Maximizing the use of clean, cost-effective, and efficient energy is essential to enabling the nation to meet its energy requirements, reduce carbon emissions, and stimulate the economy. Effective technologies and infrastructures that deliver energy efficiency are readily available, and existing networks of suppliers, engineers, technicians, and builders can rapidly implement them.
But the level of energy efficiency that is actually implemented falls far short of the nation’s technical and economic potential. Persistent market barriers have prevented most building owners from undertaking comprehensive energy efficiency projects, even when energy efficiency can cut utility bills.
The Energy Efficiency Finance Facility (EEFF), an innovative public-private institution, can address this deadlock. By strategically allocating federal credit—the most powerful approach for organizing the private sector to deliver public goods on a massive scale—the EEFF can attract billions of dollars of private capital to the efficiency market.
Currently, most energy efficiency project loans are originated by energy service companies (ESCO), which provide efficiency services and financing in return for a portion of the project savings. ESCO business models, however, rely on building system upgrades that yield high rates of return and focus on large, highly creditworthy institutions such as governments and universities. Because energy efficiency typically involves small, technically complex transactions as well as complicated financial structures, the ESCO approach is unlikely to mobilize the amount of investment capital needed to address all building sectors.
The EEFF can succeed where past efficiency initiatives have come up short. By leveraging the vast resources of the private sector instead of public funds, the EEFF can achieve great scale. In addition, by setting the commercial terms for efficiency transactions, the EEFF can develop nationally accepted standards for underwriting projects, establish performance standards, and track the financial performance of efficiency investments. These measures can bring market consistency, lower transaction costs, and better forecast project risks and returns.
Credit support is a novel tool in the efficiency markets. But other strategically significant economic sectors such as small businesses, higher education, and low-income housing have employed public – private frameworks to successfully attract significant capital on a sustainable basis. With the nation facing unprecedented economic, environmental, and energy supply challenges, it may be time to apply these processes to the efficiency sector.
Breaking the Energy Efficiency Deadlock was compiled by a team of Booz Allen energy financing experts led by Executive Vice President Gary Rahl and including Senior Associate Scott Thigpen and Lead Associate Joel Fetter.
