Monday, October 24, 2011

A Big Win for Energy Savings Insurance

A few weeks ago a business consortium including Lockheed Martin and Barclays Capital announced the largest single private-sector investment to-date for commercial property energy efficiency retrofits. The business consortium, referred to as the PACE Commercial Consortium, was created by the Carbon War Room, a Washington, D.C based non-profit group set up by British entrepreneur Richard Branson. The consortium will provide up to $550 million in financing for city-led PACE projects in Miami and $100 million for projects in Sacramento. The consortium is led by Ygrene Energy Fund of Santa Rosa, California. Loans will be provided by Barclays Capital and Lockheed Martin will provide project management and engineering services. Energy savings guarantees will be insured by Energi Insurance Services of Peabody, MA with paper backed by global re-insurance giant Hannover Re.

Energy savings insurance was first offered approximately 15 years ago, but failed to make much headway in the emerging energy efficiency marketplace principally because most of the work was being performed in the public market by large energy service companies (ESCOs) who could back their guarantees with strong balance sheets. However, with energy efficiency now moving firmly into the hugh commercial market, hundreds of energy service companies are now playing in the game, many without the financial strength of the large ESCOs. Energy savings insurance can provide a backstop to the performance guarantees made by these smaller ESCOs.

It is good to see the insurance industry, beginning with Energi and Hannover Re, coming back to the market. There is definitely a need for the product. I believe it can do much to remove the uncertainty asssociated with energy savings projections and thereby avoid disputes between building owners and ESCOs. It should also reduce the risk associated with energy efficiency lending and lower the cost of financing. As in many other areas in our industry, insurance can once again act as the grease to make the deals move forward.

Monday, October 10, 2011

Building Energy Efficiency Certifications

Licensed professional engineers and registered architects have long been practicing in the building energy efficiency market. However, in addition to these licensed programs, there are a number of nationally-recognized professional building energy efficiency certifications. When asked by peers, my first suggestions have always been the Association of Energy Engineers' Certified Energy Manager (CEM) and Certified Energy Auditor (CEA) certifications, the Building Performance Institute's Multifamily Building Analyst (MFBA) certification, and ASHRAE's High Performance Building Design Professional (HPBD) and Commisioning Process Management Professional (CPMP) certifications. I now have to add to that ASHRAE's relatively new Building Energy Assessment Professional (BEAP) certification.

Launched approximately eight months ago, this certification program was developed by ASHRAE in collaboration with the Illuminating Engineering Society of North America, the National Institute of Building Science, the Testing Adjusting and Balancing Bureau and the Sheet Metal and Air Conditioning Contractor National Association. The program is specifically designed to certify an individual's ability to audit and analyze buildings including determining project scope, collecting data, analyzing building performance, interpreting results, evaluating alternatives, submitting recommendations for energy conservation measures, and assisting with implementation of these recommendations. The certification requires an individual to meet certain eligibility criteria and pass a written examination. All those who pass the examination are posted on ASHRAE's website. To date, approximately 100 individuals have already received this new certification.

In view of all the complexities associated with the assessment of building energy performance, it would be wise to rely on the services of qualified individuals. Certifications are one way to accomplish this.

Friday, October 7, 2011

The Confusion Around "Energy Savings"

Unfortunately, in the commercial real estate industry "energy savings" means different things to different people. To some, such as the energy service companies, it generally means savings in energy use (in kBtu/year or kBtu/sq. ft. per year). To others, such as building owners, it generally means actual savings in energy expenditures (in $/year or $/sq. ft. per year). Of course, if you are relying on the energy cost savings to offset the cost of the installation, it's the actual savings in energy cost that really matters. Further complicating the picture is the fact that energy use and energy cost savings are often "adjusted." This can happen for a variety of reasons, such as to reflect changes in weather conditions or building occupancy or energy pricing. Notwithstanding, from a practical viewpoint the concern is that "adjusted" energy cost savings may not be sufficent to offset repayment of the loan.

At the heart of the problem, in my view, is the all too often lack of complete transparency on what exactly the performance guarantee is really guaranteeing. For example, even if the type energy savings is fully defined, the question still arises of how exactly it will be determined so that all parties fully understand, and if "adjustments" are made, how exactly this will be done and what it means to the building owner. The need for consistency, accuracy and transparency is of paramount importance to owners of commercial real estate. As such, we as an industry should do everything we can to comply with this mandate.