Friday, January 27, 2012

Latest Edition of IPMVP Released

The Efficiency Valuation Organization just announced release of its 2012 International Performance Measurement and Verification Protocol (IPMVP), updating the 2010 edition. The IPMVP provides a standardized framework for evaluating savings associated with energy efficiency improvements and is generally recognized as a best practice for M&V.

The update introduces two new concepts: "operational verification" and "monitoring and targeting." Both have been added as tasks to be performed as a part of the project M&V program. Four operational verification approaches are identified in the IPMVP guidance document: visual inspection; sample spot measurements; short-term performance testing; and data trending and control logic review. Operational verification can serve as a low-cost initial step for realizing energy savings potential and precedes energy savings verification activities. It also can be applied to support energy savings persistence after the the ECMs have been installed and performance verified. "Monitoring and targeting" also can follows M&V to achieve energy savings persistence. The end goal is to insure that energy savings resulting from the ECMs installed continue at the highest possible level long after measurement and verification.

The update includes a number of additional changes and can be downloaded at no cost on EVO's web site (

Friday, January 20, 2012

Challenges Associated With Incorporating Future Energy Savings into Traditional Loan Underwriting

Direct borrowing of capital from private lenders is an option for funding energy efficiency investments. While banks generally agree that more energy efficient buildings are ultimately a good investment, it is crucial that banks develop the ability to fully recognize the benefits in their loan underwriting process. To accomplish this, however, banks need to develop a much stronger energy efficiency performance database and then build scalable financing models. Unfortunately today, rarely is future energy savings considered in loan underwriting.

Traditionally, banks have rated the borrower’s ability to repay the loan (the borrower’s “creditworthiness”) at the highest end of the spectrum in the loan decision-making process. Moreover, for most commercial businesses, operational savings associated with energy retrofit projects are often too small a percentage of total expenses to impact in any significant way the borrower’s ability to pay down debt. Factors such as location that affect occupancy rates and rents are much easier for banks to analyze.

The existing mortgage on commercial properties can also present a challenge to borrowing for energy efficiency improvements in that loan covenants may restrict the addition of further debt. At a minimum, there typically are strict rules about incurring debt, particularly for commercial mortgages that have been securitized.

Another challenge that banks face is associated with understanding how a building’s energy performance can impact its value. The fact is that to-date there is insufficient data on how building valuation is impacted by energy efficiency improvements. Appraisers are not focused on a property’s energy efficiency and therefore it is not reflected in their valuation. This void creates uncertainty and adds to the potential risk associated with energy efficiency investment.

Interestingly, lenders have had a difficult time getting their hands around energy savings because energy savings cannot be measured directly. Energy savings must be based upon what is not going to happen in the future, rather than what will happen. Moreover, cash flow from future energy savings is not a familiar form of revenue or collateral to back traditional lending. There also is a general lack of confidence in energy savings projections because of the embedded bias to present projects as compelling investment opportunities.

Notwithstanding, banks are beginning to recognize that energy efficiency loans can help preserve the value of a building by avoiding obsolescence. In fact, the obsolescence issue, directly related to the value of the collateral, may even be a more important consideration today than operational savings.

Fortunately, today standardized measurement and performance protocols have emerged and are now being deployed with success to identify energy savings at a high degree of confidence. By building these protocols into the loan documentation and underwriting process, banks will eventually become more comfortable with the way energy savings and risks are quantified. Moreover, the advent of “energy savings” insurance and loan guarantees by the government will further reduce the risk and uncertainty. In the final analysis, this should enable energy efficiency financing to become a mainstream financial asset class with a high degree of standardization, predictability and scale. It should also go a long way toward moving the commercial real estate industry toward large scale adoption of energy efficiency investment.

Wednesday, January 18, 2012

Incorporating Energy Savings into Underwriting for Energy Efficiency Loans in Multifamily Properties

Earlier this week, Deutsche Bank released a study, Recognizing the Benefits of Energy Efficiency in Multifamily Underwriting, suggesting an approach to underwriting against fuel savings projections that balances the need for simplicity with that for accuracy. The study is impressive and worth the read if you are a lender looking to make energy efficiency loans.

The study and approach is based upon analysis of 231 buildings in New York City including 21,022 residential units that had undergone energy efficiency retrofits. There were a number of interesting findings. One was that improvements associated with fuel measures (such as replacing atmospheric boilers with sealed combustion units or installing a cogeneration system or switching from oil to gas) saved considerably more than improvements associated with electricity measures (such as lighting retrofits). Another was that actual energy savings were strongly correlated with pre-retrofit fuel use intensity (in kBtu per square foot normalized for weather). Higher pre-retrofit fuel use intensity translated into greater savings potential. Furthermore, heating system and building age were found to be good proxies for fuel use intensity. The study also examined the energy audits associated with these retrofits and evaluated how well the projected energy savings matched the actual energy savings (the study used the term “realization rate” to mean actual savings divided by projected savings). Across all projects, the fuel realization rate was 61% with a 90% confidence interval of +/- 14%.

The study proposes a methodology by which lenders can mitigate the risk of “over-projected” savings by limiting an energy auditor’s projected savings to a conservative threshold of expected savings as defined by the statistical correlation between pre-retrofit fuel use intensity and fuel savings. For example, if a multifamily building that uses 140 kBtu/SF pre-retrofit was projected to save 60 kBtu/SF, the capping methodology proposed in the study would suggest that this be reduced to the threshold of 40 kBtu/SF. If that same building was projected to save 25 kBtu/SF, which is below the threshold for a multifamily building of that pre-retrofit fuel use intensity, then the audit projection could be regarded as conservative for the basis of underwriting. It may sound complex, but if you obtain the study and review it, you will find that the approach does make sense.

The primary causes of under-realization of energy savings identified in the study included an inappropriate or inadequate retrofit scope of work (generally involving a lack of understanding), improper execution of the retrofit scope and unexpected post-retrofit operations and maintenance or tenant behavior.

In the final analysis, the study is a first effort to compile an historical database of actual building energy performance resulting from improvements, a database that is sorely needed by the lending industry in order to accelerate energy efficiency lending.