Archive for July, 2010

In 1989 Amory Lovins gave a keynote address at a green energy conference in Montreal.  In that address he talked about a brave new future where instead of investing in megawatts, we’d begin to invest in “Negawatts” – the avoided costs  created by implementing electrical efficiency measures.  Why does your utility give you free compact fluorescent lightbulbs like they were candy?  Because  already by 1989 it was found to be cheaper to give away energy efficient lightbulbs than to operate existing power stations.  Amory’s vision was that to solve our energy crisis we needed to work both the angle of supply AND the angle of demand.

Creating energy efficiency requires financing:  someone has to spend capital intitially to change some basic system – replace lightbulbs; add insulation; upgrade thermostats and circulation; and beyond.  Then they reap the benefits of that system.  At some point enough benefits accrue that you’ve paid back that original investment, but the longer it takes, the less motivated people are to make the initial investment.  Especially if it takes longer than you anticipate remaining in the property!  That initial capital investment might also cost more than you have handy to spend, so the next challenge is financing – a way for someone else to lend the capital up front and also reap a motivating reward for lending the money. Another challenge for financing property modifications is split-incentives – with rental properties, the owner usually pays for capital improvements, but the renter often pays the utilities, so who pays and who benefits are not the same.

In 2009 the California Institute for Energy and the Environment published an excellent roundup of various efforts to-date to create financing initiatives for residential clean energy. The paper reviews 18 residential efficiency financing programs with a focus on On-Bill Financing programs.  “This research revealed several limitations of these programs including: limited applicability of the programs to households most in need, low participation rates, difficulty assuring that savings will exceed payments, limited support for comprehensive energy retrofits, the inability of most programs to cover their costs, and issues particular to OBF programs.” (Fuller, 2009)

One of the programs covered in the paper was the Berkeley FIRST program: Financing Initative for Renewable and Solar Technology. It was a pilot project designed to finance residential solar upgrades and repay them over 20 years through a special tax added to the property bill.  This addresses the challenge of having the capital up front to pay for the system, as well as a way to pay it back over a long time so it’s less expensive than the savings.  A key innovation here is that tying the payback to the property instead of the person keeps the payback tied to the savings – so that if the house sells to a new owner the original owner isn’t still stuck with the payments.

According to the evaluation on the Berkeley website, the city of Berkeley allocated bond funding to finance up to 40 installations.  Of the 40 original applicants only 13 were actually financed.  Many of the remainder discovered they were able to get home equity loans instead (the bond interest rate was twice that of the home equity loans) and did ultimately install solar.  One owner cited as a barrier “…ridiculous prepayment penalties, I am very exposed if I attempt to sell or refinance the house, and the new lender demands that I pay off BerkeleyFirst.”  (Berkeley First Initial Evaluation)  I’ve been hearing about PACE for nearly a year so I’m surprised to find that the Berkeley pilot only concluded last year.  It was discontinued because of high costs relative to small scale according to a very nice case study at the Home Performance Resource Center.

To handle the administration of the program, Berkeley partnered with Renewable Funding, LLC, which took the responsibility of marketing the bonds.  By June of 2009, Palm Desert, California and Boulder, Colorado were working on their own programs.  The program began spreading faster than hot celebrity gossip: more than 200 cities are reported to be considering the program.  However it seems the buzz has preceeded the reality (not unlike celebrity gossip, I imagine).  According to PACE Now, 30 legislative bodies (city/county/state) have passed legislation to-date enabling such programs.  A Dow Jones report notes that Boulder and Sonoma County California had made hundreds of loans, yet interestingly the city of San Francisco is reported to have suspended their program before it started.

The objectors went national on July 6, 2010 when the Federal Housing Finance Agency determined that “certain energy retrofit lending programs present significant safety and soundness concerns that must be addressed by Fannie Mae, Freddie Mac and the Federal Home loan Banks…. Under most of these programs, such loans acquire a priority lien over existing mortgages, though certain states have chosen not to adopt such priority positions for their loans.”   Essentially, the government agencies who buy mortgages are dismayed that that cities are lending (by issuing bonds) money to homeowners  (for clean energy upgrades) and then inserting themselves with first right to repayment (because often tax obligations come ahead of mortgage obligations).  So it’s pushback because of the credit crisis.

A week later the State of California filed suit in federal court arguing that the FHFA is misrepresenting the nature of PACE programs.  A big motivation for states and municipalities is the anticipated economic stimulus and creation of green jobs that could come from a flurry of home energy upgrades.   The lobbying battle has begun.  You can get involved in your local advocacy efforts via the Pace Now website.

On the commercial side, cutting edge innovation involves the creation of Managed Energy Service Agreements (MESA) where a third party inserts between the property owner and the utilities, finances energy efficiency upgrades and then harvests the savings for return.  But that will have to be another blog.

Lovins, Amory, 1989. “The Negawatt Revolution”.   http://www.ccnr.org/amory.html

Fuller, Merrian, 2009.  “Enabling Investments in Energy Efficiency.”  http://uc-ciee.org/energyeff/documents/resfinancing.pdf

The Setup and Evaluation of the Berkeley FIRST pilot program:   http://www.ci.berkeley.ca.us/ContentDisplay.aspx?id=26580

Home Performance Resource Center, 2010. “Case Study: Berkeley FIRST”. http://www.hprcenter.org/publications/best_practices_case_study_berkeley.pdf

Renewable Funding, LLC, PACE central:  http://www.renewfund.com/

PACE Now, get involved in advocacy:  http://www.pacenow.org/

The Dow Jones report on the California lawsuit: http://tinyurl.com/26wwky5

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As I continue to wrestle with how to do a social investment appropriately, I’ve gotten a couple of new insights.  One: both in investment and grantmaking the fund provider seeks some kind of low-grade control, the tools are just different.  Two: I’m becoming convinced that for something to be a good investment, someone in the deal needs to understand how to steward that investment.

One critique of restricted non-profit funding compares it to for-profit funding and decries the specificity of how funds can be spent.  I forget where I read my first version of this critique, but it went something like “Investors in FedEx don’t get to say ‘this money is just for trucks’”.  At the time I thought that was pretty thoughtful, but now I see it’s not that simple. For profit investors have their own set of tools for exercising control. For one, most of those nonprofit donors writing detailed contracts aren’t also seeking representation on the board, but for-profit investors expect it. For-profit investors also have their own versions of restricted funding – providing services for free or discounted in return for equity. In non-profit, restricted funding is the more common tool. In for-profit, board representation is the common tool, but both are for similar ends – some funder engagement in where the money goes.

I’ve also been thinking more about how to emulate Kim Scheinberg’s Presumed Abundance model, and talking to her a bit about it. I do think that innovation needs some amount of essentially grant funding – don’t worry about the details, let’s just get started. If it doesn’t work out it was at least worth the try (and Kim emphasizes that You the Entrepreneur deserved the support anyway) and if it does work out then we all win.  I’m beginning to see that latter part can only happen if the entrepreneur actually understands how finance plays a role in the enterprise or recruits the right talent to help.  I suppose knowing how to recruit talent would be an aspect of the kind of inspiring person that a social investor just wants to support, but it doesn’t seem guaranteed.

I was initially attracted to the idea because I want to dedicate a pool of capital to building social enterprise and I don’t need that money to come back to me, but I do need it to come back to the fund or it will quickly be game over.  One aspect mentioned in Kim’s original blog was a hope of better aligning interests if it wasn’t about making more money for a seemingly greedy investor but for social enterprise overall.  I do think that helps professionals: the separation from the return being for themselves vs representing others. However I think to really “partner” with the entrepreneur, they need to understand the economics of an investment fund and be bought into the success of the fund, and getting their time & attention for that is not easy when they’re deep into their own enterprise.

In other news: I visited the Viva Farms incubator today in Skagit Valley.  I saw beautiful Romaine lettuce being grown. It actually kind of blooms out in its natural state and the 1st-year farmer showed us how just yesterday he learned that as it grows the leaves should be closed together and bound with the long twist-tie we see when it shows up at market, so it will have that distinctive elongated head.  I now think of Romaine as the veal of the lettuce world.

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