Metrus Energy, a startup seeking to popularize a power purchase agreement-like model for investing in building energy efficiency projects, has landed its first contract. The “efficiency services agreement” announced Friday calls for military contractor BAE Systems to upgrade its Merrimack, N.H. manufacturing facility’s energy efficiency with Siemens doing the upgrades and Bank of America (s BAC) doing the financing.
Bob Hinkle, founder and CEO of San Francisco-based Metrus, says the $1 million project is the first of multiple projects for BAE that his company wants to own and manage. Under the ESA, BAE pays only for a fraction of each “avoided unit of realized energy savings,” he says, with Siemens, BofA and Metrus collecting an additional fraction of the savings. That means BAE doesn’t have to pay anything up front, which removes the conflict between spending on energy efficiency versus other projects — a big barrier to spending on better efficiency for the private sector.
Hinkle, a former vice president of energy efficiency at MMA Renewable Ventures, had seen the way that power purchase agreements (PPA) helped investors put money into renewable power projects, and figured it could be applied to energy efficiency projects as well. After all, replacing lights, HVAC systems, windows and other energy efficiency measures are cheaper and pay for themselves faster than renewable energy projects. If they could be financed in a way that took the up-front costs out of the equation for building owners, both they and the investors could reap the financial rewards in the form of reduced energy bills, while helping the environment.
“The unifying theme is removing first-cost hurdles for customers,” he said. There would appear to be an untapped market for making buildings and factories more energy efficient. The National Association of Energy Service Companies pegged the energy services industry as a $3.6 billion business in 2006, with about $2.5 billion directly related to energy efficiency. But the American Council for an Energy Efficient Economy predicts a $250 billion market for commercial and industrial sector efficiency upgrades over the next decade. The Department of Energy says that buildings consume about two-fifths of the country’s total energy and represent a big target for saving power and cutting carbon emissions.
Energy services companies, or ESCOs, such as Siemens, Honeywell, Johnson Controls, Schneider Electric and Chevron Energy Services would certainly like to find more ways to reach that market. So would startups like Pulse Energy, Lucid Design Group, and others seeking to break into the market for more efficient commercial building energy management systems, or demand response companies like EnerNOC (s ENOC) that are buying their way into building efficiency services. New regulations at the federal and state level could help push energy efficiency, such as California’s proposed statewide building code.
But at present, most energy efficiency projects are done for government or institutional entities like colleges and hospitals, which can justify the longer-term investments. They’ve also got stimulus money to spend — DOE is directing $4.5 billion in stimulus to retrofit federal buildings and $3 billion to grants for state energy efficiency programs, and plans to spend $80 billion over the coming years on retrofitting federal buildings for energy and water efficiency and renewable energy.
Commercial and industrial clients have shorter payback times for energy efficiency upgrades — about three years tops, as a rule of thumb. Metrus wants to overcome this challenge with its new ESA model.
Further down the road, “I could see Metrus securitizing or putting into larger funds projects that we’ve financed and owned,” Hinkle said. “But starting out of the gates, it’s not going to be a securitization play… it’s going to be more traditional project financing. We’re not at the pooling structure stage quite yet.”
Pooled energy efficiency investment is just one of the innovative paths to more energy efficiency investment Hinkle has studied as an entrepreneur in residence at the California Clean Energy Fund (CalCEF), which is providing support to his company. Others include Property Assessed Clean Energy, or PACE, programs being implemented by cities and counties that allow costs for solar panels or efficiency improvements to be paid back through property taxes — startup Renewable Funding raised $12.2 million in October to develop, administer and finance projects through PACE programs. (For more examples of innovative programs, check out a white paper Hinkle co-wrote for CalCEF.)
As for Metrus’s financial backing, it’s received an undisclosed amount of investment from European VC firm GoGreen Capital, Hinkle said.