaining traction in the US. In Florida, the Gainesville Regional Utilities (GRU) recently switched a renewable energy program, from “Incentive plus Net Metering” to FIT. The 2 programs are comparable, in terms of the net present value per kWh of the cost over the program lifetime. This comparison is important, because some Americans dismiss successful European FIT programs as too expensive.

In the GRU service territory, 365 KW of new solar capacity was installed or committed in the final eighteen months of the “Incentive plus Net Metering” program – versus 8 MW in the first eighteen months of the FIT. That’s more than twenty times the investment, jobs, energy, carbon reduction, and community value in the same span of time – at essentially the same net present value cost per kWh to the utility.

With an energy efficiency power purchase agreement (eePPAtm) or related “pay for delivery” transactions, the FIT financial model can be applied to energy efficiency, in addition to renewable energy. The Gainesville experience suggests that government bodies and utilities can grow their local clean energy economies much faster, by investing in FIT energy programs.

The recent report “The Imminent Commercial Real Estate Crisis and The CRE Solution” from Architecture 2030, recommends a three-year federal tax deduction for energy retrofits, to raise commercial property values while creating construction jobs.  While other policies have been proposed for large commercial buildings, this proposal would address small and medium size commercial buildings–helping community and regional banks, and property owners who act quickly.

The U.S. Senate might pass legislation for clean energy this summer or fall.  Energy efficiency retrofits in commercial buildings offer one of the most cost-effective ways to enhance the nation’s energy independence, reduce greenhouse gas (GHG) emissions and create green jobs.  With “The CRE Solution”, the commercial real estate market will also benefit from energy retrofits.

Since 2007, commercial property values have dropped 40%, CRE transactions have dropped 90%, and the construction industry for commercial buildings has lost more than a million jobs. Between now and 2014, $1.4 trillion in CRE loans will come due; more than half are underwater, with loan value higher than property value. 

Energy retrofits offer a win-win investment in construction jobs, because (unlike new construction), renovation does not glut the CRE market with additional vacant space.  On the contrary, energy retrofits raise the CRE market because energy efficiency raises individual property values.  For example, at a cap rate of 8.5%, annual energy cost savings of $1.00/sf, documented over 2 years, increase the property value by $11.76/sf.  Certification with the ENERGYSTAR Label or Leadership in Energy & Environmental Design, Existing Buildings, Operations & Maintenance (LEED EBOM) can increase the value in less than 2 years, as described in the soon to be updated report from Pike Research, “Energy Efficiency Retrofits for Commercial and Public Buildings”. 

At present, a tax deduction of $1.80/sf supports retrofits that generate energy savings in the range of 10% to 20%.  The CRE Solution would provide tax deductions for larger investments ($4.50 to $9.00/sf), for energy savings of 30% to 100%.  Energy savings at these higher levels are in the public interest, because commercial buildings account for almost 20% of the nation’s energy consumption and GHG emissions. Such investments are rare at present, because energy cost is a minor consideration for most commercial property owners.

Will the proposed tax deduction inspire a large pool of property owners to invest in “deep” energy retrofits, creating hundreds of thousands of construction jobs?  If the deduction becomes available and publicized soon enough, then pro-active property owners will have time to complete energy retrofits immediately, and document 2 years of cost savings, before their loans come due. After 2 years, the retrofits will raise individual property values in the range of $10 to $30/sf (even higher in some cases), reducing losses and bringing some properties back above water.  Further, a bank could require an energy retrofit in a loan renegotiation package, to ensure that a property’s value will rise 2 years later (or sooner, with the ENERGYSTAR Label or LEED EBOM certification). 

On Earth Day in April 2010, the White House announced the winners of $454 million in federal “Retrofit Ramp-Up” funding.  This funding was intended to support pilot programs for energy retrofits in residential and commercial buildings.  Many of the winning proposals included PACE (Property Assessed Clean Energy) programs, the topic of a recent Pike Research report, “PACE Financing for Commercial Buildings”.

A few weeks later, the FHFA (Federal Housing Finance Agency), which runs Fannie Mae and Freddie Mac, derailed PACE for residential buildings.  Existing residential PACE programs such as the ClimateSmart program in Boulder, Colorado have ground to a halt, pending the outcome of ongoing negotiations.  The Boulder PACE program originally delayed the next round of residential funding by 60 days, but recently cancelled it altogether, because resolution does not appear imminent. 

PACE has the potential to increase property values while putting construction workers back to work.  In the past year, the Boulder residential PACE program has generated over $10 million in projects for more than 280 local businesses. PACE is poised for rapid expansion across the state of California, based on early successes such as Sonoma County, where a PACE program is credited with lowering the construction unemployment rate in 2009, while rates rose in surrounding counties.

If PACE programs are implemented widely across the country, they will promote national energy independence, green jobs and greenhouse gas reduction, with minimal public investment.  Unlike some government programs, PACE programs use private investment funds, and taxes on the individual program participants.  There is no cost to nonparticipating taxpayers.  To the extent that lien repayments are offset by lower energy bills, there is no net cost to participating taxpayers.  In fact, a PACE lien that is cashflow neutral can increase the property value by making a home more comfortable, at no net cost.

Even though the FHFA is a federal agency, theoretically devoted to the national good, “national energy independence, green jobs and greenhouse gas reduction with minimal public investment” are not on the to-do list for Fannie Mae and Freddie Mac.  “Increasing property values” should be on the list, but does not seem to carry much weight.  Residential PACE would require some relatively minor changes in existing procedures at these institutions. The changes are tiny compared to the potential benefits of residential PACE programs—but apparently too large for the appropriate bureaucrats to swallow, yet. 

The annual market for green retrofits in commercial and public buildings in the U.S. could become as large as $40 billion to $60 billion.  At present, the size is less than 10% of this potential.  The main innovations that are needed are financial.

Approximately half of the present commercial energy efficiency retrofit market in the U.S. exists because of one financial innovation-the performance contract.  The Clinton Climate Initiative has introduced several refinements recently, so that the performance contracting model can expand beyond large federal projects, to be applied more easily in other sectors and at smaller scales.

The practice of “utility rate decoupling” enables utilities to promote energy efficiency without losing profits.   This financial innovation has helped California lead the nation in energy efficiency results.  The practice will spread quickly throughout the country, based on requirements of the American Recovery and Reinvestment Act of 2009. 

At present, tight credit is probably the main barrier in all market segments except federal buildings.  In more than 90% of the potential commercial and public market (everything except federal buildings), the retrofit business would be expanding more rapidly if financing were available for more projects.  This is true despite the facts that most projects are low risk, almost all projects would have a positive ROI above 5%, and many would have an annual ROI in the range of 10% to 100%.

Harvard University has implemented a successful revolving loan fund to support green retrofits of campus facilities, with an excellent ROI.  The fund has already been doubled in size twice, from $3 million to $6 million to its current value of $12 million This represents roughly $0.50 per square foot of facilities.  If the fund doubles in size a few more times, it could support comprehensive green retrofits of the complete 25 million square foot facility, over time. 

During the economic depression of the 1930s, 16 Swiss businesses with vanishing credit lines and impending bankruptcies formed a coalition to make their supply chains and clients self-financing.  The resulting “economic circle” (wirtschaftsring) created an alternative currency that has annual volume today of $2 billion USD and has helped Switzerland become a global pillar of financial stability (www.lietaer.com).   Similar alternative monetary systems at various scales-from city-wide “buy local” campaigns to consortiums of global corporations with interwoven supply chains-may help support business expansion in the face of the world banking crisis.

Other financial innovations being explored include “meter loans” and “local improvement districts” (www.sightline.org).  With these mechanisms, the cost of an energy-efficiency retrofit is repaid through the utility bills or the property taxes of each building.  The cost of a major improvement can easily be passed on to future building owners.