ENERGY EFFICIENCY FINANCING IN THE COMMERCIAL SECTOR MUNICIPAL MODELS & OPPORTUNITIES

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1 ENERGY EFFICIENCY FINANCING IN THE COMMERCIAL SECTOR MUNICIPAL MODELS & OPPORTUNITIES Greg Hale Natural Resources Defense Council Pew Center on Global Climate Change Carbon Markets Insights Americas 2010

2 Access to capital is necessary for a healthy retrofit market but more financing will be needed to scale the market. Value to Property Owner Access to Capital $ Billions $400 $300 $200 Financing Gap $308 Billion Estimated Market Size for Retrofits $390 Billion * Workforce Marketing and Delivery $100 0 Current Capital Commitment $82 Billion Retrofit Financing Market McKinsey Report, McKinsey assumed a 35% efficiency threshold, considered conservative by many. Department of Energy, for example, estimates a potential $2.0 trillion U.S. retrofit market. Nonfossilfuel-related measures 2

3 New York City Energy Efficiency Corporation (NYCEEC) Public / Private Partnership created to catalyze and scale NYC retrofit market Structured as an independent 501(c)(3) non-profit corporation Public Sector Capital (Stimulus Funds) used to leverage Substantial Philanthropic and Private Sector Capital Investments Self-Sustaining Entity Transaction Fees, Interest Rate Spreads Return on Potential Investments in Retrofit Transactions Three Major Areas of Function Financial Intermediary Credit Enhancement Revolving Loan Fund Demand Generation Information Center Existing Rebates, Incentives & Tax Credits Targeted Outreach Broad Public Awareness Marketing Campaigns Workforce & Economic Development Initial Focus on Commercial Office and Multifamily (Affordable / Market Rate)

4 NYCEEC Proposed Program Structure NYSERDA ARRA $ NYC DCAS Philanthropic $ Demand Generation Information Center Marketing Campaigns Targeted Outreach NYC Energy Efficiency Corporation Transaction Fees Investment Returns Workforce Development Amalgamated Green Contractor Certification Revolving Loan Fund Financial Services Credit Enhancement Loan Loss Reserve Project Level Grants and Incentives Building Retrofits Private Capital Commercial Debt Private Equity

5 NYCEEC Proposed Administrative Structure Board of Directors NYC Energy Efficiency Corporation NYC EDC (Admin. Services) Potential Board of Advisors Executive Director Financial Advisor Outside Counsel Lender / Financial Partner Program Staff

6 NYCEEC would support several initial financing products Finance Product Description Initial Capital Future Capital Revolving Loan Fund Direct secured / unsecured loans Underwrite against future savings Collect standardized M&V data EECBG Formula / Competitive Securitization Interest Transaction fees Credit Enhancement Facility Mitigate credit risk for investors: Loan loss reserve Equity and/or sub. debt Support Energy Services Performance Constracting Support off-balance sheet models (Transcend, Metrus, EnergyRM) EECBG Formula / Competitive / Foundation PRI Transaction/other fees EE Mortgage Products Expand MF/commercial mortgages that include EE workscope HUD/CPC (Affordable Housing) TBD Securitization Transaction/other fees PACE / On-Bill Recovery PACE for MF/commercial subject to federal/state action On-bill recovery subject to state action TBD Securitization Transaction/other fees

7 Potential Allocation of EECBG Funds which would be used to leverage additional philanthropic and private capital Function EECBG Formula EECBG Competitive Potential Total Revolving Loan Fund $14.0 million $4.28 million Up to $18.28 million Credit Enhancement Facility $0.0 million $10.7 million Up to $10.7 million Administrative / Program Evaluation $1.0 million $2.14 million Up to $3.14 million Other Advisory services Audits, M&V Marketing/outreach Workforce dev. $1.1 million $4.28 million Up to $4.38 million $16.1 million $21.4 million $37.5 million Additional Funding Sources Philanthropic Foundations (PRI) Commercial Debt Private Equity Treasury Dept. CDFI Fund HUD, Fannie Mae, Freddie Mac mortgage products

8 Sale/Leaseback Model for MUSH Sector Capital Improvements An example from the City of Newark, NJ Newark sells a portfolio of its buildings to Essex County Improvement Authority; leases them back for 20 years (with option to repurchase for $1 at end of term). Authority issues bonds to fund purchase of city properties; bonds are serviced using lease payments from city. Portion of proceeds invested in EE upgrades of properties; $45 million of the $90 million Newark transaction will be used for city s 2011 operating budget, and $20 million for EE and other improvements. Bonds backed by real estate and city s obligation to pay rent under lease, resulting in cost of capital slightly higher than general obligation bonds. Typically, a portion of the bonds can be tax exempt. Savings produced by EE retrofits can be netted against lease payments, resulting in extremely low effective cost of capital. Transaction will upgrade Newark s municipal building stock, and also help cover the city s budget deficit.

9 How PACE Works 23 States have passed PACE enabling legislation Once enabling legislation has been passed, a city, county or other municipality can create a PACE program City or county creates type of land-secured financing district or similar legal mechanism Property owners voluntarily sign-up for financing and install energy projects Proceeds from revenue bond or other financing provided to property owner to pay for energy project Property owner repays bond through property tax bill (up to 20 years) Aggregated PACE financings could be securitized and sold to secondary capital markets, w/ security of senior lien

10 Distinguish PACE Residential from PACE Commercial PACE Residential as Envisioned by DOE Guidelines Would impose senior lien on participating properties w/o existing lender consent Currently at an impasse on federal level due to actions of FHFA, FNMA, FMAC, OCC PACE Commercial assumes Consent Right in favor of Existing Mortgagee OCC 7/6/10 Bulletin does not preclude banks from pursuing PACE Commercial (according to informal guidance given to a major financial institution) Owner Arranged Commercial PACE financing model Currently moving forward, cautiously, in LA and potentially in Washington, DC Wells Fargo s proposed self-consent structure If adopted by enough major commercial mortgage holders, could achieve scale required to access secondary markets