Business Models and Best Practices for Energy Efficiency Investments

Transcription

1 Business Models and Best Practices for Energy Efficiency Investments Joyce M. Ferris Blue Hill Partners LLC Sean O Neill Transcend Equity Development Zach Axelrod Skyline Innovations Jim Thoma - Green Campus Partners 1

2 It s not about the money 2

3 Blue Hill Partners Experienced investors in energy efficiency and sustainability technology and service businesses 3

4 Through our portfolio companies we have extensive experience with large property owners Office Higher Education Government 4

5 Owner s dilemma Buildings and infrastructure Technologies Sustainability Services College or University????? Students and faculty Capital Campus community Resources

6 The solution Buildings and infrastructure Technologies Sustainability Services College or University Campus Energy Efficiency Initiative Students and faculty Capital Campus community Resources

7 Barriers to deploying energy efficiency and sustainability Lack of businesses with integrated solutions approach Lack of innovative capital for enabling businesses with integrated solutions approach 7

8 Property owners want solutions not products VS Power Purchase Agreement allowed the solar industry to sell electricity not solar panels VS Charging by the minute allowed telecom industry to sell communication, not cell phones 8

9 Lack of efficiency in driving efficiency 9

10 Funding new business models for driving energy efficiency and sustainability 10

11 Key attributes of new business model Funded solutions No adverse balance sheet impact Transparent process Risk allocation Customized and innovative approach 11

12 Cracking the Energy Efficiency Code for Privately Owned Real Estate June 1, 2011

13 Buildings are the major drivers of energy use, the largest driver in urban areas. CO 2 Emissions by Sector, New York City % 20% Buildings 77% Transit On-Road Vehicles 13

14 Most buildings in the U.S. are old. Square feet (Millions) 16,000 US Commercial Buildings by Year of Construction 14,000 12,000 10,000 8,000 6,000 4,000 2,000 72% or Before 1920 to to to to to to to

15 Privately owned large buildings represent a ~$100 B market for energy efficiency. ASSET CLASS Bldgs (MM sf) Retrofitted to date $/sf to retrofit Market size ($ MM) Office Bldgs > 50,000 sf 5,612 15% $6 $28,621 Enclosed Malls 1,681 15% $7 $10,001 Educational Buildings 3,207 15% $8 $21,808 Healthcare 2,468 15% $8 $16,782 Multifamily > 50 units 4,688 15% $3.5 $13,947 TOTAL $91,159 15

16 Energy systems in most of them are often original for three key reasons. Debt Carrying Capital Needs ProhibitionCapacity of Transfer or Encumbrance. The Leases sale, make transfer, Tenants disposition get or encumbrance, the landlord whether by operation operating of law or responsible for savings from otherwise, capital. of all or any part ofretrofits. the Mortgaged Property without the written consent of Beneficiary shall constitute a default hereunder. $1 Operating Savings $1 NOI 5-year Simple Payback 10-year Landlord Payback 16

17 Common thread underlies these three barriers - obligations on the balance sheet. Commercial & Residential Violation of mortgage Encumbrance to sale On Balance Sheet Debt Universities & Hospitals Negative impact on credit rating Reduced access to capital Multi-tenant Commercial Financing lease Lease = capital, not operating Split incentive 17

18 Conventional approaches cannot solve these problems. Lease purchase finance is on balance sheet debt Savings guarantee is not a credit enhancement Very expensive deployment model 18

19 MESA addresses all three barriers by selling energy efficiency as a service. Privately Owned Building Pay utility bills Approve/reject proposed modifications Propose building modifications 19

20 How MESA Works Contract Duration 20

21 How MESA Works Savings Potential Utility Charges 21

22 How MESA Works Savings Potential Utility Charges 22

23 How MESA Works Savings Potential Utility Charges 23

24 How MESA Works Project Funding 24

25 Why does MESA work? Income Operating Expenses Asset NOI MESA (inclusive of energy costs) NO SPLIT INCENTIVE - MESA a GAAP auditable operating expense NO LEVERAGE BARRIER no debt or liens to violate mortgage BALANCE SHEET NEUTRAL no impact on host balance sheet 25

26 MESA is a proven transaction vehicle and carbon reducer. Savings Performance Accounting Validation Average 30% savings across ~40 retrofits Off balance sheet to host property GAAP valid operating cost, not capital Baseline is the MESA bill. IPMVP Option C is the billing process. Pressure tested through multiple transactions, 30+ buildings Transcend installs real-time Active Energy Management at its expense Validated by internal opinions for publicly held companies 26

27 What does MESA accomplish for a landlord? Expense neutral retrofit Tenant passthroughs unchanged Cost recovery language not used Increased Yield Replaces landlord capital expenditure Very economically attractive 27

28 Characteristics of a MESA candidate building. Energy usage Energy Systems Leases (if any) > $2.50/gross sf net of submeters Heating and/or cooling centralized, not floor-by floor Large proportion of modified gross or net leases > 75 kbtu/gross sf HVAC expense allocated pro rata, not direct metered Turnover does not exceed 40% in a given year 28

29 In Chicago, PACE funds have been repurposed to back MESA. 4/21/2010 DOE awards $25 MM in ARRA funds for PACE to CMAP 1/28/2011 CMAP issues RFP for commercial and industrial retrofits 4/20/2011 Awards $9 MM to Transcend for loan loss reserve to support C&I Program 29

30 Providing Efficiency as a Service to the Small to Medium Commercial Market Zach Axelrod, CEO June 1, 2011

31 About Skyline Founded in November 2009 with a customer-centric focus: Customers need cold air, hot water, light not electrons or BTUs. Skyline provides these services on a per-consumption basis in an easy, turnkey, guaranteed savings format

32 SKYLINE BARRIER Skyline focuses on energy saving needs and challenges of mid-sized businesses PROBLEM IDENTIFICATION SOLUTION IMPLEMENTATION LONG-TERM MANAGEMENT Energy critical, not core to business No dedicated energy specialist Incremental effort for non-behavioral solutions Capital access and spending priorities Assume performance and payback risk Ongoing maintenance expenses Energy savings as a service Outsource complexity with turnkey solution Guaranteed savings model Cool air, hot water, lights on at lower marginal rate Zero capital outlay Maintenance and monitoring included

33 Mid-commercial market characteristics RESIDENTIAL SMALL-MID COMMERCIAL MUNICIPAL + UTILITY DECISION-MAKING SPEED VALUE TO OUTSOURCED TECHNOLOGY SELECTION PROJECTS OF FINANCEABLE SIZE ATTRACTIVE PROJECT ECONOMICS

34 Deploying savings to mid-sized businesses PROFITABILITY DRIVERS SMALL-MED COMMERCIAL LARGE C&I TARGETED PROJECT SIZE $50,000 - $500,000 OVER $1,000,000 DESIRED SOLUTION TARGETED MEASURES COMPREHENSIVE PROJECT CUSTOMIZATION LOW HIGH PROJECT VOLUME HIGH LOW TRANSACTION COSTS AUTOMATED FINANCING LOW HIGH HIGH LOW COMPETITIVE FRAMEWORK DO NOTHING MULTIPLE PROVIDERS

35 Delivering efficiency -- efficiently Highly replicable project development with finance and operations automation to enable rapid scaling SCALE FOCUS EXECUTE Focused providing highly monitored solutions targeted to specific industry verticals and short sales cycles Extensive system monitoring and data analytics for continuous optimization of project performance OPTIMIZE Enterprise-class operations management to minimize transaction costs and execute projects profitably Drive continuous improvement in deploying efficiency to preserve margins

36 Further long term opportunity from profitably delivering meaningful savings today Up-sell potential: evolving from individual to bundled solutions Less competition: bidding against the status quo (begrudgingly do it yourself) Long term contracts: entrenched as energy advisor with ongoing contact The value of packaged, financed efficiency solutions for the mid-sized commercial segment extends far beyond implied cost-of-capital

37 Development, Investment and Financing of Energy Efficiency and Distributed Generation Projects June 1, 2011 Green Campus Partners, LLC Raritan Plaza I 110 Fieldcrest Avenue Edison, NJ (732)

38 About GCP GCP is a highly specialized energy project development and investment firm focused on EE and DE projects serving institutional clients with energy intensive facilities. GCP principals have closed more than $5 billion of energy projects utilizing equity, tax advantaged equity, structured project financing and private and public debt (taxable, tax-exempt and tax credit bonds). GCP has structured and funded more than $300 million of energy projects since the firm s founding in April GCP s principals have deep experience providing financing solutions to healthcare and higher education clients. GCP is a portfolio company of Hudson Clean Energy Partners, a $1.5 billion private equity fund headquartered in Teaneck, NJ. GCP is a member of NAESCO, ACORE and the US EPA CHP Partnership GCP Confidential 38

39 GCP Business Model Project Types Energy Efficiency Renewable Energy (Distributed Solar Wind, Biomass, Bio-Gas, LFGTE and Small Hydro) Distributed Energy (CUPs, Combined Heat & Power and District Energy Plants) Facility Infrastructure Client Segments Healthcare & Higher Education Federal, State & Local Governments Public Education Investment Grade Corporations Municipal Utilities Energy Project Co-Development & Investment Capital Raising Strategic & Project Consulting Financial Advisory & Structuring Financing Arrangement & Private Placement Capital Markets Solutions GCP Investment & Project Finance (Asset Ownership) Energy Savings Agreements (Energy Efficiency) Power Purchase Agreements (Renewables) Utility Service Agreements (CUP & CHP) GCP Confidential 39

40 Co-Development Business Model Contractor(s) Legal Tax/Acctg Regulatory Financial development & modeling Transaction structuring & documentation Contractor management Project ownership & management Project capitalization Tax credit & incentive monetization Project administration Regulatory & legal compliance Co- Development Team Project development, engineering and design Equipment & technology planning & procurement EPC contracting and construction management Sub-contractor and vendor bidding, selection and management O&M with performance guarantees Design Architect Engineer End-Use Client(s) GCP Confidential 40

41 Strategic Options Building owners typically have two strategic options for financing energy projects: 1. Direct Investment Ownership Model a) Cash purchase or debt financing b) Typically provides lowest cost of ownership c) Consumes capital and debt capacity 2. Third Party Investment Service Model 1. Outcomes procured via services agreement 2. Maximize value of tax and production incentives 3. Operating expense - ideally off balance sheet and off-credit GCP Confidential 41

42 Ownership Model Funding Options Capital Allocation and Cash Purchase Tax-exempt Debt GO or Revenue Bonds Private Activity Bonds Municipal Lease Tax-exempt Lease or Installment Purchase Agreement Taxable Debt Construction/Permanent Loan Equipment Lease Tax Credit Bonds CREBs, QSCBs and QECBs GCP Confidential 42

43 Service Model Overview Customer enters into a Services Agreement (ESA, PPA or USA) with GCP ProjectCo ProjectCo enters into a Site Lease with Customer to ensure unrestricted access to, and control over the Project Customer has no Project ownership control or fixed purchase option ProjectCo has all rights, risks and responsibilities of Project ownership ProjectCo contracts with a contractor to engineer, procure and construct the Project GCP capitalizes ProjectCo to fund its acquisition of the Project The Customer makes volumetric, unit priced payments to ProjectCo for all services delivered but otherwise has no fixed payment obligations The transaction typically has an accretive effect on Customer s income statement without requiring capital investment Customer has no minimum payment obligation, capacity charge or take or pay arrangement but must take services on a first-use basis GCP Confidential 43

44 Service Agreement Characteristics Site Control Customer conveys site control to ProjectCo via site lease. Right to Use Customer has no right to use or control of the plant. Ownership ProjectCo has full ownership including equity at risk, control over the operation of the plant, potential for economic losses and gains, etc. Executory Services Contract - the parties have ongoing and relatively equal obligations to perform throughout the term of Service Agreement. Unit Pricing host Customer and any additional off-takers pay unit prices for services received from the Project. Contingent Payment Obligations Customer has no take-or-pay, fixed capital cost recovery or other minimum payment obligations. Measurable Outputs ProjectCo produces and sells measurable services (energy savings, electricity or thermal energy) to Customer(s). Fulfillment of Obligations - ProjectCo can fulfill its obligations, at its cost, via alternate sources of services to the Project itself. Transfer of Project Title Service Agreement has no fixed-price purchase option or provisions for automatic transfer of title to the Customer. GCP Confidential 44

45 Basic Service Agreement Structure Utility or Savings Payments Site Lease Payments Client Development Agreement GCP as Developer & Sponsor Advise & Manage Invest Project Company EPC Contractor Investor(s) Utility or Energy Services Agreement Site Lease O&M Contractor GCP Confidential 45

46 Contact Information Joyce Ferris - Blue Hill Partners LLC joyceferris@bluehillpartners.com Sean Neil Transcend Equity Development Sean.Neill@transcended.com Zach Axelrod Skyline Innovations zaxelrod@skylineinnovations.com Jim Thoma Green Campus Partners jim.thoma@greencampuspartners.com 46