Financing Green – Putting an End to Value Engineering for Green Building

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I recently heard Jeremy Kalin deliver the lunchtime keynote talk at the Minnesota Impact! Conference hosted by the Minnesota Green Building Conference. He had some thoughts that I thought were worth sharing.

Jeremy titled his talk: Financing Green – Putting an End to Value Engineering for Green Building

Jeremy started by making the case that energy efficiency is more important than we realize. He’s not the first person to say it, but he restated that energy is an issue of National Security. The USA is effectively funding both sides of a war in the Middle East and much of this can be blamed on our lack of an Energy Policy. He referenced Puck Mykleby (one of our ISS speakers a year ago) and his work on the National Strategic Narrative, extensively.

To boil it all down, Jeremy basically argued that energy efficiency (EE) will help drive national security and at the same time provides great economic strategy. In fact, more Republicans have been interested in hearing this argument and following through with practical steps to create energy efficiency than Democrats. The economics just make too much sense, he says.

The three biggest opportunities, as he sees it, are:

  1. Smart Growth
  2. Sustainable Agriculture
  3. Advanced Manufacturing

Jeremy took time to call out the Sustainable Agriculture piece. According to a 2012 Deutsche Bank study, there are $1 trillion of EE savings out there worldwide in the ag sector over the next ten years using today’s technologies. The total cost for these EE improvements would be $279 million, yielding an annual ROR of 34%, creating 3.3 million jobs and decreasing consumption by 30%. Who would NOT want to take this on, and yet, our financing tools restrict us from starting many of these worthwhile projects.

And yet, a lot of the needed investment is not happening.

We all know the joke: Value Engineering is where they take out all the good stuff in the design because it costs too much. Even if there is a solid, sometimes a great, ROR for the investment, if the project cannot obtain the upfront financing to pay for it, something will get cut. Thus, Value Engineering.

But Jeremy made the point that if we had better financing mechanisms and we had better State and Local Policies to support these better financing mechanisms, then projects would be able to pay for more good pieces up front, realize the ROR over time, and everyone would be happier.

He reminded us that Financiers are always asking five things:

  1. Who will pay?
  2. Where is the revenue?
  3. What’s my Risk?
  4. Where is my security?
  5. What’s my return?

We can help answer these questions with the right innovative financing tools. We see some of this happening, but so much more needs to fall into place to have large significant impact and get us out of the mode of needing to do Value Engineering the way we do it now.

Chris Christie (R) started the New Jersey Energy Resilience Bank, Jeremy noted. CT and NY, both full of smart, wealthy investment bankers and hedge fund managers, both have green banks. In some ways, this is no surprise, since NYC is a center of the US banking industry – but on the other hand, there would not be green banks if these investments did not make sense.

In MN, where Jeremy was speaking, they have MN Energy Resources, statewide PACE financing, the MN Center for Energy and the Environment (MNCEE) and section of the MN Dept. of Commerce is dedicated to EE. Plus, MN allows community solar projects. He gave a shout out to Cleveland and their Clean Energy Financing Hub that is targeting $120 million of investment over the next three years, and he gave props to the AIA for issuing their Guide to Deep Energy Retrofits.

All these existing and new financial instruments still need to meet the needs of both the financiers and the property owner. The financiers’ issues are listed above. The owners’ issues often come down to three:

  1. Is it real? Jeremy suggests keeping some focus “on the meter” and prove that these savings and the ROR will be real.
  2. Does the investment fit inside the business model? What is the owners’ core business (Food? Educating 18 to 21 year olds? Running a city?) and does this make sense when incorporated into the rest of their business? It needs to make sense for everyone involved.
  3. Does the actual financing instrument work for the owner? What do they actually have to sign, and what risk comes with this?

Good questions, good considerations. We need to keep these in mind and start providing more possibilities here in PA. We could take more than a few lessons from Minnesota, New York and others. If you are interested, let me know and we’ll get you involved.

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