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Climate change is the buzz word in Washington, D.C., these
days. Everybody's talking about
conserving energy and reducing carbon footprints.
Lobbyists are publishing position papers.
Congress is debating legislation. Trouble
is, it's mostly hot air. Hardly anyone is actually reducing the consumption of kilowatts and
BTUs.
The
bloviating soon may be supplanted by real action,
however, thanks to the Energy Efficiency Partnership
of Greater Washington -- not to mention the energy
and efficiency that Laurel Colless, who heads up the
Virginia Tech initiative, brings to the job. A
New Zealand native who has lived in the U.S. only
since early 2006, Colless has assembled a formidable
team to reduce electricity use by power-guzzling buildings across the Washington
region. Blacksburg-based
Virginia Tech will spearhead
educational, outreach and research efforts. Pepco
Energy Services, an unregulated sister company to
the Washington-area power company, will retrofit up
to 100 buildings over the next five years. And
Hannon Armstrong, an Annapolis, Md.-based investment
banker, will supply $500 million to finance the
improvements.
Colless
hopes that the partnership's activity will spill
into the broader economy, sparking even more
conservation. Even after excluding federal government facilities,
hospitals and universities, she estimates, the
potential exists to save $3.6 billion a year in
electric consumption in the Washington region.
"Studies show that awareness levels here are appallingly low,"
she says: "Lower than in China" -- a nation not known either
for energy efficiency or ecological
consciousness. But the region may have reached a
tipping point. The Partnership is
generating intense interest. Says Colless: "I
have a spreadsheet with, at last count, the names of
38 commercial building owners who have approached
us."
To
my way of thinking, the Energy Efficiency
Partnership is a thing of beauty -- it shows how the
profit motive and creativity of the private sector
can be harnessed to accomplish a social goal like
energy conservation. Once someone figures out how to
make money at something, the United States doesn't
need to pass laws and regulations to make it happen
-- the model will replicate itself endlessly.
Entrepreneurs will stumble over themselves to invent
new technologies, identify new niches and refine new
business models, and there will be no scarcity of
private-sector capital to fund it. The
Partnership is wondrous for another reason: It
demonstrates the power of the Distributed Generation model
over the Big Grid model for electric power
infrastructure. The electric power system today is
dominated by a handful of giant power
companies that build giant power plants in remote
locations and criss-cross the countryside with
giant transmission lines. Under a distributed
system, entrepreneurs compete to
develop small-scale sources of electricity closer to
the consumer -- or figure out how to extend the
supply of electricity by using it more efficiently.
Dominion says that Northern Virginia faces power
blackouts as soon as 2011. But if the Energy
Efficiency Partnership can move quickly enough, it
may be possible to forestall such a calamity
without
the need for expensive and intrusive new
infrastructure investments.
The
energy-efficiency movement undoubtedly would have sprouted in
Washington sooner or later. The federal government
is a national leader in "greening" its
facilities. But Colless, who had
lived in conservation-minded countries like Japan
and Finland before arriving here, is the one who jump-started
it for the private sector. Among her
previous assignments, Colless had worked for Nokia on
corporate responsibility projects. Climate change
and energy efficiency are high priorities in
Finland, and she helped forge cross-sector
partnerships for the mobile phone giant. (She must
have been pretty good at her job -- one of the
partnerships she established was with Pekka Lintu,
whom she married and accompanied to Washington when
he was appointed Finland's ambassador to the United
States in January 2006.) Colless'
aptitude for creating partnerships was just what
Virginia Tech needed when it started looking to
bolster its presence in Northern Virginia and the
Washington region. The University doesn't want to
get into the retrofitting business itself, Colless
explains. Its goal is to support the initiative
through the unique strengths that it can bring to
bear and leave the business to others. Virginia
Tech's overarching goal is to reduce greenhouse gas
emissions from existing buildings by 20 percent to
50 percent. As a practical first step, that means
building awareness in the private sector of just how
profitable energy efficiency improvements can be.
With the London-based
World Business Council for Sustainable Development,
the university will host a workshop in March to take
the message to the construction industry.
Virginia Tech also wants to use the Initiative as an
educational tool: in effect, giving its engineering and
architecture students a living lab to learn in.
Additionally, the university wants to identify
long-term cross- disciplinary research opportunities
around the theme of energy efficiency.
Pepco
Energy Services will line up customers and handle
the retrofitting. Says Patrick Sweeney, vice
president of business development: "Our job is
to look for opportunities, qualify customers and
make sure they understand what they’re getting
into when they do an audit or a retrofit."
The first step is examining the prospective
customer's electricity bills, adjusting for square
footage and industry uses, and comparing them to
energy benchmarks. Pepco isn't interested in doing
the easy stuff -- installing compact fluorescent
lights, for instance -- that people could easily do
themselves. The company wants to undertake
comprehensive programs that offer the potential to
cut electricity usage
by 20 percent to 50 percent, Sweeney says.
For
property owners willing to achieve major savings,
Pepco will conduct a detailed energy audit and rank
the options. Alternatives range from simple tasks
like double-paning windows or installing power
managers for computers to more ambitious options
such as installing solar panels or overhauling
heating and cooling systems. HVAC systems are often
terribly inefficient, cooling some rooms too much
and others not enough. "We’ve
seen it where people have space heaters plugged in
while the room is being air conditioned,"
Sweeney says.
Not
only does Pepco deliver the project, it remains
engaged afterward. "Sometimes we do operations
and maintenance," Sweeney says. "We
measure and verify that the savings are being
delivered. There is follow through. We guarantee performance."
While
the energy savings can be ample, many property
owners don't find the investment attractive. They
may have alternate uses for their capital, or they
don't like the length of the paybacks, which can
stretch as long as eight to ten years. That's where
Hannon Armstrong comes in.
"Most
building owners, who are paying an energy bill, have
an investment horizon of one to three years,"
says Jeff Eckel, president of the investment banking
firm. "The biggest advantage we have is a
willingness to go longer than three years."
As
a generality, it costs about $5 million
"to make a building as green as it can
be," Eckel says. "It takes a lot of little
projects -- heating, cooling, lighting windows. A
lot of tiny stuff. It's most economic when it's all
pooled."
Another
advantage Hannon Armstrong brings to the table is an
ability to aggregate smaller investments that would
be individually unattractive into a package that
investors are willing to put money into. For the
financier, it takes no
more work to do a big project than a small one,
Eckel notes.
The
goal of the Energy Efficiency Initiative is to
retrofit around 100 major buildings. Using that $5
million-per- building yardstick, Hannon Armstrong
has committed to provide $500 million in capital
over the next five years.
Eckel's
strategy is to create a no-lose value proposition:
Property owners get the benefit of lower
energy bills while incurring no cost or financial
risk to themselves. As a bonus, the energy
improvements often deliver lower maintenance
expenses and improved working conditions. (Lighting is more consistent, and there's
no more shivering beside electric heaters in
excessively cooled rooms!)
"It
can be summed up as pay for savings," Eckel
says. "If the savings aren’t there, we
don’t get paid. The only choice that is uneconomic
for the end user is
to do nothing."
Pepco
and Hannon Armstrong get paid from a share of the
savings stream.
Financial
engineering is what bridges the gap between the
property owner's need for a two- or three-year
payoff and Hannon Armstrong's eight- to ten-year
investment horizon. Eckel was reluctant to discuss
the details with me, but they presumably include
tools such as synthetic and leveraged, long-term
leases as well as the use of different combinations
of debt and equity. Part of Eckel's role as
investment banker is to package instruments
that provide more stable, intermediate-term returns
that certain categories of investors are looking
for.
Although
Hannon Armstrong has financed a number of alternate
energy deals for the federal government -- wind
turbines in Guantanamo Bay, a cogeneration facility
at the 29 Palms, Calif., Marine Corps base -- Eckel
expects most customers in the Energy Efficiency
Initiative will be commercial property owners.
"The
federal government has a good program in
place," Eckel says. "Investments are
getting done, projects are happening." But the
commercial office sector is open for a gold rush.
Capitalism
rocks. Once Eckel and Sweeney
demonstrate the ability to make money from energy
efficiency, they will inspire hordes of imitators.
Entrepreneurs will scour the country for
opportunities to squeeze greenbacks out of green
buildings. Like a force of nature, they will
transform the world -- and make it a better place.
--
December 10, 2007
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