A business consortium that includes Lockheed Martin and Barclays bank plans to invest as much as $650 million over the next few years to slash the energy consumption of buildings in the Miami and Sacramento areas. It is the most ambitious effort yet to jump-start a national market for energy upgrades that many people believe could eventually be worth billions.
Focusing mainly on commercial property at first, the group plans to exploit a new tax arrangement that allows property owners to upgrade their buildings at no upfront cost, typically cutting their energy use and their utility bills by a third. The building owners would pay for the upgrades over five to 20 years through surcharges on their property-tax bills, but that would be less than the savings.
The consortium is led by a company called Ygrene Energy Fund of Santa Rosa, Calif., which has already won an exclusive contract to manage a retrofit program for a half-dozen communities in the Miami area, with the city expected to join in a few weeks. It is in the late stages of completing a contract with Sacramento, and is seeking deals in other cities.
State and city officials are optimistic they may have found a way to tackle one of the nation’s biggest energy problems — waste in older buildings — without new money from Washington. If enough building owners sign on, private capital would be put to work paying for retrofit projects that promise to save local businesses money while creating thousands of new construction jobs.
“We are so used to reaching our hand out and saying, ‘Washington, we need this,’ and ‘Tallahassee, give us that,’ ” said Edward MacDougall, the mayor of Cutler Bay, Fla., a Miami suburb that took the lead in setting up the deal in that region. “This is really a home-grown mechanism where we don’t need to do that.”
The consortium was put together by the Carbon War Room, a nonprofit environmental group based in Washington set up by Richard Branson, the British entrepreneur and billionaire, to tackle the world’s climate and energy problems in cost-saving ways. With the United States government nearly paralyzed on climate policy, he said, his group is seeking a way forward.
“We see this as the first of hopefully many, many, many projects, and a big step in the right direction,” Mr. Branson said in an interview last weekend in New York.
In the past three years, half the states have passed legislation permitting energy retrofits financed by property-tax surcharges, and hundreds of cities and counties are considering such programs. While the situation poses some risks, and programs aimed specifically at homeowners have run into a snag, many jurisdictions are moving forward with plans to focus on commercial properties.
Environmental groups have lauded the trend as one of the most exciting developments in years regarding climate change. They point out that wide use of such programs could cut emissions of heat-trapping carbon dioxide from power plants by reducing electricity demand.
“It’s a big deal,” said James D. Marston, head of energy programs for the Environmental Defense Fund, a group that has worked with Carbon War Room in developing the approach. Over the long haul, he said, “we’re talking about tens of billions of dollars in investments, and energy savings that are 10 times that amount. If you do this correctly, you would be able to shut down a third of the coal plants in the country.”
While that may take a while, there seems to be little question that the new approach could draw substantial private capital into the market for energy upgrades, which have historically been difficult for many midsize and smaller businesses to finance.
As envisioned for Miami and Sacramento, the plans will work like this:
Ygrene and its partners will gain exclusive rights for five years to offer this type of energy upgrade to businesses in a particular community. They will market the plan aggressively, helping property owners figure out what kinds of upgrades make sense for them. Lockheed Martin is expected to do the engineering work on many larger projects.
The retrofits might include new windows and doors, insulation, and more efficient lights and mechanical systems. In some cases, solar panels or other renewable power might be included. For factories, the retrofits might include new motors or other gear.
Short-term loans provided by Barclays Capital will be used to pay for the upgrades. Contractors will offer a warranty that the utility savings they have promised will actually materialize, and an insurance underwriter, Energi, of Peabody, Mass., will back up that warranty. Those insurance contracts, in turn, will be backed by Hannover Re, one of the world’s largest reinsurance companies.
As projects are completed, the upgrade loans, typically carrying interest rates of 7 percent, will be bundled into long-term bonds resembling those routinely issued by governmental taxing districts. Barclays will market the bonds. Retirement funds have expressed interest in buying these bonds, which will be repaid by tax surcharges on each property that undergoes a retrofit.
Perhaps the most serious risk is that fly-by-night contractors will be drawn to the new pot of money, pushing energy retrofits that are too costly or work poorly.
“Contractors are cowboys,” said Dennis Hunter, chairman of Ygrene. He promised close scrutiny of the ones selected for the Miami and Sacramento programs.
Ygrene is one of about a dozen start-up companies around the country pursuing such deals. The company appears to have substantial momentum, but some of its competitors have already stumbled, telling property owners they qualified for retrofits but then failing to deliver the necessary short-term financing. Still, many people are optimistic this approach will get off the ground.
“This is a game-changer,” said John D. Kinney, whose company, Clean Fund of San Rafael, Calif., has raised $250 million to invest in such projects. The company just used the technique to help finance a large solar installation at a development called Sonoma Mountain Village in Rohnert Park, Calif.
Experts point out that, with modern techniques and equipment, a retrofit can typically cut a building’s energy use so much that the project pays for itself in as little as five years. The most famous recent example was the refurbishment of the Empire State Building, which cut energy use by nearly 40 percent, turning it into one of New York’s greenest buildings.
The new financing approach is called Property Assessed Clean Energy, or PACE.
For decades, cities and counties have created special taxing districts to finance improvements that benefit private property, such as street lights or sewers. Bonds are issued to pay for the projects, then repaid with surcharges on tax bills. If an owner sells, the surcharge stays with the property.
Several years ago, the city of Berkeley, Calif., hit on the idea of using that approach to finance energy upgrades on private homes. The idea took off, and 25 states and the District of Columbia soon passed PACE legislation. One of the most successful programs to date has been in Sonoma County, Calif., where retrofit projects exceeding $50 million have been financed.
While the initial focus was on homeowners, those programs slowed last year when an arm of the federal government that oversees the mortgage market took a hostile stance toward such projects on residential property, on the grounds that they add risk to mortgages. In most states, a lien associated with a retrofit project would have to be paid ahead of the mortgage if the property went into foreclosure.
A legal and political battle is under way to try to force the Federal Housing Finance Agency to reverse its stand. So far, it appears that PACE programs for commercial properties pose fewer legal complications.
