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Bank Takes Innovative Approaches to Financing Energy Efficiency
February 12, 2014
Making buildings more energy efficient is one of the most effective and immediate actions we can take to reduce climate-changing greenhouse gas emissions. Yet, despite rapid innovation in building technology, the pace of retrofits has been painfully slow.
New Resource Bank is tackling the problem with innovative solutions to one of the biggest roadblocks: the lack of practical financing options.
Bill Peterson, executive vice president and chief credit officer at New Resource, describes the challenges: “Banks usually want to finance these kinds of upgrades as part of a long-term mortgage loan rather than financing them separately. That’s because if the building owner stops paying on the loan, you’re not going to take out the improved lighting or HVAC systems—they’re not good collateral. But building owners often don’t want to refinance. Quite a few already did that in the past few years to take advantage of low interest rates, and they may face a prepayment penalty. And in many parts of the country, commercial property values are down and owners don’t have the equity to refinance.”
Long-term improvements require long-term loans
Banks that will finance system upgrades are reluctant to do long-term loans, he continues. “Banks typically do an equipment loan on a five-year basis. That’s only a match for some energy efficiency improvements. With lighting upgrades, you can get up to 35 percent savings and a three- to four-year payback. But with new windows and HVAC systems, you’re looking at five, seven or even 10 years for payback. When you’re trying to finance a long-term improvement with a short-term loan, owners have to spend a lot more money up front to get the improvements done.”
New Resource has stepped into that breach by offering long-term (up to 10 years), fully amortized energy efficiency loans. “There aren’t many people doing it because it’s contrary to traditional lending models, but this is the kind of innovation that’s necessary in the banking industry,” says Peterson, adding, “We do like to have energy savings pay for the cost of the improvements; the ideal situation would be to structure the loan in a way so that it’s payment neutral, where the savings equal payments on the loan.”
Metrus “negawatts” approach opens up new opportunities
A solution that’s potentially more far-reaching is a pioneering program from Metrus Energy, a New Resource client that provides capital, project development and asset management services for energy-efficiency projects at large facilities. Metrus is offering what it calls a “negawatts” contract—an Efficiency Services Agreement (ESA) that allows facility owners to retrofit their buildings for energy efficiency at no up-front cost. Metrus pays for the retrofits, maintains the system and monitors savings; the building owner then pays Metrus a percentage of the savings each month until the end of the ESA term.
New Resource is financing Metrus' $5.8 million energy upgrade at Kuakini Medical Center in Honolulu, the company’s largest project to date. Scheduled for completion in September, the project includes a new central cooling and heating plant, lighting upgrades, and energy management and control systems. It’s expected to generate about 3.5 million kWh of electricity savings and 11,000 therms of natural gas savings, translating to a cost savings of more than $1 million annually.
The key to financing a project like this is coupling creative approaches with careful risk management, Peterson says. “From the bank’s point of view, there are three major risks: Will the construction be as designed and on budget? Will the energy efficiency upgrades achieve the predicted savings? And can the tenant pay the monthly bills?”
The Kuakini Medical Center project addresses those risks by employing a very experienced contractor, Energy Industries combined with a bond guaranteeing construction completion; incorporating a unique energy savings insurance policy from Energi, which provides a warranty that the equipment will perform at a certain percentage of specifications; and relying on an investment-grade institution, Kuakini, for repayment.
“I think there’s truly unlimited potential for projects like this—and there’s clearly a huge need and demand,” Peterson says. “It improves the value of the property immensely, and there are ways to mitigate the risk if you’re willing and able to understand the project. At New Resource, we don’t take greater risk—but we do take the time to understand the unique aspects of our clients and their projects, and consider innovative ways to structure financing so that it can work for everyone.”
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