Energy Efficiency: Opportunities, Challenges, and Potential Solutions - Master's Project

Energy Efficiency: Opportunities, Challenges, and Potential Solutions

By Aparna Sundaram

A practicum submitted in partial fulfillment of the requirements for the degree of Master of Science (Natural Resources and Environment) at the University of Michigan April 2009 Faculty advisors: Professor Tom Gladwin, Chair Professor Gautam Kaul

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Abstract Energy efficiency undertakings create cost savings and public benefits. These cost savings provide owners/managers with opportunities to earn a return on their investments. Benefits include lower electricity congestion, lower emissions, and potentially lower prices. However, there are many cases in which viable projects are known but not pursued. This research seeks to asses the role of capital markets in driving investment into non-residential building energy efficiency.

Research Questions:  What are the demand-side and supply-side measures that could save the most energy at the least cost?  What are the impediments to investment in these measures?  What are potential solutions, particularly in terms of financial instruments, products, and structures?

Methodology:  Secondary research  In-depth interviews  Conferences / trade shows Findings: Investment in non-residential building energy efficiency is taking place but not to the extent possible. When projects do attract customer attention, access to capital is a significant issue, not least because of the difficulty in collateralizing EE equipment, and most ESCOs’ lack of credit ratings. Utilities are looking to establish authoritative and lucrative positions, driven by new regulation.

Capital markets financiers can seize this opportunity to leverage utilities and government partners to devise financing structures that can reallocate risk and return and drive investment into nonresidential building energy efficiency.

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Acknowledgements This practicum could not have been written without Cliff Adams, Managing Director, Coady Diemar Partners (New York, NY), who, as my practicum sponsor, offered essential encouragement, support, and criticisms. To Cliff and all the other professionals– including Andrew Brix, Kateri Callahan, Brian DiGiorgio, Tom Dreessen, Jeff Eckel, Joel Fetter, Yoshiko Hill, Nina Lockhart, Mike McNalley, Bill Miller, Tracy Narel, Matt Naud, Nick D’Andrea, Gerald Polk, John Ravis, Scott Sidell, Steven Schiller, Mike Taylor, Donald Thompson, David Thurm, and Jeff White – and the faculty the University of Michigan – including Tom Gladwin and Gautam Kaul – and finally, the Erb Institute staff, students, External Advisory Board, and alumnae – including Rick Bunch, Cyndy Cleveland, Dave Fribush, Peter Fusaro, Bryan Magnus, Rick Plewa, Emily Reyna, and Ryan Waddington – who were kind enough to share their time and expertise, I offer my sincerest thanks. In addition, I would never have been able to write Apologies to those I accidentally left out.

April 20, 2009

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Table of Contents INTRODUCTIONS Customers Suppliers

5 5 7

II. CHALLENGES A. MARKET BARRIERS Impediments to Customer Demand Renters

I. OPPORTUNITY A. DEMAND Market Size: EE Products & Services Building Stock and Growth Potential Savings Average Project Size Customers Market-Based Drivers Costs Environmental Footprint Revenues Non-Market Drivers American Recovery and Reinvestment Act (ARRA) Other Legislation Commercial Energy Codes Utility Programs Other

B. SUPPLY Energy Services Defined Equipment Manufacturers & Marketers ESCOs Utility Demand-Side Management Utility Demand Response Supply-side Energy Services 28 Market Size for EE Services Market Size for Energy Performance Contracting Services Players Market-Based Drivers Non-Market Drivers Utility Regulations Major Market Locations

SUMMARY OF KEY POINTS

11 11 11 12 12 16 16 16 17 17 18 18 18 19 20 20 20 21 21 21 21 23 28 28 28 29 31 32 33 33 34 36

Owner-Occupants Non-Occupant Owners Impediments to Service Provider Supply

B. FINANCING BARRIERS Commercial Customer Risks & Costs Government Customer Risks & Costs ESCO Risks & Costs

Summary of Key Points III. SOLUTIONS A. Distributing Financing Risk Price Discovery Allocation of Risk

B. Off-balance Sheet Structures C. Aggregation D. Partnering Utilities Bill Collection Direct Financing Real Estate Investment Trust of Property Developer

Summary of Key Points

37 37 37 38 38 38 39 39 40 41 42 43 44 44 44 44 46 47 47 47 48 48 49 50

CONCLUSION APPENDIX Bill

51 A:

Waxman-Markey

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APPENDIX B: Building Energy Efficiency A. Equipment & Materials Overview B. Documented Transactions: 20032008 APPENDIX C: Suppliers of Energy Services

56 56 64

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INTRODUCTION Energy use in buildings accounts for 35 percent of total primary energy consumption in the U.S., 42 percent of total energy costs, and 35 percent of all U.S. carbon emissions (Kreith & West, 1997). The latest report by the Lawrence Berkeley National Laboratory (LBNL) corroborates Kreith and West’s decade-old statements on consumption and emissions and goes on to say that at a price of 2.7 ¢/kWh1, cumulative savings from the buildings sector alone can equal up to $170 billion in 2030 (Biermayer, Borgeson, Brown, & Koomey, 2008).

The total capital required to achieve the $170 billion in savings would be $440 billion, invested between 2010 and 2030. The simple payback2 on the $440 billion would be 2-1/2 years. The benefit-cost ratio3 (life-cycle savings relative to the cost of investment) of the investment would be 3.5 (Brown et al., 2008).

The above top-level estimates do not reflect the full complexity of energy efficiency (EE) undertakings: the $170 billion represents reduced operating costs for some (building owners and occupants), and lost revenue for others (commodity electricity suppliers). Furthermore, commodity electricity suppliers, the losers of revenue in this scenario, are guaranteed a rate of return by regulators; they can, therefore, incorporate trends of diminishing demand into budget projections and request rate increases. If approved, rate increases would eliminate some, if not all, of the upside of an EE investment undertaken by building owners and occupants. Thus the $170 billion, while attractive, will be no easy feat to achieve. It will take a thorough understanding of the ecosystem for energy efficiency – or in other words, of the real estate and energy value chains, the policies that influence within them, and the interactions between them. The remainder of this introduction outlines the EE ecosystem.

Customers Potential customers for energy efficiency products and services exist across the length of the real estate value chain, from project developers to rental unit occupants. Figure 1 illustrates these potential customers, EE technologies and services available at each point of the chain, and considerations as to revenues, expenses, regulation, and policy that can influence investment decisions in non-residential building energy efficiency projects.

Factors to note are that decisions on new construction are rarely made by the resulting occupants. In fact, decisions are frequently made by firms aiming to minimize construction risks and project costs, and maximize pre-development lease sales. Moreover, during construction, architects, not building owners or property developers, oversee change-orders and purchase equipment that may affect the overall efficiency of the building system (Jones, Bjornstad, & Greer, 2002).

For existing buildings, key points are that energy bills come from both electricity and energy suppliers, and from actors within the real estate value chain (e.g. property managers). Secondly, building occupants may or may not own the properties they inhabit, and so, may or may not have incentive to invest in building-related equipment that has insignificant stand-alone value.

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NOTE: The values, 2.7 ¢/kWh, $170 billion, and $440 billion, are presented in 2007 dollar terms.

NOTE: Simple payback measures how long it takes for an investment to be recouped, irrespective of the time value of money.

3 NOTE Benefit-to-Cost Ratio (BCR) or Savings-to-Investment Ratio (SIR): Energy cost savings divided by investment or actual costs. Usually, this is energy savings, net of maintenance and repair costs, divided by investment and replacement costs less salvage value. SIRA1:A2 = ∑N(t=0) [ CSt (1+d)-t] / ∑N(t=0)[ It (1+d)-t ] where SIRA1:A2 = savings-to-investment ratio for alternative A1 relative to mutually exclusive alternative A2; CS t = cost savings (excluding those investment costs in the denominator) plus any positive benefits of alternative A1 as compared with mutually exclusive alternative A2; and I t = additional investment costs for alternative A1 relative to A2. The higher the ratio, the more dollar savings realized per dollar of investment (Kreith & West, 1997).

2

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Figure 1

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Suppliers On the supply side of EE, product suppliers run the gamut of heating, ventilation, and air conditioning (HVAC), lighting and lighting fixtures, energy/power storage, back-up power, on-site heat and power (cogeneration) systems, on-site (distributed) generation technologies (such as micro-wind and solar PV), building automation and process-specific control systems, and more. They are represented by their products in Figures 1 and 2.

EE service providers include energy management, building equipment manufacturers and marketers, utility company demand-side management (DSM) and demand response (DR) divisions, and engineering and IT services companies. These service providers indirectly connect investors along the real estate value chain with energy suppliers – including in the case of utility-run DSM and DR programs. Retail energy suppliers (e.g. natural gas firms) directly connect customers from the real estate value chain to actors along the energy value chain; they are pictured in Figure 2, but are not a focus of this report.

Energy service companies (ESCOs) offer both equipment-specific services –such as installing and maintaining energy efficient lights or boilers – and integrated services –such as auditing buildings, devising window-HVAC-lighting upgrade projects, installing and maintaining equipment, and financing projects. In return, customers achieve energy savings. Energy savings can be accomplished by installing devices that increase conversion efficiency (in transforming a primary resource to energy) or reduce the amount of energy required for a given task. The first method can be referred to as “resource efficiency” and is relevant in the building energy efficiency context only in renewable energy and cogeneration projects. The second is comprised of both product and behavior efficiency: in other words, a product may be less energy-intense or people can use it less frequently. Either way, demand-curtailment can be achieved.

Reduction of energy demand affects energy suppliers both by dampening revenue potential and by delaying the need for infrastructure investments. The latter point is reflected in utility budgets via integrated resource planning (IRP). IRP requires utilities to evaluate all possible options, including demand-curtailment, for providing reliable and low-cost service to customers. In other words, utilities must justify investment in new or extended transmission and distribution (T&D) and/or power generation assets relative to similarly effective demand-side management programs. Stated differently, demand-side management programs compete against capacity build-outs for regulatory approval and ratepayer-based funds.

DSM thus mitigates utilities’ needs to invest in infrastructure. In fact, the International Energy Agency estimates that each additional $1 of EE investment on the demand-side saves more than $2 on the supply side (Boyle et al., 2006).

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Figure 2

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DSM 4 programs typically entail promotions, like rebates, for energy efficient technologies and products. Utilities employ program administrators (e.g. PICO and KEMA) to estimate customer participation and potential kWh, Btu, or $ savings. The budgets are presented alongside those for capacity additions to the Public Utilities Commission (PUC), the Public Service Commission (PSC), or the Utility Board, depending on the state. PUCs analyze and approve a combination of activities within one IRP. When the approved IRP includes DSM, utilities invite bids from implementing organizations, like ESCOs. ESCOs win DSM contracts and get paid via approved utility budgets. In this way, ESCOs subsidize part of their business activities with ratepayer funds. According to a source at a large ESCO, ratepayer-funded energy efficiency programs account for, at maximum, 10 percent of ESCO revenue.

(M. Taylor, personal communication, April 8, 2009).

In addition to market assessments by program administrators, utilities gather information regarding demand-curtailment activities within their service areas through interaction with ESCOs. Utilities can consequently anticipate growth in customer-sited renewable generation5 and EE investments. If utilities and DSM program administrators anticipate customers’ energy efficiency investments, they consider the volume and value of the conserved energy in their integrated resource plans, even if the investments fall outside of the purview of the utilities’ DSM programs.

As independent energy efficiency investment is relatively small, there are many opportunities for ESCOs to leverage utility resources. Were demand to grow independent of utilities, utilities would quickly find themselves at a significant disadvantage relative to other independent energy suppliers.

Independent power producers (IPPs) are not governed by the same regulation as utilities and as such have lower costs and retail prices. Utilities, which must carry the costs of legacy infrastructure and meet many regulatory hurdles as to reliability, capacity, and pricing, are less flexible: if demand drastically decreased, utilities would incur not only cash flow problems but also regulatory costs. This competitive pressure creates a strong motivation for utilities to establish a position in demand-side management.

Ratepayer-funded energy efficiency programs are estimated by the Consortium for Energy Efficiency to have been $3.74 billion in 2008, up 18 percent from 2007 (CEE, 2008). Thirty percent of the growth was channeled into each of the commercial, residential, and industrial sectors, individually (CEE, 2008).

Change of the White House Administration and expected and announced regulation exacerbate tight budgets and budget crises in many states; expansion of utilities’ DSM programs is already being seen and is expected to continue (AESP Conference Participants, January 26-29, 2009).

Being that utility DSM programs are typically promotional programs EE product sales can be expected to grow. EE service company revenues also will likely grow, as a result of the government policies, energy and environmental concerns, and search for value-adds. ESCOs will require external capital – whether from government, commercial banks, or non-bank institutions (including investment banks) – to close deals and execute customer contracts. The remainder of this report will outline the opportunity for financing non-residential building energy efficiency projects, the risks, and potential ways to minimize the latter so as to exploit the former.

Section I describes the opportunity, inclusive of market size, growth, players, and an outline of the economic interactions between them. Section II reconciles the opportunity with risks and obstacles to EE investment. First, the section outlines market barriers to building energy efficiency from customers’

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NOTE: Many utilities house subscription-based emergency shut-down Demand Response (DR) programs within their energy efficiency departments. For payment, subscribers agree to give utilities direct control over their energy loads at critical times.

5 NOTE: Some state regulators, such as in New York, require utilities to offer net meters. The interaction between on -site generation and consumption-reduction under the of umbrella energy efficiency support the observation by many industrywatchers that the future for ESCOs will be in distributed generation.

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and service providers’ points of view. Second, it identifies financing barriers such as high transaction costs, small project sizes, and lack of collateral. Section III discusses possible solutions to the issue of capital availability for energy efficiency projects.

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I. OPPORTUNITY  Market Size: In 2004, non-residential building energy efficiency was $51.3 billion In 2006, ESCOs earned $3.6 billion from performance contracting In 2008, energy efficiency services earned $12.79 billion That same year, government and utility EE spending was $3.74 billion The sector’s growth is between 18.522 percent annually

 Growth: New legislation has channeled approximately $20 billion into EE Rebates minimize EE equipment premiums Tax credits and grants minimize financing costs Compliance is required

Demand will take off when capital markets reallocate risk

A. DEMAND Market Size: EE Products & Services The American Solar Energy Society estimates the energy efficiency industry to have been $932 billion in 2007 6 . Table 1 provides a breakdown of this number by EE product and service company revenues and government expenditures.

Only a portion of this represents investment in building energy efficiency. The most recent estimate on the size of the building energy efficiency market is from 2004 by the ACEEE, in which the authors value the market at $178 billion (Ehrhardt-Martinez & Laitner, 2008). Non-residential building energy efficiency made up 29 percent of that total, or $51.3 billion that year (Ehrhardt-Martinez & Laitner, 2008).

Size of the Energy Efficiency Market Industry Segment Insulation ESCO Recycling Vehicle manufacturing Household appliances and lighting Windows and doors Computers, copies, and FAX machines TV, video, and audio equipment HVAC systems Industrial and related machinery Miscellaneous durable manufacturing Nondurable manufacturing Utilities Construction Total, Private Industry Federal government EE spending State government EE spending Local government EE spending Total Government EE trade and professional associations and NGOs TOTAL, ALL SECTORS

According to Ehrhardt-Martinez and Laitner total investment in the building efficiency sector, exclusive of

Table 1

Revenues / Budgets (billions $) 5.00 3.00 275.00 73.00 22.00 12.00 90.00 45.00 12.00 19.00 105.00 220.00 2.00 36.00 $919.00 3.30 3.00 2.30 $8.60 0.50 $932.00 Source: ASES (2007)

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NOTE: ASES defines energy efficient equipment by the DOE’s Energy Star label. ASES methodology: ASES parses the portion of total sector revenue for relevant equipment sectors (e.g. windows and doors, lighting, etc.), that is attributable to Energy Star.

ASES adds to this, the total value of the recycling and reuse, ESCO industries, and federal, state, and local government ener gy efficiency budgets. ASES includes a portion of the federal climate change budget, and finally, adds energy efficiency non-profit and association budgets. As the energy efficiency industry is comprised of subsets of disparate equipment and services industries, as seen in Table 1, the industry is defined and scoped in a variety of ways by individual authors of industry reports.

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appliances and electronics, was $90 billion in 2004 (Ehrhardt-Martinez & Laitner, 2008). Roughly 13.6 billion of this value represented an “efficiency premium”, or additional cost for energy efficiency relative to standard equipment, materials, and services (Ehrhardt-Martinez & Laitner, 2008).

Building Stock and Growth New non-residential construction accounts for approximately 2 percent of GDP annually (DOE, 2008).

Based on GDP of 14.264 trillion in 2008 (Bureau of Economic Analysis, n.d.) can be estimated as $285.28 billion for 2008 with growth to $422.398 by 2030. Sectors that will demand the most new construction are education, government, industry, office, healthcare, hospitality, and retail (McGraw Hill Construction, 2008). Existing non-residential building retrofits account for another 2 percent, annually, of GDP (DOE, 2008). Collectively the two segments equaled $570.560 billion in 2008 and will be $844.797 billion by 2030.

The energy efficiency component is 3 percent of construction output (ASES, 2007), or $17.116 billion for 2008 (Author’s calculation). Barring change in demand for EE as a percentage of construction or for new and retrofit non-residential construction as a percent of GDP, the non-residential building energy efficiency market value will be $25.343 billion by 20307 (Author’s calculation).

Potential Savings Building energy needs are comprised by requirements for heating, cooling, ventilation, air conditioning, lighting, and humidification. Indoor climate, outdoor climatic conditions and the building properties (surface / transmission heat transfer and heat transfer due to air leakage) influence gross energy needs of buildings. Energy flows within buildings and consequently, there are interactions between equipment and processes (See Figure 3). Potential savings depend upon building design and orientation, ventilation and lighting systems, thermal integrity (which is dependent on insulation, windows, and doors), construction methods, and HVAC, lighting, and building controls equipment and processes 8 (Govindarajalu, Levin, Meyer, Taylor, and Ward, 2008). In other words, location, business activity, and building orientation, matter as much as materials and equipment.

Figure 3

Source: REEEP (2006)

According to the Energy Information Agency (EIA) in its Energy Outlook for 2009, commercial buildings account for roughly 18 QBtu of primary energy end-use. This translates to approximately 20 percent of annual GHG emissions in the U.S. (EPA, n.d.). Figure 4 shows floor space, number of buildings, and primary energy consumption by non-residential building activity.

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Varying figures exist for the value of the construction industry: ASES states it as $1.2 trillion and consequently estimates the EE industry size in 2007 as $36 billion, as represented in Table 1 on page 11.

8 NOTE: Appendix B provides a compendium of building equipment and materials and their specifications.

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Figure 4

Source: DOE (2008)

Figure 5 shows primary end-use energy consumption in commercial buildings.

Commercial Primary End-Use Energy Consumption

Figure 5

Source: DOE (2008)

The EIA expects commercial electricity consumption to increase 1.4 percent per year from 2007 to 2030 (EIA, 2009) due to increased consumption of office equipment, ventilation, and service station equipment, automated teller machines, telecommunications, medical, and other business-specific equipment.

According to ConEd, energy efficient lighting is the most cost-effective EE measure: the cost to implement an EE lighting project, inclusive of both bulbs and controls, is about $3.50 per square foot (Thompson, personal communication, February 6, 2009). Annual energy savings (without factoring in utility-based DSM incentives) would be approximately $1.00 per square foot (Thompson, personal communication, February 6, 2009). Motors and air conditioning are second, and building envelop and automated energy management systems are third (Thompson, personal communication, February 6,

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2009). LBNL estimates that buildings can save 1.51 quads and 705 TWh by 2030 through energy efficiency measures (See Figure 6).

Figure 6

Source: Brown et al. (2008).

Many of necessary measures can be NPV-positive, as show in the example in Figure 7, when the value of energy cost savings is considered. In fact, the National Action Plan on Energy Efficiency reports potential energy bill savings of between 5-30 percent for measures promoted through utility DSM programs (NAPEE, 2005) alone. Larger investments, such that would enable a customer to join the ENERGY STAR9 program, show reductions in consumption of 35 percent relative to average buildings and operating cost reductions of $0.54 per square foot (ENERGY STAR, 2008).

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NOTE: ENERGY STAR is joint program of the EPA and DOE that promotes energy efficient products and practices through energy performance rating and labeling, public education, and more. More details at http://www.energystar.gov/

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Figure 7

Estimated Cost and Benefits for Commercial Building EE Measures through 2030

Input Assumptions

NPV of Commercial Measures Mid-Range Input Assumptions and 3% discount rate

Source: Fine & Mihm (2009)

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Average Project Size According to self-reported data on the DOE’s Building Technologies Program website, the median investment from 2001 to 2007 in non-residential building energy efficiency was $5.75MM (Author’s calculation based on data from DOE website; DOE, n.d.). Average investment was been $21.41MM (Author’s calculation based on data from DOE website; DOE, n.d.).

A Johnson Controls survey in 2007, of 1249 executives and managers, found that 57 percent and 80 percent of those surveyed expected to invest 8 percent of their 2008 capital budgets and 6 percent of their 2008 operating budgets in energy efficiency projects, respectively (Nesler, 2008). The average maximum payback they expected was 4.3 years (Nesler, 2008), though recent interviews conducted by the author of this report found payback requirements of 1-2 years more typical.

According to LBNL, investments in larger buildings are different than those in smaller buildings: there is greater investment in shading, HVAC systems (in new construction), and lighting in larger buildings than in smaller ones. Insulation and other envelope efficiency measures maintain similar ratios of investment dollars across building sizes (Jones et al., 2002).

Customers Potential customers for a given energy efficiency project are located within the real estate value chain.

The real estate market is fragmented and diverse: commercial buildings are owned by individuals, religious organizations, non-profits, and government entities–mostly local (DOE, 2008). Only twentynine percent of all commercial buildings are owned property management firms and corporations (DOE, 2008). The largest twenty-five owners of office space owned only 6.5 percent of total available square footage in 2003 (DOE, 2008).

Only 36 percent of commercial buildings are owner-occupied (See Figure 8). The remainder of the market is comprised of renters (DOE, 2008).

Figure 8 Source: DOE (2008).

Players with the most influence over investment decisions for commercial real estate are building owners, property developers, architects, policy makers, and building managers (Rocky Mountain Institute, 2006). These are a diverse set of actors, some driven by goals of non-real estate-based business productivity, others by cost, and still others by public objectives. Section II briefly outlines the challenges this diversity and

fragmentation causes for energy efficiency.

Institutions are active consumers of energy efficiency products and services. They are discussed in B. Supply > Market Size for Energy Performance Contracting, as the necessary context will have been given by then.

Market-Based Drivers Decision-makers base investment decisions for building equipment, materials, and components first and foremost on the investment’s contribution to productivity. Building owners define productivity in reference to an ability to raise rents – either because the investment adds to the value of the physical assets or because it adds to the unit’s marketability. Building occupants define productivity in terms of

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improved output and sales or decreased costs. For the most part, building energy efficiency projects are judged on the basis of the latter.

A survey by the National Real Estate Investor of 385 people, 170 of whom were government officials, 164 of whom were commercial real estate developers, and 51 of whom were corporate owners and occupants, found energy costs, environmental footprints, marketing, and value enhancement to be the primary motivations for energy efficiency investments (Mattson-Teig, 2008) (See Figure 9).

Ninety-two percent of corporate occupants and 83 percent of commercial real estate developers were motivated by energy costs to Figure 9 Source: Mattson-Teig (2008)). invest in green design–including both new builds and retrofits 10 (Mattson-Teig, 2008). Seventy-four percent were driven by the marketing concerns, 71 percent by the firm’s environmental impact, and 42 percent with value enhancement (Mattson-Teig, 2008).

Costs Energy accounts for 30 percent of any given business’ operating costs and constitutes the largest category by which businesses can control costs (DOE, n.d.); however, energy consumption is on the rise. Building electricity consumption accounted for 87 percent of the increase in overall electricity consumption from 1985 to 2006 (DOE, 2008), outpacing growth in industrial electricity consumption by a factor of four (See Figure 10).

Commercial building energy consumption is expected to increase 1.4 percent per year between 2007 and 2030 (EIA, 2009). This trend points to the Figure 10 growing importance of energy costs for Source: DOE businesses across the (2008) board. HVAC systems may be of particular interest as, on their own, they comprise approximately 40 percent of customers’ energy bills (Frost and Sullivan, 2008).

Environmental Footprint Ernst & Young lists the “green revolution, sustainability, and climate change” eighth on a list of the top 10 business risks for commercial real estate investment and energy price volatility tenth.

Environmental/CSR and marketing concerns can be shown to have a tangible impact on investment 10

NOTE: The survey specifically considers demand for energy efficiency retrofit projects among users and owners of office space.

Thirty percent of corporate respondents stated they had invested in energy efficiency retrofit projects, 29 percent were engaged in retrofitting projects at the time of the survey, and the 41 percent were considering such investments. Commercial real estate developers followed a similar pattern, with 29 percent having already undertaken the investments, 29 percent engaged in projects at the time, and 46 percent considering EE retrofit projects.

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and purchasing decisions: the volume of transactions in the voluntary carbon markets was $330.8MM (65 MtCO2e) in 2007 (Hamilton, Sjardin, Marcello, & Xu, 2008). Corporate activity in the voluntary carbon, renewable energy credit, and energy efficiency certificate markets is, as-yet, unregulated and consequently motivated solely by environmental, CSR, and marketing concerns11.

Revenues Of particular interest to building owners is the potential for enhanced revenue via energy efficiency investments. ENERGY STAR buildings can command a 15 percent price premium per square foot, 3.6 percent higher occupancy rates, and 8 percent higher rental incomes per square foot, relative to average buildings (CoStar Group, n.d.; EPA, 2008).

Table 2 pictures the potential impact on the commercial real estate owners’ financial statements.

Commercial Energy Efficiency – NOI, Asset Value, & Payback Times Building 100,000 sq. ft.

Investment / sq. ft.

Rate of Energy Savings

$ Savings / sq. ft. / year

Increase to NOI

Asset Value Increase

Simple Payback

Janitorial Services Operations & Maintenance

$0.01

5%

$0.14

$13,500.00

$135,000.00

Immediate

$0.05

9%

$0.20

$19,800.00

$198,000.00

4 months

Lighting

$1.04

16%

$0.36

$36,000.00

$360,000.00

3 years

HVAC

$1.21

9%

$0.21

$20,700.00

$207,000.00

6 years

All Measures

$2.31

39%

$0.90

$90,000.00

$900,000.00

2.5 years

Table 2

Source: Duke et al. (2008) .

Non-Market Drivers Government vehicles to promote energy efficiency include low interest loans, zero interest loans, interest tax-free loans, investment tax credits, and more. Related initiatives that drive investment into energy efficiency include smart grid development, revamp of utility infrastructure, upgrading of school and university facilities, workforce training, tax incentives, employing governmental bonding authority to promote energy efficiency, and loan guarantees for EE projects (Callahan, n.d.).

American Recovery and Reinvestment Act (ARRA) The ARRA appropriated close to $20 billion for energy efficiency. $0.3 billion for appliance rebates via ENERGY STAR, $5 billion for weatherization, and $1.2 billion for renewable energy development (Callahan, n.d.). Highlights include:  Department of Energy’s (DOE’s) State Energy Program ($3.1 billion): This program gives grants and funding to state energy offices for EE and renewable energy (RE) programs, as relevant to state regulations, building codes, and programs regarding both.

States must establish lighting efficiency standards for public buildings, incorporate EE criteria into procurement, and upgrade the thermal efficiency of new and renovated buildings (ASE, n.d.). The DOE further suggests that states establish energy efficient building codes and standards, offer loans, grants and incentives for EE projects, and prioritize building retrofits in their territories (ASE, n.d.).

11

NOTE: Partly, the activity in environmental finance markets is due to the belief that cap and trade legislation is imminent and today’s market participants can build experience at lower costs.

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 The Energy Efficiency and Conservation Block Grant Program ($3.2 billion): This program allocates $1,863,880,000 for eligible cities and counties, $767,480,000 for states, U.S. territories, and the District of Columbia, $54,820,000 for eligible Indian tribes to implement energy efficiency measures in their areas (not specifically in building energy efficiency) (ASE, n.d.). Funds can be disbursed to private sector players, if the receiving government agency so decides (ASE, n.d.).  Green Federal Buildings ($4.5 billion): New Federal buildings are required to reduce energy consumption 45 percent and existing Federal buildings must reduce consumption 25 percent by 2014. According to the Alliance to Save Energy, EE measures will be implemented in 75 percent of all federal buildings (Callahan, n.d.). $400 million is reserved for establishing the Office of Federal High Performance Green Buildings (Callahan, n.d.). $3.6 billion is reserved for the Department of Defense to invest in energy efficiency projects and facilities upgrades (Callahan, n.d.).  Innovative Technology and Loan Guarantee Program ($6 billion): This program supports commercialization of advanced technologies that enable pollution and GHG emissions control, some of which pertain to energy efficiency (Callahan, n.d.).  Smart Grid ($4.5 billion): Allocation of capital for research and development and pilot projects for the electric grid and federal Investor matching funds for the Smart Grid Investment Program (Callahan, n.d.).

Federal Tax  Tax Credits Interest-free Principal Credit zeroes out Energy Conservation financing payments interest Bonds ($2.4 billion) are allocated by population to local government and enable tax-free financing Federal State or local for energy efficiency and government government renewable energy (Ungar, 2009) (See Figure 11).

Investment If loan, Commercial Building grants or loans payments Deductions: Through 2013, commercial Figure 11 buildings can deduct up EE Project to $1.80 per sq. ft. for Source: Ungar (2009) buildings that, on the whole, use 50 percent less energy than current commercial energy codes require.

They can also deduct up to $0.60 per sq. ft. for individual building envelope, HVAC, hot water, or lighting systems (Ungar, 2009). Section 179D of the ARRA describes these and additional measures in detail (Ungar, 2009).

Utility Depreciation Rules: Utilities can accelerate depreciation on smart grid and metering technologies (Ungar, 2009).

Appliance Manufacturer Tax Credits: Between 2008 and 2010, manufacturers of energy efficient refrigerators, clothes washers, and dishwashers can receive tax credits of $45-250 (Ungar, 2009).

Grants: Between 2009 and 2010, if tax credits are irrelevant to potential customers or manufacturers, the Federal Government is offering the opportunity to apply for grants instead (Ungar, 2009).  Rebates ($300 million): Rebates and matching grants for state rebates are available for ENERGY STAR appliances (ASE, n.d.).

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Other Legislation The Troubled Assets Relief Program (TARP) includes $800 million for energy conservation bonds (Ungar, 2009). The Waxman-Markey Bill is currently being discussed; provisions that relate to energy efficiency are presented in Appendix A. Commercial Energy Codes Commercial energy codes were developed by the American Society of Heating, Refrigerating and AirConditioning Engineers in 1975. After the U.S. passed the Energy Policy Act of 1992, the number of states with commercial energy codes that met or exceeded the ASHRAE standard went from five to forty (DOE, 2008). States that meet or exceed the ASHRAE 1990 standard are pictured in Figure 12.

Figure 12

The DOE aims improve energy efficiency by an additional 30 percent in the Standard 90.1-2010 iteration in 2010 (DOE, 2008).

Utility Programs Utility programs include demand-side management (DSM) rebates and event-based payments for participation in demand response (DR) programs. Non-residential customers have achieved 63 percent energy savings from utility programs (ACEEE, 2009). End use lighting has accounted for nearly twothirds of all these savings (ACEEE, 2009). DSM and DR programs are detailed in B. Supply > Non-Market Drivers, below.

Other Other government measures include building ratings, building and appliance labeling, and promotional programs, such as ENERGY STAR.

Utility-based commercial building rebate programs and ESCO services target:  Lighting  Motors  Pumps  Refrigeration  Food service equipment  Prescriptive rebates Source: NAPEE (2006)

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B. SUPPLY EE suppliers are comprised of a wide range of companies, technologies, service offerings, and business models, including IT systems integrators, engineering and consulting firms, energy auditing, integration, and maintenance companies (ESCOs), and utility program administrators. A compendium of building energy efficiency materials and equipment is included in Appendix B – as is a deal list from 2003-2008.

The below outlines the EE services market.

Energy Services Defined Equipment Manufacturers & Marketers Equipment vendors sometimes offer customers the option to lease EE equipment.

ESCOs ESCOs audit, design, engineer, install, maintain, and finance equipment and processes that improve energy efficiency12.

ESCOs’ first task is to meet customers’ requirements of payback times. This can be done by selecting a complementary group of products and processes, packaging rebates and subsidies from utilities and government, and organizing affordable financing. Financing occurs through:  Project finance: Project finance is applicable to CHP and recycled energy, performance contracting (outlined below), and marketing programs offered by equipment manufacturers (Source: Laitner, 2008).  Debt: Debt is relevant to fund REITs, portfolio investments, mortgage backed securities, or pooled loans, or credit enhancements (Source: Laitner, 2008).  Equity: Equity can be invested by venture capital or private equity firms or raised through stock issues.

ESCOs, customers, and financial institutions structure partnerships so as to ensure that energy savings cover the cost of ESCO services and EE equipment, and repayments are covered by lease purchase arrangements on equipment (Goldberger, 2002). Figure 13 shows two typical financing structures for ESCO projects.

12

NOTE: Cogeneration accounts for 15-20 percent of ESCO revenues according to Frost and Sullivan. However, demand is primarily from industrial customers in non-building EE projects (Frost and Sullivan, 2008).

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Model 1

Model 2 Lender

Lender

Repays

Lends

ESCO

Owns, Operates, Maintains

Figure 13 User

Lends

Lends

User

Owns, Operates, Maintains

ESCO Source: ICICI (2003)

Project costs and risks can be minimized through a variety of on-balance sheet measures, if the customers’ or ESCOs’ credit rating is high enough. Components of successful financing can include:    

Coordinating loan repayment schedules with energy savings cash flows Depositing energy savings into escrow accounts from which loans are repaid Leveraging utility partners to collect loan repayments Employing chauffage agreements13

Second, ESCOs must minimize implicit risk premiums. This can be done by capitalizing performance risk, which, according to Dan Goldberger, is the most significant service ESCOs perform. In performance contracts, ESCOs organize financing, conduct feasibility, commission and install energy efficient equipment, monitor and verify energy savings, and train facility operators to optimize energy savings over the life of the retrofit (Goldberger, 2002). Types of agreements between customers and ESCOs include fast payout - wherein ESCOs receive all energy savings for a specified period or until the project cost has been recouped -, energy savings - wherein building owners pay monthly flat fees for energy as specified in contracts with the ESCO keeping all of the upside if savings are greater than expected, or bearing all of the downside if they are less (Goldberger, 2002) -, and leasing - wherein ESCOs provide customers with extended warranties. Experienced customers have evolved from accepting these arrangements to performance contracting.

There are two models for performance contracting: shared and guaranteed savings.  Shared savings: ESCOs organize the financing for project installation and earn a specified percentage of actual savings, usually at a set price for energy (International Institute for Energy Conservation and Export Council for Energy Efficiency, December 1998). The cost of capital is based on the customers’ creditworthiness; while customers do not get access to

13

NOTE: Chauffage is a system in which building owners purchase supplies of heating, cooling, or electricity from CHP or cogeneration system rather than the equipment itself, in the same way as one might purchase energy savings from other types of EE projects, or energy from a power plant. The difference between chauffage and energy savings is that the former has a fixed asset that can be collateralized.

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cheaper financing, they do get limited recourse to ESCOs for contract performance (See Figure 14).  Guaranteed savings: ESCOs are paid on the basis of verified energy savings. The ESCO administers the loan repayment and may need to guarantee payments to financiers, but even if not, financiers have recourse to EE project customers’ balance sheets. The customers, in turn, have recourse to ESCOs through the performance guarantee (See Figure 15).

Figure 15 Figure 14

Source: Govindarajalu et al. (2008)

Source: Govindarajalu et al. (2008)

Performance contracting costs, on the whole, account for 13-15 percent of overall financing costs (Goldberger, 2002). The typical cost of capitalizing performance risk via a performance guarantee is 8 percent of a project’s total financing costs.

Figure 16 on page 24 illustrates customer analysis of an EE guaranteed savings project. In this realworld example, real rates are much higher than stipulated, yielding energy savings beyond the expectations of the project. Prior year usage (e.g. 1996 and 1997) is extrapolated to the present and weighed against current prices to roughly estimate the value of EE investments to the firm.

For customers with advanced technical knowledge, and consequently greater confidence that the given investment will achieve the projected energy savings, the essential service that can be provided

by ESCOs is off-balance-sheet financing (Govindarajalu et al., 2008). This is actually an issue for customers across the board as most ESCOs lack a strong enough rating to leverage their own balance sheets, and consequently, customers bear the brunt of exposure to financing risk. This is discussed further in Section II. Capital markets are essential to solving this issue: Hannon Armstrong, for example, securitized14 $1.5 billion of energy savings through late 2008 (The Economist, 2008). Securitization is one possibility for reallocating risk, though the state of that market is such that simpler options, like governmental loan guarantees, interest rate buy-downs, or government grant, may be better. These options are explored further in Section III.

14

NOTE: To securitize a product is to turn it into a capital market instrument – or, in other words, to sell ownership rights to the aspect of the product that is monetizable. In this case, it is to sell the ownership rights to the energy savings. This diffe rs from the rest of the discussion in this section as securitization enables the savings to be bought and sold in the public markets, rather than in bilateral deals.

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Plant Name Plant 1 Plant 2 Plant 3 Plant 4 Plant 5 Plant 6 Plant 7 Plant 8 Plant 9 Plant 10 Plant 11 Plant 12

Year

Month TT Elec Kwh

2005 2005 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006

11 12 1 2 3 4 5 6 7 8 9 10

8,940,917 8,373,462 8,583,966 8,351,872 7,985,549 8,765,785 8,546,629 8,247,316 8,046,357 8,867,293 6,100,518 8,680,097

2006 99,489,761 1996 137,578,387 1997 139,968,993

Performance Contract Baseline Energy Guranteed Energy % of total energy % of HVAC Energy Guranteed Savings Actual Savings at current rates

$$ Elec

$$ per KWh

$457,226.49 $427,062.58 $451,526.87 $434,302.82 $417,931.03 $453,673.21 $597,510.43 $574,803.43 $574,041.91 $636,878.26 $482,408.92 $629,581.09

$.051 $.051 $.053 $.052 $.052 $.052 $.07 $.07 $.071 $.072 $.079 $.073

6,136,947 $ 7,163,351 7,285,787

Electricity Stipulated rates Elec (kwhr) $.045 22,470,243 $ 1,011,161 10,644,572 479,006 8.5% 52.6% 11,825,671 $ 532,155

0.062 0.052 0.052

2006 Rates $.062 $1,386,059 656,602

$

Figure 16

TT Gas Use $$ TOTAL Gas Cost $$ per MMBtu N Gas

729,457

22,053 41,605 29,430 30,975 22,626 9,217 6,562 2,235 1,620 1,719 3,573 7,111 178,727 $ 443,310 434,909

$128,603.92 $337,442.56 $221,860.22 $273,345.88 $147,137.66 $101,302.03 $45,442.38 $16,687.8 $9,745.24 $11,085.09 $13,185.96 $40,759.79 1,346,599 1,383,331 1,266,832

$5.832 $8.111 $7.538 $8.825 $6.503 $10.99 $6.926 $7.467 $6.016 $6.45 $3.69 $5.732 $

Natural Gas Stipulated rates Gas (mcf) $ 3.00 $ 442,248 $ 1,326,744 $ 145,810 437,430 67.5% 67.0% 296,438 $ 889,314 $

7.53 3.12 2.91

Total Energy ($) 7,483,546 8,546,682 8,552,619

Total Energy Costs 2006 Rates Stipulated Rates 2006 Rates 7.53 3,332,075 $ 2,337,905 $ 4,718,135 1,098,592 $ 916,436 $ 1,755,194 16.6% 60.8% $ 1,421,469 2,233,484 $ 2,962,941

memo: misc savings such as water, chemicals etc not included in this analysis

1996 This is the contract guaranteed energy savings your should recognize.

This is the real savings amount, including economics

Plant X (96/97 adjusted to 2006 economics to account for increased energy prices)

1997

2006

12,000,000

11,000,000

10,000,000

Annual True Up payments made

2001 $ 43,427 $

2002 26,990

$

2003 74,957 $

2004 77,770 $

2005

2006 69,256

$

Supplier Economics Gas Electricity

9,000,000

84,068

8,000,000

7,000,000

6,000,000

5,000,000 1996

1997

2006

Source: White, personal communication, April 13, 2009.

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Utility Demand-Side Management DSM programs include public education and training, financing and financial incentives, energy savings bidding, and performance contracting. Utilities are in a position of significant importance as they have pre-existing customer relationships. They can directly offer shared savings contracts; however, they usually prefer to employ incentive mechanisms, as described below.  Prescriptive rebates: set payments per item, KWh, or KWh saved, paid to customers or trade partners (NAPEE, 2006). In a 2003 LBNL study, utility rebate programs were found to reduce payback times by 1-2 years (Goldman et al., 2003).  Custom rebates: customized payments to customers based on the type of measures undertaken and tied either to specified payback times or energy savings (NAPEE, 2006)  Performance contracting incentives: payments by program administrators to lower ESCO risk premiums (NAPEE, 2006).  Low interest financing: reduced interest rates on loans to customers (NAPEE, 2006).  Cooperative advertising: co-marketing arrangements, with partial funding provided by the utility (NAPEE, 2006).  Retailer buy downs: payments made to retailers to decrease or eliminate the price premium for energy efficient products (NAPEE, 2006).  MW auctions: payments made by program administrators to third parties per MW or MWh savings (NAPEE, 2006).  On-bill financing: de-facto loans offered by utilities to customers for an amount equal to the total project cost. Loan payments are collected via charges on the customers’ utility bills. The advantage of on-bill financing is that it can streamline billing and reduce the risks associated with loan repayment, as most people pay their utility bills on time (Frank, 2008). Utilities can offer on-bill financing in independent services engagements or with implementation partners (e.g. program administrators and ESCOs).

Utilities can fund energy efficiency program through any of the following mechanisms:  Revenue requirements or resource procurement funding: Due to Integrated Resource Planning, utilities must evaluate both demand- and supply-side measures’ effectiveness in providing customers with reliable and low-cost electricity (See Figure 17) using life cycle cost accounting.

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Activities in Integrated Resource Planning Load Forecast

Identify Goals

Existing Resources

Need for New Resources

Supply

Demand

Social, Enviro.

Factors

T&D

Define Suitable Resource Mixes

PUC Approval & Public Participation Monitor

Acquire Resources

Rates

Uncertainty Analysis

Figure 17 Source: Kreith & West (1997)

Life cycle costs are measured using the Total Resource Cost (TRC) method. The TRC test measures net benefits of DSM programs based on total costs of the program, including both participant and utility costs.

The primary factors considered are the costs of avoided resources and equipment and program support costs (Thompson, personal communication, February 6, 2009) with program viability falling within the range of $0.025-0.012 per KWh (M. McNalley, personal communication, February, 16, 2009).

Figure 18 shows the Source: NAPEE (2006) Figure 18 benefits of EE in resource planning. Figure 19 on page 27 illustrates utility estimates of EE potential in achieving the IRP goals of providing customers with reliable and low-cost electricity.

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Source: NAPEE (2006).

Figure 19

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 System benefits charges (SBC): a tariff added to rate-payer bills to fund energy efficiency programs and administration. SBC funds are typically used to offer financial incentives (e.g. grants) to end-use customers. SBC funds can be administered by the utility, an independent non-profit, or a quasi-government agency–e.g. NYSERDA, a public benefit corporation, that administers grant programs for EE and renewable energy projects in New York State.  Rate-basing: utilities can use dynamic and competitive pricing to promote conservation or load shifting. Methods include increasing tier block costs, time-of-use (TOU) pricing, real-time pricing (RTP), critical peak pricing (CPP), non-firm pricing for emergency relief to power systems, and two-part rates (NAPEE, 2006).

Utilities are in an important position as they own relationships with customers as well as metering technologies that verify actual energy use. Both of these points could be leveraged by ESCOs to bring down the perceived risk of their projects. Similarly, as highly regulated entities, utilities have fairly stable cash flows which could alleviate certain financing issues facing ESCOs and their customers.

These same points can be leveraged by utilities themselves: were they to launch ESCO subsidiaries or affiliates, they could employ their own balance sheets to finance projects, eliminating the exposure of the customer. This would give utilities a significant advantage in the sales process. This is discussed further in Section III. According to the International Energy Agency (IEA), for each $1 invested in energy efficiency, more than $2 can be saved on the supply side (Boyle et al., 2008). For these reasons utilities are increasing their EE expenditures: National Grid, for one, reports that it expects to double or triple its EE investment in the next five years across the Northeast (Stout, 2008). To reiterate, this funding can be used to launch or execute independent ESCO services or work with existing ESCOs. In both cases, utility expenditures drive down the cost of energy efficiency projects to end consumers.

Utility Demand Response Demand response (DR) programs are typically subscription-based emergency shut-down programs aimed at freeing supply-side resources at critical times. Utilities solicit customers who agree to give direct control to the utilities over their energy loads at critical times in return for payment. DR thus alleviates strain on the electricity system at peak times, serving a similar need as demand-side management. Consequently, utilities group these two programs together, yet DR does not specifically address consumers’ energy consumption or necessarily lead to energy savings on the whole.

Participating customers typically employ back-up power systems when shut-downs, known as “events” or “critical events”, occur. DR has received attention from capital markets –e.g. EnerNOC and Comverge both had multi-million dollar IPOs in 200715.

Supply-side Energy Services Supply-side services aim to reduce costs through procurement of energy resources in competitive markets. Companies in this segment conduct rate analysis, risk management, billing administration, and market intelligence (Frost and Sullivan, 2008). Like DR, supply-side services address critical issues for utilities, and in this case, also for customers. This issue is cost: ability to arbitrage prices and meet energy requirements brings down utilities’ costs and prices. Reduced electricity prices can serve as a disincentive to energy efficiency, though environmental legislation and public perception could just as well counter-balance the lack of economic motivation. In either case, supply-side services do not specifically address consumers’ energy consumption.

Market Size for EE Services 15

EnerNOC’s IPO was for $103MM and Comverge’s was for $378MM in 2007. Currently, EnerNOC, the energy efficiency services player (Comverge is a demand response company) is experiencing significant losses, as reflected by negative EPS - (Frost and Sullivan, 2008) EPS: 1.88 as of 4/20/09.

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Frost and Sullivan estimates the market for energy management services to have been $20.356 billion16 in 2008, inclusive of equipment manufacturer and marketing services, ESCO activity and DSM, DR, and supply-side services like procurement (Frost & Sullivan, 2008) (See Appendix A for list of tracked companies. Demand response accounts for 8 percent of this and supply-side services for 36.3 percent.

ESCO services, separated from demand response and supply-side services were valued at $12.79 billion in 2008 (Frost and Sullivan, 2008). This makes up 9 percent of the total annual revenues of the companies tracked (Author’s calculation based on data from Dunn & Bradstreet, 2009 and Frost and Sullivan, 2008). Supply-side services account for only 5 percent of the same.

Frost and Sullivan report an ESCO industry CAGR of 18.5 percent for the period 2008-2013 (Frost & Sullivan, 2008).

Utility and government energy efficiency budgets are valued as a separate segment by the Consortium on Energy Efficiency; in 2008, these two expenditure categories totaled $3.74 billion dollars for 2008 (CEE, 2008).

As discussed above, much of the money allocated through utility DSM programs goes towards rebates for EE products. Utilities also hire ESCOs to deliver Source: CEE (2008). energy savings for their utility DSM programs. This Figure 20 enables utilities to achieve mandated reductions in energy consumption in their service areas. Figure 20 shows the breakdown of utilities’ budgets per market segment.

Market Size for Energy Performance Contracting Services LBNL counts as ESCOs only companies that engage in energy performance contracting (EPC, a.k.a.

ESPC); in their survey of the EE services market, they discount revenues from non-EPC companies and divisions and value the remainder of the market. The most recent year for which they have data is 2006: the EPC market was $3.6 billion17 that year (Birr, Gilligan, Goldman, Hopper, & Singer, 2007), with growth between 2004 and 2008 estimated to have been 22 percent annually (Birr et al., 2007).

2006 ESCO Industry Revenues by According to LBNL, demand for EPC is greatest Market Segment among institutional customers; government & institutions account for 60 percent of EPC revenues (Birr et al., 2007) (See Figure 21). The DoD alone accounts for 60 percent of government EE performance contracting projects and 70 percent of the investment dollars18(US Department of Energy, 2005; San Miguel & Summers, 2006). According to Dr. Joseph San Miguel of the Naval Post Graduate Source: Birr, Gilligan, School, performance contracts have been used Goldman, Hopper, & in 18 different federal agencies and departments Figure 21 Singer (2007) in 46 states (San Miguel & Summers, 2006).

16

NOTE: The majority of the services counted within this value concern buildings or building-related technologies, but nonbuilding energy efficiency measures have not be eliminated; moreover, the market size data concerns services rendered to both residential and non-residential consumers.

17 NOTE: For multi-function companies, LBNL counts only the portion of revenues from energy performance contracting. Utility DSM and DR programs are not part of the calculation, nor are revenues from engineering and contracting services.

18 NOTE: The time period was unspecified but is assumed to be 2001-2005.

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Major national ESCOs like Honeywell and Johnson Controls are the preferred service providers, and have transacted 300 performance contracts with the federal government19 (San Miguel & Summers, 2006).

The ARRA of February 2009 requires new federal buildings to reduce their energy consumption 45 percent and existing federal buildings to reduce their consumption 25 percent by 2014. The Alliance to Save Energy expects EE measures to be implemented in 75 percent of all federal buildings (Callahan, n.d.). States must establish lighting efficiency standards for public buildings, incorporate EE criteria into procurement, and upgrade the thermal efficiency of new and renovated buildings (ASE, n.d.). The DOE further suggests that states establish energy efficient building codes and standards, offer loans, grants and incentives for EE projects, and prioritize building retrofits in their territories (ASE, n.d.).

Consequently, the Federal and MUSH markets are going to see significant activity in the next five years.

According to a Honeywell executive, EPCs provide government agencies with ways to:  Address their deferred maintenance and capital needs (Taylor, personal communication, April 7, 2009)  Mitigate the effect of EE projects on their budgets, and (Taylor, personal communication, April 7, 2009)  Gain recourse to ESCOs with reference to project performance (Taylor, personal communication, April 7, 2009) Energy performance contracts are financed, via intermediaries like Hannon Armstrong, by private sources of capital (San Miguel & Summers, 2006). Federal agencies more frequently use congressional appropriations than MUSH customers (Goldman, Hopper, and Birr, 2004), yet, according to Jennifer Schafer of Cascade Associates, the ARRA allocates most of its funds to only 28 percent of the agencies affected by new federal building energy efficiency requirements (Schafer, 2009). The remaining 72 percent of agencies will need private capital, and will likely choose to use performance contracts (Schafer, 2009). EPCs accounted for 51 percent of the total federal investment in energy efficiency from 2001-2006, while appropriations accounted for 23 percent (San Miguel & Summers, 2006).

Another reason for the dominance of institutional customers among ESCO projects is that institutional customers are more creditworthy and usually execute larger projects. Both of these factors appeal to financiers. In addition to availability of private capital, government agencies can fund projects through a variety of low interest vehicles. For example, government can issue low-interest and tax-free bonds, including General Obligation Bonds, Limited Tax General Obligation Bonds, and revenue bonds.  General Obligation Bonds (GOs): Governments can borrow money at approximately 5.75- 7 percent via GOs. GOs usually need approval of the electorate (Goldberger, 2002) and as such require longer lead times. Borrowers’ balance sheets have full exposure.  Limited Tax General Obligation Bonds (LTGOs): Governments can issue LGTOs on behalf of non-tax-exempt parities (Goldberger, 2002).  Revenue bonds: Revenue bonds are tied to projected income streams, and have been used with long-term power purchase or chauffage agreements (Goldberger, 2002).

As institutional customers can get better interest rates, they can afford to invest in projects with payback times of up to 10-25 years, where commercial customers often look for payback with 1-3 years (Osborn, Goldman, Hopper, & Singer, 2002). Where commercial customers look to single-measure projects, like lighting or motor replacements, institutional customers more frequently pursue integrated projects that include not only lighting and motors but also control systems, chillers, boilers, and building envelope technologies (Taylor, personal communication, April 7, 2009) (See Figure 22).

19

NOTE: The time period was unspecified but is assumed to be 2001-2005.

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LBNL estimates that institutional customers achieved $1.3 billion in net economic benefits across 771 projects, while the private sector achieved only $320MM across 309 projects in the same time period (Goldman et al., 2003).

Figure 22

Source: Goldman et al. (2005)

Within the MUSH segment, school projects have the longest payback times and most complexity: according to the LBNL 2003 survey, the median simple payback for schools was 10 years and the majority of contracts were improvement projects within which energy savings were a small part. As energy savings are only a segment of the improvements pursued, they are often difficult to identify and count separately, making these projects risky. By way of comparison, municipality and hospital projects had payback times of 4 years (Goldman et al., 2003).

Players Suppliers of EE projects’ products and services come from both the energy and real estate sectors – with the latter being comprised of designers, engineers, contractors, consultants, and equipmentsuppliers. Product suppliers include manufacturers and marketers of HVAC and HVAC control systems, lighting and lighting fixtures, energy/power storage, back-up power, on-site heat and power (cogeneration) systems, on-site (distributed) generation technologies (such as micro-wind and solar PV), building automation and process-specific control systems, and more. Service providers include energy management companies, equipment marketers, utility DSM and DR program administrators, and engineering and IT services.

Comprising the 20.356 billion market tracked by Frost and Sullivan are ESCOs, equipment manufacturers and marketers, utilities, and one pure-play demand response company. The company applies a percent-of-revenue calculation to all of these groups to parse the value of energy efficiency services, which they estimate as $12.79 billion.

Of the 63 companies in the ESCO category, six are public, compared to four out of five equipment manufacturers & marketers, and six out of ten utilities. The five equipment manufacturers account for 54.5 percent of total revenues from demand-side energy efficiency services. In other words, ESCOs are mostly small private companies: average revenues are $170MM and average size is 161 employees, inclusive of the public firms.

The one pure-play DR firm commands 36.8 percent of the demand response market, with the bulk of the remainder of the market (58.1 percent) split across the ten utility companies.

Utilities command 72.2 percent of total revenues from supply-side services.

Average growth for ESCOs, equipment manufacturers and marketers, and utilities is between 16.4 and 18 percent, irrespective of company size or ownership. Growth is lowest for the one pure-play demand response company, at 8.5 percent.

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The picture this outlines is that utilities are immersed in a supply-side view of the world; they are active in activities which decrease immediate costs (e.g. price arbitrage and load management). Energy efficiency, with its long-term affect on loads and costs, is part of the utility consciousness, but outside its institutional bearings. As such, utilities may stand to benefit more from working with outsourcing partners (e.g. ESCOs), if not from establishing independently-run subsidiaries.

Frost and Sullivan point to slow consolidation in the energy management services market (Frost and Sullivan, 2008). The authors predict that the top ten firms in the space will control more than 50 percent of the market within five years (Frost and Sullivan, 2008). In particular, they expect smaller ESCOs to be acquired by equipment manufacturers and large ESCOs. Acquisition will be driven by new market entry, or rather, re-entry20, as the case may be (Frost and Sullivan, 2008).

With increasing consolidation and market power accruing to those players, utilities will have to establish a position, regardless of whether that is as partner or competitor, soon.

Market-Based Drivers Stand-alone drivers for private-sector demand for energy efficiency have been described in Section A. Described here are drivers for utility investment in energy efficiency, which can feed back to foster private sector demand for ESCO services as well as demand by utilities themselves.

The need to meet increasing demand for electricity is the largest driver of utility investment in EE. Commercial real estate accounts for 73 billion square feet today and is expected to grow to 111 billion square feet by 2030, in line with growth in GDP of 50 percent between 2007 and 2030 (author’s calculation based on DOE projections; DOE 2008).

Simultaneously, commercial electricity consumption is rising 1.4 percent per year (EIA, 2009).

Demand will need to be met by energy suppliers; however, utilities are facing increasing Figure 23 deregulation and more direct competition with independent Source: power producers (IPPs). Utility Dickerson, prices include costs for excess n.d. capacity, social programs, research and development, and historical costs, as well as the Figure 24 requirement of maintaining high equity capitalization rates (Kreith and West, 1997). IPPs are not beholden by the same regulations or legacy costs and can offer commercial customers significantly lower prices.

In the face of deregulation and high energy price volatility,

Source: Dickerson, n.d.

20

NOTE: Many utilities owned and operated ESCOs in the past but divested them in the last two decades. These players may seek acquisitions to re-enter the market.

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investments in new capacity may seem less attractive than those in energy efficiency. In fact, PG&E analyzed the effect of EE investment on its energy price hedging activities. The analysis showed that EE reduced demand which, in turn, reduced volatility (Dickerson, n.d.) (See Figure 23). Decreased volatility brought down utility costs, which it then could pass to its customers via lower rates (Dickerson, n.d.). Figure 24 exemplifies this: a 1,000MW EE investment yielded $200MM in benefits, $65MM of which derived from reduced hedging.

The economic rationale for utility investment in energy efficiency may either drive revenues for ESCOs or may spark direct competition with them by utilities. The first point can be accomplished by:  Utilities buying-down interest rates on ESCO project contracts so as to claim projects’ energy savings to regulators (Frost and Sullivan, 2008). Regardless of the motivation, this may enhance EE projects’ economics from customers’ points of view.  Utilities making forward capacity market (FCM) payments21 to ESCOs and, by diversifying ESCO revenues, enabling them to charge customers less for given projects.  Utilities outsourcing additional business processes, such as billing administration, due to heightened complexity in metering technologies and rate and usage that are pushing up utilities’ administrative costs (Frost and Sullivan, 2008). This is of particular interest as it could offer ESCOs an opportunity to provide the utilities with a service while eliminating a significant source of their own operating risk. There is, however, no particular reason to predict that utilities will outsource these processes to ESCOs rather than other outsourcing companies.

Non-Market Drivers The American Reinvestment and Recovery Act in February 2009, allocated $500 million for research, labor exchange, and job training for professional development in energy efficiency and renewable energy. This may enable bring down labor costs (via elimination of training costs) or increase consumer confidence and enable the industry to pursue additional sales.

Utility Regulations Changes in regulation over the past three decades have created an economic rationale for utility investment in energy efficiency. The main points are highlighted below, though it should be noted that these measures have not been implemented uniformly across the US.  Decoupling: Redefinition of the economic factors upon which utilities earn revenue. Rather than tie revenue to volume of energy sold, revenues can be attached to non-volumetric factors, such as the number of customers in the service area or projections of fixed cost trends and balancing accounts (NAPEE, 2006). Decoupling can thus eliminate throughput22 disincentives and push utilities to competitively evaluate EE. Over 32 states have decoupled utility rates from volume of energy sold (Frank, 2008).  Integrated resource planning and total resource costing: Comparative costing of capacity additions and demand curtailment.  Environmental legislation: The Waxman-Market proposed legislation on requires emissions reductions of 3 percent by 2012, 20 percent by 2020, 42 percent by 2030, and 83 percent by 2050, relative to a 2005 baseline (ASE, n.d.) (See Appendix A for list of EE-related measures in the bill, as compiled by the Alliance to Save Energy in March 2009).

21

NOTE: The New England Independent Service Operator (ISO) program launched a much-touted experimental program that “sells” forward capacity. Forward Capacity Markets (FCM) require utilities to procure enough resources to meet their regions’ future demand. In the FCM auction, the New England ISO auctions this obligation and makes FCM payments to the winner to implement the plan. In the New England case, payments range from $3.05/kW per month to $4.10 per kW per month.

22 NOTE: throughput refers to the incentive utilities have to sell more power, as the marginal returns are high. This is a widelyknown disincentive to energy efficiency on the part of utilities.

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 Renewable Energy Portfolio Standard: requirement for utilities to obtain stated percentages of sales or forecasted growth from renewable energy sources–via procurement of RE resources or renewable energy certificates. Energy efficiency is often a critical strategy for achieving the RPS targets: energy efficiency reduces overall energy consumption and slows growth of demand making the RPS targets easier or less costly to achieve.  Energy Efficiency Portfolio Standard: requirement for utilities to obtain stated percentages of sales or forecasted growth from energy efficiency measures–via DSM or DR spending or through purchase of energy efficiency certificates. Connecticut, Pennsylvania, and Nevada have implemented EEPS while California, Hawaii, New York, New Jersey, Oregon, Colorado, Washington, Illinois, Minnesota, Texas, Florida, Vermont, North Carolina and Virginia are in the process of doing so (Wood, 2008).  EE program modularity and flexibility

Major Market Locations According to the ACEEE, states with the most aggressive utility-sector energy efficiency programs and best performance are California, Massachusetts, Connecticut, Vermont, Wisconsin, New York, Oregon, Minnesota, New Jersey, Washington, Texas, Iowa, Rhode Island, and Nevada (ACEEE, 2009). Figure 25 shows the success these states have achieved with their utility-based programs. Electricity prices for commercial customers in these states ranged from $6.55 to $15.92 in 2007 (EIA, n.d.). The average price for commercial electricity of was $11.02, compared with a national average of $9.65 that year (EIA, n.d.).

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Source: Kushler, York, & Witte (2006).

Figure 25

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SUMMARY OF KEY POINTS Market Size: The buildings sector accounts for 62 percent of total investment in energy efficiency, according to Ehrhardt-Martinez and Laitner (Ehrhard-Martinez & Laitner, 2008). Non-residential building energy efficiency was a $51.3 billion in 2004 and demand has only grown (Ehrhard-Martinez & Laitner, 2008).

Customers: Energy consumption and floor space is highest for offices, retail, and education. At the same time, demonstrated demand for building energy efficiency services is highest among municipal governments, universities and colleges, schools, and hospitals (MUSH). Finally, the American Reinvestment and Recovery Act requires significant upgrades to federal facilities by 2014. Given that federal and MUSH facilities are generally large, have ageing infrastructure, and limited capital budgets for improvements, there will be growth in demand for energy performance contracting services among these groups, if not also commercial customers.  Energy management services were a $12.79 billion in 2008 with compound annual growth rate of 18.5%  Energy performance contracting services were a $3.6 billion in 2006 with annual growth of 22 percent per year.

Stakeholders: Utilities are being pushed, through a combination of market and regulatory forces, to invest in energy efficiency. They have a vested interest in increasing the viability, reliability, and costeffectiveness of energy efficiency as an energy resource. Consequently utilities are pushing consumer adoption with promotional efforts and outsourcing implementation to keep program costs low.  Government & utility energy efficiency spending was $3.74 in 2008 and is expected to grow significantly, in part because of the new Administration’s promise to overhauling the nation’s energy infrastructure.

Drivers: Drivers for investment in non-residential building energy efficiency are energy costs, environmental concerns, marketing, and compliance.  New regulation has just been issued (e.g. ARRA) and additional legislation is imminent (e.g.

Waxman-Markey): approximately $20 billion in government funding will be spent on energy efficiency.  Policies specifically target building energy efficiency via environmental caps, building energy codes, and required upgrades for Federal facilities.  Additional measures include tax breaks, rebates, public-private partnership financing schemes, and public education campaigns, which directly bring down the price premium commanded by energy efficient technologies.  These factors can create a leverage effect that spurs further investment in EE technologies and services between the present day and 2013. Key to this effect will be minimization of the perceived risk of energy efficiency projects and technologies: performance risk and cost are being addressed by measures mentioned above. Financing risk remains an issue.

The operative role capital markets can play in building energy efficiency projects is distributing financing risk.

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II. CHALLENGES  Market Barriers: EE is lower priority than other capital projects Life-cycle cost accounting is not widespread Usage affects savings, necessitating detailed contracts

 Financing Barriers: ESCOs lack credit ratings Projects lack collateral Customers must provide banks with recourse

Capital markets intermediaries can distribute financing risk by aggregating assets in off-balance sheet structures.

A. MARKET BARRIERS Impediments to Customer Demand Impediments for the growth of energy efficiency have been extensively documented and are only briefly outlined here. This primary concern of this section is to outline impediments to investment in viable projects – which, it should be noted, are most EE projects, according to many of the studies referenced in this report. Minimum criteria that define “viable” include:  Payback times: The median implicit discount rate used by customers is 34 percent for nonrefrigeration projects and 58 percent for refrigeration projects (Sanstad, Hanemann, & Auffhammer, n.d.). Projects’ ability to meet customers’ simple payback requirements are gono-go criteria. If project costs are low enough, customers will continue to consider them.  Cost: Certain projects seem viable from an outsider’s point of view but bear hidden costs.

Examples include reduced product performance, reliability, or quality, increased managerial or administrative costs, and opportunity costs of disrupted production or foregone (Schleich, 2007). When these considerations are discovered and factored into the equation, either the base cost or implicit discount rate is raised and the project becomes unviable.  Delicacy: Certain processes may be too delicate or critical for a firm to outsource, despite potential cost savings.

The remainder of this section concerns impediments to projects that have passed the above tests as to viability. Obstacles common across all customer classes and types include:  Bounded rationality: Constraints on time, attention, or ability to process information may lead potential customers to forego a viable project. This issue is exacerbated by any lack of information on historical and current energy use and technical understanding of energy efficiency technologies or engineering (Schleich, 2007).  Appraisal methodology: A related issue is that most firms do not yet use life-cycle costing consistently, and consequently base decisions on up-front costs. Energy efficient products are often higher priced than other commercially-available technologies, and are consequently considered uncompetitive. Life-cycle costing enables firms to evaluate the cost-savings potential of energy efficient technologies, such that derive from longer use-cycles and less frequent replacement, reduced maintenance requirements, or simplified disposal. Firms that

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use life-cycle costing place a much higher priority on energy efficiency projects (J. White, personal communication, April 9, 2009).  Variability of savings: Projects in which energy savings is highly influenced by usage may be discarded if performance risk is borne by the ESCO and not the consumer (Sorrell, 2002; J. White, personal communication, April 9, 2009).  Low contribution of energy prices to overall business costs: Energy, while comprising 30 percent of a building’s operating costs, accounts for only 4-5 percent of office building user costs (BOMA 2000b; Jones et al., 2002). The low contribution of energy prices to overall business costs make energy efficiency investments lower priority than other projects.

Renters The dilemma facing renters is that of investing in projects for which benefits accrue to others. This is known as the split-incentive problem. Many projects involve capital expenditures in assets that have little-to-no physical transferability or stand-alone value. In other words, if tenants moved, the EE equipment (e.g. insulation, windows, lighting fixtures, or CHP systems) could not be moved to the new location. In addition, the asset value of the equipment would accrue to building owners.

Secondly, because renters move, energy efficiency projects harbor revenue risk: energy savings, to the degree necessary to recoup investment, may not be realized before tenants move out and lose access to the equipment.

Owner-Occupants Like renters, owner-occupants are uncertain about the length of time they will stay in their properties, or are fairly certain they will move out before the investment has paid off. HVAC upgrades and other typical EE measures often do little to increase property values and so remain low priority.

Non-Occupant Owners Energy efficiency is lower priority than rental revenue. Furthermore, energy prices have a much lower variance than commercial rental rates. Consequently, rental rates infuse greater variability into firm cash flows than energy prices and command far greater attention than energy (BOMA 2000a; Jones et al., 2002). Property developers’ first priority is to execute projects at the lowest possible cost, while achieving the highest possible number of pre-development lease commitments (Jones et al., 2002).  In the words of Jones, Bjornstad, and Greer, “the commercial building design that produces the greatest energy savings tends to be quite different from the design that yields the greatest cost saving” (Jones et al., 2002). Many new technologies detract from rentable square footage (due to their size), increase maintenance costs, or add to first costs (Jones et al., 2002). Interactions between technologies and processes add further to first costs – e.g. glazed windows that reduce street noise but increase internal building temperatures, necessitating investment in shading, or bigger ventilation or air conditioning systems (Jones et al., 2002).  This year in particular, the real estate industry will prioritize rental revenue and cost minimization. For office REITs, rental rates are down, particularly in Manhattan: available space in midtown Manhattan in late 2008 was up 2 percentage points from 2007 and downtown availability was up 100 basis points (McMillan, Pandya, & Shepard, 2008). These vacancy numbers are significantly lower than in many other parts of the country (McMillan et al., 2008)23.  Commercial developers manage to optimize risk-return across a portfolio of properties.

Projects concerning energy performance in single units are lower priority than portfolio management (Jones et al., 2002).

23

NOTE: On the positive side, for hospital REITs, however, the outlook is rosier: revenue growth is highly correlated with reimbursement rates from government programs and any advancement towards universal coverage will boost revenues.

Moreover, nursing home revenues are projected to increase in 2009 (McMillan et al., 2008).

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Figure 26 summarizes obstacles to building energy efficiency investments by various commercial actors.

Figure 26

Source: NAPEE (2006).

Impediments to Service Provider Supply Market barriers include long lead times, high transaction costs, complex technical information requirements that clients may not have at the ready, as well as complex organizational and property ownership structures that preclude quick or efficient decision-making on the part of customers.  Due diligence costs: When projects are being developed, significant energy savings measures may be discovered. However, due to the complexity of ownership structures and organizational structures, decision-makers may not be easy to locate and these measures may be abandoned (J. Ravis, personal communication, February 17, 2009).  Government lead times: According to the LBNL 2004 survey of ESCOs, the most ubiquitous and important barrier to sales in the government sector was the project development time 12 months at minimum, compared with only 6-9 months for MUSH customers (Goldman et al., 2004). During this period, the ESCO usually bears all costs.

All of these factors lead to long pre-development times. The specificity of individual projects is exacerbated by the typical size of EE projects: together small project size and long lead times yield high transaction costs.

B. FINANCING BARRIERS The first task is assessment of the business plan – including the contractor, construction schedule, environmental factors, performance & persistence of energy savings, service terms, guarantees, and warranties, and financing terms; however, to assess the plan, all parties need technical knowledge.

Figure 27 illustrates the factors and steps involved in calculating energy usage baselines and savings while Figure 28 illustrates the assessments each party makes of the same contract.

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Calculating Energy Use and Savings

Figure 27

Source: REEEP (2005)

Figure 28 Source: The Energy Group & Econergy (n.d.)

Contracting parties must be aware of potential environmental liabilities: much equipment contains hazardous materials, like mercury in fluorescent lamps. Installation and disposal may pose issues (Econergy, n.d.).

Commercial Customer Risks & Costs

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Customer financing options are illustrated in Figure 29. In all cases other than operating leases, customers bear financing risk. They must be in good enough financial standing that financiers and/or ESCO partners are confident that they will meet payment obligations for the length of the contract. Lenders may require up to a 40% for downpayment for EE project loans (Econergy, n.d.) and/or will Source: The Energy Group and look for “Termination for Econergy, n.d.

Figure 29 Convenience” clauses and debt service offsets (Flynn, 2009).

Performance contracting enables customers to shift some risk to ESCOs; however, most ESCOs lack the balance sheets to appease financiers (Gilligan et al., 2005) and customers are required to offer banks recourse. This is, in part, due to the fact that the equipment ESCOs purchase is installed at the customer site, and is near-impossible for ESCOs to collateralize. Though ESCOs own the installed EE equipment until projects are paid off, and neither the equipment, nor the debt used to finance acquisition and installation, are recorded on customers’ balance sheets, financing is based on the customers’ creditworthiness (Boyle et al., 2008; Econergy, n.d.). Customers bear exposure to potential downgrading of their credit ratings during the project – a significant concern for most (White, personal communication, April 9, 2009; A. Brix and M. Naud, personal communication, November 19, 2008; D. Thurm, personal communication, March 5, 2009).

Government Customer Risks & Costs Figure 30 shows an outline of financing options for governmental customers, and the particular hurdles associated with each.

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Figure 30

Source: Zobler & Hatcher (2003)

As can be seen, performance contracting offers the most flexibility of all non-cash options; however, it poses the same issues for institutional customers as commercial customers. If congressional appropriations are available, Bostonia Partners recommends leveraging them to attract private capital (See Figure 31). According to Bostonia Partners, energy performance contracting for government projects has channeled more than $2.5 billion in the past ten years via public-private partnerships (Flynn, 2008).

ESCO Risks & Costs Construction is the highest cost factor in a typical project (See Source: Flynn (2008) Table 3). Unexpected increases Figure 31 in construction costs or delays in customer sign-offs can bankrupt the bearer of credit risk during the construction phase.

ESCOs are responsible for construction risk and construction costs, as well as system design and longterm performance. ESCOs also carry transaction costs and any expenses related to project dissolution (Econergy, n.d.; Govindarajalu et al., 2008). Ways to mitigate risk during project development and construction are through payment requirements performance bonds and ESCO indemnification projects fails to go through (Flynn, 2009).

Persistence of savings can be affected the number of hours customers use given equipment or processes. Weather and internal equipment or appliance choices also affect energy savings. Together, these factors comprise energy efficiency projects’ “capacity factors” (Govindarajalu et al., 2008) and constitute a significant component of energy savings calculations. Other factors that affect the

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persistence of energy savings include facility managers’ skill at operating the new equipment (Govindarajalu et al., 2008), equipment breakdowns and replacements24, variability and quality of energy supplies, and changes in energy prices. Product-specific issues can simply be addressed through warranties (Econergy, n.d.) but other issues must be detailed in project-specific contracts.

As with any outsourcing project, contract specificity takes time to develop but also limits clients’ and service providers’ ability to respond to unforeseen events (Sorrell). Regardless, detailed contracts are critical.

The major financing issue ESCOs face, other than a lack of credit rating and subsequent dependence on customers’ credit standings, is mismatch between project timelines and financing terms. Many banks fund EE projects via working capital loans rather than term loans (Gilligan et al., 2005; The Energy Group and Econergy, n.d.). Working capital loans typically require repayment within one year, yet projects typically last multiple years.

SUMMARY OF KEY POINTS Market Barriers: Customers place low priorities on energy savings projects relative to other capital projects due to the low cost share of energy in building usage costs and the higher cash flow impact of other factors. Partly, this is because accounting methods like life-cycle cost accounting are not widely used and consequently, much of the benefits of energy efficiency projects are left out of calculations.

Partly, this is because energy savings projects are complex: a multitude of factors, including equipment and appliance choices made at future points and occupant usage patterns, affect savings.

This necessitates development of detailed project plans and contracts, pushing up costs.

Financing Barriers: Most EE projects lack collateral and many ESCOs lack credit ratings and balance sheet strength to get bank loans. Consequently, customers must provide banks with recourse.

Capital markets can be instrumental in aggregating assets in offbalance sheet structures to distribute financing risk.

24

NOTE: Though not associated with an ESCO contract, many utilities have found that rebate programs drive consumers to install CFLs at that moment; come time for replacement, however, consumers have no allegiance or obligation to again install energy efficient technologies. Oddly, this often a less-than-conscious decision and consumers may not even realize that their choices will negate on-going energy savings. As a result, persistence is a risk not just for ESCOs but also consumers themselves.

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III. SOLUTIONS  Distributing financing risk: Capital markets profile risks and capitalize EE benefits in project and property prices via price discovery Through sales, they allocate risk to lenders or investors with appropriate risk preferences

 Off-balance sheet financing: Limits project sponsor’s exposure  Aggregation Programmatic approaches for aggregation are being tried New technologies may help

Capital markets will be critical to establishing financing partnerships that minimize risk and distribute return

A. Distributing Financing Risk Price Discovery The first function that capital markets execute is risk profiling. Financiers identify all the risks posed by the asset, project, or business, and compare them to similar investment/financing opportunities. In the case of the EE projects, risk is defined first and foremost by contractor reputation and technical skill, the technical plan to create and maintain energy savings, construction details, and the customer’s ability to make payments. At root, these risks are encapsulated in stipulated debt-service requirements – or in other words, project interest rates. Energy efficiency investments have been called low-risk (Jones et al., 2002), while at the same time commanding high implicit rates of return by customers and explicit interest rates by external financiers. Financing via public capital markets could help clarify this issue.

Price discovery occurs through profiling risk, estimating return, and making a sale. Energy efficiency projects are often not valued at a different price than traditional renovations (though, in the new construction market, green buildings do sometimes command premiums (Mattson-Teig, 2008). As shown in the previous section, customers evaluate projects on the basis of implied rate of return.

Financiers, on the other hand, create risk profiles for properties for which projects have been undertaken and estimate likely returns. Identified prices capitalize EE investments into property prices.

Through this process, risks are identified and priced, as are the values associated with the energy savings that are based on capital assets that will remain fixed at the location in question.

The typical problem for energy efficiency projects and project participants is that risk assessment and price discovery end up pricing energy efficient properties the same as like-properties that are not energy-efficient. This is a factor of investor or buyer demand – upon which calculations of return are based – for energy efficiency “services” being low. The solution is in public education as to the value of EE – firstly in terms of cost savings, secondly, environmental impact, and thirdly, marketing. Due in no small part to ENERGY STAR and President Obama’s prioritization of weatherization and EE in general, public education is happening, now more than ever. Capital markets can assess and indicate whether this publicity has materially affected demand or appeal for energy efficient properties, via price discovery.

Allocation of Risk

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The next function capital markets carry out is allocating risk. This is done by channeling capital into projects from sources other than the building owners – including from bank savings deposits. In other words, risks to building owners are decreased when no owners longer have to finance projects directly with cash or shares. When distributing capital, capital markets define liabilities – via collateral, recourse, and shareholder/debt-holder priority ranking (i.e. senior or junior bond-holder), and effectively sell risk to those investors or lenders for whom it has appeal.

The usual problem in this regard in financing energy efficiency projects is unfavorable priority ranking for project lenders, investors, or bondholders. Energy efficiency projects often involve installation or construction of equipment in a building; the building owner has a mortgage. The mortgage-holder is first in line for repayment of his/her loan, should bankruptcy occur. The second factor in this scenario is that much of the EE equipment or materials have little-to-no stand-alone value; consequently, the lender has no recourse via the physical property as that is again the purview of the mortgage-lender.

Capital markets players are in a better position to find investors with the appropriate appetite for these types of risk.

The major tools capital markets players use to distribute risk are 1) prioritization, 2) diversification, and 3) structuring25. Other tools include guarantees and letters of credit, both of which speak to lenders’ exposure to financing risk. Operating risk (and to the extent that operational practices create financing risk) can be minimized through purchase agreements and letters of intent. For energy efficiency, these are the contracts that guarantee payments by customers or partners (e.g. utilities, via DSM or Forward Capacity Market (FCM) payments). DSM and FCM payments can ensure that at least part of a given project’s revenue comes from stable sources. This regular revenue can be used as “collateral” for a bank loan, or as receivables a company sells to private investors via securitization.

This will be discussed further below.) If EE projects are combined with renewable energy generation of large enough scale, power purchase agreements can also be leveraged as collateral.

An easier way to minimize the perception of financing risk is using public partners. To promote nongovernmental EE projects, public agencies can issue bonds (briefly mentioned in Section II), set up revolving loan funds, offer master municipal leases, and more (Goldberger, 2002). Loan guarantees are the first and simplest option for government (See Figures 32 and 33): the DOE has had an EE loan program in place for a number of years, though it previously failed to dispense even one guarantee.

The ARRA, Energy Bill, and Energy Independence and Security Act (EISA) of 2007 have pushed other agencies to offer guarantees, however. Many states have EE loan guarantee programs and the EISA requires the Small Business Administration (SBA) to developing on-bill financing programs with utilities, for which it can be expected primarily to provide loan guarantees (Ryan, 2008).

25

NOTE: Structuring, in this context, refers to the formation of corporate entities that “own” assets and provide lender/buyers and/or sellers loss protection.

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Loan GOVERNMENT FUND

Repayment

Loan COMMERCIAL BANK

Repayment via energy savings

ESCO / CUSTOMER

Fee Fee

Repayment Guarantee Shareholder and/or Financial Guarantee

Fee GUARANTEE FUND

Figure 32 Source: Selman (2002)

GOVERNMENT FUND

TECHNICAL CONSULTANT

Certifies ESCO Funds

Certifies Project

Repayment

BANK

Loan

ESCO

Repayment

Contingent Payment

ESCROW ACCOUNT

Investment

CUSTOMER (END USER)

Payments

Guarantee Fee

Deposit

GUARANTEE FUND

Security interest in payment stream to ESCO

Figure 33 Source: Selman (2002)

It may also be possible to insure energy savings, such that is offered by Zurich American Insurance (Goldberger, 2002).

B. Off-balance Sheet Structures

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Off-balance sheet structures are ones in which investments are counted as operational expenses or allocated to independent entities, whether or not they exist outside a “paper� universe. The first option, operating leases, work, and are used, for stand-alone EE appliances or equipment (e.g. washer/dryer or stove). For the most part, however, they have the same issues as described above: much EE equipment has little-to-no stand-alone value once installed. Operating leases are typically shorter term than the life of the asset; as such, the owner/installer will incur losses.

The second way to achieve off-balance sheet financing in EE projects is using performance contracts: here, assets and financing remain off-balance sheet for customers, but, due to the structure of the contract, customers still bear exposure to financing risk. As discussed previously, customers are eager to find ways to limit their exposure.

C. Aggregation A major impediment to capital availability for EE projects has been their small size: typical project finance is unavailable for projects that cost less than $10MM (J. Ravis, personal communication, February 17, 2009) - which most energy efficiency projects do. The way around this issue is aggregation.

Many ESCOs have pursued programmatic approaches to aggregation for processes or equipment that have fairly stable characteristics across buildings, customer classes, or end-user types. The issue has remained the specificity of each deal, which foils programmatic efforts.

Developments within the EE industry itself may foster aggregation. Meters, controls, and sensing technologies are advancing: during the contract development stage, procurement for parts and services, measurement and verification, energy prices and variability, and other parameters can be input into a model that simulates outcomes, taking into account real meter-based usage and (Kromer & Kumar, 2006). There is an open source platform called BACNet that aims to facilitate developments of these types of technologies; furthermore, many of the top building automation systems and providers of IT systems for facilities managers are investing money in this direction, and web-based systems have already made their way into the market. The web-based systems enable customers to access real-time data on energy usage and manage facilities and equipment remotely (Kromer & Kumar, 2006).

With or without the above technology, the many contractual specifics, such as ownership of assets, seniority or lack thereof, sub-metering, time in the property, etc., lead some experts to believe that project-specific analysis and pooling will be more effective (Eckel, 2008). It is theoretically possible to pair projects with government customers (large projects, stable credit rating, and stable payments) with higher risk and higher return projects, very different in nature (e.g. restaurant retrofit or hospitality-sector project), so as to bring down the cost of financing for the smaller projects and incrementally bump up the returns on the larger one. Precedents exist: intellectual property (Brown, Rudnick Berlack, Israels LLP, 2005), small business loans (Board of Governors of the Federal Reserve System, 2007), and many other assets have been matched, according to their very specific risk-return characteristics, and combined in a larger financing vehicle.

D. Partnering Alongside technological developments are financial innovations, many of which can be sponsored by partnerships. Utilities, REITS or property developers, or governments may be extremely viable partners.

Utilities Utilities are in important positions as they own relationships with customers, metering technologies that verify actual energy use, and have strong balance sheets. One potentially growing motivation for

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the utility to involve itself in financing and aggregating EE projects is the ability to earn carbon credits for compliance purposes (Goldberger, 2002). Even without environmental legislation as a motivator, utilities can carve out a position of significant importance in EE, leveraging the advantages mentioned above. Moreover, the fact of their being regulated entities could currently play to their advantage: governmental oversight may inspire investor confidence in more innovative financing structures which would otherwise be considered risky or opaque.

Bill Collection In On-bill Financing (OBF) utilities make loans to EE project customers and collect repayment via utility bills. The loans can come from the utilities themselves or from third party financiers. The particular advantage of OBF is that it ties loan repayment to the property in which the EE measure was executed, rather than to the customer. This minimizes the mismatch between long payback times and short occupancy cycles; moreover, because payment is tied to properties rather than customers, OBF enables current occupants to move without taking EE investment liabilities with them.

Other benefits of OBF are that the programs simplify loan application processes, can be approved based on customers’ utility bill payment histories, can utilize actual energy-use data from meters, and can be cash flow neutral (Ryan, 2008). As most people pay their utility bills on time, OBF can bring down default rates. In California, OBF programs have been designed by most of the state’s utilities and generally offer non-residential customers 0 percent financing for approximately five years via OBF (Ryan, 2008; Skinner, n.d.).

The main issue with OBF is that third party financiers remain subordinate to the utilities as utilities collect customer payments and subtract their costs before passing the balance to financers.

One way around this issue is through Tariffed Installation Programs (TIPs). In TIPs, utilities employ their billing systems to collect payments on behalf of project financiers. These funds are collected via a separate tariff and are managed separate from customer bill payments. Like OBF, this mechanism ties loan repayment to the property in which the EE measure was executed, rather than to the customer.

Typically, the tariff amount is less than expected energy savings and shorter-term than the EE project (Fuller, 2008).

Direct Financing Utilities can directly finance individual projects, work with ESCOs, or work with financiers to deliver financing, but also bill customers and collect payments. Being highly regulated, utilities have fairly stable cash flows which can eliminate risk premiums attached to ESCOs or their customers. Utilities can also simply provide fee-for-services to ESCOs, regarding measurement and verification, and/or payment collection. Were utilities to launch ESCO subsidiaries or affiliates, they could directly employ their own balance sheets to finance projects, eliminating customer exposure. In fact, in one documented case, a utility launched an ESCO subsidiary and shared metering and other usage data with it (decreasing the ESCO’s operating risk). The utility then borrowed at its own rate (9 percent) and lent to the subsidiary at a higher rate (15 percent), pocketing the spread (Gilligan et al., 2005). By leveraging its customer network, real-time usage data, and financing strength utilities can build a powerful position in the EE services industry.

Securitization: Another option is to create securitization pools using utility partners (See Figure 33).

The precedent comes from stranded cost securitization - one example is securitization of a demandside management program in Puget Sound in 1995 (Forrester, 2008). The advantage securitization has is that it keeps the financing burden off the balance sheets of the administrator (in this case, the utility).

Ratings agencies rated stranded cost securitizations in their highest rating categories, according to the J. P. Forrester in the Public Utilities Fortnightly (Forrester, 2008).

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Figure 33

Source: de T’Serclaes (2007)

The value utilities add as administrators of pooled securitization vehicles relative to other parties is in bringing in government oversight. Today’s credit crisis derives from mortgage-backed securities markets which are securitized, off-balance sheet, financial products. According to many financiers and economists, the “outsourcing of the funding side of an originator's balance sheet … undermines … incentives to monitor the quality of the loans [a given entity] originates” (Caprio, Jr. et al., 2008). In other words, off-balance sheet financing reduces the need for fiscal discipline. Using utilities to sponsor securitization pools necessitates government oversight: utilities would have to present their cases for securitizations in regulatory hearings – and consequently establish transparency as to cost and clarity. This ensures oversight both of the financing mechanisms and energy savings’ E,M&V processes and can keep abuses in check. Such requirements could bolster investor confidence.

The other benefit of utility-sponsored securitization is that energy savings receivables can be collected via utility bills – whether through a tariff or volumetric charge (Forrester, 2008), as discussed above.

Real Estate Investment Trust of Property Developer

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Final options would be to incorporate renewable energy generation, and thereby create power purchase agreements to obtain lower-interest loans. MMA Renewable Ventures is one company that does this: the typical project size is between $2-10MM with terms from 7-15 years (Hinkle, 2008). Both measures can provide customers with a partial hedge against utility price fluctuations (Hinkle, 2008).

Though somewhat complex, Figure X provides a schematic of such a structure.

Other examples from around the globe that could be effective in the US include property developers financing ESCOs: in the case mentioned by Gilligan, Lin, and Zhao, the property developer lent money to ESCOs for projects, leveraging its physical assets to borrow capital from banks. This eliminated both the cost of negotiation with financiers and of long-term monitoring and verification for the ESCO, both of which were borne by the property developer, at a considerably lower rate (Gilligan et al., 2005).

SUMMARY OF KEY POINTS Identifying, Pricing, and Distributing Risk: Capital markets profile risks and capitalize EE benefits in project and property prices via price discovery. Through sales, they allocate risk to lenders or investors with appropriate risk preferences. In particular, financiers can limit ESCO or customer exposure via off-balance sheet financing.

Aggregating EE projects into off-balance sheet vehicles: Programmatic approaches for aggregation are being tried. New technologies may help. Partnerships will be effective – particularly public-private partnerships.

Capital markets will be critical to establishing financing partnerships that minimize risk and distribute return

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CONCLUSION Energy use in buildings accounts for 35 percent of total primary energy consumption in the U.S., 42 percent of total energy costs, and 35 percent of all U.S. carbon emissions (Kreith & West, 1997). LBNL goes on to say that at a price of 2.7 ¢/kWh, cumulative savings from the buildings sector alone can equal up to $170 billion in 2030 (Biermayer et al., 2008). The total investment required would be $440 billion, invested between 2010 and 2030. The simple payback on would be 2 1/2 years with a benefitcost ratio of 3.5 (Brown et al., 2008).

The questions this research sough to answer were:  Is this investment materializing?  If not, what is impeding it?  Can new regulation, environmental finance products, or alternate structures (e.g. public private partnerships) eliminate these obstacles and open the floodgates to this investment?

Firstly, demand for non-residential building energy efficiency products and projects is growing. The buildings sector accounts for 62 percent of total investment in energy efficiency, according to Ehrhardt-Martinez and Laitner (Ehrhard-Martinez & Laitner, 2008). Non-residential building energy efficiency was a $51.3 billion in 2004 and demand has only grown (Ehrhard-Martinez & Laitner, 2008).

Customers for EE projects include owners and occupants in commercial offices and retail buildings, Federal buildings, and MUSH buildings. Energy consumption and floor space is highest for offices, retail, and education yet demonstrated demand for building energy efficiency services is highest among municipal governments, universities and colleges, schools, and hospitals. However, the American Reinvestment and Recovery Act mandates upgrades of 45 and 25 percent to new and existing federal facilities by 2014, respectively. The Alliance to Save Energy expects EE projects to take place in 75 percent of federal building stock.

Given that federal and MUSH facilities are generally large, have ageing infrastructure, and limited capital budgets for improvements, there will be growth in demand for energy performance contracting services among these groups, if not also commercial customers.  Energy management services were a $12.79 billion in 2008 with compound annual growth rate of 18.5%  Energy performance contracting services were a $3.6 billion in 2006 with annual growth of 22 percent per year.

Key stakeholders in the drive towards demand-curtailment are utilities. Utilities are being driven, through a combination of market and regulatory forces, to invest in energy efficiency. They have a vested interest in increasing the viability, reliability, and cost-effectiveness of energy efficiency as an energy resource. Consequently utilities are pushing consumer adoption with promotional efforts and outsourcing implementation to keep program costs low.  Government & utility energy efficiency spending was $3.74 in 2008 and is expected to grow significantly, in part because of the new Administration’s promise to overhauling the nation’s energy infrastructure.

Drivers for investment in non-residential building energy efficiency are energy costs, environmental concerns, marketing, and compliance. Approximately $20 billion in government funding will be spent on energy efficiency via the TARP, ARRA, and additional measures.

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 Policies specifically target building energy efficiency via environmental caps, building energy codes, and required upgrades for Federal facilities.  Additional measures include tax breaks, rebates, public-private partnership financing schemes, and public education campaigns, which directly bring down the price premium commanded by energy efficient technologies.  These factors can create a leverage effect that spurs further investment in EE technologies and services between the present day and 2013. Key to this effect will be minimization of the perceived risk of energy efficiency projects and technologies: performance risk and cost are being addressed by measures mentioned above. Financing risk remains an issue.

Due to these factors, investment is materializing.

However, impediments to full achievement of the US building stock’s energy savings potential are numerous. First and foremost, energy is a low priority relative to other capital projects, due to its low cost share and the due to the greater cash flow impacts of other potential projects. Partly, this is the case because accounting methods like life-cycle cost accounting are not widely used. Partly, this is because energy savings projects are complex: a multitude of factors, including equipment and appliance choices made at future points and occupant usage patterns, affect savings. This latter factor necessitates development of detailed project plans and contracts, pushing up costs.

When projects are sought, they lack collateral and the implementing service providers often lack credit ratings and strong enough balance sheets to independently get project loans. Consequently, customers must provide banks with recourse. Customers are actively in search of ways to minimize their exposure.

Capital markets can provide a solution to the problem of financing risk. In particular, there are a variety of off-balance sheet structures that could be used to finance a project. However, the complexity of these structures bears cost, which the typically sized ESCO projects cannot support. As such, intermediaries must aggregate projects before most off-balance sheet financing structures can be viable.

The interest of the new White House Administration and the plethora of rules, policies, and programs it has put towards both promoting energy efficiency and overhaul of the energy and power infrastructure of the US create new partnership opportunities. Government, but more importantly, utilities, can serve the critical function of project aggregation. With this accomplished, and subsidized by tax-payers and/or rate-payers, private capital can effectively identify, price, and parse risk, thereby driving investment into building energy efficiency. The role of capital markets in financing nonresidential building energy efficiency is consequently to allocate and distribute financing risk – in particular by organizing financing partnerships with public and private entities that bring with them a stabilizing force that can bolster investor and lender confidence.

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Appendix A: Waxman-Markey Bill26 Alliance to Save Energy Summary of Energy Efficiency Measures Subtitle A—Building Energy Efficiency Programs Sec. 201: Greater Energy Efficiency in Building Codes: This section sets targets for the national model building energy codes and standards to achieve overall energy savings of at least 30 percent starting with the next edition of the model codes and 50 percent with the editions of each code that comes after January 1, 2016, as compared to the 2006 IECC for homes and ASHRAE Standard 90.1-2004 for commercial buildings. After 2016, the U.S. Department of Energy (DOE) is to set these targets at least once every 3 years at the maximum level of energy efficiency that is technologically feasible and lifecycle cost effective. DOE must also assist IECC and ASHRAE, determine whether their model codes meet the targets, and establish modified model codes if the IECC and ASHRAE codes do not achieve the efficiency goals.

Sec. 202: Building Retrofit Program: This section directs EPA and DOE to establish standards for a national energy and environmental building retrofit policy for the commercial and residential sectors and to develop the Retrofit for Energy and Environmental Performance (REEP) program to implement these policies. This program would promote cost-effective energy efficiency and other environmental improvements in existing buildings through low-cost audits, technical help, training, incentive financing and other mechanisms. This section specifies the amounts and forms of support that can be provided under this program and requires that REEP funding not exceed 50% of the total cost of retrofit in each building. Funding for this program will flow through the State Energy Offices (or their equivalents, as determined by the governor) based on the formula used for allocating State Energy Program (SEP) funding for the first year and a combination of the SEP formula and state-wide performance on energy savings achieved through REEP. In addition, this section also directs EPA and DOE to make appropriate use of existing programs such as the EPA Energy Star for Buildings in creating and operating REEP. Sec. 204: Building Energy Performance Labeling Program: This section directs the EPA to create a model building energy performance labeling program. EPA is to conduct demonstration projects for different building types to assess the sufficiency of the current Commercial Buildings Energy Consumption Survey and other data, inform the development of measurement protocols for other building types and identify any areas of needed data improvement. EPA and DOE are to coordinate these demonstration projects with those undertaken for the Zero-Net-Energy Commercial Buildings Initiative adopted in Energy Independence and Security Act of 2007 (EISA). EPA, in consultation with DOE, is to work with the State Energy Offices (or other state entities) on implementation of the labeling program.

Funding under this section is available to states that have adopted assessment and labeling requirements under this program and have an implementation plan within 6 months of establishment of the program. One third of the funds are to be allocated equally among these states, the remaining funds will be allocated in proportion to the number of eligible buildings in each state.

Subtitle B—Lighting and Appliance Energy Efficiency Programs

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NOTE: This section has been excerpted from the Alliance to Save Energy’s website

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Sec. 211: Lighting Efficiency Standards: This section establishes efficiency standards for outdoor luminaires, increasing from 50 lumens per watt by 2011 to 80 lumens per watt by 2015, and for outdoor high light output lamps to 45 lumens per watt by 2012. It also requires that portable light fixtures manufactured on or after 2012 be made for use with Energy-Star certified CFLs or LEDs - not incandescent lamps of any type. Additionally, GU-24 base lamps shall not be incandescent, and DOE must come out with new standards for incandescent reflector lamps within 1 year of the bill’s enactment.

Sec. 212: Other Appliance Efficiency Standards: This section establishes energy efficiency standards for water dispensers, hot food holding cabinets, and portable electric spas, gas- and oil-fired commercial warm air furnaces.

Sec. 213: Appliance Efficiency Determinations and Procedures: This section prescribes a water efficiency standard for showerheads, faucets, water closets, and urinals, and an energy efficiency standard and optional water efficiency standard for clothes washers and dishwashers. It also requires manufacturers of products with efficiency standards to submit reports to DOE regarding their compliance, economic impact of a standard, and sales. An estimated total annual carbon output on appliance “Energyguide” labels is also required.

Sec. 214: Best-in-Class Appliances Deployment Program: This section establishes a Best-in-Class Appliances Deployment Program, administered by DOE, that rewards retailers with 1) bonuses for increasing the sales of high efficiency equipment, electronics, and appliances and 2) bounties for the replacement and recycling of old, inefficient appliances. It also awards bonuses to manufacturers for developing “superefficient” best-in-class products.

Subtitle D– Utilities Energy Efficiency Sec. 231: Energy Efficiency Resource Standard for Retail Electricity and Natural Gas Distributors: The draft establishes a federal standard requiring electricity and natural gas utilities to help their customers implement measures to reduce their electric and natural gas use each year from 2012 to 2020. The reduction targets are based on the average energy use in the two years prior to the enactment of the bill and increase incrementally to reach savings of 15% of electricity and 10% of natural gas by 2020 achieved through these programs since the bill’s enactment. Below is a table of energy efficiency targets for calendar years 2012 through 2020. Eligible activities to achieve energy savings include: utility efficiency programs, building energy codes, appliance standards, combined heat and power, distribution system savings and related efficiency measures.Utilities can also buy savings from customers and from third parties through bilateral contacts, though no open market trading will be allowed.

DOE is to set measurement and verification and other rules, and states that choose to do so will administer the standard for their utilities, with oversight from DOE. For energy savings to count, the utility must demonstrate significant utility involvement, beyond business-as-usual measures, and thirdparty verification.

Subtitle F—Improvements in Energy Savings Performance Contracting Sec. 251: Energy Savings Performance Contracts: This section amends requirements for Energy Saving Performance Contracting of federal buildings by requiring a competitive application process, allowing for the purchase of renewable energy from utilities, and allowing for the installation of renewable or efficient energy systems on site, including electric, thermal, cogeneration and heat recovery programs.

The competitive application process requires the head of a Federal agency to review the qualifications,

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request references, and conduct discussions with two or more contractors. The selected contractor(s) must then conduct a site-survey and submit a firmed-fixed price proposal to implement specific energy conservation measures prior to the issuance of the delivery order.

Subtitle E —Smart Grid Advancement Sec. 142: Incorporation of Smart Grid Capability in Energy Star Program: This section expands the Energy Star labeling to include an indicator of products’ smart grid-capability, based on studies to assess functionality, integration with smart grid features, and use by consumers.

Sec. 143: Smart Grid Peak Reduction Goals: A program to set out peak reduction goals for load-serving entities of greater than 250MW capacity is proposed, to be developed by those entities and the states.

It does not set out specific reductions or mitigation that would be expected, merely that such entities would develop their own targets in conjunction with FERC. FERC, DOE, and NERC would collaborate to develop measurement and verification rules. Peak load reduction plans could be managed in a number of ways, including efficiency programs, demand response, distributed generation, and stored energy.

It would have to be tested to ensure effectiveness.

Sec. 144 Reauthorization of Energy Efficiency Public Information Program to Include Smart Grid Information The Energy Efficiency Public Information program, originally created by EPAct 2005, but for which funds were never appropriated, would be expanded to include information about smart grid and the program would be extended to 2020. The program, in which the DOE conducts activities to raise public awareness about efficiency, would be expanded to include smart grid. Advertising and media awareness campaigns would be used to inform the public about smart grid and efficiency. Such campaigns would be conducted in collaboration with the private sector, state governments, and local governments. The program would also be extended to 2020.

Sec. 145: Inclusion of Smart-Grid Features in Appliance Rebate Program: Smart grid-capable appliances would be eligible to receive rebates under this federal appliance rebate program, which was created in EPAct 2005, and is operated through state offices. It would also clarify that states are only required to match the administrative costs of the program rather than the entire costs. The program would fund states to issue rebates to consumers purchasing energy efficient or smart grid-capable appliances.

Subtitle F —Transmission Planning Sec. 151 Transmission Planning: This section would make furthering the integration of renewable and other zero-carbon energy sources and taking into account all demand- and supply-side options a policy of federal electric grid planning. The demand- and supply-side technologies that would be supported would include energy efficiency, distributed generation, smart grid, demand response, storage, voltage regulation, advanced conductor technologies, underground transmission, and conventional transmission capacity and corridors. FERC would develop principles for planning accordingly. It would also coordinate and collaborate with regional entities to manage conflict resolution and enable multiregional meetings to plan transmission.

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Appendix B: Building Energy Efficiency27 A. Equipment & Materials Overview The complexity of the interactions between system components and design elements that produce energy efficiency is a big factor in the high cost and low uptake of energy efficiency projects. Technical specifications are briefly described and include R-values for walls and ceilings, U-values for windows and glazing, AFUE values for gas furnaces, SEER values for air conditioners, EFR values for gas water heaters, and thermal mass for buildings overall.

HVAC Heating Heating can be accomplished by heating the air within a space (e.g. supply air systems, perimeter fin-tube "radiators"), or by heating the occupants directly by radiation (e.g. floor/ceiling/wall radiation or radiant panels).

Boilers: Boilers consist of a vessel or tank where heat produced through fuel combustion generates hot water or steam. The steam is used for space heating, domestic water heating, food preparation, and industrial processes. For efficiency, operators must attend to boiler staging, water chemistry, pumping and boiler controls, boiler and pipe insulation, fuel-air mixtures, burn-to-load ratio, and stack temperatures.

Electric Resistance Heating: Electric resistance heating converts almost 100% of the energy in the electricity - itself produced from oil, gas, or coal generators that convert only about 30% of fuel energy into electricity - into heat. Electric heat is often more expensive than heat produced on-site with combustion appliances. Electric resistance heat can be provided by electric baseboard heaters, electric wall heaters, electric radiant heat, electric space heaters, electric furnaces, or electric thermal storage systems.

High-Efficiency Gas-Fired Rooftop Units: An evaporator, condenser, and compressor in combined unit usually placed on a roof. Air supply and return ducts come from indoors through the building's exterior wall or roof to connect with the packaged air conditioner, usually located outdoors. A way to boost energy efficiency is by increasing combustion efficiencies, currently between 78-82% on average.

Another method is by modulating burner and combustion air flows.

Heat Pumps: Heat pumps move (or pump) heat from one place to another: like a standard air conditioner, a heat pump takes heat from inside a building and dumps it outside. The difference is that a heat pump can be reversed to take heat from a heat source outside and pump it inside, where air conditioners cannot. Heat pumps use electricity to operate pumps that alternately evaporate and condense a refrigerant fluid to move that heat. In the heating mode, heat pumps are far more

27

NOTE: Much of what follows in this section has been excerpted from the websites of Wikipedia, the Whole Building Design Guide, Building Green, and the DOE’s Energy Efficiency and Renewable Energy.

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"efficient" at converting electricity into usable heat because the electricity is used to move heat, not to generate it. The two primary types of heat pumps are: Air-source Heat Pumps: The most common type of heat pump—an air-source heat pump— uses outside air as the heat source during the heating season and the heat sink during the air conditioning season.

Ground-source Heat Pumps: Geothermal, or ground source, heat pumps employ a system of coiled pipes several meters beneath the earth’s surface to “pre-cool” or “pre-heat” incoming air. They work in a similar way as above, except that the heat source/sink is the ground source (the soil, groundwater etc.), or a body of surface water, such as a lake. For simplicity, watersource heat pumps are often lumped with ground-source heat pumps.

Components of a Ground-Source Heat Pump System

Using a heat pump within an air conditioning system (called a heat pump air condition system), in combination with renewable energy, can produce upwards of 40% to 60% energy savings. The quoted price of a heat pump central AC system is 10% more than a traditional central AC system. However, operating costs can be reduced by 40% using the heat pump air condition system.

Radiant Floor Heat: Radiant air floors (where air is the heat-carrying medium), electric radiant floors, and hot water (hydronic) radiant floors either make use of the large thermal mass of a concrete slab floor or lightweight concrete over a wooden subfloor or "sandwich" radiant floor tubing between two layers of plywood to heat a space.

Ventilation Ventilating maintains an adequate mixture of gases in the air building occupants breath (e.g. O2 vs.

CO2), controls odors, and removes contaminants from occupied spaces. Ventilation means that all air exhausted from a building must be replaced by outside air. This can be accomplished passively through natural means (e.g. open windows), or actively through mechanical distribution systems

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powered by fans. Regardless, outside air must be brought to a certain temperature by makeup air units used throughout the building. Negative building pressure can be a problem during winter heating season and could lead to a number of other problems such as difficulty in opening doors and equipment operation.

Frequency conversion air conditioner (FCAC): Variable frequency controllers are the most effective controllers available today. To create an effective system, controllers need to match loads with individual needs within rooms in a multi-zone system. There are two types of FCACs: direct current and alternative current. Direct current FCACs are more efficient than alternative current ones by 10%-30%, and decrease noise by 5-10 decibels. There are two types of FCACs, variable air volume (VAV) and variable refrigerant volume (VRV).

Variable air volume (VAV): Careful selection of equipment and energy-saving system design can increase efficiency of VAV systems. The simplest VAV system incorporates one supply duct that, when in cooling mode, distributes approximately 55° Fahrenheit air. Because the air temperature, in this simplest of VAV systems, is constant, the air flow rate must vary to meet the rising and falling heat gains or losses within the thermal zone being served. Air flow rate can be controlled by blower's flow rate in single zone systems or a single VAV air handler varied flow rates to each zone in a multi-zone systems. In other words, as temperatures across rooms vary, diffusers ducted from a VAV box to individual rooms accordingly modulate the amount of conditioned air delivered to each room. This eliminates over-heating or over-cooling, which occurs in constant air volume (CAV) systems; moreover, VAV diffusers require lower fan energy, thereby enhancing energy savings.

Variable refrigerant volume (VRV): Variable refrigerant volume systems use indoor temperature sensors to control electronic expansion valves on the refrigerant pipes in indoor units. These sensors and valves control compressors on outdoor units and, according to changes in refrigerant pressure, vary the volume of refrigerant in a system. In this way, the air conditioning system can adjust itself automatically to meet the changing needs within a building. At present, there are two types of variable refrigerant volume air conditioning system: variable frequency multi-zone and the variable volume multi-zone.

Other ventilating technologies which can afford energy efficiency gains include low-pressure-drop ducting design, low-face-velocity air handlers, fan sizing and variable-frequency-drive (VFD) fan motors, and displacement ventilation systems.

Air Conditioning: Air-conditioning refers to the “sensible” and “latent” cooling of air. “Sensible cooling” involves the control of air temperature while “latent cooling” involves the control of air humidity. Air conditioning is accomplished by transferring heat between spaces, such as with a water loop heat pump system, or by rejecting it to the outside air via air-cooled or water-cooled equipment. Heat can also be rejected to the ground using geothermal exchange. As cool air is uncomfortable when too humid, air is dehumidified by condensing latent moisture on a cold surface and removing the moisture through absorption (desiccant dehumidification). In dry climates, humidification may be required for comfort instead of dehumidification. Evaporative humidification also cools the air. In dry climates it is possible to use radiant cooling systems, similar to the radiant

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heating systems mentioned above. AC technologies that can increase energy efficiency include absorption cooling, high-efficiency gas-fired rooftop units (see heating section, above), chillers, desiccant dehumidification, and evaporative cooling.

Lighting  Technical Specifications: Luminaire Efficacy/Efficiency Rating (LER): Luminaires are characterized by illuminance (the amount of light that reaches a surface), measured in footcandles (lumens/square foot) or lux (lumens/square meter), and Luminaire Efficacy/Efficiency Rating (LER) which is the light output (lumens) per watt of electricity use (lm/w). The LER is a measurement created by a voluntary efficiency program of the National Lighting Collaborative.

Ballast Efficacy Factor (BEF): the ratio of ballast factor (BF) to power (watts). The BF is the ratio of light output of a lamp with a given ballast to that of the same lamp with a reference ballast. High BFs can reduce lamp life and hasten lumen deficiency due to high currents while low BFs can reduce lamp life due to low currents.

System Efficacy: the ratio of the light output to the power, measured in lumens per watt (lm/w), for a particular lamp ballast system.

Light Sources The below are types of energy efficient lights. Metrics mentioned include the Color Rendering Index (CRI), which is a scale from 0-100 that measures the accuracy of a light source’s rendering of color.

Incandescent lights have a CRI of 97.

Tubular fluorescents: T8 lamps, one inch in diameter, and T5 lamps, fiveeighths of an inch in diameter, are fluorescent lights that replace older T12 lamps with improved color rendering and efficacy achieved using rare-earth phosphors. The correlated color temperature (CCT) and CRI of the lamps is controlled by varying the selection of phosphors. The CRI of T8 and T5 lamps can be specified from 70 to as high as the mid-90’s. T8s require electronic ballasts specifically designed to operate lamps at a lower current than T12 lamps. T5 lamps have a different base, and are shorter than T8s, so new luminaires are needed. T8 lamps used with electronic ballasts will typically use about 32% less energy than the same luminaires with T12 and magnetic ballasts. T8 lamps have the same 20,000hour + rated lamp life as standard T12 lamps. Frequent on/off cycles can reduce fluorescent lamp life.

Using programmed start or dimming ballasts can increase lamp life to as much as 30,000 hours. T8 lamps also exhibit a slower decline in light output over time, relative to T12 lamps. At 40% of their lifespan, standard T12 lamps only produce about 80 percent of their initial rated light output, compared to about 90 percent for T8 lamps.

Compact Fluorescent Lamps: fluorescent lamps comprised of a gas-filled tube and magnetic or electronic ballast (see below) from 10-25 watts. The ballast can be integrated or non-integrated; while the latter has higher efficiency and longevity, it is up to 10x more expensive. CFLs have an average efficacy of 50-75 lm/w for 27-40 watts. CFLs last up to 10 times longer than incandescent lamps (10,000 hours, under optimal conditions), use about one-fourth the energy, and produce 90% less heat. They require special ballasts for dimming with compatible control devices. CFLs come in four color temperatures: 2,500K (soft white), 3,000K, 4,000K and 5,000K (daylight), though all have a relatively low CRI of around 85. Rare-earth trichromatic phosphor is used by all large EEL suppliers and most

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medium-sized enterprises, as it increases lamp life span by 30% and so qualifies fluorescent lights as energy-efficient in global market. Without this input, CFLs are neither energy-efficient nor of competitive quality for international markets.

High Intensity Discharge Lamps: lamps that employ an electrical arc, struck against tungsten electrodes, inside a glass tube filled with gas and metals. Types of HID lamps include mercury vapor (CRI range 15-55), metal halide (CRI range 65-80), and high-pressure sodium (CRI range 22-75).

Standard high-pressure sodium lamps have the highest efficacy of HID lamps, but produce a yellowish light. HIDs, like fluorescent lamps, require ballasts. HIDs are most relevant for use in gymnasiums, warehouses, roadways, parking lots, and pathways, but are gaining traction in retail and residential markets. Some dimming systems for high-intensity discharge lamps also require special dimming ballasts. However, these lamps do not dim easily, requiring special ballasts to be dimmed up to 50%. Additionally, they take about 15 minutes to start after they have been off for some time.

Induction Lamps: lamps that have no electrodes and last 100,000 hours on average, have illumination capacity of ~12,000 lumens, low maintenance requirements and function well in hot or cold environments.

Low Pressure Sodium Lamps: employing a similar mechanism to fluorescent lamps, low-pressure sodium lamps can produce up to 180 lumens/watt - and consequently have the highest efficacy of all commercially available lighting sources. Because they are long, however, light distribution is less controllable than with other types of EELs. Additionally, low-pressure sodium lamps take a few minutes to warm-up. A bigger drawback than wait time is the CRI of 0 - i.e. absence of color rendition.

They are most relevant for outdoor, roadway, parking lot, and pathway lighting. They also require ballasts.

Solid-State Lighting (LEDs and OLEDs): Semi-conductor diodes that produce light after application of an electric current. Warm white LEDs have an efficacy of 50 lm/w, while cool white LEDs can achieve efficacies up to 100 lm/w. LEDs are used alone and in clusters. LED lights have lives of up to 100,000 hours though their efficiency level is, at present, only optimal for low-light uses such as in exit signs.

Ballasts Consume, transform, and control electrical power to start and operate electric-discharge lamps like fluorescent, HID, and low-pressure sodium lamps.

Magnetic ballasts: least expensive and least efficient ballasts. Magnetic ballasts operate at 60 hertz.

Hybrid Ballasts: higher cost than magnetic ballasts, with equivalent operating frequency, and improved energy efficiency.

Electronic Ballasts: The most expensive and most efficient ballasts. Electronic ballasts operate at 20-60 kilohertz - an increased efficacy of 10-15%. Electronic ballasts reduce energy consumption by between 8%-20% over magnetic ballasts.

Luminaires Fixtures, comprised of reflectors, diffusers and polarizing panels, that must be designed specifically for different types of lights in order to achieve efficient light-production. Luminaires are characterized by illuminance (the amount of light that reaches a surface), measured in footcandles (lumens/square foot) or lux (lumens/square meter), and Luminaire Efficacy/Efficiency Rating (LER) which is the light output (lumens) per watt of electricity use (lm/w). The LER is a measurement created by a voluntary efficiency program of the National Lighting Collaborative.

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Lighting Controls Manual dimmers: slider switches, button-operated preset scene controls, and remote-controls.

Photosensors: illuminance-detection using photocells, which are light-responding silicon chips that convert incident radiant energy into electrical current, to automatically adjust light output.

Photosensors can dim lights and switch them on and off.

Occupancy sensors: motion-detection via passive infrared (PIR) sensors (sensors that react to the movement of heat-emitting bodies), ultrasonic sensors (sensors that emit an inaudible sound pattern, read the reflections, and react to changes in the sound patterns), and dual-technology occupancy sensors that combine the other two technologies.

Clock switches or timers: internal mechanical or digital clocks and timers that can be used alone or in conjunction with photosensors.

Centralized controls: building automation systems that can automatically turn on and off, or dim the lights.

Integrated Lighting / Lighting Design Lighting solutions change electric power usage and thermal loads, reducing cooling requirements in a building. Window placement can enhance these reductions by letting more sunlight into a building, though solar heat gain from the windows could then eliminate reduced cooling requirements. As such, lighting should be considered during the design stage of a building, though retrofit energy savings projects can and should still be undertaken.

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Windows ď ś Technical Specifications: Windows lose heat in four ways: conduction, convection, radiation and air leakage. Conduction is the movement of heat through a solid material; convection is the cycling of heat and cold in a current (i.e. creating the feeling of a draft); radiation is the movement of long-wave heat energy from a warmer place to cooler one; and air leakage is self-explanatory. Ways to increase the efficiency of windows are with glazing, coatings (e.g. low-e), glazing spacers, gas fills, insulating frames and sashes, and weather-stripping. Insulated glass (commonly referred to as Insulated Glazing/ Glass Units (IGU)) is the energy efficient segment of glass-based fenestration products. An IGU consists of two or more sheets of glass spaced apart and hermetically sealed to form a single glazed unit with an air space between each sheet.

No one metric reflects the efficiency of all window components: instead, a heat flow coefficient, solar heat gain coefficient, and visible transmission metric, among other things, are all used in tandem. Heat flow is measured by U-values which combine the total heat flow of window frames, dividers, centers, and glazing edges; in other words, U-values measure the total heat flow via conduction, convection, radiation, and air leakage of all parts of a window over its lifetime. U-values are produced with specialized computer software in accredited testing labs.

The solar heat gain coefficient (SHGC) is the ratio of solar heat gain coming through the window to the incident solar energy striking the window. Visible Transmittance (VT) is the fraction of visible light transmitted by a window. Other measures and rankings report air leakage and annual heating (Fenestration Heating Rating - FHR) and cooling (Fenestration Cooling Rating - FCR), the latter two of which are calculated using U-values, solar heat gain coefficients, and air leakage together. At present, window labels only include U-vales, not SHGC, air leakage rankings, FHRs, or FCRs. Glazing Additional layers of glaze trap additional layers of air, increasing insulation. For example, two layers with a Âź inch air space between them changes the center-of-glass insulating value from R-0.9 to R1.75.

Coating Tint lowers the transmittance of solar heat, but also blocks visible light. While it is used in commercial buildings, it is uncommon in residential buildings.

Low-emissivity (Low-e) is a coating technology that has changed the window game. Low-e uses a thin, transparent coating of silver or tin oxide on glass or on a suspended plastic film. This enables short-wavelength sunlight pass through while blocking longerwavelength heat radiation (such as that emitted from surfaces inside the building). If the low-e coating is on the outside of the inner layer of glass, the glass warms up. The window, in essence, reflects radiation back into the room.

However, if the low-e coating is on the inside of the outer layer of glass, the glass warms up and reflects heat radiation both inward and outward. The radiant heat striking the low-e coating on the

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outer layer of glass is reflected back toward the inner layer of glass. The two types of low-e coatings are soft-coat and hard-coat.

Soft-coat involves thin layers of silver and anti-reflective coatings applied to a glass surface by vacuum deposition and sealed with an IG unit. The thickness and number coatings affect emissivity (standard soft-coat low-e glass has an emissivity of about 0.15, while the newer lowe has an emissivity of 0.04) and total solar transmissivity.

Hard-coat (a.k.a. pyrolytic) low-e glass uses a thin layer of tin oxide incorporated into the surface of the glass during manufacture, increasing the durability of the coating, and enabling the coating to be integrated into single- glazed windows or storm panels. Hard-coat low-e glass has higher emissivity (about 0.2 and center-ofglass insulating value in IG units with ½ inch air spaces of R-2.86) and higher total solar transmissivity.

Additional coatings, used in commercial buildings, block or transmit light of various wavelengths so as to retain visible light transmittance and eliminate solar heat gain.

Glazing spacers Aluminum channels with desiccant beads inside are effective for holding apart panes of glass and providing a substrate for sealants. Yet, aluminum is highly conductive. Reducing the conductivity of the glazing perimeter decreases incidence of condensation. Condensation is the most common reason for window call-backs. Wood, thin-walled Csection steel, thermally broken steel, vinyl, fiberglass, steel-reinforced butyl rubber, polyurethane foam, and silicone foam are alternative types of glazing spacers.

Air space Window manufacturers increase the distance between layers of glass, employing the air in that space as an insulator. Too much distance, however, forms convection loops in the air space, exacerbating a window’s convective heat loss. Optimal air space is 13-25 mm.

Gas fill: Replacement of air with low-conductivity gas, improves window performance. Carbon dioxide was used first, then CFC gas, and today, argon – a plentiful, inexpensive, and inert gas. Superior gases are krypton and xenon, though neither is used with the frequency of argon.

Sash and frame materials High thermal conductivity of the sash and frame causes heat loss. As such, frames and sashes are a place for IP: Anderson Windows created a PVC-wood composite that increases the strength and substantially lowers the thermal expansion coefficient of the frame relative to PVC alone (see Vinyl, below, for more on thermal expansion). GE Plastics developed its own material - an acrylonitrile butadiene styrene (ABS) plastic called CYCOLAC® that is highly weather resistant, equivalent in thermal expansion to vinyl, and can come in a greater range of colors. Foamed PVC (vinyl), hollow vinyl, wood, and fiberglass are alternatives to the formerly commonplace non-thermally-broken aluminum or steel sashes and frames.

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Wood: High prices and maintenance and durability concerns have led manufacturers away from wood.

Engineered wood: Finger-jointed, laminated-veneer, and laminated-strand wood are all used in components of window frames.

Aluminum and steel: High recycled content and recyclability has led manufacturers to these materials; however, high thermal conductivity necessitates thermal breaks, usually produced with petrochemical-based resins, like epoxy or vinyl, and has turned the market towards alternatives.

Vinyl: polyvinyl chloride (PVC) surpassed aluminum in the 90’s due to its low cost and maintenance requirements. Aside from the environmental issues associated with PVC manufacture, vinyl has a high coefficient of thermal expansion. This causes it to expand and contract as temperatures change and can lead to loosened seals and cracked corners and flanges, necessitating more frequent window replacement.

Foamed PVC: Tiny air bubbles in lower-density vinyl enhance foamed PVC frames’ R-values, but also increases the PVC/window amount by so much as to make it potentially too toxic.

Fiberglass: As it is durable, strong, and thermally stable (thermal expansion coefficient far lower than vinyl or aluminum), polyester resin and glass fiber mix is gaining popularity.

Weather-stripping systems Hinged windows can employ compression-based weather-stripping gaskets, increasing air-tightness relative to sliding-sash windows. Still, air-tightness varies considerably from product to product.

Super windows More and more manufacturers are creating combinations of the above components for superior performance.

Smart Windows The future for windows, however, is in "smart windows", or chromogenic windows, that respond dynamically to environmental such as temperature (thermotropics), light (photochromic), and electrical input (electrochromic) factors. Chromogenic glazing can reduce both heating and cooling energy wastage. Despite this, "smart window" technologies are presently uncompetitive, due to extremely high prices.

In curtain walls, glazes, coatings, and gas-fills are all also extremely important.

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Walls - Insulation  Technical Specifications: Energy efficiency is correlated to thermal efficiency, or, in other words, the rate at which heat is gained or lost through a building’s skin. Thermal efficiency is expressed as an R-value, or in other words, a value that illustrates a material’s resistance to heat flow. The R-value depends on trapped air within all types of insulation. If the trapped air is replaced with water or is squeezed out by crushing, the R-value is reduced. Moisture resistance and compressive strength are consequently related to thermal efficiency. R-values are inversely related to Uvalues, the latter of which rate fenestration products (windows, doors, etc.): higher R-values mean higher performance insulation, while lower U-values mean higher performance windows.

Materials usually have a range of R-values, as the rate at which they lose or gain heat is affected any factor that influences the degree of difference between indoor and outdoor temperatures. Thermal efficiency is proportional to the difference between these two temperatures. Geography, climate, location, type of building (commercial, residential, public, etc.), activity within building, amount of equipment used inside, humidity, etc., all affect thermal efficiency.

In addition to R-values, material considerations include environmental impact: some materials, like XPS and polysio, are produced with hydro chlorofluorocarbons (HCFCs) or chlorofluorocarbons (CFCs) which deplete the ozone layer, while others (e.g. cellulose or mineral wool) are made with recycled materials.

Foamed plastics Foamed plastics are polymers used in construction, packaging, and consumer products, like furniture cushions and automobiles. Foamed plastics are stronger, lighter weight, less resin-intensive, and cheaper, over the product’s lifetime, than non-foamed alternatives. The polymers most used in the building industry as thermal insulators are: Expanded polystyrenes (EPS) are polystyrenes whose foam beads are molded and pressed together. It is also known as MEPS or beadboard. Low-density EPS is relatively inexpensive, moisture-resistant, and possible to use underground. High-density EPS is moisture-resistant and used only in exterior foundation walls in locations where the soil is relatively dry. EPS uses either, or both, recycled materials (e.g. post-consumer plastic) and CFCs as blowing agents. An alternative blowing agent to CFCs, HCFCs, and HFCs - all of which are industrial greenhouse gases and two of which (CFCs and HCFCs) are ozone-depleting - is pentane.

Extruded polystyrenes (XPS), also known as blueboard, have a smooth, cut-cell surface that blocks airinfiltration. It is stronger than EPS. High-density XPS is used for foundation slabs, concrete floors, roofs, and other load bearing applications. However, XPS is typically produced with HCFC or HFC blowing agents.

Rigid polyisocyanurates, also known as polyiso, have a higher R-value than either polystyrene or polyurethane. The material is made, in part, from recycled plastic, such as from PET beverage containers. It has a gas-filled closed-cell foam structure that is denser and more rigid than polystyrene panels - though it is also more expensive. Relative to polyurethane, polyisocyanurates is more stable at high temperatures, less flammable, and equally prone to damage from prolonged exposure to water.

Spray polyurethanes: (white or yellow) are produced by mixing isocyanate and polyether in the

Page 65 of 80

presence of catalyst and blowing agent. The material contains many tiny, closed cells, making it relatively waterproof. Still, prolonged exposure to water is detrimental. Like EPS, if conditions are relatively dry, polyurethanes can be used underground.

Mineral Wool Mineral wool is an inorganic and non-metallic material used for both thermal and acoustic insulation.

Mineral wool includes rock wool, which is an inorganic material made from volcanic basalt rock and limestone; slag wool, made from the industrial waste slag from iron ore blast furnaces; and fiberglass (or glass mineral wool), made from silica. Mineral wool has low thermal conductivity, tolerance to high temperatures, such as from 550°C to 850°C, water repellence, and high sound-absorption. It is also non-corrosive and inert. Mineral wool can be cut and shaped and as such is sold in batt-, blanket-, board-, and sheet-form, with or without membranes. As such, it is used in walls, roofs, and floors, and around water cylinders and pipes. Other uses include air condition ducting, fire protection in partitioning and ceilings, and as insulation for industrial, domestic appliance, and transportation equipment, as well as in petrochemical installations and pipes. The major drawback of mineral wool is that it can cause physical irritation, resulting in rashes and the like.

Cellulose Cellulose is made from old newspapers and cotton. Natural fiber is obtained from renewable or nondepletable resources, and can be recycled. However, this material is the least used of those listed above: improvements in the thermal performance of plastics has kept cellulose from gaining market share.

Vacuum insulation Thin panels with R-values as high as 50 / inch; like double-glazed glass, the panels lose their airtightness over time.

Phenolic or phenol-formaldehyde Higher strength, less flammable foam whose open-celled structure gives it lower insulating capacity, high water absorption, and high water vapor permeability. The material degrades over time and releases some formaldehyde.

Lightweight Wood Fiber Board Perlite Natural fiber Insulations treated with low toxicity fire and insect retardants Structural insulating panels (SIPs) also known as stressed-skin walls Cork

Page 66 of 80

B. Documented Transactions: 2003-2008

US Investment in Energy Efficient Building Equipment & Materials 2003-2008 (US$ 313.5 MM)

24%

Wall Windows HVAC Lighting BAS

15% 53%

3% 5%

Building Energy Efficiency Equipment Deals: 2003-2008 Date 6/29/05 9/1/03 6/8/05 9/26/05 10/27/03 10/30/06 11/20/06 4/25/07 8/9/07 10/1/07 1/25/08 2/13/08 2/20/08 5/3/04 7/18/06 5/1/07 11/15/07 6/25/08 7/17/07

Name iWatt Inc Valere Power Crossbow Technology Inc Sensicast Systems Inc DryKor Holdings Inc Orion Energy Systems Intematix Corporation Rubicon Technology Solatube International Inc Ciralight LumenZ Lumenergi Albeo Technologies Starfire Systems Inc Glacier Bay Inc GigaCrete Inc Serious Materials Aspen Aerogels Inc SAGE Electrochromics Inc

Segment BAS BAS BAS BAS HVAC Lighting Lighting Lighting Lighting Lighting Lighting Lighting Lighting Wall Wall Wall Wall Wall Windows

Technology Inductors / Converters Management Sensors Sensors Air Conditioning & De-Humidifying Phosphors for LED, CFL, and CCFL LED Daylighting Daylighting LED Ballasts LED Coating Vacuum Insulation EPS Drywall Nanotechnology Electrochromic

Demand-Side Energy Efficiency Deals: 2003-2008

Amount ($ MM) 31.000 6.000 22.000 16.000 8.000 5.000 16.500 16.000 1.700 3.000 3.000 1.500 0.800 8.000 5.000 52.000 102.000 16.000 313.500

Investment Type VC VC VC VC VC VC VC PE VC VC VC VC VC VC VC VC VC VC VC

Stage Series C Series C Series C Series B Series C Series C Series C Asset / Capacity investment Debt / Leasing Seed / Angel Seed / Angel Series A Series A Series A Series A Series A Pre-IPO round Pre-IPO round

Source: New Energy Finance, retrieved July 2008.

Page 67 of 80

Primary sector

Organisation

Efficiency: Demand Side

Itron Inc

Efficiency: Demand Side

MicroPlanet Technology Corp (formerly HF Capital Corp)

Efficiency: Demand Side

Stockmarkets

Country name

NASDAQ Global Select Market (ITRI) TSX Venture Exchange (MP)

United States

Odyne Corporation

OTC Bulletin Board (ODYC)

United States

Efficiency: Demand Side

SatCon Technology Corp

NASDAQ Global Market (formerly NASDAQ-NM) (SATC)

United States

Efficiency: Demand Side

Orion Energy Systems

NASDAQ Global Market (formerly NASDAQ-NM) (OESX)

Efficiency: Demand Side

United States

Date announced/ completed

Abstract

Post money value ($)

New equity raised ($)

6-May-08 Itron, US-based smart grid technology provider, plans to raise over USD 300m in a secondary offering on the NASDAQ Global Select Market.

22-Apr-08 MicroPlanet Technology Corp, US-based maker of energy efficient electrical products, plans to raise CAD 8m (USD 7.8m) in a private placement.

Total offering size ($)

Deal status

Transaction type

300 m

Announced/filed

Secondary

7.8 m

Announced/filed

OTC Secondary/PIPE

27-Mar-08 Odyne, US-based developer of plug-in electric hybrid vehicles, has raised USD 7m in gross proceeds through a PIPE. 1-Jan-08 SatCon, a Boston-based electrical power conversion and control devices developer, received USD 25m from institutional investors through a private placement.

7m

7m

Completed

OTC Secondary/PIPE

25 m

25 m

Completed

Private Investment in Public Equity (PIPE)

United States

20-Dec-07 Orion Energy Systems, US-based designer and 330 m manufacturer of energy efficient lighting systems and controls, has completed its USD 100m IPO on the Nasdaq stock market.

74 m

100 m

Completed

IPO

Catalytic Solutions AIM (London) Inc (CSI) (CTS)

United States

9.5 m

9.5 m

Completed

Secondary

Efficiency: Demand Side

Comverge Inc

NASDAQ Global Market (formerly NASDAQ-NM) (COMV)

United States

20-Dec-07 Catalytic Solutions, US-based technology developer and manufacturer, raised USD 9.5m to fund the acquisition of Engine Control Systems.

14-Dec-07 Comverge, the US-based demand response provider, 594 m raised USD 24.3m in net proceeds after closing its previously postponed secondary offering on the NASDAQ Global Market.

44.1 m

150.8 m

Completed

Secondary

Efficiency: Demand Side

Rubicon Technology

NASDAQ Global Market (formerly NASDAQ-NM) (RBCN)

United States

15-Nov-07 Rubicon Technology, a maker of sapphire substrates for LEDs and integrated circuits, has floated on the NASDAQ. The Initial offering of 6.7m shares at $14 per share will raise $93.8m for the company.

93.8 m

93.8 m

Completed

IPO

Efficiency: Demand Side

ZAP

OTC Bulletin Board (ZAAP)

United States

5m

5m

Completed

OTC Secondary/PIPE

Efficiency: Demand Side

Odyne Corporation

OTC Bulletin Board (ODYC)

United States

12-Nov-07 ZAP, the US-based advanced transportation technologies company, has raised USD 5m through the sale of new shares to Al-Yousuf Group, the Dubai based vehicle distributer.

29-Oct-07 Odyne, the US-based hybrid electric vehicle systems developer, has received USD 3.2m in a private placementin the form of 10% senior secured convertible notes and warrants from investor David Gelbaum.

3.2 m

3.2 m

Completed

OTC Secondary/PIPE

Efficiency: Demand Side

Lime Energy (formerly Electric City Corporation)

OTC Bulletin Board (LMEG)

United States

5m

5m

Completed

OTC Convertible

Efficiency: Demand Side

Vectrix Corporation

AIM (London) (VRX)

United States

73.6 m

73.6 m

Completed

IPO

Efficiency: Demand Side

Universal Display NASDAQ Global Corp.

Market (formerly NASDAQ-NM) (PANL)

40.6 m

40.6 m

Completed

Secondary

United States

6-Jun-07 Lime Energy raises a total of $5m issuing convertible notes.

24-May-07 Vectrix, an electric scooter company with major product 265 m MAXI Scooter, raised USD 66.2m through an IPO on AIM, to ramp up sales and marketing of its MAXI Scooter, further develop its dealer network, accelerate R&D and finance future products tooling.

22-May-07 Universal Display Corporation raises USD 40.6m with a secondary offering. Universal Display develops and licenses OLED technology.

Page 68 of 80

Primary sector

Efficiency: Demand Side

Organisation

Stockmarkets

Country name

Date announced/ completed

Abstract

Post money value ($)

New equity raised ($)

Total offering size ($)

Deal status

Transaction type

Linear Technology NASDAQ Global Corp Select Market (LLTC) Comverge Inc NASDAQ Global Market (formerly NASDAQ-NM) (COMV)

United States

24-Apr-07 US integrated circuit manufacturer completed proposed private placement of USD 1.7bn of convertible note.

1700 m

1700 m

Completed

Convertible

United States

18-Apr-07 Comverge completed on 18 April 2007 its USD 124m IPO 332.5 m on NASDAQ and started trading under the ticker 'COMV'.

110 m

124 m

Completed

IPO

Efficiency: Demand Side

Lime Energy (formerly Electric City Corporation)

OTC Bulletin Board (LMEG)

United States

30-Mar-07 Lime Energy raises $3m in share offering.

3m

3m

Completed

OTC Secondary/PIPE

Efficiency: Demand Side

Itron Inc

NASDAQ Global Select Market (ITRI)

United States

1-Mar-07 NEX constituent and US energy management software provider Itron sold 4.1m common shares to ten institutional investors and raised USD 235m.

235 m

235 m

Completed

Private Investment in Public Equity (PIPE)

Efficiency: Demand Side

Baldor Electric Company

New York Stock United States Exchange (NYSE) (BEZ)

850 m

850 m

Completed

Convertible

Efficiency: Demand Side

Nexxus Lighting, Inc.

NASDAQ-CM (formerly SCM) (NEXS)

31-Jan-07 Baldor Electric Company, which markets, designs, and manufactures industrial electric motors, drives and generators, closed the USD 350m common stock offering and USD 550m 8.625% senior unsecured notes issue due 15 Feb 2017.

7-Dec-06 Super Vision International Inc. raised $9.0m in a private placement of stock. Super Vision International was renamed Nexxus Lighting Inc in 2007.

8.4 m

9m

Completed

Private Investment in Public Equity (PIPE)

Efficiency: Demand Side

Catalytic Solutions AIM (London) Inc (CSI) (CTS)

United States

2m

2m

Completed

Private Investment in Public Equity (PIPE)

Efficiency: Demand Side

Catalytic Solutions AIM (London) Inc (CSI) (CTS)

United States

30.2 m

30.2 m

Completed

IPO

Efficiency: Demand Side

Power Integrations NASDAQ Global Inc Market (formerly NASDAQ-NM) (POWI)

United States

22-Nov-06 12,870,000 shares were offered at GBP 1.23 (USD 2.33) 150 m raising proceeds of GBP 15.8m (USD 30.2m) that will be used in relation to the acquisition of Applied Utility Systems.

30-Oct-06 Pinksheets-listed US circuits supplier, Power Integrations, resumes trading on the NASDAQ on 30 October under the ticker symbol POWI.

Completed

Share registration

Efficiency: Demand Side

Odyne Corporation

OTC Bulletin Board (ODYC)

United States

3.1 m

3.1 m

Completed

OTC Reverse IPO

Efficiency: Demand Side

Lime Energy (formerly Electric City Corporation)

OTC Bulletin Board (ELCY)

United States

29.4 m

Postponed/cancell OTC ed Secondary/PIPE

Efficiency: Demand Side

Itron Inc

NASDAQ Global Select Market (ITRI)

United States

345 m

Completed

Convertible

Efficiency: Demand Side

Power Integrations NASDAQ Global Inc Market (formerly NASDAQ-NM) (POWI)

United States

18-Oct-06 Hybrid engine maker Odyne Corporation went public in a reverse merger with Roseland, N.J.-based shell company Technology Integration Group.

4-Aug-06 Electric City decided to delay a proposed rights offering to holders of the Company's common stock to raise USD 29.4m after Labor Day in order to ensure stockholders returning from summer holidays have the opportunity to carefully evaluate the offering.

4-Aug-06 Itron raised approximately USD 345m for acquisition or investment in business products or technologies that are complementary to its own, and general corporate purposes as well.

2-Aug-06 Power Integrations was delisted from NASDAQ because the company did not meet a deadline to become current in its regulatory filings.

Completed

Delisting

Efficiency: Demand Side

United States

6-Dec-06 Catalytic Solutions raised USD 2.0m from 7 undisclosed accredited investors.

345 m

Page 69 of 80

Primary sector

Organisation

Stockmarkets

Country name

Date announced/ completed

Abstract

Efficiency: Demand Side

Lime Energy (formerly Electric City Corporation)

OTC Bulletin Board (ELCY)

United States

5-Jul-06 Electric City raised gross proceeds of USD 17,875,000 through the sale of shares of common stock in a private placement to fund the acquisition of Parke P.A.N.D.A.

Efficiency: Demand Side

Microfield Group Inc

OTC Bulletin Board (MICG)

United States

Efficiency: Demand Side

Lime Energy (formerly Electric City Corporation)

OTC Bulletin Board (ELCY)

United States

3-Jul-06 Microfield Group raised USD 15m through a private placement for general working capital and further developement of the EnergyConnect business acquired by Microfield in Oct 2005.

12-Jun-06 Electric City announced its intention to list on the OTCBB after delisted from AMEX.

Efficiency: Demand Side

Lime Energy (formerly Electric City Corporation)

American Stock United States Exchange (AMEX) (ELC)

9-Jun-06 Electric City has announced its intention to delist from AMEX after being advised it was no longer in compliance with listing standards.

Efficiency: Demand Side

International Rectifier Corporation

New York Stock United States Exchange (NYSE)

8-Jun-06 International Rectifier Corporation (NYSE:IRF) announced that, due to adverse market conditions, the company has decided to withdraw its previously announced private offering of 750m aggregate principal amount of convertible subordinated notes due 2013.

Efficiency: Demand Side

Power Efficiency Corporation (PEFF)

OTC Bulletin Board (PEFF)

Efficiency: Demand Side

PowerSecure American Stock United States (formerly Metretek Exchange (AMEX) Technologies Inc) (MEK)

Efficiency: Demand Side

MicroPlanet Technology Corp (formerly HF Capital Corp)

TSX Venture Exchange (MP)

Efficiency: Demand Side

Lime Energy (formerly Electric City Corporation)

American Stock United States Exchange (AMEX) (ELC)

Efficiency: Demand Side

eMagin Corporation

OTC Bulletin Board (EMAN)

United States

Efficiency: Demand Side

Advanced Analogic Technologies Inc

NASDAQ Global Market (formerly NASDAQ-NM) (AATI)

United States

4-Aug-05 AnalogicTech completed the initial public offering of 10,600,000 shares of common stock at USD 10.00 per share.

Efficiency: Demand Side

Itron Inc

NASDAQ Global Market (formerly NASDAQ-NM) (ITRI)

United States

19-May-05 Itron Inc placed 1,720,000 of its common shares to raise USD 62.4m.

Efficiency: Demand Side

MicroPlanet Technology Corp (formerly HF Capital Corp)

TSX Venture Exchange (MP)

United States

United States

United States

Post money value ($)

New equity raised ($)

Total offering size ($)

Deal status

Transaction type

17.9 m

17.9 m

Completed

OTC Secondary/PIPE

15 m

15 m

Completed

OTC Secondary/PIPE

Completed

OTC Share registration

Completed

Delisting

750 m

Postponed/cancell Convertible ed

1.5 m

1.5 m

Completed

OTC Convertible

28.2 m

33.6 m

Completed

Secondary

3m

8.7 m

Completed

OTC Secondary/PIPE

30-Nov-05 Electric City has entered into a definitive loan agreement with Laurus Master Fund for funding of a four year, USD 5.0m convertible term loan.

5m

5m

Completed

Convertible

20-Oct-05 eMagin Corporation, a maker of visual data equipment for near-eye virtual imaging systems using OLED displays raises USD 9.14m with by issuing stock.

9.1 m

9.1 m

Completed

OTC Secondary/PIPE

409.6 m

90 m

106 m

Completed

IPO

849 m

62.4 m

62.4 m

Completed

Secondary

5.4 m

5.4 m

Completed

OTC Reverse IPO

31-May-06 Power Efficiency, a developer and manufacturer of advanced energy savings technologies for electric motors, increased the USD 1m convertible debt financing to USD 1.5m.

10-Apr-06 Metretek Technologies has completed USD 28.2m 219.8 m placement of common shares.

3-Mar-06 MicroPlanet Technology Corp raised CAD 3.35m (USD 2.95m) though its original target was to raise CAD 10m (USD 8.7m) announced in Jan 2006.

6-May-05 Microplanet Technologies, has completed a reverse-listing on the Toronto Venture Exchange by merging with HF Capital. The transaction has raised USD 5.4m from undisclosed investors. The new company is named Microplanet Technologies Corporation.

15 m

Page 70 of 80

Primary sector

Efficiency: Demand Side

Organisation

Lime Energy (formerly Electric City Corporation)

Stockmarkets

Country name

Date announced/ completed

American Stock United States Exchange (AMEX) (ELC)

Abstract

Post money value ($)

4-May-05 Electric City (ELC), a US-based developer, manufacturer and integrator of energy savings technologies, announced the closure of a series of transactions in which it raised gross proceeds of USD 5.6m.

New equity raised ($) 5.6 m

Total offering size ($) 5.6 m

Deal status

Completed

Transaction type

Private Investment in Public Equity (PIPE)

Source: New Energy Finance, retrieved July 2008.

Smart-Buildings Deals: 2003-2008 Organisation

Country

Primary sector

Saddlehorn

United States

Efficiency: EnergySmart Buildings

GigaCrete Inc

United States

Efficiency: EnergySmart Buildings

DryKor Holdings Inc United States

Efficiency: EnergySmart Buildings

SAGE United States Electrochromics Inc

Efficiency: EnergySmart Buildings

Date announced/ completed

Lead investors

21-Feb-07 Low Carbon Investors Ltd

May-07 Craton Equity Partners

27-Oct-03 Challenge Fund Etgar, RockPort Capital Partners, VentureInc 17-Jul-07 Walden Good Energies

Other investors

Abstract

Total invested ($)

Funding type

Post money valuation ($)

Low Carbon Accelerator has invested USD 3.0m in Saddlehorn, equal to a 43% holding in its raised investment capital.

3 VC - Series A / First 7 m round

Energy-smart buildings materials developer GigaCrete has raised USD 5m in series A funding from Craton Equity Partners.

5 VC - Series A / First round

DryKor raised USD 8.0m in it's third round of funding for development and research in the US.

8 VC - Series C / Third round

Applied Ventures Glass manufacturer Sage Electrochromics Inc has raised LLC, NV Bekaert SA (USD 16m) in series B funding. Good Energies, Applied Ventures LLC and N.V. Bekaert took part in the funding.

16 VC - Series B / Second round

Source: New Energy Finance, retrieved July 2008.

Page 71 of 80

Appendix C: Suppliers of Energy Services Demand-Side Energy Services Companies Company Name

Growth Rate (%)

Annual Revenue ($MM)

Energy Management Services Revenue ($MM)

Energy Efficiency Revenue ($MM)

Demand Response Revenue ($MM)

Services (Supply-side) Revenue ($MM)

Public / Private

EMCOR Group Inc.

18.5%

$6,785.20

$3,773.20

$3,773.20

$0.00

$0.00 Public

Facilities Solutions Group

18.5%

$306.40

$306.40

$306.40

$0.00

$0.00 Private

NovaTech Energy Services Group, Inc.

18.5%

$12.00

$12.00

$12.00

$0.00

$0.00 Private

GreenTech Energy Services

18.5%

$8.20

$8.20

$8.20

$0.00

$0.00 Private

California Retrofit, Inc.

18.5%

$4.50

$4.50

$4.50

$0.00

$0.00 Private

Energy Conservation and Supply, Inc.

18.5%

$2.30

$4.50

$4.50

$0.00

$0.00 Private

Essential Energy Service, Inc.

18.5%

$4.50

$4.50

$0.00

$0.00 Private

Earthwell Energy Management, Inc.

18.5%

$3.50

$3.50

$3.50

$0.00

$0.00 Private

National Energy Services, Inc.

18.5%

$2.80

$2.80

$2.80

$0.00

$0.00 Private

Southern Energy Technologies

18.5%

$0.10

$2.40

$2.40

$0.00

$0.00 Private

Energy & Environment LLC

18.5%

$2.00

$2.00

$2.00

$0.00

$0.00 Private

Financial Energy Management, Inc.

18.5%

$2.00

$2.00

$2.00

$0.00

$0.00 Private

Imbue Technology Solutions, Inc.

18.5%

$0.50

$1.20

$1.20

$0.00

$0.00 Private

ESCO Energy Services Company

18.5%

$1.10

$1.10

$1.10

$0.00

$0.00 Private

DDC Systems Service Company

18.5%

$1.00

$1.00

$0.00

$0.00 Private

Enerlight Inc.

18.5%

$1.00

$1.00

$0.00

$0.00 Private

Lighting Efficiency Specialists, Inc.

18.5%

$1.00

$1.00

$0.00

$0.00 Private

Building Energy Solutions & Technology

18.5%

$0.90

$0.90

$0.90

$0.00

$0.00 Private

Energy and Power Solutions

18.5%

$0.10

$0.90

$0.90

$0.00

$0.00 Private

ibcontrols, inc.

18.5%

$1.80

$0.60

$0.60

$0.00

$0.00 Private

Aelux

18.5%

$0.70

$0.50

$0.50

$0.00

$0.00 Private

Eastern Energy Solutions, LLC

18.5%

$0.30

$0.30

$0.30

$0.00

$0.00 Private

International Energy Conservation

18.5%

$0.20

$0.20

$0.00

$0.00 Private

Lighting Solutions Associates, LLC

18.3%

$0.20

$0.20

$0.00

$0.00 Private

Legacy Energy Management Solutions

18.4%

$1.00

$0.99

$0.01

$0.00 Private

LIME Energy

16.0%

$57.20

$19.50

$18.14

$0.00

$1.37 Public

I.C. Thomasson Associates, Inc.

18.3%

$20.00

$20.00

$18.40

$0.00

$1.60 Private

DMJM Harris

18.0%

$53.50

$12.00

$9.60

$0.00

$2.40 Public

$0.50

Page 72 of 80

Demand-Side Energy Services Companies (continued) Company Name

Growth Rate (%)

Annual Revenue ($MM)

Energy Management Services Revenue ($MM)

Energy Efficiency Revenue ($MM)

Demand Response Revenue ($MM)

Services (Supply-side) Revenue ($MM)

Public / Private

Performance Consulting Group, LLC

18.0%

$3.10

$5.00

$4.00

$0.00

$1.00 Private

Quest Energy Group

18.0%

$0.10

$0.20

$0.16

$0.00

$0.04 Private

Optimira Energy Solutions

17.9%

$55.80

$41.85

$0.00

$13.95 Private

Pritchett Controls, Inc.

17.9%

$3.40

$2.55

$0.00

$0.85 Private

Temsco

17.9%

$1.00

$0.75

$0.00

$0.25 Private

Burns & McDonnell

17.8%

$127.80

$56.00

$39.20

$0.00

$16.80 Private

Comverge Inc.

16.1%

$77.20

$27.20

$18.71

$5.71

$2.77 Public

SmartWatt Energy, Inc.

17.7%

$1.20

$4.20

$2.80

$0.00

$1.40 Private

Demand Management Institute, Inc.

17.3%

$0.10

$1.00

$0.67

$0.05

$0.28 Private

Ameresco

17.5%

31.40

$378.50

$227.10

$0.00

$151.40 Private

$4.20

Ozark Energy Services, Inc.

17.5%

$0.40

$0.30

$0.18

$0.00

$0.12 Private

Energy Systems Group

17.4%

$100.00

$122.80

$67.54

$0.00

$55.26 Private

APS Energy Services

17.3%

$15.70

Facilities Performance Services

17.3%

Atlantic Energy Solutions

17.1%

Noresco

$15.70

$7.85

$0.00

$7.85 Public

$14.40

$7.20

$0.00

$7.20 Private

$0.10

$1.90

$0.86

$0.00

17.0%

$21.50

$150.00

$60.00

$0.00

Energy Advantage

16.2%

$0.50

$5.10

$2.04

$0.51

$2.55 Private

Princeton Energy Systems

17.0%

$1.20

$1.20

$0.48

$0.00

$0.72 Private

EMO Energy Solutions

17.0%

$0.90

$0.90

$0.36

$0.00

$0.54 Private

Frontier Associates, LLC

16.8%

$6.00

$2.70

$0.90

$0.00

$1.80 Private

PRES Services

16.8%

$0.90

$0.90

$0.30

$0.00

$0.60 Private

EnergySolve

15.9%

$5.00

$5.50

$1.38

$0.55

$3.58 Private

Sieben Energy Associates

16.6%

$1.10

$1.10

$0.28

$0.00

$0.83 Private

Nexant, Inc.

16.5%

$14.90

$13.80

$2.76

$0.00

$11.04 Private

Prenova

15.6%

$8.70

$8.70

$1.31

$0.87

$6.53 Private

EnerVision

16.3%

$0.10

$0.50

$0.05

$0.00

$0.45 Private

$1.05 Private $90.00 Public

Celtic Energy

16.2%

$0.50

$0.04

$0.00

$0.46 Private

U.S. Energy Management, Inc.

16.0%

$9.90

$0.00

$0.00

$9.90 Private

Summit Energy

16.0%

$5.60

$0.00

$0.00

$5.60 Private

Page 73 of 80

Demand-Side Energy Services Companies (continued) Company Name

Growth Rate (%)

Annual Revenue ($MM)

Energy Management Services Revenue ($MM)

Energy Efficiency Revenue ($MM)

Demand Response Revenue ($MM)

Services (Supply-side) Revenue ($MM)

Public / Private

Onsite Energy Corporation

15.0%

$2.90

$0.00

$0.36

$2.54 Private

Mach Energy

16.0%

$1.50

$0.00

$0.00

$1.50 Private

Entelrgy LLC

16.0%

$1.00

$0.00

$0.00

$1.00 Private

Energy Related Services Corp

16.0%

$0.50

$0.00

$0.00

$0.50 Private

Abraxas Energy Consulting LLC

16.0%

$0.40

$0.00

$0.00

$0.40 Private

MCEnergy, Inc.

16.0%

$0.30

$0.00

$0.00

$0.30 Private

Skye Energy

16.0%

$0.10

$0.00

$0.00

$0.10 Private

Source: Frost and Sullivan, 2008; Dun & Bradstreet, 2009.

Equipment Manufacturers with Marketing Services Company Name

Growth Rate (%)

Annual Revenue ($MM)

Energy Management Services Revenue ($MM)

Energy Efficiency Revenue ($MM)

Demand Response Revenue ($MM)

Services (Supply-side) Revenue ($MM)

Public / Private

Comfort Systems USA Energy Services

18.4%

$1,328.50

$898.70

$862.75

$0.00

$35.95 Public

Honeywell International, Inc.

17.9%

$36,556.00

$2,994.70

$2,246.03

$0.00

$748.68 Public

Johnson Controls

18.5%

$38,062.00

$2,363.90

$2,363.90

$0.00

$0.00 Public

Siemens Building Technologies

17.9%

$546.80

$1,008.40

$756.30

$0.00

$252.10 Public

TAC America

17.4%

$89.20

$1,362.00

$749.10

$0.00

$612.90 Private

Source: Frost and Sullivan, 2008; Dun & Bradstreet, 2009.

Page 74 of 80

Utility Companies Company Name

Growth Rate (%)

Annual Revenue ($MM)

Energy Management Services Revenue ($MM)

Energy Efficiency Revenue ($MM)

Demand Response Revenue ($MM)

Services (Supply-side) Revenue ($MM)

Public / Private

Advantage IQ

16.0%

$47.30

$0.00

$0.00

$47.30 Private

Alliant

16.6%

$3,681.70

$263.00

$65.75

$0.00

$197.25 Public

BlueStar Energy Services

16.5%

$171.10

$171.50

$34.30

$0.00

$137.20 Private

Chevron Energy Solutions

17.7%

$22.10

$260.00

$174.20

$0.00

Consolidated Edison, Inc.

16.5%

$13,583.00

$1,383.00

$276.60

$0.00

Constellation Energy Group, Inc.

16.0%

$19,818.30

$211.90

$31.79

$10.60

$169.52 Public

Direct Energy

16.5%

$40.20

$1,645.00

$329.00

$0.00

$1,316.00 Private

Integrys Energy Services

16.5%

$60.30

$24.70

$4.94

$0.00

Pacific Gas & Electric Company Utility Services

16.1%

$14,628.00

$264.70

$52.94

$13.24

$198.53 Public

PEPCO Energy Services

16.0%

$1,900.00

$2,309.20

$184.74

$69.28

$2,055.19 Public

$85.80 Private $1,106.40 Public

$19.76 Public

Source: Frost and Sullivan, 2008; Dun & Bradstreet, 2009.

Pure-play Demand Response Company Name

Enernoc

Growth Rate (%)

8.5%

Annual Revenue ($MM)

Energy Management Services Revenue ($MM) $60.80

Energy Efficiency Revenue ($MM) $0.00

Demand Response Revenue ($MM) $58.98

Services (Supply-side) Revenue ($MM)

Public / Private

$1.82

Source: Frost and Sullivan, 2008; Dun & Bradstreet, 2009.

Page 75 of 80

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