The Barriers to Unlocking Capital for Energy Efficiency

Energy efficiency is the quickest and cheapest way to meet our energy needs now or in the future, earning it the nickname, "first fuel." Unfortunately, most companies aren't seizing energy efficiency opportunities, leaving billions of dollars of potential savings and investment dollars stranded on the sidelines.

That is one of the top-level findings from "Show Me The Money: Energy Efficiency Financing Barriers and Opportunities." While researching the report, which was released Thursday, the authors, representing the Environmental Defense Fund, U.S. Environmental Protection Agency and Nicholas Institute for Environmental Solutions, heard a variety of reasons for why energy efficiency projects weren't being scaled.

High upfront costs. Long payback periods. Perceived risk and uneasiness over measuring energy savings. A lack of capital.

But the potential for energy savings is huge, as we've covered at GreenBiz.com for years. Here are just a few highlights:

• In one example from EDF's Climate Corps, the program that matches MBA students with companies to look for efficiency opportunities, Fellow Jen Snook (pictured above) discovered that installing lighting sensors in AT&T's central offices across the country could trim lighting energy use by 80 percent because lights were turned on about half of the time, but the spaces were occupied just 10 percent of the time. The company invested in 4,200 energy efficiency projects in 2010, saving AT&T an estimated $44 million a year.

• Diversey invested $14 million in its bid to reduce its greenhouse gas emissions by 25 percent, but expects savings to total $32 million by 2013.

• Red Robin's corporate restaurants began using LED lighting three years ago and save $600,000 in electricity costs annually. LED lighting was installed in a further 22 franchised locations earlier this year, expected to save the restaurants $117,000 annually.

These companies are finding ways of overcoming the barriers of internally investing in efficiency, sometimes by broadening their investment criteria or altering evalution methods to accommodate energy efficiency projects, such as going beyond ROI requirements to also give more weight to future savings. Diversey, for example, carefully takes a portfolio approach to choosing efficiency projects with diverse rates of return and emissions reductions, according to this profile by John Davies, vice president of the GreenBiz Intelligence Division.

Companies that can't fund energy efficiency projects themselves may turn to third parties, such as energy service company performance contracts, better known as ESCOs, or investment funds. In one possible scenario, the investor would pay the energy efficiency project, such as a lighting or HVAC retrofit, and then act as the middle man between the building owner and utility, paying the monthly bill while collecting a fixed cost from the building owner for an agreed-upon period of time.

Report co-author Namrita Kapur is bullish on the prospects of energy efficiency projects becoming a prime investment opportunity, noting the potential 17 percent rate of return estimated by McKinsey and the Conference Board.

"There is a rate of return to be had in this market," Kapur said. "I do believe it will be the next new asset class. It's just a matter of time."

The big problem: There is no pipeline of energy efficiency projects on which investors can perform their due diligence.

"For us, one of the biggest conclusions or a-ha moments was the sense that projects aren't there, and there's not a scable way to identify and aggregate those projects," she said.

The report does a good job of synthesizing the energy efficiency marketplace and spotlights some of the early energy efficiency investment players, including Hudson Clean Energy Partners, which took a controlling interest last year in Green Campus Partners, a company that develops and finances energy efficiency projects.

The big takeaway for companies: identify energy efficiency projects and seek out some of these market players if your CFO is sitting on the fence about funding them.

"If anyone of these players mentioned was contacted by a company who said I want you to do an audit, what are opportunities for energy efficiency, they would willingly do that and I guarantee it would be very cost-effective," Kapur said. "They see the return. Getting them to identify projects and make themesleves accessible to these players in marketplace -- that would be huge. They're throwing away money by not focusing on this."