Climate Leadership Conference: Practical Energy Finance Solutions
One session at last week’s Climate Leadership Conference in Detroit dealt with financing strategies for energy and sustainability improvements.
PRACTICAL SOLUTIONS FOR CLIMATE CHANGE MITIGATION
Alex Kregie presented on Green Banks, a model to create a publicly chartered financial institution, similar to a CDFI or a GSE (Government-Sponsored Enterprise) like federal home loan banks. Investment in decarbonization, Kregie said, has been relatively stagnant in recent years. He attributes this to a lack of good financing options. Connecticut already has such a Green Bank, while Michigan has its own partnership program that is similar.
Mary Templeton presented on Michigan Saves, a similarly structured partnership program set up as a nonprofit that has lent $225 million in its 11 years of existence after it was seeded with a comparatively modest, $6.5 million grant from the Public Service Commission. The program aims to quadruple that total amount in the next few years. It is worth pointing out that investments, dollar-for-dollar, go a long way in areas with a heavy reliance on fossil fuels in heating climates (where the weather is very cold). Michigan Saves loans also have the ability to
Ben Jordan represented Coca-Cola, talking about how the company’s efforts to improve operational energy efficiency at its 875 bottling facilities and several thousand distribution facilities, none of which it owns. To be clear, Coca-Cola isn’t exactly a paragon of virtue for all of the plastic it creates. But it presents an interesting strategic challenge for the business as it works to reduce carbon footprint while improving the bottom lines for its contracted distributors and bottlers.
Certainly, the interest in reducing operational emissions is virtuous. But Coca-Cola has a massive carbon footprint from its reliance on single-use plastics. This is the kind of thing we need to be talking about in the question and answer sessions of these conferences. (Narrator voice: As it turns out, they didn’t talk about it).
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Kregie concluded by pointing out that these programs are not meant to supplant private financing for large-scale projects, which typically have an easier time finding capital. Rather, these are lending models designed specifically for energy and sustainability projects. As pretty much every building that is built today is going to be underperforming new builds in energy terms, it becomes necessary to think about how to affordably retrofit older building stock.
This reduces costs to occupants and improves occupant health while also reducing carbon footprint.
IMPROVING FINANCING STRUCTURES
To the non finance-brains among us, it may seem counterintuitive that increasing the complexity of a capital stack would actually improve a project’s viability. But in this case, we’re adding a layer in order to make a stronger case for the project’s viability.
Energy improvements translate to lower operational costs and often translate to more durable and resilient systems. This can strengthen the case for financing to a lender if the lender is aware of such things. Green mortgages, which reduce borrowing costs based on energy-related parameters, are a vague attempt to institutionalize this, but, at a very basic level, reducing energy costs decreases risk for a lender.
MISaves also lends for related improvements to a property– for example, if an electrical panel needs to be replace as part of an electrification improvement, or if a roof repair needs to be done as part of an insulation retrofit. This flexibility is crucial. As we’ve discussed in the Energy Waste Reduction work group in Lansing, many home repair programs or energy grants do not allow for concurrent, vital improvements to the building envelope.
APPLICATION IN THE TRIPLE BOTTOM LINE
How these energy finance systems can be applied equitably across both renters and owners is up for debate. Landlords, particularly landlords of lower-income housing, have little incentive to improve occupied properties unless they are required to by law. States like Michigan have few protections for renters, though the city of Detroit’s rental registration ordinance is an attempt to move the needle in this realm a bit.
Some simple policy improvements might be to require 12 months of energy bills for a property be included in every rental listing. Chicago does this. The idea is to give renters an “all other things being equal” comparison between like housing products. In Germany, building energy efficiency is distilled into a simple letter grade that is included in every real estate listing. HERS ratings would be a way to do this. But HERS only deals with energy usage intensity as opposed to other important factors like pervious paving or indoor air quality. Any of these solutions require extensive education and widespread adoption to be effective.
Do you have experience with energy finance? What are the best ways we can think about how to equitably improve the built environment while reducing carbon footprint? Drop us a line.
(This article is part of a series on the Climate Leadership Conference, which took place March 4-6, 2020 at the Westin Book Cadillac in downtown Detroit. Other entries include the introduction to the conference with some ideas about climate adaptation, an interview with the Rocky Mountain Institute’s Carla Frisch on America’s Pledge, and coverage of a panel on decarbonizing transportation.)