Building Energy Efficiency Is a Hard Market to Crack

It’s a cliché you inevitably hear in any discussion about building energy efficiency retrofits: It’s the “low-hanging fruit” of cleantech. Apparently, however, it’s not low enough, because the market hasn’t exactly taken off. The residential market in particular has been tough because the spending on energy efficiency projects tends to be low, and the returns on investments for service providers can be lengthy.

“The average resident nationwide pays $1,200 a year in utility costs. My cost of acquiring that consumer may be $2,000, and that would be cheap. It’ll be 10 years before anyone can extract money out of that thing. It’s a really hard market to crack,” said Kevin Surace, CEO of energy efficiency building product provider Serious Materials during a panel at the SolarTech conference last week.

Although steps such as insulating the roof, sealing air ducts and installing windows that minimize heat loss usually cost less than, say, erecting a solar electric system on the roof, they are still pricey enough to give homeowners pause, especially when the economy is recovering.

San Francisco-based Recurve, which raised at least $14 million in venture capital, has moved out of the energy auditing business to focus on developing and selling software to help energy auditors determine the most cost-efficient energy efficiency measures for their customers.

Federal Help

Federal, state and even local incentive programs are available for home energy retrofits, but consumers still need to fork over a big chunk of the cost. A solid energy audit should include a blower door test to gauge how airtight a home is. But the test costs from $800 to $1,000, which prolongs the time it will take the homeowners to recoup the investment, if they do at all, Surace noted.

A financing model called Property Assessed Clean Energy (PACE), which allows homeowners to pay their retrofits as part of their property tax payments over time, promised to make energy efficiency measures more affordable. But Fannie Mae and Freddie Mac opposed such a financing model because tax payment becomes senior to home mortgages. That means if a homeowner defaults, the homeowner will have to pay back the PACE debt first before the mortgage.

The White House and the Department of Energy promised to work on alternative plans and proposed last November to work with banks to come up with low-interest loans to help finance energy retrofits. The DOE also launched a pilot project called Home Energy Score to standardize how energy auditors do their work and present data to consumers. The idea is to make it easier for consumers to understand the energy audit process and pick credible companies to do the audits and upgrades. The inspiration for Home Energy Score came from the Energy Star program for appliances or fuel economy labels for cars.

The Commercial Market

The commercial sector might be a more lucrative space for energy retrofit providers, Surace said. Businesses tend to use energy more intensely and pay more attention to ways to cut energy costs and reduce their carbon footprint. Their retrofit projects also can be larger, and that could attract more lenders.

Until now, a bulk of energy retrofit projects in the commercial space take place in public facilities, such as government buildings, colleges and hospitals, Peter Larsen, a researcher at the Lawrence Berkeley National Laboratory, told me. The lab has tracked the energy service market for over 15 years and built up a database of about 3,500 projects.

Public agencies tend to have buildings with outdated wiring and other equipment that could use some modernization, and they have the money to do it. Private businesses, however, are much more tight-fisted with their money and tend to carry out smaller retrofit projects and expect a much quicker payback to please their shareholders, Larsen said.

The commercial market has been dominated by long-time players such as Johnson Controls (s JCI) and Honeywell (s HON), which guarantee energy savings and line up banks to finance the projects, or pay for the projects themselves. New entrants have come in to compete for this market; Metrus Energy, founded in 2009 and based in San Francisco, won BAE Systems as its first customer and is doing a second project for the defense contractor.

Surace and others on the panel said commercial energy retrofits currently can take a few years to plan and finance. New business models that can deliver the projects more quickly and efficiently are needed to lure more business customers. During the panel discussion at SolarTech, Matt Cheney, CEO of Cleanpath Ventures, which finances renewable energy projects, said he saw a good fit between real estate companies and energy efficiency services. Derrick Rebello, CEO of Quantum Energy Services & Technologies, would like to see utilities involved to help finance energy retrofits. Some states have regulations that reward utilities for energy conservation efforts.

Photo courtesy of Bryn Pinzgauer via Flickr.