Show Me the Money: Energy Efficiency Financing Barriers and Opportunities

Energy efficiency represents a significant largely untapped opportunity for meeting the dual goals of financial return and environmental protection. By eliminating wasted energy, the U.S. can reduce its fossil fuel use, move toward energy independence, and reduce its greenhouse gas (GHG) emissions by almost forty percent by 2030 at a net savings to customers.

The investor stands to harvest an estimated $130 billion in annual energy savings according to 2009 research from McKinsey & Company. However, a host of barriers stand in the way of these cost savings and associated GHG emissions reductions being realized, including but not limited to:

• High upfront capital costs
• High development costs
• Long payback periods
• Uncertainty of savings and perceptions of risk
• Split incentives
• Limited capital availability

How real are these barriers? What progress has been made in developing business models that resolve them? Which are the key market failures that need to be addressed to motivate investors to be first movers in this marketplace? These are some of the questions that Environmental Defense Fund (EDF) and the Nicholas Institute for Environmental Policy Solutions (NI) set out to answer through delving into the literature on the space; collecting information from EDF partner companies; and interviewing a dozen investors, who have been actively conducting due diligence on energy efficiency deals.

This paper briefly characterizes energy efficiency market sectors; describes the major players in the energy efficiency financing market; describes the key barriers facing each market sector; reviews primary internal and external financing strategies used by each market sector; summarizes our investor discussions; and offers conclusions and recommendations for catalyzing large-scale deployment of capital to the energy efficiency sector.