financing “negawatts - seeaconference.com© oliver wyman 3 energy efficiency addressable market...
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© Oliver Wyman
ENERGY & UTILITIES
Financing “Negawatts”
Southeast Energy Efficiency Alliance
October 29, 2015
Arun Mani, Partner
832 648 8513
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Copyright © Oliver Wyman
22© Oliver Wyman
Utility Sector DisruptionCord cutting and changing regulation are coming together in the utilities sector, forming a powerful cocktail of issues and potential challenges
This confluence is giving rise to utilities having to evaluate how to balance product
and service needs of various customers
“Off Grid”
Generation“Negawatts”
Machine to
MachineCost Plus or
Revenue Minus
Net Metering, Electric
Vehicles, Energy
Storage
Energy Efficiency,
Peak Management,
Demand Response
Smart Meters, Smart
Phones, Smart
Devices
Rate and Bill
Redesign, Energy
Analytics
Growth Innovation Customers Performance Cost reduction Turnaround Distributed
Generation
Safety and
Security
Industry
Issues
33© Oliver Wyman
Energy Efficiency Addressable MarketThere are approximately 326 billion of squared feet of buildings with potential for the application of energy efficiency solutionsTotal building footage in the US in 2013
Residential, Commercial and Institutional [billion ft2]
5,5%
15,6%
78,8%
Buildings Area (billion ft2)
Residential 257
Commercial 51
Institutional 18
Total 326
Residential257
(78,8%)226 (88,0%)
8 (3,0%)
15 (6,0%)
8 (3,0%)Mobile Home5+ Unit Building2 – 4 Unit BuildingSingle Family
4 (8,0%)
4 (8,0%)10 (20,0%)
2 (3,0%)
51
(15,6%)
1 (2,0%)
2 (3,0%)
5 (10,0%)11 (22,0%)12 (24,0%)Commercial
Other
Warehouse / Storage
Service (other than retail and food)
Public Assembly
Office
Mercantile
Lodging
Food Service
Food Sales
Institutional18
(5,5%)10 (55,0%)
3 (18,0%)
1 (6,0%)4 (21,0%)
Healthcare WorshipPublic Order & SafetyEducation
Source: Deutsche Bank Report: United States Building Energy Efficiency – Retrofits Market Sizing and Financing Models - March 2012; OW Analysis
44© Oliver Wyman
Potential Financial SavingsSignificant amounts of money can be saved through investing in energy efficiency programs across all market segments
“In the United States alone, more than $279 billion
could be invested across the residential, commercial,
and institutional market segments. This investment
could yield more than $1 trillion of energy savings over
10 years, equivalent to savings of approximately
30 percent of the annual electricity spend in the US” 1
848
4.000
3.000
2.000
1.000
0
Institutional
293
CommercialResidential
1.892
Total
3.033
72
279
182
0
100
200
30025
CommercialResidential TotalInstitutional
Energy Savings (Tbtu) 1
Total Investment ($ billions) 1
Source: 1 Deutsche Bank Report: United States Building Energy Efficiency – Retrofits Market Sizing and Financing Models - March 2012; OW Analysis
Deutsche Bank Analysis
Category SegmentTotal Investment
($ million)
Residential
Single Family 144,000
2 – 4 Unit Building 17,000
5+ Unit Building 17,000
Mobile Home 5,000
Commercial
Food Sales 4,000
Food Service 6,100
Lodging 7,500
Mercantile 18,000
Office 17,000
Public Assembly 6,000
Service (non retail / food) 4,500
Warehouse / Storage 4,400
Other 4,000
Institutional
Education 13,000
Healthcare 7,300
Public Order and Safety 2,000
Worship 3,000
Potential Impact by Market Category
55© Oliver Wyman
Financing ModelsThere are five fundamental financing options available to customers today
Source: Deutsche Bank Report: United States Building Energy Efficiency – Retrofits Market Sizing and Financing Models - March 2012; OW Analysis
Financing
Source
Repayment
Source
Savings
Recipient
Collateral Incremental
Cost
Sale
Restrictions
Energy
Performance
Contracts
Private Built cash flow Owner / TenantMortgage,
General recourse
Loan payments
less energy
savings
Credit-worthy
buyer or pay out
remaining value of
contract
Energy
Service
Agreements
Private Energy savingsInvestor and
customer
Equipment,
Financing
Statement
None
None. Can be
transferred or
terminated
Property
Assessed
Clean
Energy
Public or Private
Property tax pass-
through of energy
savings or
recovery
Owner / Tenant Tax Lien
Higher tax
assessment less
energy savings
and recoveries
Obligations remain
with property
On-bill EE
Tariffs &
Loans
Public Energy Savings Owner / Tenant
Equipment,
Financing
Statement
Utility bill less
energy savings
Tariff stays with
the Property
Credit Cards Personal CreditPersonal
Guarantee
Individual
(Owner)
NoneCredit card
payments less
energy savings
None
66© Oliver Wyman
Energy Efficiency As An Asset Investment Class Institutional investors now consider energy efficiency to be a robust asset class with proven and predictable returns
Key drivers
• Funds seeking new asset
classes within remits as
traditional renewable assets
(wind, solar, biomass)
become less attractive
• Significant potential demand
for capital for EE
investments in commercial
sector over next five years
• Specialist fund managers
aggregating packages of
smaller projects to generate
right size levels of
investment
• Government-backed models
in Europe have
demonstrated bankability of
managed services income
streams based on savings
• Emergence of secondary
market through specialist
funds
Energy Service
Company (ESCO)
End user
e.g.. hospital, factories
Financing partner
Service fee (depending
on savings)• Provision of
assets
• Installation
• Maintenance
Capital
Business Model Overview Energy Service Company
• Provides finance,
infrastructure and expertise
to deliver a managed
service to large energy
users
• Uses proven technologies to drive significant energy savings
• ESCO fee model:
o Shared savings: flexible fee based on the energy savings the ESCO services bring; assets typically on ESCO’s balance sheet
o Guaranteed savings: fixed fee; assets typically remain on end user’s balance sheets sheet
Revenue
Stream
77© Oliver Wyman
Community Based ProgramsUtilities can facilitate community based programs for residential and small commercial and industrial (C&I) customers
Vision
• The local utility company and an ESCO jointly establish a Community Program for residential and small C&I customers, providing energy efficiency services (can be expanded into other areas as well, such as Distributed Generation and Demand Response)
• The power supplier relies upon energy efficiency savings according to a pre-agreed energy capacity arrangement guaranteed by the ESCO and facilitated by the local utility
• Customers pay a service fee to the ESCO. ESCO shares any additional energy savings at the aggregated program level with its customers
• A third party financier provides the upfront capital. ESCO aggregates and rewires the Principal and Interest (P&I)
• The power supplier provides additional guarantee to financiers through a financial back-stop.
Power
Supplier
ESCO Op
Co
Tech.
Supplier
Financier
Community Program
Energy
Efficiency
Services
Fixed Energy
Service Fee
Shared
savings
Up-front
capitalP&I
Guaranteed
Energy Capacity
Agreement
…Technology
agreement
Residential and Small C&I Customers
Energy
savings
Cash flow
Financial
Back-Stop
Energy services
Ratepayer funds
Business Model Overview
Local UtilityEnergy
Savings
Require greater
security in supply
planning
Want guarantee
of energy costs /
energy savings
Like to see predictable
revenues backed by a
utility’s balance sheet
Local Utility
aggregates
individual
projects
ESCO runs the program
as a managed services
entity along with a
technology supplier
8© Oliver Wyman 8
• In the US, the total addressable market for energy efficiency is approximately 326 billion
square feet and nearly 80% of that area corresponds to residential buildings
• A more diverse range of financial models for energy efficiency are available nowadays. These
models differ from each other in the sources for financing and repayment, who the recipients
are, the collateral and incremental cost, and the associated sale restrictions
• Additional emerging models that have proven successful in foreign markets, such as energy
investment as an asset class, may be adopted in the US in the near future
• Projections from several sources anticipate large amount of savings coming from the
implementation of energy efficiency programs through diverse financial models
• The single family segment within the residential category represents 50% of the total energy
savings and is also estimated to require 50% of the total investments
ConclusionsEnergy Efficiency financing at the residential and small C&I level presents a large opportunity but also has challenges with customer acquisition which is where a partnership with the local utility could make sense
Loan Amount Minimum Rate Term:
$1,000 – $5,500 0% APR1,2 36 months
$5,501 - $7,500 7.50% APR1 Up to 48 months
$7,501 - $10,000 7.50% APR1 Up to 60 months
$10,001 - $15,000 7.50% APR1 Up to 72 months
Consumers can finance:
Energy Star Rated Heating and Cooling Systems
Energy Star Rated Windows
Insulation for home attics, walls, crawl
spaces and basements
Weatherization items – weather-stripping,
caulking, duct work sealing and insulation
Rates and Available Loan Amounts:
What were the results?
2,748 Loans were funded and closed
During the 2 year program, $13,477,194 in loans were
made in Georgia.
SOUTHFACE GOALS
• Markets• Non-profits
• Schools
• Rural municipalities
• Projects• $20k - $300k+
• 20-40% savings
• Partnerships• Portfolio development
• Finance & loan management
SAMPLE RESULTS
• 12 small commercial buildings
• 8-9 months of savings:
• $83,813, 24% cost savings, 11% ROI
• 297 MTCO2e
NEXT STEPS
• Business model refinement
• Simulation project(s)
• Additional partnerships
• Industry engagement
Stay in touch:
Laura Capps
404-604-3621