For decades energy experts have known that dramatic improvements in energy efficiency provide compelling economic benefits. As much as half of the energy we use in our homes, office buildings and businesses is wasted. Buildings consume 40 percent of all the energy we use in the U.S. Until recently, barriers in the marketplace hindered our ability to reduce this waste, leaving customers on the hook for billions of dollars in electricity bills — dollars that could be spent elsewhere.
New Jersey is making huge strides in breaking down these barriers. Thanks to the recent integration of a new pilot program into the state’s existing Pay for Performance energy-efficiency program, the Garden State stands on the cusp of creating a new, robust market for efficiency investments — one that could unleash job creation and cost savings for New Jersey businesses. Getting the private sector involved also helps New Jersey achieve another objective: meeting state environmental goals without burdening energy consumers or taxpayers.
The pilot program, developed by the New Jersey Board of Public Utilities (NJBPU) in conjunction with the Environmental Defense Fund’s Investor Confidence Project (ICP), utilizes a set of standardized project guidelines to facilitate investment in energy-efficient buildings.
As a principal with Joule Assets, an investment firm that specializes in energy-efficiency finance, I can confirm the attractiveness of this investment opportunity for New Jersey. NJBPU’s pilot, which outlines a clear system of standards and protocols for energy-efficiency projects, closes a gap that has prevented scalability for investments in this arena. It’s important for everyone to understand why this is such a big deal.
A big barrier in this market has been the inconsistency in approaches to performance measurement. Most energy-efficiency projects in buildings target obvious renovations to yield efficient lighting, improvements to heating and air conditioning systems, upgrades to boilers and pumps and better insulation. Surprisingly, though, few projects include measurement of the actual energy savings that these installations produce — and when they do, performance measurement is not standardized.
For investors interested in capitalizing on financial savings from energy-efficiency measures, this inconsistency presents a problem: It’s difficult to deploy capital on a project-by-project basis. It would be a far more effective use of capital to invest in dozens or hundreds of buildings at a time. To do so, however, those buildings’ management teams need to measure the performance of their efficiency upgrades and report on energy and financial savings in a similar manner. The lack of consistent standards raises project costs for everyone involved.
That’s where the ICP comes in. The group has developed a certification specifically designed to rate investor-ready energy-efficiency projects. Hartford Steam Boiler, a subsidiary of insurer Munich Re, offers performance insurance, for which underwriting is done at the portfolio level, as opposed to project by project. This is a direct result of the standardized investment process outlined by ICP protocols.
The concept is fairly straightforward. If a building owner or investor wants to make improvements intended to reduce energy expenses — say, upgrades to lighting or heating systems — there should be a way to measure those energy savings over time and ensure that the investments are paying off in the form of reduced energy bills. The ICP approach, which encompasses an exacting set of industry-leading protocols for the design, commissioning and evaluation of energy-efficiency investments, gives owners and investors confidence that the expected returns will materialize.
Consistent, rigorous metrics are like manna to investors. Every investment plan is different. But when the plans are developed using standardized protocols, financial risk can be analyzed across a portfolio of projects. Those data help make for informed investments. And because energy-efficiency projects essentially capture money otherwise wasted through inefficient lighting, old air conditioners and poor insulation, the returns on such investments are both large and uncorrelated to traditional stock and bond markets. In a weak economy, people are still wasting energy — and money in the process. If you invest in building upgrades, you will get a solid rate of return, even if the broader economy is struggling.
As the first state in the U.S. to adopt the ICP approach, New Jersey is at the forefront of this opportunity. The state will have a leg up on others that will inevitably emulate the model. New businesses will start here and expand while other states catch up. And certainly, by attracting private sector investments under pay-for-performance models, New Jersey is also ensuring that its energy-efficiency programs achieve the ultimate goal for green projects: turning wasted energy into cash flow.
In many ways, the efficiency opportunity seems too good to be true: profits from waste, jobs from new investments, cleaner air and savings for customers. Thanks to the NJBPU and ICP, the investment community will have far more confidence in these outcomes. That’s something everyone in the Garden State can get excited about.
Maria Fields is managing director and handles investor relations at Joule Assets, an impact investment management firm based in Bedford Hills, New York.
