Energy Efficiency Finance Options That Are Failing

The principal efforts to stimulate private lending to energy efficiency have thus far failed to adequately isolate savings creation as a financeable credit distinct from the host (the property where the activity takes place) or the equipment (the instruments used to create savings).

For example, the Property Assessed Clean Energy (PACE) program would give lenders security in the host property via government tax assessments. Traditional equipment finance (equipment leasing, lease purchase, etc) gives the lender security in the equipment. Pending legislation in Washington would give the lender recourse to a government guarantee.

The problem with these approaches is not simply that they run afoul of the mortgage covenants that prohibit additional debt or liens, which is the chief reason they have failed in the marketplace. They are problematic both as financial policy and environmental policy.

Any time a lender does not have to worry about whether projected energy savings are actually created because there is some other recourse, there is the potential for (arguably an incentive for) bad energy projects. Developers, equipment vendors, contractors and others whose fees are inevitably tied to the size of the project will be heavily incentivized to press the envelope, to exceed what savings will justify, even to build projects with a marginal relationship to energy savings.

Lenders eager for new opportunities to place debt will gladly cooperate if the debt is backstopped by federal guarantees or somehow circumvents the seniority of the existing mortgage.

As financial policy, these approaches risk freighting property with additional debt without an offsetting increase in income (via savings), which is why the distinction between “host risk” and “performance risk” is a dubious one. As a matter of environmental policy, capital should seek out inefficient buildings, not assets that can sustain more debt. These current approaches put the credibility of “green finance” at risk.


The Green Skyscraper | The Energy Collective

The Green Skyscraper | The Energy Collective

We recommend this blog post by David Levy (professor) mainly because he does a good job of laying the groundwork for the need in LEED EB. There are several big thoughts to consider when reading his blog post:

- LEED EB projects are up 35% since last year
- NYC has over 5,000 buildings that are classified as skyscrapers, and over 900,000 buildings in total
- 80% of NYC's greenhouse emissions are created from these skyscrapers
- In the United States as a whole, 38% of greenhouse emissions are created by commercial buildings
- 85% of the buildings in NYC by 2030 already exist today

So, in summary, LEED EB is growing rapidly and it won't slow down anytime soon. This also means the financial modeling of how to pay for all these projects will continue to expand and innovate the industry.