Energy Efficiency: Opportunities, Challenges,

and Potential Solutions

By Aparna Sundaram

A practicum submitted
in partial fulfillment of the requirements
for the degree of
Master of Science
(Natural Resources and Environment)
at the University of Michigan
April 2009

Faculty advisors:
Professor Tom Gladwin, Chair
Professor Gautam Kaul
i
Executive Summary
Energy use in buildings accounts for 35 percent of total primary energy consumption in the U.S. (Kreith
& West, 1997). The Lawrence Berkeley National Laboratory (LBNL) estimates potential cumulative
energy savings from the buildings sector alone to be $170 billion in 2030 (Biermayer et al., 2008), if
investments totaling $440 billion were made from 2010 and 2030. In other words, investments with a
simple payback of 2 1/2 years and a benefit-cost ratio of 3.5 (Brown et al., 2008) could net $170 billion in
savings on energy expenses in 2030. This investment case posed by aggregate savings parallels the
investment case, potential energy savings, and returns for individual non-residential building energy
efficiency projects; yet much investment is failing to occur. This research seeks to asses why and
whether capital markets play a role in enabling or hindering investment in non-residential building
energy efficiency projects.

Research Questions:
 What are the demand-side and supply-side measures that could save the most energy at the
least cost?
 What are the impediments to investment in these measures?
 What might be potential solutions, particularly in terms of financial instruments, products,
and structures?

Methodology:
 Secondary research
 In-depth interviews
 Conferences / trade shows

Findings:
Demand for non-residential building energy efficiency products and projects is growing. The buildings
sector accounts for 62 percent of total investment in energy efficiency, according to Ehrhardt-
Martinez and Laitner (Ehrhardt-Martinez & Laitner, 2008). Non-residential building energy efficiency
was a $51.3 billion in 2004 and demand has only grown (Ehrhardt-Martinez & Laitner, 2008).

Customers for EE projects include owners and occupants in commercial offices and retail buildings,
Federal buildings, and MUSH buildings.

Energy consumption and floor space is highest for offices, retail, and education yet demonstrated
demand for building energy efficiency services is highest among municipal governments, universities
and colleges, schools, and hospitals (MUSH). However, the American Reinvestment and Recovery Act
mandates upgrades of 45 and 25 percent to new and existing federal facilities by 2014, respectively
and the Alliance to Save Energy expects EE projects to take place in 75 percent of federal building
stock.

Given that the facilities are generally large, have ageing infrastructure, and limited capital budgets for
improvements, customers often prefer to contract energy management services firms to improve
their facilities. These firms have found significant obstacles, such as up-front equipment costs, to
impede growth in their sector. As a result, energy services companies (ESCOs) have created financing
structures, such as performance contracting, which address structural issues in the energy efficiency
market. As a result:

 Energy management services were a $12.79 billion in 2008 with compound annual growth rate
of 18.5%
 Energy performance contracting services were a $3.6 billion in 2006 with annual growth of 22
percent per year.

ii
Drivers for investment in non-residential building energy efficiency are energy costs, environmental
concerns, marketing, and compliance. Approximately $20 billion in government funding will be spent
on energy efficiency via the TARP, ARRA, and additional measures.

 Policies specifically target building energy efficiency via environmental caps, building energy
codes, and required upgrades for Federal facilities.
 Additional measures include tax breaks, rebates, public-private partnership financing schemes,
and public education campaigns, which directly bring down the price premium commanded
by energy efficient technologies.
 These factors can create a leverage effect that spurs further investment in EE technologies
and services between the present day and 2013. Key to this effect will be minimization of the
perceived risk of energy efficiency projects and technologies: performance risk and cost are
being addressed by measures mentioned above. Financing risk remains an issue.

Due to these factors, investment in non-residential building energy efficiency is taking place though
still not to the extent possible. Impediments to full achievement of the US building stock’s energy
savings potential include the following:

 Energy is a low priority relative to other capital projects, due to its low cost share and the due
to the greater cash flow impacts of other potential projects.
 Most energy efficiency projects lack collateral and the implementing service providers often
lack credit ratings and strong enough balance sheets to independently get project loans.

The role that capital markets can play in driving investment into non-residential building energy
efficiency projects is in addressing the second point by allocating and distributing financing risk –
which, in particular, bolsters investor and lender confidence. EE projects’ lack of collateral value
increases the risk of investors’ bearing full exposure in the event of bankruptcy or default. At present,
investors require customers to provide them recourse though financing is arranged by third-party
ESCOs. Customers consequently face the risk of credit down-grading; they are eager to find off-
balance sheet financing structures that protect them from this risk. Capital markets financiers can
organize structures which allocate and distribute financing risk differently – firstly by structuring the
financing off-balance sheet, and secondly, by obtaining government credit support.

Still, the typical size of an individual energy efficiency project is small; the transaction costs incurred
necessitate minimum deal sizes of $10MM. Consequently, financiers must also facilitate aggregation.
Government and utilities can play a role in aggregating projects; utilities are particularly well-placed,
having, as they do, pre-established customer networks, usage meters, billing capabilities, and strong
balance sheets. Moreover, utilities are being driven, through a combination of market and regulatory
forces, to invest in energy efficiency. They have a vested interest in increasing the viability, reliability,
and cost-effectiveness of energy efficiency as an energy resource. Consequently utilities are pushing
consumer adoption with promotional efforts and outsourcing implementation to keep program costs
low.

Capital markets financiers can seize the opportunity presented by these changing market dynamics to
leverage utility, government, or other partners to aggregate projects in controlled-risk off-balance
sheet structures to drive investment into energy efficiency.

iii
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Acknowledgements
This practicum could not have been written without Cliff Adams, Managing Director, Coady Diemar
Partners (New York, NY), who, as my practicum sponsor, offered essential encouragement, support,
and criticisms. To Cliff and all the other professionals– including Andrew Brix, Kateri Callahan, Brian
DiGiorgio, Tom Dreessen, Jeff Eckel, Joel Fetter, Yoshiko Hill, Nina Lockhart, Mike McNalley, Bill Miller,
Tracy Narel, Matt Naud, Nick D’Andrea, Gerald Polk, John Ravis, Scott Sidell, Steven Schiller, Mike
Taylor, Donald Thompson, David Thurm, and Jeff White – and the faculty the University of Michigan –
including Tom Gladwin and Gautam Kaul – and finally, the Erb Institute staff, students, External
Advisory Board, and alumnae – including Rick Bunch, Cyndy Cleveland, Dave Fribush, Peter Fusaro,
Bryan Magnus, Rick Plewa, Emily Reyna, and Ryan Waddington – who were kind enough to share their
time and expertise, I offer my sincerest thanks. I offer my sincerest apologies to those whom I
accidentally left out.

April 20, 2009

v
Table of Contents

INTRODUCTION 7 Major Market Locations 35

Customers 7 Summary of Key Points 37
Suppliers 9
II. CHALLENGES 38
I. OPPORTUNITY 12 A. Market Barriers 38
A. Demand 12 Impediments to Customer Demand 38
Market Size: EE Products & Services 12 Renters 39
Building Stock and Growth 13 Owner-Occupants 39
Potential Savings 13 Non-Occupant Owners 39
Average Project Size 17 Impediments to Service Provider Supply 40
Customers 17 B. Financing Barriers 40
Market-Based Drivers 17 Commercial Customer Risks & Costs 41
Costs 18 Government Customer Risks & Costs 42
Environmental Footprint 18 ESCO Risks & Costs 43
Revenues 19 Summary of Key Points 44
Non-Market Drivers 19
American Recovery and
Reinvestment Act (ARRA)
19 III. SOLUTIONS 45
Other Legislation 21 A. Distributing Financing Risk 45
Commercial Energy Codes 21 B. Minimizing Transaction Costs 46
Utility Programs 21 C. Partners, Tools, and Structures 46
Other 21 Government 47
Utilities 48
B. Supply 22 Real Estate Investment Trust of Property Developer 50
Energy Services Defined 22 Summary of Key Points 50
Equipment Manufacturers &
Marketers
22
ESCOs 22 CONCLUSION 52
Utility Demand-Side Management 26
Utility Demand Response 29 APPENDIX A: Waxman-Markey Bill 54
Supply-side Energy Services 29
Market Size for EE Services 29 APPENDIX B: Building Energy Efficiency 57
Market Size for Energy Performance
Contracting Services
30 A. Equipment & Materials Overview 57
Players 32 B. Documented Transactions: 2003-2008 68
Market-Based Drivers 33
APPENDIX C: Suppliers of Energy
Non-Market Drivers 34 73
Services
Utility Regulations 34

Page 6 of 81
INTRODUCTION
Energy use in buildings accounts for 35 percent of total primary energy consumption in the U.S., 42
percent of total energy costs, and 35 percent of all U.S. carbon emissions (Kreith & West, 1997). The
latest report by the Lawrence Berkeley National Laboratory (LBNL) corroborates Kreith and West’s
decade-old statements on consumption and emissions and goes on to say that at a price of 2.7 ¢/kWh1,
cumulative savings from the buildings sector alone can equal up to $170 billion in 2030 (Biermayer,
Borgeson, Brown, & Koomey, 2008).

The total capital required to achieve the $170 billion in savings would be $440 billion, invested between
2010 and 2030. The simple payback2 on the $440 billion would be 2-1/2 years. The benefit-cost ratio3
(life-cycle savings relative to the cost of investment) of the investment would be 3.5 (Brown et al.,
2008).

The above top-level estimates do not reflect the full complexity of energy efficiency (EE) undertakings:
the $170 billion represents reduced operating costs for some (building owners and occupants), and
lost revenue for others (commodity electricity suppliers). Furthermore, commodity electricity
suppliers, the losers of revenue in this scenario, are guaranteed a rate of return by regulators; they
can, therefore, incorporate trends of diminishing demand into budget projections and request rate
increases. If approved, rate increases would eliminate some, if not all, of the upside of an EE
investment undertaken by building owners and occupants. Thus the $170 billion, while attractive, will
be no easy feat to achieve. It will take a thorough understanding of the ecosystem for energy
efficiency – or in other words, of the real estate and energy value chains, the policies that influence
within them, and the interactions between them. The remainder of this introduction outlines the EE
ecosystem.

Customers
Potential customers for energy efficiency products and services exist across the length of the real
estate value chain, from project developers to rental unit occupants. Figure 1 illustrates these potential
customers, EE technologies and services available at each point of the chain, and considerations as to
revenues, expenses, regulation, and policy that can influence investment decisions in non-residential
building energy efficiency projects.

Factors to note are that decisions on new construction are rarely made by the resulting occupants. In
fact, decisions are frequently made by firms aiming to minimize construction risks and project costs,
and maximize pre-development lease sales. Moreover, during construction, architects, not building
owners or property developers, oversee change-orders and purchase equipment that may affect the
overall efficiency of the building system (Jones, Bjornstad, & Greer, 2002).

For existing buildings, key points are that energy bills come from both electricity and energy suppliers,
and from actors within the real estate value chain (e.g. property managers). Secondly, building
occupants may or may not own the properties they inhabit, and so, may or may not have incentive to
invest in building-related equipment that has insignificant stand-alone value.

1
NOTE: The values, 2.7 ¢/kWh, $170 billion, and $440 billion, are presented in 2007 dollar terms.
2
NOTE: Simple payback measures how long it takes for an investment to be recouped, irrespective of the time value of money.
3
NOTE Benefit-to-Cost Ratio (BCR) or Savings-to-Investment Ratio (SIR): Energy cost savings divided by investment or actual
costs. Usually, this is energy savings, net of maintenance and repair costs, divided by investment and replacement costs less
salvage value. SIRA1:A2 = ∑N(t=0) [ CSt (1+d)-t] / ∑N(t=0)[ It (1+d)-t ] where SIRA1:A2 = savings-to-investment ratio for alternative A1 relative
to mutually exclusive alternative A2; CSt = cost savings (excluding those investment costs in the denominator) plus any positive
benefits of alternative A1 as compared with mutually exclusive alternative A2; and It = additional investment costs for alternative
A1 relative to A2. The higher the ratio, the more dollar savings realized per dollar of investment (Kreith & West, 1997).

Page 7 of 81
Figure 1

Page 8 of 81
Suppliers
On the supply side of EE, products run the gamut of heating, ventilation, and air conditioning (HVAC),
lighting and lighting fixtures, energy/power storage, back-up power, on-site heat and power
(cogeneration) systems, on-site (distributed) generation technologies (such as micro-wind and solar
PV), building automation and process-specific control systems, and more. Product suppliers are
represented by their products in Figures 1 and 2.

EE service providers include energy management, building equipment manufacturers and marketers,
utility company demand-side management (DSM) and demand response (DR) divisions, and
engineering and IT services companies. These service providers indirectly connect investors along the
real estate value chain with energy suppliers (See Figure 2). Retail energy suppliers (e.g. natural gas
firms) directly connect customers from the real estate value chain to actors along the energy value
chain; they are pictured in Figure 2, but are not a focus of this report.

Energy service companies (ESCOs) offer both equipment-specific services –such as installing and
maintaining energy efficient lights or boilers – and integrated services –such as auditing buildings,
devising window-HVAC-lighting upgrade projects, installing and maintaining equipment, and financing
projects. In return, customers achieve energy savings. Energy savings can be accomplished by
installing devices that increase conversion efficiency (in transforming a primary resource to energy) or
reduce the amount of energy required for a given task. The first method can be referred to as
“resource efficiency” and is relevant in the building energy efficiency context only in renewable
energy and cogeneration projects. The second is comprised of both product and behavior efficiency: in
other words, a product may be less energy-intense or people can use it less frequently. Either way,
demand-curtailment can be achieved.

Reduction of energy demand affects energy suppliers both by dampening revenue potential and by
delaying the need for infrastructure investments. The latter point is reflected in utility budgets via
integrated resource planning (IRP). IRP requires utilities to evaluate all possible options, including
demand-curtailment, for providing reliable and low-cost service to customers. In other words, utilities
must justify investment in new or extended transmission and distribution (T&D) and/or power
generation assets relative to similarly effective demand-side management programs. Stated
differently, demand-side management programs compete against capacity build-outs for regulatory
approval and ratepayer-based funds.

DSM thus mitigates utilities’ needs to invest in infrastructure. In fact, the International Energy Agency
estimates that each additional $1 of EE investment on the demand-side saves more than $2 on the
supply side (Boyle et al., 2006).

DSM 4 programs typically entail promotions, like rebates, for energy efficient technologies and
products. Utilities employ program administrators (e.g. PICO and KEMA) to estimate customer
participation and potential kWh, Btu, or $ savings. The budgets are presented alongside those for
capacity additions to the Public Utilities Commission (PUC), the Public Service Commission (PSC), or
the Utility Board, depending on the state. PUCs analyze and approve a combination of activities within
one IRP. When the approved IRP includes DSM, utilities invite bids from implementing organizations,
like ESCOs. ESCOs win DSM contracts and get paid via approved utility budgets. In this way, ESCOs
subsidize part of their business activities with ratepayer funds. According to a source at a large ESCO,
ratepayer-funded energy efficiency programs account for, at maximum, 10 percent of ESCO revenue.
(M. Taylor, personal communication, April 8, 2009).

4
NOTE: Many utilities house subscription-based emergency shut-down Demand Response (DR) programs within their energy
efficiency departments. For payment, subscribers agree to give utilities direct control over their energy loads at critical times.

Page 9 of 81
Figure 2

Page 10 of 81
In addition to market assessments by program administrators, utilities gather information regarding
demand-curtailment activities within their service areas through interaction with ESCOs. Utilities can
consequently anticipate growth in customer-sited renewable generation 5 and EE investments. If
utilities and DSM program administrators anticipate customers’ energy efficiency investments, they
consider the volume and value of the conserved energy in their integrated resource plans, even if the
investments fall outside of the purview of the utilities’ DSM programs.

As independent energy efficiency investment is relatively small, most ESCOs bid for utility DSM
contracts. Were demand for EE to grow independent of utilities, utilities would quickly find themselves
at a significant disadvantage relative to other independent energy suppliers. Independent power
producers (IPPs) are not governed by the same regulation as utilities and as such have lower costs and
retail prices. Utilities, which must carry the costs of legacy infrastructure and meet many regulatory
hurdles as to reliability, capacity, and pricing, are less flexible: if demand drastically decreased, utilities
would incur not only cash flow problems but also regulatory costs. This competitive pressure creates a
strong motivation for utilities to establish a position in demand-side management.

Ratepayer-funded energy efficiency programs are estimated by the Consortium for Energy Efficiency
to have been $3.74 billion in 2008, up 18 percent from 2007 (CEE, 2008). Thirty percent of the growth
was channeled into each of the commercial, residential, and industrial sectors, individually (CEE, 2008).

Change of the White House Administration and expected and announced regulation exacerbate tight
budgets and budget crises in many states; expansion of utilities’ DSM programs is already being seen
and is expected to continue (AESP Conference Participants, January 26-29, 2009).

Being that utility DSM programs are typically promotional programs EE product sales can be expected
to grow. EE service company revenues also will likely grow, as a result of the government policies,
energy and environmental concerns, and search for value-adds. ESCOs will require external capital –
whether from government, commercial banks, or non-bank institutions (including investment banks) –
to close deals and execute customer contracts. The remainder of this report will outline the
opportunity for financing non-residential building energy efficiency projects, the risks, and potential
ways to minimize the latter so as to exploit the former.

Section I describes the opportunity, inclusive of market size, growth, players, and an outline of the
economic interactions between them. Section II reconciles the opportunity with risks and obstacles to
EE investment. First, the section outlines market barriers to building energy efficiency from customers’
and service providers’ points of view. Second, it identifies financing barriers such as high transaction
costs, small project sizes, and lack of collateral. Section III discusses possible solutions to the issue of
capital availability for energy efficiency projects.

5
NOTE: Some state regulators, such as in New York, require utilities to offer net meters. The interaction between on-site
generation and consumption-reduction under the of umbrella energy efficiency support the observation by many industry-
watchers that the future for ESCOs will be in distributed generation.

Page 11 of 81
 I. OPPORTUNITY
 Market Size:
In 2004, non-residential building EE
was a $51.3 billion market
In 2006, ESCOs earned $3.6 billion
from performance contracting
In 2008, energy efficiency services
earned $12.79 billion
That same year, government and
utility EE spending was $3.74 billion
The sector’s growth is between 18.5-
22 percent annually
 Drivers of Growth: New legislation
has channeled approximately $20
billion into EE since early 2009
Rebates minimize EE equipment
premiums
Tax credits and grants minimize
financing costs
Compliance is required
Demand will materialize when
capital markets reallocate risk

A. DEMAND
Size of the Energy Efficiency Market
Market Size: EE Products & Industry Segment Revenues / Budgets
Services (billions $)
Insulation 5.00
ESCO 3.00
The American Solar Energy Society Recycling 275.00
estimates the energy efficiency industry to Vehicle manufacturing 73.00
have been $932 billion in 2007 6 . Table 1 Household appliances and lighting 22.00
provides a breakdown of this number by EE Windows and doors 12.00
Computers, copies, and FAX machines 90.00
product and service company revenues and
TV, video, and audio equipment 45.00
government expenditures. HVAC systems 12.00
Industrial and related machinery 19.00
Only a portion of this represents investment Miscellaneous durable manufacturing 105.00
in building energy efficiency. The most Nondurable manufacturing 220.00
Utilities 2.00
recent estimate on the size of the building Construction 36.00
energy efficiency market is from 2004 by Total, Private Industry $919.00
the ACEEE, in which the authors value the Federal government EE spending 3.30
market at $178 billion (Ehrhardt-Martinez & State government EE spending 3.00
Laitner, 2008). Non-residential building Local government EE spending 2.30
energy efficiency made up 29 percent of Total Government $8.60
that total, or $51.3 billion that year EE trade and professional associations
0.50
(Ehrhardt-Martinez & Laitner, 2008). and NGOs
TOTAL, ALL SECTORS $932.00
According to Ehrhardt-Martinez and
Laitner total investment in the building Table 1 Source: ASES (2007)
efficiency sector, exclusive of

6
NOTE: ASES defines energy efficient equipment by the DOE’s Energy Star label. ASES methodology: ASES parses the portion of
total sector revenue for relevant equipment sectors (e.g. windows and doors, lighting, etc.), that is attributable to Energy Star.
ASES adds to this, the total value of the recycling and reuse, ESCO industries, and federal, state, and local government energy
efficiency budgets. ASES includes a portion of the federal climate change budget, and finally, adds energy efficiency non-profit
and association budgets. As the energy efficiency industry is comprised of subsets of disparate equipment and services
industries, as seen in Table 1, the industry is defined and scoped in a variety of ways by individual authors of industry reports.

Page 12 of 81
appliances and electronics, was $90 billion in 2004 (Ehrhardt-Martinez & Laitner, 2008). Roughly 13.6
billion of this value represented an “efficiency premium”, or additional cost for energy efficiency
relative to standard equipment, materials, and services (Ehrhardt-Martinez & Laitner, 2008).

Building Stock and Growth

New non-residential construction accounts for approximately 2 percent of GDP annually (DOE, 2008).
Based on GDP of 14.264 trillion in 2008 (Bureau of Economic Analysis, n.d.) can be estimated as
$285.28 billion for 2008 with growth to $422.398 by 2030. Sectors that will demand the most new
construction are education, government, industry, office, healthcare, hospitality, and retail (McGraw
Hill Construction, 2008). Existing non-residential building retrofits account for another 2 percent,
annually, of GDP (DOE, 2008). Collectively the two segments equaled $570.560 billion in 2008 and will
be $844.797 billion by 2030.

The energy efficiency component is 3 percent of construction output (ASES, 2007), or $17.116 billion for
2008 (Author’s calculation). Barring change in demand for EE as a percentage of construction or for
new and retrofit non-residential construction as a percent of GDP, the non-residential building energy
efficiency market value will be $25.343 billion by 20307 (Author’s calculation).

Potential Savings
Building energy needs are comprised by requirements for heating, cooling, ventilation, air
conditioning, lighting, and humidification. Indoor climate, outdoor climatic conditions and the building
properties (surface / transmission heat transfer and heat transfer due to air leakage) influence gross
energy needs of buildings. Energy flows within buildings and consequently, there are interactions
between equipment and processes (See Figure 3). Potential savings depend upon building design and
orientation, ventilation and lighting
systems, thermal integrity (which is
dependent on insulation, windows,
and doors), construction methods,
and HVAC, lighting, and building
controls equipment and processes 8
(Govindarajalu, Levin, Meyer, Taylor,
and Ward, 2008). In other words,
location, business activity, and
building orientation, matter as much
as materials and equipment.
Figure 3 Source: REEEP (2006)
According to the Energy Information
Agency (EIA) in its Energy Outlook for 2009, commercial buildings account for roughly 18 QBtu of
primary energy end-use. This translates to approximately 20 percent of annual GHG emissions in the
U.S. (EPA, n.d.). Figure 4 shows floor space, number of buildings, and primary energy consumption by
non-residential building activity.

7
Varying figures exist for the value of the construction industry: ASES states it as $1.2 trillion and consequently estimates the EE
industry size in 2007 as $36 billion, as represented in Table 1 on page 11.
8
NOTE: Appendix B provides a compendium of building equipment and materials and their specifications.

Page 13 of 81
 Figure 4

Source: DOE
(2008)

Figure 5 shows primary end-use energy consumption in commercial buildings.

Commercial Primary End-Use Energy

Consumption

Source: DOE (2008)

Figure 5

The EIA expects commercial electricity consumption to increase 1.4 percent per year from 2007 to
2030 (EIA, 2009) due to increased consumption of office equipment, ventilation, and service station
equipment, automated teller machines, telecommunications, medical, and other business-specific
equipment.

According to ConEd, energy efficient lighting is the most cost-effective EE measure: the cost to
implement an EE lighting project, inclusive of both bulbs and controls, is about $3.50 per square foot
(D. Thompson, personal communication, February 6, 2009). Annual energy savings (without factoring
in utility-based DSM incentives) would be approximately $1.00 per square foot (D. Thompson, personal
communication, February 6, 2009). Motors and air conditioning are second, and building envelope and
automated energy management systems are third (D. Thompson, personal communication, February 6,

Page 14 of 81
2009). LBNL estimates that buildings can save 1.51 quads and 705 TWh by 2030 through energy
efficiency measures (See Figure 6).

Figure 6

Source: Brown et al. (2008).

Many of necessary measures can be NPV-positive, as show in the example in Figure 7, when the value
of energy cost savings is considered. In fact, the National Action Plan on Energy Efficiency reports
potential energy bill savings of between 5-30 percent for measures promoted through utility DSM
programs (NAPEE, 2005) alone. Larger investments, such that would enable a customer to join the
ENERGY STAR9 program, show reductions in consumption of 35 percent relative to average buildings
and operating cost reductions of $0.54 per square foot (ENERGY STAR, 2008).

9
NOTE: ENERGY STAR is joint program of the EPA and DOE that promotes energy efficient products and practices through
energy performance rating and labeling, public education, and more. More details at http://www.energystar.gov/

Page 15 of 81
Figure 7 Estimated Cost and Benefits for Commercial Building EE
Measures through 2030

Input Assumptions

NPV of Commercial Measures

Mid-Range Input Assumptions and 3% discount rate

Source: Fine & Mihm (2009)

Page 16 of 81
Average Project Size
According to self-reported data on the DOE’s Building Technologies Program website, the median
investment from 2001 to 2007 in non-residential building energy efficiency was $5.75MM (Author’s
calculation based on data from DOE website; DOE, n.d.). Average investment was $21.41MM (Author’s
calculation based on data from DOE website; DOE, n.d.).

A Johnson Controls survey in 2007, of 1249 executives and managers, found that 57 percent and 80
percent of those surveyed expected to invest 8 percent of their 2008 capital budgets and 6 percent of
their 2008 operating budgets in energy efficiency projects, respectively (Nesler, 2008). The average
maximum payback they expected was 4.3 years (Nesler, 2008), though recent interviews conducted
by the author of this report found payback requirements of 1-2 years more typical.

According to LBNL, investments in larger buildings are different than those in smaller buildings: there
is greater investment in shading, HVAC systems (in new construction), and lighting in larger buildings
than in smaller ones. Insulation and other envelope efficiency measures maintain similar ratios of
investment dollars across building sizes (Jones et al., 2002).

Customers
Potential customers for a given energy efficiency project are located within the real estate value chain.
The real estate market is fragmented and diverse: commercial buildings are owned by individuals,
religious organizations, non-profits, and government entities–mostly local (DOE, 2008). Only twenty-
nine percent of all commercial buildings are owned property management firms and corporations
(DOE, 2008). The largest twenty-five owners of office space owned only 6.5 percent of total available
square footage in 2003 (DOE, 2008).

Only 36 percent of commercial buildings are

owner-occupied (See Figure 8). The remainder of
the market is comprised of renters (DOE, 2008).

Players with the most influence over investment

decisions for commercial real estate are building
owners, property developers, architects, policy
makers, and building managers (Rocky Mountain
Figure 8 Institute, 2006). These are a diverse set of actors,
some driven by goals of non-real estate-based
business productivity, others by cost, and still
Source: DOE (2008). others by public objectives. Section II briefly
outlines the challenges this diversity and
fragmentation causes for energy efficiency.

Institutions are active consumers of energy efficiency products and services. They are discussed in B.
Supply > Market Size for Energy Performance Contracting, as the necessary context will have been
given by then.

Market-Based Drivers
Decision-makers base investment decisions for building equipment, materials, and components first
and foremost on the investment’s contribution to productivity. Building owners define productivity in
reference to an ability to raise rents – either because the investment adds to the value of the physical
assets or because it adds to the unit’s marketability. Occupants define productivity in terms of

Page 17 of 81
improved output and sales or decreased costs. For the most part, building energy efficiency projects
are judged on the basis of the latter.

A survey by the National Real Estate Investor of 385 people, 170 of whom were government officials,
164 of whom were commercial real
estate developers, and 51 of whom
were corporate owners and
occupants, found energy costs,
environmental footprints,
marketing, and value enhancement
to be the primary motivations for
energy efficiency investments
(Mattson-Teig, 2008) (See Figure 9).
Ninety-two percent of corporate
occupants and 83 percent of
commercial real estate developers
were motivated by energy costs to Figure 9 Source: Mattson-Teig (2008)).
invest in green design–including
both new builds and retrofits 10 (Mattson-Teig, 2008). Seventy-four percent were driven by the
marketing concerns, 71 percent by the firm’s environmental impact, and 42 percent with value
enhancement (Mattson-Teig, 2008).

Costs

Energy accounts for 30 percent of any given business’ operating costs and constitutes the largest
category by which businesses can control costs (DOE, n.d.); however, energy consumption is on the
rise. Building electricity consumption accounted for 87 percent of the increase in overall electricity
consumption from 1985 to 2006 (DOE,
2008), outpacing growth in industrial
electricity consumption by a factor of
four (See Figure 10).

Commercial building energy

consumption is expected to increase
1.4 percent per year between 2007
and 2030 (EIA, 2009). This
trend points to the
Figure 10 growing importance of
Source: DOE energy costs for
(2008) businesses across the
board. HVAC systems
may be of particular interest as, on their own, they comprise approximately 40 percent of customers’
energy bills (Frost and Sullivan, 2008).

Environmental Footprint
Ernst & Young lists the “green revolution, sustainability, and climate change” eighth on a list of the
top 10 business risks for commercial real estate investment and energy price volatility tenth.
Environmental/CSR and marketing concerns can be shown to have a tangible impact on investment

10
NOTE: The survey specifically considers demand for energy efficiency retrofit projects among users and owners of office space.
Thirty percent of corporate respondents stated they had invested in energy efficiency retrofit projects, 29 percent were
engaged in retrofitting projects at the time of the survey, and the 41 percent were considering such investments. Commercial
real estate developers followed a similar pattern, with 29 percent having already undertaken the investments, 29 percent
engaged in projects at the time, and 46 percent considering EE retrofit projects.

Page 18 of 81
and purchasing decisions: the volume of transactions in the voluntary carbon markets was $330.8MM
(65 MtCO2e) in 2007 (Hamilton, Sjardin, Marcello, & Xu, 2008). Corporate activity in the voluntary
carbon, renewable energy credit, and energy efficiency certificate markets is, as-yet, unregulated and
consequently motivated solely by environmental, CSR, and marketing concerns 11.

Revenues
Of particular interest to building owners is the potential for enhanced revenue via energy efficiency
investments. ENERGY STAR buildings can command a 15 percent price premium per square foot, 3.6
percent higher occupancy rates, and 8 percent higher rental incomes per square foot, relative to
average buildings (CoStar Group, n.d.; EPA, 2008).

Table 2 pictures the potential impact on the commercial real estate owners’ financial statements.

Commercial Energy Efficiency – NOI, Asset Value, & Payback Times

Building Investment / Rate of $ Savings / Increase to NOI Asset Value Simple
100,000 sq. ft. sq. ft. Energy sq. ft. / year Increase Payback
Savings
Janitorial
Services $0.01 5% $0.14 $13,500.00 $135,000.00 Immediate
Operations &
Maintenance $0.05 9% $0.20 $19,800.00 $198,000.00 4 months
Lighting $1.04 16% $0.36 $36,000.00 $360,000.00 3 years
HVAC $1.21 9% $0.21 $20,700.00 $207,000.00 6 years
All Measures $2.31 39% $0.90 $90,000.00 $900,000.00 2.5 years

Table 2 Source: Duke et al. (2008) .

Non-Market Drivers
Government vehicles to promote energy efficiency include low interest loans, zero interest loans,
interest tax-free loans, investment tax credits, and more. Related initiatives that drive investment into
energy efficiency include smart grid development, revamp of utility infrastructure, upgrading of school
and university facilities, workforce training, tax incentives, employing governmental bonding authority
to promote energy efficiency, and loan guarantees for EE projects (Callahan, n.d.).

American Recovery and Reinvestment Act (ARRA)

The ARRA appropriated close to $20 billion for energy efficiency. $0.3 billion for appliance rebates via
ENERGY STAR, $5 billion for weatherization, and $1.2 billion for renewable energy development
(Callahan, n.d.). Highlights include:

 Department of Energy’s (DOE’s) State Energy Program ($3.1 billion): This program gives grants
and funding to state energy offices for EE and renewable energy (RE) programs, as relevant
to state regulations, building codes, and programs regarding both.
States must establish lighting efficiency standards for public buildings, incorporate EE
criteria into procurement, and upgrade the thermal efficiency of new and renovated
buildings (ASE, n.d.). The DOE further suggests that states establish energy efficient
building codes and standards, offer loans, grants and incentives for EE projects, and
prioritize building retrofits in their territories (ASE, n.d.).

11
NOTE: Partly, the activity in environmental finance markets is due to the belief that cap and trade legislation is imminent and
today’s market participants can build experience at lower costs.

Page 19 of 81
 The Energy Efficiency and Conservation Block Grant Program ($3.2 billion): This program
allocates $1,863,880,000 for eligible cities and counties, $767,480,000 for states, U.S.
territories, and the District of Columbia, $54,820,000 for eligible Indian tribes to implement
energy efficiency measures in their areas (not specifically in building energy efficiency) (ASE,
n.d.). Funds can be disbursed to private sector players, if the receiving government agency so
decides (ASE, n.d.).
 Green Federal Buildings ($4.5 billion): New Federal buildings are required to reduce energy
consumption 45 percent and existing Federal buildings must reduce consumption 25 percent
by 2014. According to the Alliance to Save Energy, EE measures will be implemented in 75
percent of all federal buildings (Callahan, n.d.).
$400 million is reserved for establishing the Office of Federal High Performance
Green Buildings (Callahan, n.d.).
$3.6 billion is reserved for the Department of Defense to invest in energy efficiency
projects and facilities upgrades (Callahan, n.d.).
 Innovative Technology and Loan Guarantee Program ($6 billion): This program supports
commercialization of advanced technologies that enable pollution and GHG emissions
control, some of which pertain to energy efficiency (Callahan, n.d.).
 Smart Grid ($4.5 billion): Allocation of capital for research and development and pilot projects
for the electric grid and federal
matching funds for the Smart Grid Investor
Investment Program (Callahan,
n.d.).
 Tax Credits Federal Tax
Interest-free Principal
Energy Conservation Credit zeroes out
financing payments
Bonds ($2.4 billion) are interest
allocated by population
to local government and
enable tax-free financing State or local Federal
for energy efficiency and government government
renewable energy (Ungar,
2009) (See Figure 11).
Investment
Commercial Building If loan,
grants or loans
Deductions: Through payments
2013, commercial Figure 11
buildings can deduct up
to $1.80 per sq. ft. for EE Project Source: Ungar (2009)
buildings that, on the
whole, use 50 percent less energy than current commercial energy codes require.
They can also deduct up to $0.60 per sq. ft. for individual building envelope, HVAC,
hot water, or lighting systems (Ungar, 2009). Section 179D of the ARRA describes
these and additional measures in detail (Ungar, 2009).
Utility Depreciation Rules: Utilities can accelerate depreciation on smart grid and
metering technologies (Ungar, 2009).
Appliance Manufacturer Tax Credits: Between 2008 and 2010, manufacturers of
energy efficient refrigerators, clothes washers, and dishwashers can receive tax
credits of $45-250 (Ungar, 2009).
Grants: Between 2009 and 2010, if tax credits are irrelevant to potential customers or
manufacturers, the Federal Government is offering the opportunity to apply for
grants instead (Ungar, 2009).
 Rebates ($300 million): Rebates and matching grants for state rebates are available for
ENERGY STAR appliances (ASE, n.d.).

Page 20 of 81
Other Legislation
The Troubled Assets Relief Program (TARP) includes $800 million for energy conservation bonds
(Ungar, 2009). The Waxman-Markey Bill is currently being discussed; provisions that relate to energy
efficiency are presented in Appendix A.

Commercial Energy Codes

Commercial energy codes were developed by the American Society of Heating, Refrigerating and Air-
Conditioning Engineers in 1975. After the U.S. passed the Energy Policy Act of 1992, the number of
states with commercial energy codes that met or exceeded the ASHRAE standard went from five to
forty (DOE, 2008). States that meet or exceed the ASHRAE 1990 standard are pictured in Figure 12.

Figure 12

The DOE aims improve energy efficiency by an additional 30 percent in the Standard 90.1-2010 iteration
in 2010 (DOE, 2008).

Utility Programs
Utility programs include demand-side management (DSM)
rebates and event-based payments for participation in demand Utility-based commercial building
response (DR) programs. Non-residential customers have rebate programs and ESCO services
achieved 63 percent energy savings from utility programs target:
 Lighting
(ACEEE, 2009). End use lighting has accounted for nearly two-
 Motors
thirds of all these savings (ACEEE, 2009). DSM and DR  Pumps
programs are detailed in B. Supply > Non-Market Drivers,  Refrigeration
below.  Food service equipment
 Prescriptive rebates
Other
Source: NAPEE
Other government measures include building ratings, building (2006)
and appliance labeling, and promotional programs, such as
ENERGY STAR.

Page 21 of 81
B. SUPPLY
EE suppliers are comprised of a wide range of companies, technologies, service offerings, and business
models, including IT systems integrators, engineering and consulting firms, energy auditing,
integration, and maintenance companies (ESCOs), and utility program administrators. A compendium
of building energy efficiency materials and equipment is included in Appendix B – as is a deal list from
2003-2008.

The below outlines the EE services market.

Energy Services Defined

Equipment Manufacturers & Marketers

Equipment vendors sometimes offer customers the option to lease EE equipment.

ESCOs
ESCOs audit, design, engineer, install, maintain, and finance equipment and processes that improve
energy efficiency12.

ESCOs’ first task is to meet customers’ requirements of payback times. This can be done by selecting a
complementary group of products and processes, packaging rebates and subsidies from utilities and
government, and organizing affordable financing. Financing occurs through:

 Project finance: Project finance is applicable to CHP and recycled energy, performance
contracting (outlined below), and marketing programs offered by equipment manufacturers
(Source: Laitner, 2008).
 Debt: Debt is relevant to fund REITs, portfolio investments, mortgage backed securities,
pooled loans, or credit enhancements (Source: Laitner, 2008).
 Equity: Equity can be invested by venture capital or private equity firms or raised through
stock issues.

ESCOs, customers, and financial institutions structure partnerships so as to ensure that energy savings
cover the cost of ESCO services and EE equipment and lease purchase arrangements on equipment
cover repayments (Goldberger, 2002). Figure 13 shows two typical financing structures for ESCO
projects.

12
NOTE: Cogeneration accounts for 15-20 percent of ESCO revenues according to Frost and Sullivan. However, demand is
primarily from industrial customers in non-building EE projects (Frost and Sullivan, 2008).

Page 22 of 81
 Model 1 Model 2

Lender Lender

Lends Repays
Lends

Repays Lends User

ESCO

Owns, Operates, Owns, Operates,

Maintains Maintains
Figure 13
User ESCO
Source: ICICI (2003)

Project costs and risks can be minimized through a variety of on-balance sheet measures, if the
customers’ or ESCOs’ credit rating is high enough. Components of successful financing can include:

 Coordinating loan repayment schedules with energy savings cash flows

 Depositing energy savings into escrow accounts from which loans are repaid
 Leveraging utility partners to collect loan repayments
 Employing chauffage agreements13

Second, ESCOs must minimize implied risk premiums. This can be done by capitalizing performance
risk, which is one of the most significant service ESCOs perform (Goldberger, 2002). In performance
contracts, ESCOs organize financing, conduct feasibility, commission and install energy efficient
equipment, monitor and verify energy savings, and train facility operators to optimize energy savings
over the life of the retrofit (Goldberger, 2002). Types of agreements between customers and ESCOs
include fast payout - wherein ESCOs receive all energy savings for a specified period or until the
project cost has been recouped -, energy savings - wherein building owners pay monthly flat fees for
energy as specified in contracts with the ESCO keeping all of the upside if savings are greater than
expected, or bearing all of the downside if they are less (Goldberger, 2002) -, and leasing - wherein
ESCOs provide customers with extended warranties. Experienced customers have evolved from
accepting these arrangements to performance contracting.

There are two models for performance contracting: shared and guaranteed savings.

 Shared savings: ESCOs organize the financing for project installation and earn a specified
percentage of actual savings, usually at a set price for energy (International Institute for
Energy Conservation and Export Council for Energy Efficiency, December 1998). The cost of
capital is based on the customers’ creditworthiness; while customers do not get access to

13
NOTE: Chauffage is a system in which building owners purchase supplies of heating, cooling, or electricity from CHP or
cogeneration system rather than the equipment itself, in the same way as one might purchase energy savings from other types
of EE projects, or energy from a power plant. The difference between chauffage and energy savings is that the former has a
fixed asset that can be collateralized.

Page 23 of 81
 cheaper financing, they do get limited recourse to ESCOs for contract performance (See
Figure 14).
 Guaranteed savings: ESCOs are paid on the basis of verified energy savings. The ESCO
administers the loan repayment and may need to guarantee payments to financiers, but even
if not, financiers have recourse to EE project customers’ balance sheets. The customers, in
turn, have recourse to ESCOs through the performance guarantee (See Figure 15).

Figure 15
Source: Govindarajalu
et al. (2008)
Figure 14 Source: Govindarajalu
et al. (2008)

Performance contracting costs, on the whole, account for 13-15 percent of overall financing costs
(Goldberger, 2002). The typical cost of capitalizing performance risk via a performance guarantee is 8
percent of a project’s total
financing costs. Figure 16
diagrams the details flows of
work and capital in a typical
performance contract.

Figure 17 on page 24 illustrates

customer analysis of an EE
guaranteed savings project. In
this real-world example, real rates
are much higher than stipulated,
yielding energy savings beyond
the expectations of the project.
Prior year usage (e.g. 1996 and
1997) is extrapolated to the
present and weighed against
current prices to roughly
estimate the value of EE
Figure 16 Source: Govindarajalu
et al. (2008)
investments to the firm.

Page 24 of 81
 Plant Name Year Month TT Elec Kwh $$ Elec $$ per KWh TT Gas Use $$ TOTAL Gas Cost $$ per MMBtu N Gas
Figure 17
Plant 1 2005 11 8,940,917 $457,226.49 $.051 22,053 $128,603.92 $5.832
Plant 2 2005 12 8,373,462 $427,062.58 $.051 41,605 $337,442.56 $8.111
Plant 3 2006 1 8,583,966 $451,526.87 $.053 29,430 $221,860.22 $7.538
Plant 4 2006 2 8,351,872 $434,302.82 $.052 30,975 $273,345.88 $8.825
Plant 5 2006 3 7,985,549 $417,931.03 $.052 22,626 $147,137.66 $6.503
Plant 6 2006 4 8,765,785 $453,673.21 $.052 9,217 $101,302.03 $10.99
Plant 7 2006 5 8,546,629 $597,510.43 $.07 6,562 $45,442.38 $6.926
Plant 8 2006 6 8,247,316 $574,803.43 $.07 2,235 $16,687.8 $7.467
Plant 9 2006 7 8,046,357 $574,041.91 $.071 1,620 $9,745.24 $6.016
Plant 10 2006 8 8,867,293 $636,878.26 $.072 1,719 $11,085.09 $6.45
Plant 11 2006 9 6,100,518 $482,408.92 $.079 3,573 $13,185.96 $3.69
Plant 12 2006 10 8,680,097 $629,581.09 $.073 7,111 $40,759.79 $5.732
Total Energy ($)
2006 99,489,761 6,136,947 $ 0.062 178,727 $ 1,346,599 $ 7.53 7,483,546
1996 137,578,387 7,163,351 0.052 443,310 1,383,331 3.12 8,546,682
1997 139,968,993 7,285,787 0.052 434,909 1,266,832 2.91 8,552,619

Electricity Natural Gas Total Energy Costs

Stipulated rates 2006 Rates Stipulated rates 2006 Rates Stipulated Rates 2006 Rates
Performance Contract Elec (kwhr) $.045 $.062 Gas (mcf) $ 3.00 $ 7.53
Baseline Energy 22,470,243 $ 1,011,161 $1,386,059 442,248 $ 1,326,744 $ 3,332,075 $ 2,337,905 $ 4,718,135
Guranteed Energy 10,644,572 479,006 656,602 145,810 437,430 1,098,592 $ 916,436 $ 1,755,194
% of total energy 8.5% 67.5% 16.6%
% of HVAC Energy 52.6% 67.0% 60.8%
Guranteed Savings 11,825,671 $ 532,155 296,438 $ 889,314 $ 1,421,469
Actual Savings at current rates $ 729,457 $ 2,233,484 $ 2,962,941

memo: misc savings such as water, chemicals etc not included in this analysis Plant X
(96/97 adjusted to 2006 economics

1996 1997
to account for increased energy prices)
2006
This is the contract guaranteed energy savings your should recognize. 12,000,000

This is the real savings amount, including economics 11,000,000

10,000,000

2001 2002 2003 2004 2005 2006 9,000,000

Supplier
Economics
Gas

Annual True Up payments made $ 43,427 $ 26,990 $ 74,957 $ 77,770 $ 69,256 $ 84,0688,000,000
Electricity

7,000,000

6,000,000

5,000,000
1996 1997 2006

Source: White, personal communication, April 13, 2009.

Page 25 of 81
Utility Demand-Side Management
DSM programs include public education and training, financing and financial incentives, energy savings
bidding, and performance contracting. Utilities are in a position of significant importance as they have
pre-existing customer relationships. They can directly offer shared savings contracts; however, they
usually prefer to employ incentive mechanisms, as described below.

 Prescriptive rebates: set payments per item, KWh, or KWh saved, paid to customers or trade
partners (NAPEE, 2006). In a 2003 LBNL study, utility rebate programs were found to reduce
payback times by 1-2 years (Goldman et al., 2003).
 Custom rebates: customized payments to customers based on the type of measures
undertaken and tied either to specified payback times or energy savings (NAPEE, 2006)
 Performance contracting incentives: payments by program administrators to lower ESCO risk
premiums (NAPEE, 2006).
 Low interest financing: reduced interest rates on loans to customers (NAPEE, 2006).
 Cooperative advertising: co-marketing arrangements, with partial funding provided by the
utility (NAPEE, 2006).
 Retailer buy downs: payments made to retailers to decrease or eliminate the price premium
for energy efficient products (NAPEE, 2006).
 MW auctions: payments made by program administrators to third parties per MW or MWh
savings (NAPEE, 2006).
 On-bill financing: de-facto loans offered by utilities to customers for an amount equal to the
total project cost. Loan payments are collected via charges on the customers’ utility bills. The
advantage of on-bill financing is that it can streamline billing and reduce the risks associated
with loan repayment, as most people pay their utility bills on time (Frank, 2008). Utilities can
offer on-bill financing in independent services engagements or with implementation partners
(e.g. program administrators and ESCOs).

Utilities can fund energy efficiency programs through any of the following mechanisms:

 Revenue requirements or resource procurement funding: Due to Integrated Resource

Planning, utilities must evaluate both demand- and supply-side measures’ effectiveness in
providing customers with reliable and low-cost electricity (See Figure 18) using life cycle cost
accounting.

Page 26 of 81
 Activities in Integrated Resource Planning
Load Forecast
Identify Existing
Goals Resources

Need for New

Resources

Supply Demand T&D Rates

Social, Enviro. Define Suitable Uncertainty

Factors Resource Mixes Analysis

PUC Approval
& Public Participation

Acquire
Figure 18
Monitor Resources
Source: Kreith &
West (1997)

Life cycle costs are measured using the Total Resource Cost (TRC) method. The TRC
test measures net
benefits of DSM
programs based on total
costs of the program,
including both
participant and utility
costs.
The primary factors
considered are the costs
of avoided resources and
equipment and program
support costs
(Thompson, personal
communication,
February 6, 2009) with
program viability falling
within the range of
$0.025-0.012 per KWh (M.
McNalley, personal
communication,
February, 16, 2009).
Figure 19 shows the
benefits of EE in resource
Figure 19 Source: NAPEE (2006)

planning. Figure 20 on page 27 illustrates utility estimates of EE potential in achieving

the IRP goals of providing customers with reliable and low-cost electricity.

Page 27 of 81
Source: NAPEE (2006).

Figure 20

Page 28 of 81
  System benefits charges (SBC): a tariff added to rate-payer bills to fund energy efficiency
programs and administration. SBC funds are typically used to offer financial incentives (e.g.
grants) to end-use customers. SBC funds can be administered by the utility, an independent
non-profit, or a quasi-government agency–e.g. NYSERDA, a public benefit corporation, that
administers grant programs for EE and renewable energy projects in New York State.
 Rate-basing: utilities can use dynamic and competitive pricing to promote conservation or
load shifting. Methods include increasing tier block costs, time-of-use (TOU) pricing, real-time
pricing (RTP), critical peak pricing (CPP), non-firm pricing for emergency relief to power
systems, and two-part rates (NAPEE, 2006).

Utilities are in an important position as they own relationships with customers as well as metering
technologies that verify actual energy use. Both of these points could be leveraged by ESCOs to bring
down the perceived risk of their projects. Similarly, as highly regulated entities, utilities have fairly
stable cash flows which could alleviate certain financing issues facing ESCOs and their customers.
These same points can be leveraged by utilities themselves: were they to launch ESCO subsidiaries or
affiliates, they could employ their own balance sheets to finance projects, eliminating the exposure of
the customer. This would give utilities a significant advantage in the sales process. This is discussed
further in Section III.

According to the International Energy Agency (IEA), for each $1 invested in energy efficiency, more
than $2 can be saved on the supply side (Boyle et al., 2008). For these reasons utilities are increasing
their EE expenditures: National Grid, for one, reports that it expects to double or triple its EE
investment in the next five years across the Northeast (Stout, 2008). To reiterate, this funding can be
used to launch or execute independent ESCO services or work with existing ESCOs. In both cases,
utility expenditures drive down the cost of energy efficiency projects to end consumers.

Utility Demand Response

Demand response (DR) programs are typically subscription-based emergency shut-down programs
aimed at freeing supply-side resources at critical times. Utilities solicit customers who agree to give
direct control to the utilities over their energy loads at critical times in return for payment. DR thus
alleviates strain on the electricity system at peak times, serving a similar need as demand-side
management. Consequently, utilities group these two programs together, yet DR does not specifically
address consumers’ energy consumption or necessarily lead to energy savings on the whole.
Participating customers typically employ back-up power systems when shut-downs, known as
“events” or “critical events”, occur. DR has received attention from capital markets –e.g. EnerNOC
and Comverge both had multi-million dollar IPOs in 200714.

Supply-side Energy Services

Supply-side services aim to reduce costs through procurement of energy resources in competitive
markets. Companies in this segment conduct rate analysis, risk management, billing administration,
and market intelligence (Frost and Sullivan, 2008). Like DR, supply-side services address critical issues
for utilities, and in this case, also for customers. This issue is cost: ability to arbitrage prices and meet
energy requirements brings down utilities’ costs and prices. Reduced electricity prices can serve as a
disincentive to energy efficiency, though environmental legislation and public perception could just as
well counter-balance the lack of economic motivation. In either case, supply-side services do not
specifically address consumers’ energy consumption.

Market Size for EE Services

14
EnerNOC’s IPO was for $103MM and Comverge’s was for $378MM in 2007. Currently, EnerNOC, the energy efficiency services
player (Comverge is a demand response company) is experiencing significant losses, as reflected by negative EPS - (Frost and
Sullivan, 2008) EPS: - 1.94 as of 5/21/09 per Yahoo!® Finance.

Page 29 of 81
Frost and Sullivan estimates the market for energy management services to have been $20.356 billion15
in 2008, inclusive of equipment manufacturer and marketing services, ESCO activity and DSM, DR, and
supply-side services like procurement (Frost & Sullivan, 2008) (See Appendix C for list of tracked
companies). Demand response accounts for 8 percent of this and supply-side services for 36.3 percent.

ESCO services, separated from demand response and supply-side services were valued at $12.79 billion
in 2008 (Frost and Sullivan, 2008). This makes up 9 percent of the total annual revenues of the
companies tracked (Author’s calculation based on data from Dunn & Bradstreet, 2009 and Frost and
Sullivan, 2008). Supply-side services account for only 5 percent of the same.

Frost and Sullivan report an ESCO industry CAGR of

18.5 percent for the period 2008-2013 (Frost & Sullivan,
2008).

Utility and government energy efficiency budgets are

valued as a separate segment by the Consortium on
Energy Efficiency; in 2008, these two expenditure
categories totaled $3.74 billion dollars for 2008 (CEE,
2008).

As discussed above, much of the money allocated

through utility DSM programs goes towards rebates
for EE products. Utilities also hire ESCOs to deliver Source: CEE (2008).
energy savings for their utility DSM programs. This Figure 21
enables utilities to achieve mandated reductions in energy consumption in
their service areas. Figure 21 shows the breakdown of utilities’ budgets per market segment.

Market Size for Energy Performance Contracting Services

LBNL counts as ESCOs only companies that engage in energy performance contracting (EPC, a.k.a.
ESPC); in their survey of the EE services market, they discount revenues from non-EPC companies and
divisions and value the remainder of the market. The most recent year for which they have data is
2006: the EPC market was $3.6 billion16 that year (Birr, Gilligan, Goldman, Hopper, & Singer, 2007), with
growth between 2004 and 2008 estimated to have been 22 percent annually (Birr et al., 2007).
2006 ESCO Industry Revenues by
Market Segment According to LBNL, demand for EPC is greatest
among institutional customers; government &
institutions account for 60 percent of EPC
revenues (Birr et al., 2007) (See Figure 22). The
DoD alone accounts for 60 percent of
government EE performance contracting
projects and 70 percent of the investment
dollars17 (US Department of Energy, 2005; San
Miguel & Summers, 2006). According to Dr.
Joseph San Miguel of the Naval Post Graduate
Source: Birr, Gilligan, School, performance contracts have been used
Figure 22 Goldman, Hopper, &
Singer (2007)
in 18 different federal agencies and departments
in 46 states (San Miguel & Summers, 2006).

15
NOTE: The majority of the services counted within this value concern buildings or building-related technologies, but non-
building energy efficiency measures have not be eliminated; moreover, the market size data concerns services rendered to both
residential and non-residential consumers.
16
NOTE: For multi-function companies, LBNL counts only the portion of revenues from energy performance contracting. Utility
DSM and DR programs are not part of the calculation, nor are revenues from engineering and contracting services.
17
NOTE: The time period was unspecified but is assumed to be 2001-2005.

Page 30 of 81
Major national ESCOs like Honeywell and Johnson Controls are the preferred service providers, and
have transacted 300 performance contracts with the federal government 18 (San Miguel & Summers,
2006).

The ARRA of February 2009 requires new federal buildings to reduce their energy consumption 45
percent and existing federal buildings to reduce their consumption 25 percent by 2014. The Alliance to
Save Energy expects EE measures to be implemented in 75 percent of all federal buildings (Callahan,
n.d.). States must establish lighting efficiency standards for public buildings, incorporate EE criteria
into procurement, and upgrade the thermal efficiency of new and renovated buildings (ASE, n.d.). The
DOE further suggests that states establish energy efficient building codes and standards, offer loans,
grants and incentives for EE projects, and prioritize building retrofits in their territories (ASE, n.d.).
Consequently, the Federal and MUSH markets are going to see significant activity in the next five years.

According to a Honeywell executive, EPCs provide government agencies with ways to:

 Address their deferred maintenance and capital needs (Taylor, personal communication, April
7, 2009)
 Mitigate the effect of EE projects on their budgets, and (Taylor, personal communication,
April 7, 2009)
 Gain recourse to ESCOs with reference to project performance (Taylor, personal
communication, April 7, 2009)

Energy performance contracts are financed, via intermediaries like Hannon Armstrong, by private
sources of capital (San Miguel & Summers, 2006). Federal agencies more frequently use congressional
appropriations than MUSH customers (Goldman, Hopper, and Birr, 2004), yet, according to Jennifer
Schafer of Cascade Associates, the ARRA allocates most of its funds to only 28 percent of the agencies
affected by new federal building energy efficiency requirements (Schafer, 2009). The remaining 72
percent of agencies will need private capital, and will likely choose to use performance contracts
(Schafer, 2009). EPCs accounted for 51 percent of the total federal investment in energy efficiency
from 2001-2006, while appropriations accounted for 23 percent (San Miguel & Summers, 2006).

Another reason for the dominance of institutional customers among ESCO projects is that institutional
customers are more creditworthy and usually execute larger projects. Both of these factors appeal to
financiers. In addition to availability of private capital, government agencies can fund projects through
a variety of low interest vehicles. For example, government can issue low-interest and tax-free bonds,
including General Obligation Bonds, Limited Tax General Obligation Bonds, and revenue bonds.

 General Obligation Bonds (GOs): Governments can borrow money at approximately 5.75- 7
percent via GOs. GOs usually need approval of the electorate (Goldberger, 2002) and as such
require longer lead times. Borrowers’ balance sheets have full exposure.
 Limited Tax General Obligation Bonds (LTGOs): Governments can issue LGTOs on behalf of
non-tax-exempt parities (Goldberger, 2002).
 Revenue bonds: Revenue bonds are tied to projected income streams, and have been used
with long-term power purchase or chauffage agreements (Goldberger, 2002).

As institutional customers can get better interest rates, they can afford to invest in projects with
payback times of up to 10-25 years, where commercial customers often look for payback with 1-3 years
(Osborn, Goldman, Hopper, & Singer, 2002). Where commercial customers look to single-measure
projects, like lighting or motor replacements, institutional customers more frequently pursue
integrated projects that include not only lighting and motors but also control systems, chillers, boilers,
and building envelope technologies (Taylor, personal communication, April 7, 2009) (See Figure 23).

18
NOTE: The time period was unspecified but is assumed to be 2001-2005.

Page 31 of 81
LBNL estimates that institutional customers achieved $1.3 billion in net economic benefits across 771
projects, while the private sector achieved only $320MM across 309 projects in the same time period
(Goldman et al., 2003).

Source: Goldman et
Figure 23 al. (2005)

Within the MUSH segment, school projects have the longest payback times and most complexity:
according to the LBNL 2003 survey, the median simple payback for schools was 10 years and the
majority of contracts were improvement projects within which energy savings were a small part. As
energy savings are only a segment of the improvements pursued, they are often difficult to identify
and count separately, making these projects risky. By way of comparison, municipality and hospital
projects had payback times of 4 years (Goldman et al., 2003).

Players
Suppliers of EE projects’ products and services come from both the energy and real estate sectors –
with the latter being comprised of designers, engineers, contractors, consultants, and equipment-
suppliers. Product suppliers include manufacturers and marketers of HVAC and HVAC control systems,
lighting and lighting fixtures, energy/power storage, back-up power, on-site heat and power
(cogeneration) systems, on-site (distributed) generation technologies (such as micro-wind and solar
PV), building automation and process-specific control systems, and more. Service providers include
energy management companies, equipment marketers, utility DSM and DR program administrators,
and engineering and IT services.

Comprising the 20.356 billion market tracked by Frost and Sullivan are ESCOs, equipment
manufacturers and marketers, utilities, and one pure-play demand response company. The company
applies a percent-of-revenue calculation to all of these groups to parse the value of energy efficiency
services, which they estimate as $12.79 billion.

Of the 63 companies in the ESCO category, six are public, compared to four out of five equipment
manufacturers & marketers, and six out of ten utilities. The five equipment manufacturers account for
54.5 percent of total revenues from demand-side energy efficiency services. In other words, ESCOs are
mostly small private companies: average revenues are $170MM and average size is 161 employees,
inclusive of the public firms.

The one pure-play DR firm commands 36.8 percent of the demand response market, with the bulk of
the remainder of the market (58.1 percent) split across the ten utility companies.

Utilities command 72.2 percent of total revenues from supply-side services.

Average growth for ESCOs, equipment manufacturers and marketers, and utilities is between 16.4 and
18 percent, irrespective of company size or ownership. Growth is lowest for the one pure-play demand
response company, at 8.5 percent.

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The picture this outlines is that utilities are immersed in a supply-side view of the world; they are active
in activities which decrease immediate costs (e.g. price arbitrage and load management). Energy
efficiency, with its long-term affect on loads and costs, is part of the utility consciousness, but outside
its institutional bearings. As such, utilities may stand to benefit more from working with outsourcing
partners (e.g. ESCOs), if not from establishing independently-run subsidiaries.

Frost and Sullivan point to slow consolidation in the energy management services market (Frost and
Sullivan, 2008). The authors predict that the top ten firms in the space will control more than 50
percent of the market within five years (Frost and Sullivan, 2008). In particular, they expect smaller
ESCOs to be acquired by equipment manufacturers and large ESCOs. Acquisition will be driven by new
market entry, or rather, re-entry19, as the case may be (Frost and Sullivan, 2008).

With increasing consolidation and market power accruing to those players, utilities will have to
establish a position, regardless of whether that is as partner or competitor, soon.

Market-Based Drivers
Stand-alone drivers for private-sector demand for energy efficiency have been described in Section A.
Described here are drivers for utility investment in energy efficiency, which can feed back to foster
private sector demand for ESCO services as well as demand by utilities themselves.

The need to meet increasing demand for electricity is the largest driver of utility investment in EE.
Commercial real estate accounts for 73 billion square feet today and is expected to grow to 111 billion
square feet by 2030, in line with growth in GDP of 50 percent between 2007 and 2030 (author’s
calculation based on DOE
projections; DOE 2008).
Simultaneously, commercial
electricity consumption is rising
1.4 percent per year (EIA, 2009).
Demand will need to be met by
energy suppliers; however,
utilities are facing increasing
deregulation and more direct
Figure 24
competition with independent
Source:
power producers (IPPs). Utility
Dickerson,
prices include costs for excess n.d.
capacity, social programs,
research and development, and
historical costs, as well as the
requirement of maintaining high Figure 25
equity capitalization rates (Kreith
and West, 1997). IPPs are not
beholden by the same regulations
or legacy costs and can offer
commercial customers
significantly lower prices.

In the face of deregulation and Source: Dickerson,

high energy price volatility, n.d.

19
NOTE: Many utilities owned and operated ESCOs in the past but divested them in the last two decades. These players may
seek acquisitions to re-enter the market.

Page 33 of 81
investments in new capacity may seem less attractive than those in energy efficiency. In fact, PG&E
analyzed the effect of EE investment on its energy price hedging activities. The analysis showed that
EE reduced demand which, in turn, reduced volatility (Dickerson, n.d.) (See Figure 24). Decreased
volatility brought down utility costs, which it then could pass to its customers via lower rates
(Dickerson, n.d.). Figure 25 exemplifies this: a 1,000MW EE investment yielded $200MM in benefits,
$65MM of which derived from reduced hedging.

The economic rationale for utility investment in energy efficiency may either drive revenues for ESCOs
or may spark direct competition with them by utilities. The first point can be accomplished by:

 Utilities buying-down interest rates on ESCO project contracts so as to claim projects’ energy
savings to regulators (Frost and Sullivan, 2008). Regardless of the motivation, this may
enhance EE projects’ economics from customers’ points of view.
 Utilities making forward capacity market (FCM) payments20 to ESCOs and, by diversifying
ESCO revenues, enabling them to charge customers less for given projects.
 Utilities outsourcing additional business processes, such as billing administration, due to
heightened complexity in metering technologies and rate and usage that are pushing up
utilities’ administrative costs (Frost and Sullivan, 2008). This is of particular interest as it could
offer ESCOs an opportunity to provide the utilities with a service while eliminating a
significant source of their own operating risk. There is, however, no particular reason to
predict that utilities will outsource these processes to ESCOs rather than other outsourcing
companies.

Non-Market Drivers
The American Reinvestment and Recovery Act in February 2009, allocated $500 million for research,
labor exchange, and job training for professional development in energy efficiency and renewable
energy. This may bring down labor costs (via elimination of training costs) or increase consumer
confidence and enable the industry to pursue additional sales.

Utility Regulations
Changes in regulation over the past three decades have created an economic rationale for utility
investment in energy efficiency. The main points are highlighted below, though it should be noted that
these measures have not been implemented uniformly across the US.

 Decoupling: Redefinition of the economic factors upon which utilities earn revenue. Rather
than tie revenue to volume of energy sold, revenues can be attached to non-volumetric
factors, such as the number of customers in the service area or projections of fixed cost
trends and balancing accounts (NAPEE, 2006). Decoupling can thus eliminate throughput21
disincentives and push utilities to competitively evaluate EE. Over 32 states have decoupled
utility rates from volume of energy sold (Frank, 2008).
 Integrated resource planning and total resource costing: Comparative costing of capacity
additions and demand curtailment.
 Environmental legislation: The Waxman-Markey proposed legislation on requires emissions
reductions of 3 percent by 2012, 20 percent by 2020, 42 percent by 2030, and 83 percent by
2050, relative to a 2005 baseline (ASE, n.d.) (See Appendix A for list of EE-related measures in
the bill, as compiled by the Alliance to Save Energy in March 2009).

20
NOTE: The New England Independent Service Operator (ISO) program launched a much-touted experimental program that
“sells” forward capacity. Forward Capacity Markets (FCM) require utilities to procure enough resources to meet their regions’
future demand. In the FCM auction, the New England ISO auctions this obligation and makes FCM payments to the winner to
implement the plan. In the New England case, payments range from $3.05/kW per month to $4.10 per kW per month.
21
NOTE: throughput refers to the incentive utilities have to sell more power, as the marginal returns are high. This is a widely-
known disincentive to energy efficiency on the part of utilities.

Page 34 of 81
  Renewable Energy Portfolio Standards: requirement for utilities to obtain stated percentages
of sales or forecasted growth from renewable energy sources–via procurement of RE
resources or renewable energy certificates. Energy efficiency is often a critical strategy for
achieving the RPS targets: energy efficiency reduces overall energy consumption and slows
growth of demand making the RPS targets easier or less costly to achieve.
 Energy Efficiency Portfolio Standards: requirement for utilities to obtain stated percentages
of sales or forecasted growth from energy efficiency measures–via DSM or DR spending or
through purchase of energy efficiency certificates. Connecticut, Pennsylvania, and Nevada
have implemented EEPS while California, Hawaii, New York, New Jersey, Oregon, Colorado,
Washington, Illinois, Minnesota, Texas, Florida, Vermont, North Carolina and Virginia are in the
process of doing so (Wood, 2008).
 EE program modularity and flexibility

Major Market Locations

According to the ACEEE, states with the most aggressive utility-sector energy efficiency programs and
best performance are California, Massachusetts, Connecticut, Vermont, Wisconsin, New York, Oregon,
Minnesota, New Jersey, Washington, Texas, Iowa, Rhode Island, and Nevada (ACEEE, 2009). Figure 26
shows the success these states have achieved with their utility-based programs. Electricity prices for
commercial customers in these states ranged from $6.55 to $15.92 in 2007 (EIA, n.d.). The average
price for commercial electricity of was $11.02, compared with a national average of $9.65 that year (EIA,
n.d.).

Page 35 of 81
 Source: Kushler, York, & Witte (2006).

Figure 26

Page 36 of 81
SUMMARY OF KEY POINTS
Market Size: The buildings sector accounts for 62 percent of total investment in energy efficiency,
according to Ehrhardt-Martinez and Laitner (Ehrhard-Martinez & Laitner, 2008). Non-residential
building energy efficiency was a $51.3 billion in 2004 and demand has only grown (Ehrhard-Martinez &
Laitner, 2008).

Customers: Energy consumption and floor space is highest for offices, retail, and education. At the
same time, demonstrated demand for building energy efficiency services is highest among municipal
governments, universities and colleges, schools, and hospitals (MUSH). Finally, the American
Reinvestment and Recovery Act requires significant upgrades to federal facilities by 2014. Given that
federal and MUSH facilities are generally large, have ageing infrastructure, and limited capital budgets
for improvements, there will be growth in demand for energy performance contracting services
among these groups, if not also commercial customers.

 Energy management services were a $12.79 billion in 2008 with compound annual growth rate
of 18.5%
 Energy performance contracting services were a $3.6 billion in 2006 with annual growth of 22
percent per year.

Stakeholders: Utilities are being pushed, through a combination of market and regulatory forces, to
invest in energy efficiency. They have a vested interest in increasing the viability, reliability, and cost-
effectiveness of energy efficiency as an energy resource. Consequently utilities are pushing consumer
adoption with promotional efforts and outsourcing implementation to keep program costs low.

 Government & utility energy efficiency spending was $3.74 in 2008 and is expected to grow
significantly, in part because of the new Administration’s promise to overhauling the nation’s
energy infrastructure.

Drivers: Drivers for investment in non-residential building energy efficiency are energy costs,
environmental concerns, marketing, and compliance.

 New regulation has just been issued (e.g. ARRA) and additional legislation is imminent (e.g.
Waxman-Markey): approximately $20 billion in government funding will be spent on energy
efficiency.
 Policies specifically target building energy efficiency via environmental caps, building energy
codes, and required upgrades for Federal facilities.
 Additional measures include tax breaks, rebates, public-private partnership financing schemes,
and public education campaigns, which directly bring down the price premium commanded
by energy efficient technologies.
 These factors can create a leverage effect that spurs further investment in EE technologies
and services between the present day and 2013. Key to this effect will be minimization of the
perceived risk of energy efficiency projects and technologies: performance risk and cost are
being addressed by measures mentioned above. Financing risk remains an issue.

The operative role capital markets can play in building energy

efficiency projects is distributing financing risk.

Page 37 of 81
 II. CHALLENGES
 Market Barriers:  Financing Barriers:
EE is lower priority than other capital ESCOs lack credit ratings
projects Projects lack collateral
Life-cycle cost accounting is not Customers must provide banks
widespread with recourse
Usage affects savings, necessitating
detailed contracts

Capital markets intermediaries can distribute financing risk by

aggregating assets in off-balance sheet structures.

A. MARKET BARRIERS
Impediments to Customer Demand
Impediments for the growth of energy efficiency have been extensively documented and are only
briefly outlined here. The primary concern of this section is to outline impediments to investment in
viable projects – which, it should be noted, are most EE projects, according to many of the studies
referenced in this report. Minimum criteria that define “viable” include:

 Payback times: The median implied discount rate used by customers is 34 percent for non-
refrigeration projects and 58 percent for refrigeration projects (Sanstad, Hanemann, &
Auffhammer, n.d.). Projects’ ability to meet customers’ simple payback requirements are go-
no-go criteria. If project costs are low enough, customers will continue to consider them.
 Cost: Certain projects seem viable from an outsider’s point of view but bear hidden costs.
Examples include reduced product performance, reliability, or quality, increased managerial
or administrative costs, and opportunity costs of disrupted production or foregone (Schleich,
2007). When these considerations are discovered and factored into the equation, either the
base cost or implicit discount rate is raised and the project becomes unviable.
 Delicacy: Certain processes may be too delicate or critical for a firm to outsource, despite
potential cost savings.

The remainder of this section concerns impediments to projects that have passed the above tests as
to viability. Obstacles common across all customer classes and types include:

 Bounded rationality: Constraints on time, attention, or ability to process information may lead
potential customers to forego a viable project. This issue is exacerbated by any lack of
information on historical and current energy use and technical understanding of energy
efficiency technologies or engineering (Schleich, 2007).
 Appraisal methodology: A related issue is that most firms do not yet use life-cycle costing
consistently, and consequently base decisions on up-front costs. Energy efficient products are
often higher priced than other commercially-available technologies, and are consequently
considered uncompetitive. Life-cycle costing enables firms to evaluate the cost-savings
potential of energy efficient technologies, such that derive from longer use-cycles and less
frequent replacement, reduced maintenance requirements, or simplified disposal. Firms that
use life-cycle costing place a much higher priority on energy efficiency projects (J. White,
personal communication, April 9, 2009).

Page 38 of 81
  Variability of savings: Projects in which energy savings is highly influenced by usage may be
discarded if performance risk is borne by the ESCO and not the consumer (Sorrell, 2002; J.
White, personal communication, April 9, 2009).
 Low contribution of energy prices to overall business costs: Energy, while comprising 30
percent of a building’s operating costs, accounts for only 4-5 percent of office building user
costs (BOMA 2000b; Jones et al., 2002). The low contribution of energy prices to overall
business costs make energy efficiency investments lower priority than other projects.

Renters
The dilemma facing renters is that of investing in projects for which benefits accrue to others. This is
known as the split-incentive problem. Many projects involve capital expenditures in assets that have
little-to-no physical transferability or stand-alone value. In other words, if tenants moved, the EE
equipment (e.g. insulation, windows, lighting fixtures, or CHP systems) could not be moved to the
new location. In addition, the asset value of the equipment would accrue to building owners.
Secondly, because renters move, energy efficiency projects harbor revenue risk: energy savings, to the
degree necessary to recoup investment, may not be realized before tenants move out and lose access
to the equipment.

Owner-Occupants
Like renters, owner-occupants are uncertain about the length of time they will stay in their properties,
or are fairly certain they will move out before the investment has paid off. HVAC upgrades and other
typical EE measures often do little to increase property values and so remain low priority.

Non-Occupant Owners
Energy efficiency is lower priority than rental revenue. Furthermore, energy prices have a much lower
variance than commercial rental rates. Consequently, rental rates infuse greater variability into firm
cash flows than energy prices and command far greater attention than energy (BOMA 2000a; Jones et
al., 2002). Property developers’ first priority is to execute projects at the lowest possible cost, while
achieving the highest possible number of pre-development lease commitments (Jones et al., 2002). In
the words of Jones, Bjornstad, and Greer, “the commercial building design that produces the greatest
energy savings tends to be quite different from the design that yields the greatest cost saving” (Jones
et al., 2002). Many new technologies detract from rentable square footage (due to their size), increase
maintenance costs, or add to first costs (Jones et al., 2002). Interactions between technologies and
processes add further to first costs – e.g. glazed windows that reduce street noise but increase
internal building temperatures, necessitating investment in shading, or bigger ventilation or air
conditioning systems (Jones et al., 2002). Moreover, commercial developers manage to optimize risk-
return across a portfolio of properties. Projects concerning energy performance in single units are
lower priority than portfolio management (Jones et al., 2002).

Figure 27 summarizes obstacles to building energy efficiency investments by various commercial

actors.

Page 39 of 81
 Figure 27 Source: NAPEE (2006).

This year in particular, the real estate industry will prioritize rental revenue and cost minimization. For
office REITs, rental rates are down, particularly in Manhattan: available space in midtown Manhattan
in late 2008 was up 2 percentage points from 2007 and downtown availability was up 100 basis points
(McMillan, Pandya, & Shepard, 2008). These vacancy numbers are significantly lower than in many
other parts of the country (McMillan et al., 2008)22.

Impediments to Service Provider Supply

Market barriers include long lead times, high transaction costs, complex technical information
requirements that clients may not have at the ready, as well as complex organizational and property
ownership structures that preclude quick or efficient decision-making on the part of customers.

 Due diligence costs: When projects are being developed, significant energy savings measures
may be discovered. However, due to the complexity of ownership structures and
organizational structures, decision-makers may not be easy to locate and these measures may
be abandoned (J. Ravis, personal communication, February 17, 2009).
 Government lead times: According to the LBNL 2004 survey of ESCOs, the most ubiquitous
and important barrier to sales in the government sector was the project development time -
12 months at minimum, compared with only 6-9 months for MUSH customers (Goldman et al.,
2004). During this period, the ESCO usually bears all costs.

The specificity of individual projects is exacerbated by the typical size of EE projects: together small
project size and long lead times yield high transaction costs.

B. FINANCING BARRIERS

22
NOTE: On the positive side, for hospital REITs, however, the outlook is rosier: revenue growth is highly correlated with
reimbursement rates from government programs and any advancement towards universal coverage will boost revenues.
Moreover, nursing home revenues are projected to increase in 2009 (McMillan et al., 2008).

Page 40 of 81
The first task is assessment of the business plan – including the contractor, construction schedule,
environmental factors, performance & persistence of energy savings, service terms, guarantees, and
warranties, and financing terms; however, to assess the plan, all parties need technical knowledge.
Figure 28 illustrates the factors and steps involved in calculating energy usage baselines and savings
while Figure 29 illustrates the assessments each party makes of the same contract.

Calculating
Energy Use Figure 28
and
Savings

Source: REEEP (2005)

Figure 29
Source: The Energy
Group & Econergy
(n.d.)

Contracting parties must be aware of potential environmental liabilities: much equipment contains
hazardous materials, like mercury in fluorescent lamps. Installation and disposal may pose issues
(Econergy, n.d.).

Page 41 of 81
Commercial Customer Risks & Costs
Customer financing options are illustrated in Figure 30. In all cases other than operating leases,
customers bear financing
risk. They must be in good
enough financial standing
that financiers and/or ESCO
partners are confident that
they will meet payment
obligations for the length of
the contract. Lenders may
require up to a 40% for down-
payment for EE project loans
(Econergy, n.d.) and/or will
look for “Termination for Source: The Energy Group and
Convenience” clauses and Figure 30 Econergy, n.d.

debt service offsets (Flynn,

2009).

Performance contracting enables customers to shift some risk to ESCOs; however, most ESCOs lack
the balance sheets to appease financiers (Gilligan et al., 2005) and customers are required to offer
banks recourse. This is, in part, due to the fact that the equipment ESCOs purchase with the financers’
money is installed at the customer site, and is near-impossible for ESCOs to collateralize. Though
ESCOs own the installed EE equipment until projects are paid off, and neither the equipment, nor the
debt used to finance acquisition and installation, are recorded on customers’ balance sheets, financing
is based on the customers’ creditworthiness (Boyle et al., 2008; Econergy, n.d.). Customers bear
exposure to potential downgrading of their credit ratings during the project – a significant concern for
most (White, personal communication, April 9, 2009; A. Brix and M. Naud, personal communication,
November 19, 2008; D. Thurm, personal communication, March 5, 2009).

Government Customer Risks & Costs

Figure 31 shows an outline of financing options for governmental customers, and the particular
hurdles associated with each.

Page 42 of 81
 Figure 31

Source: Zobler &

Hatcher (2003)

As can be seen, performance contracting offers the most flexibility of all non-cash options; however, it
poses the same issues for institutional customers as commercial customers. If congressional
appropriations are available, Bostonia Partners recommends leveraging them to attract private capital
(See Figure 32). According to
that company, energy
performance contracting for
government projects has
channeled more than $2.5
billion in the past ten years via
public-private partnerships
(Flynn, 2008).

ESCO Risks & Costs

The major financing issue Source: Flynn (2008)
ESCOs face, other than a lack of Figure 32
credit rating and subsequent
dependence on customers’ credit standings, is mismatch between project timelines and financing
terms. Many banks fund EE projects via working capital loans rather than term loans (Gilligan et al.,
2005; The Energy Group and Econergy, n.d.). Working capital loans typically require repayment within
one year, yet projects typically last multiple years. As with any outsourcing project, contract specificity
takes time to develop but also limits clients’ and service providers’ ability to respond to unforeseen
events (Sorrell).

Other than the timing of financing, ESCOs are responsible for construction costs and risks, as well as
system design, and long-term performance.

Page 43 of 81
  Construction is the highest cost factor in a typical project: unexpected increases in
construction costs or delays in customer sign-offs can bankrupt the bearer of credit risk
during the construction phase.
Ways to mitigate risk during project development and construction are through
payment requirements performance bonds and ESCO indemnification projects fails to
go through (Flynn, 2009).
 Long-term performance is affected not only by system design but also customer behavior,
equipment failures, and more. Persistence of energy savings can, for example, be affected the
number of hours customers use given equipment or processes. Weather and internal
equipment or appliance choices also affect energy savings. Together, these factors comprise
energy efficiency projects’ “capacity factors” (Govindarajalu et al., 2008) and constitute a
significant component of energy savings calculations. Other factors that affect the
persistence of energy savings include facility managers’ skill at operating the new equipment
(Govindarajalu et al., 2008), equipment breakdowns and replacements 23 , variability and
quality of energy supplies, and changes in energy prices.
Product-specific issues can simply be addressed through warranties (Econergy, n.d.)
but other issues must be detailed in project-specific contracts.

ESCOs also carry transaction costs and any expenses related to project dissolution (Econergy, n.d.;
Govindarajalu et al., 2008).

SUMMARY OF KEY POINTS

Market Barriers: Customers place low priorities on energy savings projects relative to other capital
projects due to the low cost share of energy in building usage costs and the higher cash flow impact of
other factors. Partly, this is because accounting methods like life-cycle cost accounting are not widely
used and consequently, much of the benefits of energy efficiency projects are left out of calculations.
Partly, this is because energy savings projects are complex: a multitude of factors, including
equipment and appliance choices made at future points and occupant usage patterns, affect savings.
This necessitates development of detailed project plans and contracts, pushing up costs.

Financing Barriers: Most EE projects lack collateral and many ESCOs lack credit ratings and balance
sheet strength to get bank loans. Consequently, customers must provide banks with recourse. This
detracts from a given project’s appeal and leads would-be customers not to invest.

Capital markets can be instrumental in distributing financing risk by

creating structures that better match costs and revenues with
financing requirements.

23
NOTE: Though not associated with an ESCO contract, many utilities have found that rebate programs drive consumers to
install CFLs at that moment; come time for replacement, however, consumers have no allegiance or obligation to again install
energy efficient technologies. Oddly, this often a less-than-conscious decision and consumers may not even realize that their
choices will negate on-going energy savings. As a result, persistence is a risk not just for ESCOs but also consumers themselves.

Page 44 of 81
 III. SOLUTIONS
 Distributing financing risk:  Off-balance sheet financing:
Capital markets profile risks and Limits project sponsor’s
capitalize EE benefits in project and exposure
property prices via price discovery  Aggregation
Through sales, they allocate risk to Programmatic approaches for
lenders or investors with aggregation are being tried
appropriate risk preferences New technologies may help

Capital markets play a critical role in structuring financing to

distribute risk & minimize transaction costs

A. Distributing Financing Risk

The typical problem for energy efficiency projects and project participants is that the processes of risk
assessment and price discovery do not yield distinct values for energy efficient properties relative to
similar inefficient ones. This is a factor of investor or buyer demand – upon which calculations of
return are based – for energy efficiency “services” being low. The solution is in public education as to
the value of EE – firstly in terms of cost savings, secondly, environmental impact, and thirdly,
marketing. Due in no small part to ENERGY STAR and President Obama’s prioritization of
weatherization and EE in general, public education is happening, now more than ever. Capital markets
can assess and indicate whether this publicity has materially affected demand or appeal for energy
efficient properties, via price discovery.

Price discovery occurs through profiling risk, estimating return, and making a sale. Energy efficiency
investments have been called low-risk (Jones et al., 2002), while at the same time commanding high
implied rates of return by customers, as shown in the previous section. Financiers, on the other hand,
create risk profiles for properties for which projects have been undertaken and estimate likely returns.
Identified prices capitalize EE investments into property prices. Financiers identify all the risks posed
by the asset, project, or business, and compare them to similar investment/financing opportunities. In
the case of the EE projects, risk is defined first and foremost by contractor reputation and technical
skill, the technical plan to create and maintain energy savings, construction details, and the customer’s
ability to make payments. At root, these risks are encapsulated in project interest rates and stipulated
debt-service requirements. In this way, risks are identified and priced, as are the values associated with
the energy savings that are based on capital assets that will remain fixed at the location in question.

Risk is allocated by channeling capital into projects from sources other than the building owners –
including from bank savings deposits. In other words, risks to building owners are decreased when
they no longer have to finance projects directly with cash or shares. When distributing capital, capital
markets define liabilities – via collateral, recourse, and shareholder/debt-holder priority ranking (i.e.
senior or junior bond-holder), and effectively sell risk to those investors or lenders for whom it has
appeal. The usual problem in this regard is unfavorable priority ranking for project lenders, investors,
or bondholders. Energy efficiency projects often involve installation or construction of equipment in a
building; the building owner has a mortgage. The mortgage-holder is first in line for repayment of
his/her loan, should bankruptcy occur. The second factor in this scenario is that much of the EE
equipment or materials have little-to-no stand-alone value; consequently, the lender has no recourse
via the physical property as that is again the purview of the mortgage-lender.

Page 45 of 81
Risk can be minimized and aggregate returns improved by combining a set of discrete investment
opportunities into a diversified portfolio of opportunities and selling shares in this portfolio. The many
contractual specifics, such as ownership of assets, seniority or lack thereof, sub-metering, time in the
property, etc., have led some experts to believe that project-specific analysis and pooling will be more
effective (Eckel, 2008). It is theoretically possible to pair projects with government customers (large
projects, stable credit rating, and stable payments) with higher risk and higher return projects, very
different in nature (e.g. restaurant retrofit or hospitality-sector project), so as to bring down the cost
of financing for the smaller projects and incrementally bump up the returns on the larger one.
Precedents exist: intellectual property (Brown, Rudnick Berlack, Israels LLP, 2005), small business
loans (Board of Governors of the Federal Reserve System, 2007), and many other assets have been
matched, according to their specific risk-return characteristics, and combined in a larger financing
vehicle.

B. Minimizing Transaction Costs

A major impediment to capital availability for EE projects has been their small size: typical project
finance is unavailable for projects that cost less than $10MM (J. Ravis, personal communication,
February 17, 2009) - which most energy efficiency projects do. The way around this issue is aggregation.
Many ESCOs have pursued programmatic approaches to aggregation for processes or equipment that
have fairly stable characteristics across buildings, customer classes, or end-user types. The issue has
remained the specificity of each deal, which foils programmatic efforts.

Developments within the EE industry itself may foster aggregation. Meters, controls, and sensing
technologies are advancing: during the contract development stage, procurement for parts and
services, measurement and verification, energy prices and variability, and other parameters can be
input into a model that simulates outcomes, taking into account real meter-based usage and (Kromer
& Kumar, 2006). There is an open source platform called BACNet that aims to facilitate developments
of these types of technologies; furthermore, many of the top building automation systems and
providers of IT systems for facilities managers are investing money in this direction, and web-based
systems have already made their way into the market. The web-based systems enable customers to
access real-time data on energy usage and manage facilities and equipment remotely (Kromer &
Kumar, 2006).

Alongside technological developments are financial innovations, many of which can be sponsored by
partnerships – particularly with governments, utilities, or REITS or property developers. The major
tools capital markets players use to distribute risk across multiple investors or partners is structuring24.

C. Partners, Tools, and Structures

Structures which keep financing off the balance sheets of project partners are particularly in demand.
Off-balance-sheet structures are ones in which investments are counted as operational expenses or
allocated to independent entities, whether or not they exist outside a “paper” universe. The first
option, operating leases, work, and are used, for stand-alone EE appliances or equipment (e.g.
washer/dryer or stove). For the most part, however, they have the same issues as described above:
much EE equipment has little-to-no stand-alone value once installed. Operating leases are typically
shorter term than the life of the asset; as such, the owner/installer will incur losses. The second way to
achieve off-balance sheet financing in EE projects is using performance contracts: here, assets and

24
NOTE: Structuring, in this context, refers to the formation of corporate entities that “own” assets and provide lender/buyers
and/or sellers loss protection.

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financing remain off-balance sheet for customers, but, due to the structure of the contract, customers
still bear exposure to financing risk. As discussed previously, customers are eager to find ways to limit
their exposure.

Other tools include guarantees and letters of credit, both of which speak to lenders’ exposure to
financing risk. Operating risk (and to the extent that operational practices create financing risk) can be
minimized through purchase agreements and letters of intent. It may also be possible to insure energy
savings, such that is offered by Zurich American Insurance (Goldberger, 2002).

Government
Public, quasi-public, and private partners can play a significant role in minimizing perceived financing
risks and transaction costs. To promote non-governmental EE projects, public agencies can issue
bonds (briefly mentioned in Section II), set up revolving loan funds, offer master municipal leases, and
more (Goldberger, 2002). Loan guarantees are the first and simplest option for government (See
Figures 33 and 34): the DOE has had an EE loan program in place for a number of years, though it
previously failed to dispense even one guarantee. The ARRA, Energy Bill, and Energy Independence
and Security Act (EISA) of 2007 have pushed other agencies to offer guarantees, however. Many
states have EE loan guarantee programs and the EISA requires the Small Business Administration
(SBA) to developing on-bill financing programs with utilities, for which it can be expected primarily to
provide loan guarantees (Ryan, 2008).

Loan Loan

GOVERNMENT FUND COMMERCIAL BANK ESCO / CUSTOMER

Repayment Repayment
via energy
savings
Fee
Fee

Repayment
Guarantee
Shareholder and/or
Financial Guarantee
Fee

GUARANTEE FUND

Figure 33
Source: Selman (2002)

Page 47 of 81
 GOVERNMENT TECHNICAL
FUND CONSULTANT

Certifies ESCO
Funds Repayment Certifies
Project

Loan Investment
BANK ESCO CUSTOMER
(END USER)
Repayment Payments

Contingent
Payment Guarantee Fee

Security interest in
ESCROW GUARANTEE payment stream to
ACCOUNT Deposit FUND
ESCO

Figure 34
Source: Selman (2002)

Utilities
Utilities can directly finance individual projects, work with ESCOs, or work with financiers to deliver
financing, but also bill customers and collect payments. Being highly regulated, utilities have fairly
stable cash flows which can eliminate risk premiums attached to ESCOs or their customers. Utilities
can also simply provide fee-for-services to ESCOs, regarding measurement and verification, and/or
payment collection. Were utilities to launch ESCO subsidiaries or affiliates, they could directly employ
their own balance sheets to finance projects, eliminating customer exposure. In fact, in one
documented case, a utility launched an ESCO subsidiary and shared metering and other usage data
with it (decreasing the ESCO’s operating risk). The utility then borrowed at its own rate (9 percent)
and lent to the subsidiary at a higher rate (15 percent), pocketing the spread (Gilligan et al., 2005). By
leveraging its customer network, real-time usage data, and financing strength utilities can build a
powerful position in the EE services industry.

Alternatively, utilities can leverage their relationships with customers, their meters, which verify actual
energy use, and their strong balance sheets to facilitate financing. The fact of their being regulated
entities could currently play to their advantage in a financing partnership as well: governmental
oversight may inspire investor confidence in more innovative financing structures which would
otherwise be considered risky or opaque. Additionally by leveraging the fact that they are regulated
entities with relatively predictable cash flows, utilities can provide pre-commitments that “guarantee”
payments to ESCOs. In particular, utilities can use DSM or Forward Capacity Market (FCM) payments in
this way. DSM and FCM payments can ensure that at least part of a given project’s revenue comes
from a stable source. This regular revenue can be used as “collateral” for a bank loan, or as receivables
a company sells to private investors via securitization (See Figure 35). The precedent for securitization
using utility partners comes from stranded cost securitization - one example is securitization of a
demand-side management program in Puget Sound in 1995 (Forrester, 2008). The advantage

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securitization has is that it keeps the financing burden off the balance sheets of the administrator (in
this case, the utility).

Figure 35

Source: de
T’Serclaes
(2007)

Ratings agencies rated stranded cost securitizations in their highest rating categories, according to the
J. P. Forrester in the Public Utilities Fortnightly (Forrester, 2008).

If EE projects are combined with renewable energy generation of large enough scale, power purchase
agreements can also be leveraged.

A key point of value that utilities add as administrators of pooled loan or securitization vehicles
relative to other parties is in bringing in government oversight. Today’s credit crisis derives from
mortgage-backed securities markets which are securitized, off-balance sheet, financial products.
According to many financiers and economists, the “outsourcing of the funding side of an originator's
balance sheet … undermines … incentives to monitor the quality of the loans [a given entity]
originates” (Caprio, Jr. et al., 2008). In other words, off-balance sheet financing reduces the need for
fiscal discipline. Using utility partnerships would necessitate government oversight: utilities would
have to present their cases for financing partnerships in regulatory hearings – and consequently

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establish transparency as to cost and clarity. This ensures oversight both of the financing mechanisms
and energy savings’ E,M&V processes and can keep abuses in check. Such requirements could bolster
investor confidence – particularly important in today’s economic climate.

The other benefit of utility partnerships is that energy savings receivables can be collected via utility
bills – whether through a tariff or volumetric charge (Forrester, 2008). In On-bill Financing (OBF)
utilities make loans to EE project customers and collect repayment via utility bills. The loans can come
from the utilities themselves or from third party financiers. The particular advantage of OBF is that it
ties loan repayment to the property in which the EE measure was executed, rather than to the
customer. This minimizes the mismatch between long payback times and short occupancy cycles;
moreover, because payment is tied to properties rather than customers, OBF enables current
occupants to move without taking EE investment liabilities with them. Other benefits of OBF are that
the programs simplify loan application processes, can be approved based on customers’ utility bill
payment histories, can utilize actual energy-use data from meters, and can be cash flow neutral (Ryan,
2008). As most people pay their utility bills on time, OBF can bring down default rates. In California,
OBF programs have been designed by most of the state’s utilities and generally offer non-residential
customers 0 percent financing for approximately five years via OBF (Ryan, 2008; Skinner, n.d.).

The main issue with OBF is that third party financiers remain subordinate to the utilities as utilities
collect customer payments and subtract their costs before passing the balance to financers. One way
around this issue is through Tariffed Installation Programs (TIPs). In TIPs, utilities employ their billing
systems to collect payments on behalf of project financiers. These funds are collected via a separate
tariff and are managed separate from customer bill payments. Like OBF, this mechanism ties loan
repayment to the property in which the EE measure was executed, rather than to the customer.
Typically, the tariff amount is less than expected energy savings and shorter-term than the EE project
(Fuller, 2008).

A growing motivation for utilities to involve themselves in financing and aggregating EE projects is
ability to earn carbon credits for compliance purposes (Goldberger, 2002). Even without
environmental legislation as a motivator, utilities can carve out a position of significant importance in
aggregating and financing EE projects, leveraging the advantages (i.e. customer relationships,
metering technologies, and strong balance sheets) mentioned above.

Real Estate Investment Trust of Property Developer

Final options would be to incorporate renewable energy generation, and thereby create power
purchase agreements to obtain lower-interest loans. MMA Renewable Ventures is one company that
does this: the typical project size is between $2-10MM with terms from 7-15 years (Hinkle, 2008). Both
measures can provide customers with a partial hedge against utility price fluctuations (Hinkle, 2008).

Other examples from around the globe that could be effective in the US include property developers
financing ESCOs: in the case mentioned by Gilligan, Lin, and Zhao, the property developer lent money
to ESCOs for projects, leveraging its physical assets to borrow capital from banks. This eliminated both
the cost of negotiation with financiers and of long-term monitoring and verification for the ESCO, both
of which were borne by the property developer, at a considerably lower rate (Gilligan et al., 2005).

SUMMARY OF KEY POINTS

Identifying, Pricing, and Distributing Risk: Capital markets profile risks and capitalize EE
benefits in project and property prices via price discovery. Through sales, they allocate risk to lenders

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or investors with appropriate risk preferences. In particular, financiers can limit ESCO or customer
exposure via off-balance sheet financing.

Aggregating EE projects into off-balance sheet vehicles: Programmatic approaches for

aggregation are being tried. New technologies may help. Partnerships will be effective – particularly
public-private partnerships in which lenders’ and investors’ worries as to projects’ stability are
appeased. Using government credit support programs and/or stable partners can address investors’
confidence, yet each of these partners also increase transaction costs. As such, partners that bring
additional functions – such as a payment collection mechanism that is already in place, complete with
customer relationships – is likely to be the most effective type of partnership.

Capital markets will be critical to establishing financing partnerships

that minimize risk and distribute return

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CONCLUSION
Energy use in buildings accounts for 35 percent of total primary energy consumption in the U.S., 42
percent of total energy costs, and 35 percent of all U.S. carbon emissions (Kreith & West, 1997). LBNL
goes on to say that at a price of 2.7 ¢/kWh, cumulative savings from the buildings sector alone can
equal up to $170 billion in 2030 (Biermayer et al., 2008). The total investment required would be $440
billion, invested between 2010 and 2030. The simple payback on would be 2 1/2 years with a benefit-
cost ratio of 3.5 (Brown et al., 2008).

The questions this research sought to answer were:

 Is this investment materializing?

 If not, what is impeding it?
 Can new regulation, environmental finance products, or alternate structures (e.g. public
private partnerships) eliminate these obstacles and open the floodgates to this investment?

Firstly, demand for non-residential building energy efficiency products and projects is growing. The
buildings sector accounts for 62 percent of total investment in energy efficiency, according to
Ehrhardt-Martinez and Laitner (Ehrhard-Martinez & Laitner, 2008). Non-residential building energy
efficiency was a $51.3 billion in 2004 and demand has only grown (Ehrhard-Martinez & Laitner, 2008).

Customers for EE projects include owners and occupants in commercial offices and retail buildings,
Federal buildings, and MUSH buildings. Energy consumption and floor space is highest for offices,
retail, and education yet demonstrated demand for building energy efficiency services is highest
among municipal governments, universities and colleges, schools, and hospitals. However, the
American Reinvestment and Recovery Act mandates upgrades of 45 and 25 percent to new and
existing federal facilities by 2014, respectively. The Alliance to Save Energy expects EE projects to take
place in 75 percent of federal building stock.

Given that federal and MUSH facilities are generally large, have ageing infrastructure, and limited
capital budgets for improvements, there will be growth in demand for energy performance
contracting services among these groups, if not also commercial customers.

 Energy management services were a $12.79 billion in 2008 with compound annual growth rate
of 18.5%
 Energy performance contracting services were a $3.6 billion in 2006 with annual growth of 22
percent per year.

Key stakeholders in the drive towards demand-curtailment are utilities. Utilities are being driven,
through a combination of market and regulatory forces, to invest in energy efficiency. They have a
vested interest in increasing the viability, reliability, and cost-effectiveness of energy efficiency as an
energy resource. Consequently utilities are pushing consumer adoption with promotional efforts and
outsourcing implementation to keep program costs low.

 Government & utility energy efficiency spending was $3.74 in 2008 and is expected to grow
significantly, in part because of the new Administration’s promise to overhauling the nation’s
energy infrastructure.

Drivers for investment in non-residential building energy efficiency are energy costs, environmental
concerns, marketing, and compliance. Approximately $20 billion in government funding will be spent
on energy efficiency via the TARP, ARRA, and additional measures.

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  Policies specifically target building energy efficiency via environmental caps, building energy
codes, and required upgrades for Federal facilities.
 Additional measures include tax breaks, rebates, public-private partnership financing schemes,
and public education campaigns, which directly bring down the price premium commanded
by energy efficient technologies.
 These factors can create a leverage effect that spurs further investment in EE technologies
and services between the present day and 2013. Key to this effect will be minimization of the
perceived risk of energy efficiency projects and technologies: performance risk and cost are
being addressed by measures mentioned above. Financing risk remains an issue.

Due to these factors, investment is materializing.

However, impediments to full achievement of the US building stock’s energy savings potential are
numerous. First and foremost, energy is a low priority relative to other capital projects, due to its low
cost share and the due to the greater cash flow impacts of other potential projects. Partly, this is the
case because accounting methods like life-cycle cost accounting are not widely used. Partly, this is
because energy savings projects are complex: a multitude of factors, including equipment and
appliance choices made at future points and occupant usage patterns, affect savings. This latter factor
necessitates development of detailed project plans and contracts, pushing up costs.

When projects are sought, they lack collateral and the implementing service providers often lack credit
ratings and strong enough balance sheets to independently get project loans. Consequently,
customers must provide banks with recourse. Customers are actively in search of ways to minimize
their exposure.

The role of capital markets in financing non-residential building energy efficiency is consequently to
allocate and distribute financing risk – in particular by organizing financing partnerships with public
and private entities that bring with them a stabilizing force that can bolster investor and lender
confidence. Capital markets can provide a solution to the problem of financing risk. In particular, there
are a variety of off-balance sheet structures that could be used to finance a project. However, the
complexity of these structures brings costs, which the typically sized ESCO projects cannot support. As
such, intermediaries must aggregate projects before most off-balance sheet financing structures can
be viable. Government, but more importantly, utilities, can serve the critical function of project
aggregation. The interest of the new White House Administration and the plethora of rules, policies,
and programs it has put towards both promoting energy efficiency and overhaul of the energy and
power infrastructure of the US create new partnership opportunities. With aggregation accomplished,
and subsidized by tax-payers and/or rate-payers, private capital can effectively identify, price, and
parse risk, thereby driving investment into building energy efficiency.

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 Appendix A: Waxman-Markey Bill25
Alliance to Save Energy Summary of Energy Efficiency
Measures
Subtitle A—Building Energy Efficiency Programs

Sec. 201: Greater Energy Efficiency in Building Codes: This section sets targets for the national model
building energy codes and standards to achieve overall energy savings of at least 30 percent starting
with the next edition of the model codes and 50 percent with the editions of each code that comes
after January 1, 2016, as compared to the 2006 IECC for homes and ASHRAE Standard 90.1-2004 for
commercial buildings. After 2016, the U.S. Department of Energy (DOE) is to set these targets at least
once every 3 years at the maximum level of energy efficiency that is technologically feasible and life-
cycle cost effective. DOE must also assist IECC and ASHRAE, determine whether their model codes
meet the targets, and establish modified model codes if the IECC and ASHRAE codes do not achieve
the efficiency goals.

Sec. 202: Building Retrofit Program: This section directs EPA and DOE to establish standards for a
national energy and environmental building retrofit policy for the commercial and residential sectors
and to develop the Retrofit for Energy and Environmental Performance (REEP) program to implement
these policies. This program would promote cost-effective energy efficiency and other environmental
improvements in existing buildings through low-cost audits, technical help, training, incentive
financing and other mechanisms. This section specifies the amounts and forms of support that can be
provided under this program and requires that REEP funding not exceed 50% of the total cost of
retrofit in each building. Funding for this program will flow through the State Energy Offices (or their
equivalents, as determined by the governor) based on the formula used for allocating State Energy
Program (SEP) funding for the first year and a combination of the SEP formula and state-wide
performance on energy savings achieved through REEP. In addition, this section also directs EPA and
DOE to make appropriate use of existing programs such as the EPA Energy Star for Buildings in
creating and operating REEP.

Sec. 204: Building Energy Performance Labeling Program: This section directs the EPA to create a
model building energy performance labeling program. EPA is to conduct demonstration projects for
different building types to assess the sufficiency of the current Commercial Buildings Energy
Consumption Survey and other data, inform the development of measurement protocols for other
building types and identify any areas of needed data improvement. EPA and DOE are to coordinate
these demonstration projects with those undertaken for the Zero-Net-Energy Commercial Buildings
Initiative adopted in Energy Independence and Security Act of 2007 (EISA). EPA, in consultation with
DOE, is to work with the State Energy Offices (or other state entities) on implementation of the
labeling program.

Funding under this section is available to states that have adopted assessment and labeling
requirements under this program and have an implementation plan within 6 months of establishment
of the program. One third of the funds are to be allocated equally among these states, the remaining
funds will be allocated in proportion to the number of eligible buildings in each state.

Subtitle B—Lighting and Appliance Energy Efficiency Programs

25
NOTE: This section has been excerpted from the Alliance to Save Energy’s website

Page 54 of 81
Sec. 211: Lighting Efficiency Standards: This section establishes efficiency standards for outdoor
luminaires, increasing from 50 lumens per watt by 2011 to 80 lumens per watt by 2015, and for outdoor
high light output lamps to 45 lumens per watt by 2012. It also requires that portable light fixtures
manufactured on or after 2012 be made for use with Energy-Star certified CFLs or LEDs - not
incandescent lamps of any type. Additionally, GU-24 base lamps shall not be incandescent, and DOE
must come out with new standards for incandescent reflector lamps within 1 year of the bill’s
enactment.

Sec. 212: Other Appliance Efficiency Standards: This section establishes energy efficiency standards for
water dispensers, hot food holding cabinets, and portable electric spas, gas- and oil-fired commercial
warm air furnaces.

Sec. 213: Appliance Efficiency Determinations and Procedures: This section prescribes a water
efficiency standard for showerheads, faucets, water closets, and urinals, and an energy efficiency
standard and optional water efficiency standard for clothes washers and dishwashers. It also requires
manufacturers of products with efficiency standards to submit reports to DOE regarding their
compliance, economic impact of a standard, and sales. An estimated total annual carbon output on
appliance “Energyguide” labels is also required.

Sec. 214: Best-in-Class Appliances Deployment Program: This section establishes a Best-in-Class
Appliances Deployment Program, administered by DOE, that rewards retailers with 1) bonuses for
increasing the sales of high efficiency equipment, electronics, and appliances and 2) bounties for the
replacement and recycling of old, inefficient appliances. It also awards bonuses to manufacturers for
developing “superefficient” best-in-class products.

Subtitle D– Utilities Energy Efficiency

Sec. 231: Energy Efficiency Resource Standard for Retail Electricity and Natural Gas Distributors: The
draft establishes a federal standard requiring electricity and natural gas utilities to help their
customers implement measures to reduce their electric and natural gas use each year from 2012 to
2020. The reduction targets are based on the average energy use in the two years prior to the
enactment of the bill and increase incrementally to reach savings of 15% of electricity and 10% of natural
gas by 2020 achieved through these programs since the bill’s enactment. Below is a table of energy
efficiency targets for calendar years 2012 through 2020. Eligible activities to achieve energy savings
include: utility efficiency programs, building energy codes, appliance standards, combined heat and
power, distribution system savings and related efficiency measures.Utilities can also buy savings from
customers and from third parties through bilateral contacts, though no open market trading will be
allowed.

DOE is to set measurement and verification and other rules, and states that choose to do so will
administer the standard for their utilities, with oversight from DOE. For energy savings to count, the
utility must demonstrate significant utility involvement, beyond business-as-usual measures, and third-
party verification.

Subtitle F—Improvements in Energy Savings Performance Contracting

Sec. 251: Energy Savings Performance Contracts: This section amends requirements for Energy Saving
Performance Contracting of federal buildings by requiring a competitive application process, allowing
for the purchase of renewable energy from utilities, and allowing for the installation of renewable or
efficient energy systems on site, including electric, thermal, cogeneration and heat recovery programs.
The competitive application process requires the head of a Federal agency to review the qualifications,

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request references, and conduct discussions with two or more contractors. The selected contractor(s)
must then conduct a site-survey and submit a firmed-fixed price proposal to implement specific energy
conservation measures prior to the issuance of the delivery order.

Subtitle E —Smart Grid Advancement

Sec. 142: Incorporation of Smart Grid Capability in Energy Star Program: This section expands the
Energy Star labeling to include an indicator of products’ smart grid-capability, based on studies to
assess functionality, integration with smart grid features, and use by consumers.

Sec. 143: Smart Grid Peak Reduction Goals: A program to set out peak reduction goals for load-serving
entities of greater than 250MW capacity is proposed, to be developed by those entities and the states.
It does not set out specific reductions or mitigation that would be expected, merely that such entities
would develop their own targets in conjunction with FERC. FERC, DOE, and NERC would collaborate to
develop measurement and verification rules. Peak load reduction plans could be managed in a number
of ways, including efficiency programs, demand response, distributed generation, and stored energy.
It would have to be tested to ensure effectiveness.

Sec. 144 Reauthorization of Energy Efficiency Public Information Program to Include Smart Grid
Information

The Energy Efficiency Public Information program, originally created by EPAct 2005, but for which
funds were never appropriated, would be expanded to include information about smart grid and the
program would be extended to 2020. The program, in which the DOE conducts activities to raise public
awareness about efficiency, would be expanded to include smart grid. Advertising and media
awareness campaigns would be used to inform the public about smart grid and efficiency. Such
campaigns would be conducted in collaboration with the private sector, state governments, and local
governments. The program would also be extended to 2020.

Sec. 145: Inclusion of Smart-Grid Features in Appliance Rebate Program: Smart grid-capable appliances
would be eligible to receive rebates under this federal appliance rebate program, which was created in
EPAct 2005, and is operated through state offices. It would also clarify that states are only required to
match the administrative costs of the program rather than the entire costs. The program would fund
states to issue rebates to consumers purchasing energy efficient or smart grid-capable appliances.

Subtitle F —Transmission Planning

Sec. 151 Transmission Planning: This section would make furthering the integration of renewable and
other zero-carbon energy sources and taking into account all demand- and supply-side options a policy
of federal electric grid planning. The demand- and supply-side technologies that would be supported
would include energy efficiency, distributed generation, smart grid, demand response, storage,
voltage regulation, advanced conductor technologies, underground transmission, and conventional
transmission capacity and corridors. FERC would develop principles for planning accordingly. It would
also coordinate and collaborate with regional entities to manage conflict resolution and enable multi-
regional meetings to plan transmission.

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 Appendix B: Building Energy Efficiency26
A. Equipment & Materials Overview
The complexity of the interactions between system components and design elements that produce
energy efficiency is a big factor in the high cost and low uptake of energy efficiency projects. Technical
specifications are briefly described and include R-values for walls and ceilings, U-values for windows
and glazing, AFUE values for gas furnaces, SEER values for air conditioners, EFR values for gas water
heaters, and thermal mass for buildings overall.

HVAC
Heating
Heating can be accomplished by
heating the air within a space (e.g.
supply air systems, perimeter fin-tube
"radiators"), or by heating the
occupants directly by radiation (e.g.
floor/ceiling/wall radiation or radiant
panels).

Boilers: Boilers consist of a vessel or

tank where heat produced through
fuel combustion generates hot water
or steam. The steam is used for space
heating, domestic water heating,
food preparation, and industrial
processes. For efficiency, operators
must attend to boiler staging, water
chemistry, pumping and boiler
controls, boiler and pipe insulation, fuel-air mixtures, burn-to-load ratio, and stack temperatures.

Electric Resistance Heating: Electric resistance heating converts almost 100% of the energy in the
electricity - itself produced from oil, gas, or coal generators that convert only about 30% of fuel energy
into electricity - into heat. Electric heat is often more expensive than heat produced on-site with
combustion appliances. Electric resistance heat can be provided by electric baseboard heaters, electric
wall heaters, electric radiant heat, electric space heaters, electric furnaces, or electric thermal storage
systems.

High-Efficiency Gas-Fired Rooftop Units: An evaporator, condenser, and compressor in combined unit
usually placed on a roof. Air supply and return ducts come from indoors through the building's
exterior wall or roof to connect with the packaged air conditioner, usually located outdoors. A way to
boost energy efficiency is by increasing combustion efficiencies, currently between 78-82% on average.
Another method is by modulating burner and combustion air flows.

Heat Pumps: Heat pumps move (or pump) heat from one place to another: like a standard air
conditioner, a heat pump takes heat from inside a building and dumps it outside. The difference is that
a heat pump can be reversed to take heat from a heat source outside and pump it inside, where air
conditioners cannot. Heat pumps use electricity to operate pumps that alternately evaporate and
condense a refrigerant fluid to move that heat. In the heating mode, heat pumps are far more

26
NOTE: Much of what follows in this section has been excerpted from the websites of Wikipedia, the Whole Building Design
Guide, Building Green, and the DOE’s Energy Efficiency and Renewable Energy, and draws in information from Frost and Sullivan.

Page 57 of 81
"efficient" at converting electricity into usable heat because the electricity is used to move heat, not
to generate it. The two primary types of heat pumps are:

Air-source Heat Pumps: The most common type of heat pump—an air-source heat pump—
uses outside air as the heat source during the heating season and the heat sink during the air
conditioning season.

Ground-source Heat Pumps: Geothermal, or ground source, heat pumps employ a system of
coiled pipes several meters beneath the earth’s surface to “pre-cool” or “pre-heat” incoming
air. They work in a similar way as above, except that the heat source/sink is the ground source
(the soil, groundwater etc.), or a body of surface water, such as a lake. For simplicity, water-
source heat pumps are often lumped with ground-source heat pumps.

Components of a Ground-Source Heat Pump System

Using a heat pump within an air conditioning system (called a heat pump air condition
system), in combination with renewable energy, can produce upwards of 40% to 60% energy
savings. The quoted price of a heat pump central AC system is 10% more than a traditional
central AC system. However, operating costs can be reduced by 40% using the heat pump air
condition system.

Radiant Floor Heat: Radiant air floors (where air is the heat-carrying medium), electric radiant floors,
and hot water (hydronic) radiant floors either make use of the large thermal mass of a concrete slab
floor or lightweight concrete over a wooden subfloor or "sandwich" radiant floor tubing between two
layers of plywood to heat a space.

Ventilation
Ventilating maintains an adequate mixture of gases in the air building occupants breath (e.g. O2 vs.
CO2), controls odors, and removes contaminants from occupied spaces. Ventilation means that all air
exhausted from a building must be replaced by outside air. This can be accomplished passively
through natural means (e.g. open windows), or actively through mechanical distribution systems

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powered by fans. Regardless, outside air must be brought to a certain temperature by makeup air
units used throughout the building. Negative building pressure can be a problem during winter
heating season and could lead to a number of other problems such as difficulty in opening doors and
equipment operation.

Frequency conversion air conditioner (FCAC): Variable frequency controllers are the most effective
controllers available today. To create an effective system, controllers need to match loads with
individual needs within rooms in a multi-zone system. There are two types of FCACs: direct current and
alternative current. Direct current FCACs are more efficient than alternative current ones by 10%-30%,
and decrease noise by 5-10 decibels. There are two types of FCACs, variable air volume (VAV) and
variable refrigerant volume (VRV).

Variable air volume (VAV): Careful selection of equipment and energy-saving system design can
increase efficiency of VAV systems. The simplest VAV system incorporates one supply duct that,
when in cooling mode, distributes approximately 55° Fahrenheit air. Because the air temperature,
in this simplest of VAV systems, is constant, the air flow rate must vary to meet the rising and
falling heat gains or losses within the thermal zone being served. Air flow rate can be controlled by
blower's flow rate in single zone systems or a single VAV air handler varied flow rates to each zone
in a multi-zone systems. In other words, as temperatures across rooms vary, diffusers ducted from
a VAV box to individual rooms accordingly modulate the amount of conditioned air delivered to
each room. This eliminates over-heating or over-cooling, which occurs in constant air volume (CAV)
systems; moreover, VAV diffusers require lower fan energy, thereby enhancing energy savings.

Variable refrigerant volume (VRV): Variable refrigerant volume systems use indoor temperature
sensors to control electronic expansion valves on the refrigerant pipes in indoor units. These
sensors and valves control compressors on outdoor units and, according to changes in refrigerant
pressure, vary the volume of refrigerant in a system. In this way, the air conditioning system can
adjust itself automatically to meet the changing needs within a building. At present, there are two
types of variable refrigerant volume air conditioning system: variable frequency multi-zone and the
variable volume multi-zone.

Other ventilating technologies which can afford energy efficiency gains include low-pressure-drop
ducting design, low-face-velocity air handlers, fan sizing and variable-frequency-drive (VFD) fan
motors, and displacement ventilation systems.

Air Conditioning:
Air-conditioning refers to the “sensible” and
“latent” cooling of air. “Sensible cooling”
involves the control of air temperature while
“latent cooling” involves the control of air
humidity. Air conditioning is accomplished by
transferring heat between spaces, such as
with a water loop heat pump system, or by
rejecting it to the outside air via air-cooled or
water-cooled equipment. Heat can also be
rejected to the ground using geothermal
exchange. As cool air is uncomfortable when
too humid, air is dehumidified by condensing
latent moisture on a cold surface and
removing the moisture through absorption
(desiccant dehumidification). In dry climates,
humidification may be required for comfort instead of dehumidification. Evaporative humidification
also cools the air. In dry climates it is possible to use radiant cooling systems, similar to the radiant

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heating systems mentioned above. AC technologies that can increase energy efficiency include
absorption cooling, high-efficiency gas-fired rooftop units (see heating section, above), chillers,
desiccant dehumidification, and evaporative cooling.

Lighting
 Technical Specifications:
Luminaire Efficacy/Efficiency Rating (LER): Luminaires are characterized by
illuminance (the amount of light that reaches a surface), measured in footcandles
(lumens/square foot) or lux (lumens/square meter), and Luminaire
Efficacy/Efficiency Rating (LER) which is the light output (lumens) per watt of
electricity use (lm/w). The LER is a measurement created by a voluntary efficiency
program of the National Lighting Collaborative.
Ballast Efficacy Factor (BEF): the ratio of ballast factor (BF) to power (watts). The
BF is the ratio of light output of a lamp with a given ballast to that of the same
lamp with a reference ballast. High BFs can reduce lamp life and hasten lumen
deficiency due to high currents while low BFs can reduce lamp life due to low
currents.
System Efficacy: the ratio of the light output to the power, measured in lumens
per watt (lm/w), for a particular lamp ballast system.

Light Sources
The below are types of energy efficient lights. Metrics mentioned include the Color Rendering Index
(CRI), which is a scale from 0-100 that measures the accuracy of a light source’s rendering of color.
Incandescent lights have a CRI of 97.

Tubular fluorescents: T8 lamps, one inch in diameter, and T5 lamps, five-

eighths of an inch in diameter, are fluorescent lights that replace older
T12 lamps with improved color rendering and efficacy achieved using
rare-earth phosphors. The correlated color temperature (CCT) and CRI
of the lamps is controlled by varying the selection of phosphors. The CRI of T8 and T5 lamps can be
specified from 70 to as high as the mid-90’s. T8s require electronic ballasts specifically designed to
operate lamps at a lower current than T12 lamps. T5 lamps have a different base, and are shorter than
T8s, so new luminaires are needed. T8 lamps used with electronic ballasts will typically use about 32%
less energy than the same luminaires with T12 and magnetic ballasts. T8 lamps have the same 20,000-
hour + rated lamp life as standard T12 lamps. Frequent on/off cycles can reduce fluorescent lamp life.
Using programmed start or dimming ballasts can increase lamp life to as much as 30,000 hours. T8
lamps also exhibit a slower decline in light output over time, relative to T12 lamps. At 40% of their
lifespan, standard T12 lamps only produce about 80 percent of their initial rated light output,
compared to about 90 percent for T8 lamps.

Compact Fluorescent Lamps: fluorescent lamps comprised of a gas-filled tube and magnetic or
electronic ballast (see below) from 10-25 watts. The ballast can be integrated or non-integrated; while
the latter has higher efficiency and longevity, it is up to 10x more expensive. CFLs have an average
efficacy of 50-75 lm/w for 27-40 watts. CFLs last up to 10 times longer than incandescent lamps (10,000
hours, under optimal conditions), use about one-fourth the energy, and produce 90% less heat. They
require special ballasts for dimming with compatible control devices. CFLs come in four color
temperatures: 2,500K (soft white), 3,000K, 4,000K and 5,000K (daylight), though all have a relatively
low CRI of around 85. Rare-earth trichromatic phosphor is used by all large EEL suppliers and most

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medium-sized enterprises, as it increases lamp life span by 30% and so qualifies fluorescent lights as
energy-efficient in global market. Without this input, CFLs are neither energy-efficient nor of
competitive quality for international markets.

High Intensity Discharge Lamps: lamps that employ an electrical arc, struck against tungsten
electrodes, inside a glass tube filled with gas and metals. Types of HID lamps include mercury vapor
(CRI range 15-55), metal halide (CRI range 65-80), and high-pressure sodium (CRI range 22-75).
Standard high-pressure sodium lamps have the highest efficacy of
HID lamps, but produce a yellowish light. HIDs, like fluorescent
lamps, require ballasts. HIDs are most relevant for use in
gymnasiums, warehouses, roadways, parking lots, and pathways,
but are gaining traction in retail and residential markets. Some
dimming systems for high-intensity discharge lamps also require
special dimming ballasts. However, these lamps do not dim easily,
requiring special ballasts to be dimmed up to 50%. Additionally, they take about 15 minutes to start
after they have been off for some time.

Induction Lamps: lamps that have no electrodes and last 100,000 hours on average, have illumination
capacity of ~12,000 lumens, low maintenance requirements and function well in hot or cold
environments.

Low Pressure Sodium Lamps: employing a similar mechanism to fluorescent lamps, low-pressure
sodium lamps can produce up to 180 lumens/watt - and consequently have the highest efficacy of all
commercially available lighting sources. Because they are long, however, light distribution is less
controllable than with other types of EELs. Additionally, low-pressure sodium lamps take a few
minutes to warm-up. A bigger drawback than wait time is the CRI of 0 - i.e. absence of color rendition.
They are most relevant for outdoor, roadway, parking lot, and pathway lighting. They also require
ballasts.

Solid-State Lighting (LEDs and OLEDs): Semi-conductor diodes that produce light after application of
an electric current. Warm white LEDs have an efficacy of 50 lm/w, while cool white LEDs can achieve
efficacies up to 100 lm/w. LEDs are used alone and in clusters. LED lights have lives of up to 100,000
hours though their efficiency level is, at present, only optimal for
low-light uses such as in exit signs.

Ballasts
Consume, transform, and control electrical power to start and
operate electric-discharge lamps like fluorescent, HID, and low-pressure sodium lamps.

Magnetic ballasts: least expensive and least efficient ballasts. Magnetic ballasts operate at 60 hertz.
Hybrid Ballasts: higher cost than magnetic ballasts, with equivalent operating frequency, and
improved energy efficiency.
Electronic Ballasts: The most expensive and most efficient ballasts. Electronic ballasts operate at 20-60
kilohertz - an increased efficacy of 10-15%. Electronic ballasts reduce energy consumption by between
8%-20% over magnetic ballasts.

Luminaires
Fixtures, comprised of reflectors, diffusers and polarizing panels, that must be designed specifically
for different types of lights in order to achieve efficient light-production. Luminaires are characterized
by illuminance (the amount of light that reaches a surface), measured in footcandles (lumens/square
foot) or lux (lumens/square meter), and Luminaire Efficacy/Efficiency Rating (LER) which is the light
output (lumens) per watt of electricity use (lm/w). The LER is a measurement created by a voluntary
efficiency program of the National Lighting Collaborative.

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Lighting Controls

Manual dimmers: slider switches, button-operated preset scene controls, and remote-controls.
Photosensors: illuminance-detection using photocells, which are light-responding silicon chips that
convert incident radiant energy into electrical current, to automatically adjust light output.
Photosensors can dim lights and switch them on and off.
Occupancy sensors: motion-detection via passive infrared (PIR) sensors (sensors that react to the
movement of heat-emitting bodies), ultrasonic sensors (sensors that emit an inaudible sound pattern,
read the reflections, and react to changes in the sound patterns), and dual-technology occupancy
sensors that combine the other two technologies.
Clock switches or timers: internal mechanical or digital clocks and timers that can be used alone or in
conjunction with photosensors.
Centralized controls: building automation systems that can automatically turn on and off, or dim the
lights.

Integrated Lighting / Lighting Design

Lighting solutions change electric power usage and thermal loads, reducing cooling requirements in a
building. Window placement can enhance these reductions by letting more sunlight into a building,
though solar heat gain from the windows could then eliminate reduced cooling requirements. As such,
lighting should be considered during the design stage of a building, though retrofit energy savings
projects can and should still be undertaken.

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 Windows
 Technical Specifications:
Windows lose heat in four ways: conduction, convection, radiation and air
leakage. Conduction is the movement of heat through a solid material;
convection is the cycling of heat and cold in a current (i.e. creating the feeling of a
draft); radiation is the movement of long-wave heat energy from a warmer place
to cooler one; and air leakage is self-explanatory. Ways to increase the efficiency
of windows are with glazing, coatings (e.g. low-e), glazing spacers, gas fills,
insulating frames and sashes, and weather-stripping. Insulated glass (commonly
referred to as Insulated Glazing/ Glass Units (IGU)) is the energy efficient segment
of glass-based fenestration products. An IGU consists of two or more sheets of
glass spaced apart and hermetically sealed to form a single glazed unit with an air
space between each sheet.
No one metric reflects the efficiency of all window components: instead, a heat
flow coefficient, solar heat gain coefficient, and visible transmission metric,
among other things, are all used in tandem. Heat flow is measured by U-values
which combine the total heat flow of window frames, dividers, centers, and
glazing edges; in other words, U-values measure the total heat flow via
conduction, convection, radiation, and air leakage of all parts of a window over its
lifetime. U-values are produced with specialized computer software in accredited
testing labs.
The solar heat gain coefficient (SHGC) is the ratio of solar heat gain coming
through the window to the incident solar energy striking the window. Visible
Transmittance (VT) is the fraction of visible light transmitted by a window. Other
measures and rankings report air leakage and annual heating (Fenestration
Heating Rating - FHR) and cooling (Fenestration Cooling Rating - FCR), the latter
two of which are calculated using U-values, solar heat gain coefficients, and air
leakage together. At present, window labels only include U-vales, not SHGC, air
leakage rankings, FHRs, or FCRs.

Glazing
Additional layers of glaze trap additional layers of air, increasing
insulation. For example, two layers with a ¼ inch air space between
them changes the center-of-glass insulating value from R-0.9 to R-
1.75.

Coating
Tint lowers the transmittance of solar heat, but also blocks visible
light. While it is used in commercial buildings, it is uncommon in
residential buildings.

Low-emissivity (Low-e) is a coating technology that has changed

the window game. Low-e uses a thin, transparent coating of silver
or tin oxide on glass or on a suspended plastic film. This enables
short-wavelength sunlight pass through while blocking longer-
wavelength heat radiation (such as that emitted from surfaces
inside the building). If the low-e coating is on the outside of the
inner layer of glass, the glass warms up. The window, in essence, reflects radiation back into the room.
However, if the low-e coating is on the inside of the outer layer of glass, the glass warms up and
reflects heat radiation both inward and outward. The radiant heat striking the low-e coating on the

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outer layer of glass is reflected back toward the inner layer of glass. The two types of low-e coatings
are soft-coat and hard-coat.

Soft-coat involves thin layers of silver and anti-reflective coatings applied to a glass surface by
vacuum deposition and sealed with an IG unit. The thickness and number coatings affect
emissivity (standard soft-coat low-e glass has an emissivity of about 0.15, while the newer low-
e has an emissivity of 0.04) and total solar transmissivity.

Hard-coat (a.k.a. pyrolytic) low-e glass uses a thin layer of tin oxide incorporated into the
surface of the glass during manufacture, increasing the durability of the coating, and enabling
the coating to be integrated into single- glazed windows or
storm panels. Hard-coat low-e glass has
higher emissivity (about 0.2 and center-of-
glass insulating value in IG units with ½ inch
air spaces of R-2.86) and higher total solar
transmissivity.

Additional coatings, used in commercial buildings,

block or transmit light of various wavelengths so as to
retain visible light transmittance and eliminate solar
heat gain.

Glazing spacers
Aluminum channels with desiccant beads inside are
effective for holding apart panes of glass and
providing a substrate for sealants. Yet, aluminum is
highly conductive. Reducing the conductivity of the
glazing perimeter decreases incidence of
condensation. Condensation is the most common
reason for window call-backs. Wood, thin-walled C-
section steel, thermally broken steel, vinyl, fiberglass,
steel-reinforced butyl rubber, polyurethane foam, and
silicone foam are alternative types of glazing spacers.

Air space
Window manufacturers increase the distance between layers of glass, employing the air in that space
as an insulator. Too much distance, however, forms convection loops in the air space, exacerbating a
window’s convective heat loss. Optimal air space is 13-25 mm.

Gas fill: Replacement of air with low-conductivity gas, improves window performance. Carbon dioxide
was used first, then CFC gas, and today, argon – a plentiful, inexpensive, and inert gas. Superior gases
are krypton and xenon, though neither is used with the frequency of argon.

Sash and frame materials

High thermal conductivity of the sash and frame causes heat loss. As such, frames and sashes are a
place for IP: Anderson Windows created a PVC-wood composite that increases the strength and
substantially lowers the thermal expansion coefficient of the frame relative to PVC alone (see Vinyl,
below, for more on thermal expansion). GE Plastics developed its own material - an acrylonitrile
butadiene styrene (ABS) plastic called CYCOLAC® that is highly weather resistant, equivalent in
thermal expansion to vinyl, and can come in a greater range of colors. Foamed PVC (vinyl), hollow vinyl,
wood, and fiberglass are alternatives to the formerly commonplace non-thermally-broken aluminum
or steel sashes and frames.

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Wood: High prices and maintenance and durability concerns have led manufacturers away from wood.

Engineered wood: Finger-jointed, laminated-veneer, and laminated-strand wood are all used in
components of window frames.

Aluminum and steel: High recycled content and recyclability has led manufacturers to these materials;
however, high thermal conductivity necessitates thermal breaks, usually produced with
petrochemical-based resins, like epoxy or vinyl, and has turned the market towards alternatives.

Vinyl: polyvinyl chloride (PVC) surpassed aluminum in the 90’s due to its low cost and maintenance
requirements. Aside from the environmental issues associated with PVC manufacture, vinyl has a high
coefficient of thermal expansion. This causes it to expand and contract as temperatures change and
can lead to loosened seals and cracked corners and flanges, necessitating more frequent window
replacement.

Foamed PVC: Tiny air bubbles in lower-density vinyl enhance foamed PVC frames’ R-values, but also
increases the PVC/window amount by so much as to make it potentially too toxic.

Fiberglass: As it is durable, strong, and thermally stable (thermal expansion coefficient far lower than
vinyl or aluminum), polyester resin and glass fiber mix is gaining popularity.

Weather-stripping systems
Hinged windows can employ compression-based weather-stripping gaskets, increasing air-tightness
relative to sliding-sash windows. Still, air-tightness varies considerably from product to product.

Super windows
More and more manufacturers are creating combinations of the above components for superior
performance.

Smart Windows
The future for windows, however, is in "smart windows", or chromogenic windows, that respond
dynamically to environmental such as temperature (thermotropics), light (photochromic), and
electrical input (electrochromic) factors. Chromogenic glazing can reduce both heating and cooling
energy wastage. Despite this, "smart window" technologies are presently uncompetitive, due to
extremely high prices.

In curtain walls, glazes, coatings, and gas-fills are all also extremely important.

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 Walls - Insulation
 Technical Specifications:
Energy efficiency is correlated to thermal efficiency, or, in other words, the rate at
which heat is gained or lost through a building’s skin. Thermal efficiency is
expressed as an R-value, or in other words, a value that illustrates a material’s
resistance to heat flow. The R-value depends on trapped air within all types of
insulation. If the trapped air is replaced with water or is squeezed out by
crushing, the R-value is reduced. Moisture resistance and compressive strength
are consequently related to thermal efficiency. R-values are inversely related to U-
values, the latter of which rate fenestration products (windows, doors, etc.):
higher R-values mean higher performance insulation, while lower U-values mean
higher performance windows.
Materials usually have a range of R-values, as the rate at which they lose or gain
heat is affected any factor that influences the degree of difference between
indoor and outdoor temperatures. Thermal efficiency is proportional to the
difference between these two temperatures. Geography, climate, location, type
of building (commercial, residential, public, etc.), activity within building, amount
of equipment used inside, humidity, etc., all affect thermal efficiency.
In addition to R-values, material considerations include environmental impact:
some materials, like XPS and polysio, are produced with hydro
chlorofluorocarbons (HCFCs) or chlorofluorocarbons (CFCs) which deplete the
ozone layer, while others (e.g. cellulose or mineral wool) are made with recycled
materials.

Foamed plastics
Foamed plastics are polymers used in construction, packaging, and consumer products, like furniture
cushions and automobiles. Foamed plastics are stronger, lighter weight, less resin-intensive, and
cheaper, over the product’s lifetime, than non-foamed alternatives. The polymers most used in the
building industry as thermal insulators are:

Expanded polystyrenes (EPS) are polystyrenes whose foam beads are molded and pressed together. It
is also known as MEPS or beadboard. Low-density EPS is relatively inexpensive, moisture-resistant, and
possible to use underground. High-density EPS is moisture-resistant and used only in exterior
foundation walls in locations where the soil is relatively dry. EPS uses either, or both, recycled
materials (e.g. post-consumer plastic) and CFCs as blowing agents. An alternative blowing agent to
CFCs, HCFCs, and HFCs - all of which are industrial greenhouse gases and two of which (CFCs and
HCFCs) are ozone-depleting - is pentane.

Extruded polystyrenes (XPS), also known as blueboard, have a smooth, cut-cell surface that blocks air-
infiltration. It is stronger than EPS. High-density XPS is used for foundation slabs, concrete floors, roofs,
and other load bearing applications. However, XPS is typically produced with HCFC or HFC blowing
agents.

Rigid polyisocyanurates, also known as polyiso, have a higher R-value than either polystyrene or
polyurethane. The material is made, in part, from recycled plastic, such as from PET beverage
containers. It has a gas-filled closed-cell foam structure that is denser and more rigid than polystyrene
panels - though it is also more expensive. Relative to polyurethane, polyisocyanurates is more stable at
high temperatures, less flammable, and equally prone to damage from prolonged exposure to water.
Spray polyurethanes: (white or yellow) are produced by mixing isocyanate and polyether in the

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presence of catalyst and blowing agent. The material contains many tiny, closed cells, making it
relatively waterproof. Still, prolonged exposure to water is detrimental. Like EPS, if conditions are
relatively dry, polyurethanes can be used underground.

Mineral Wool
Mineral wool is an inorganic and non-metallic material used for both thermal and acoustic insulation.
Mineral wool includes rock wool, which is an inorganic material made from volcanic basalt rock and
limestone; slag wool, made from the industrial waste slag from iron ore blast furnaces; and fiberglass
(or glass mineral wool), made from silica. Mineral wool has low thermal conductivity, tolerance to high
temperatures, such as from 550°C to 850°C, water repellence, and high sound-absorption. It is also
non-corrosive and inert. Mineral wool can be cut and shaped and as such is sold in batt-, blanket-,
board-, and sheet-form, with or without membranes. As such, it is used in walls, roofs, and floors, and
around water cylinders and pipes. Other uses include air condition ducting, fire protection in
partitioning and ceilings, and as insulation for industrial, domestic appliance, and transportation
equipment, as well as in petrochemical installations and pipes. The major drawback of mineral wool is
that it can cause physical irritation, resulting in rashes and the like.

Cellulose
Cellulose is made from old newspapers and cotton. Natural fiber is obtained from renewable or non-
depletable resources, and can be recycled. However, this material is the least used of those listed
above: improvements in the thermal performance of plastics has kept cellulose from gaining market
share.

Vacuum insulation
Thin panels with R-values as high as 50 / inch; like double-glazed glass, the panels lose their air-
tightness over time.

Phenolic or phenol-formaldehyde
Higher strength, less flammable foam whose open-celled structure gives it lower insulating capacity,
high water absorption, and high water vapor permeability. The material degrades over time and
releases some formaldehyde.

Lightweight Wood Fiber Board

Perlite

Natural fiber
Insulations treated with low toxicity fire and insect retardants

Structural insulating panels (SIPs) also known as stressed-skin walls

Cork

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B. Documented Transactions: 2003-2008 US Investment in Energy Efficient Building Equipment & Materials -
2003-2008 (US$ 313.5 MM)

24%

Wall
Windows
HVAC
Lighting

15% BAS

53%
3%

5%

Building Energy Efficiency Equipment Deals: 2003-2008

Date Name Segment Technology Amount ($ MM) Investment Type Stage
6/29/05 iWatt Inc BAS Inductors / Converters 31.000 VC Series C
9/1/03 Valere Power BAS Management 6.000 VC Series C
6/8/05 Crossbow Technology Inc BAS Sensors 22.000 VC Series C
9/26/05 Sensicast Systems Inc BAS Sensors 16.000 VC Series B
10/27/03 DryKor Holdings Inc HVAC Air Conditioning & De-Humidifying 8.000 VC Series C
10/30/06 Orion Energy Systems Lighting 5.000 VC Series C
11/20/06 Intematix Corporation Lighting Phosphors for LED, CFL, and CCFL 16.500 VC Series C
4/25/07 Rubicon Technology Lighting LED 16.000 PE Asset / Capacity investment
8/9/07 Solatube International Inc Lighting Daylighting VC Debt / Leasing
10/1/07 Ciralight Lighting Daylighting 1.700 VC Seed / Angel
1/25/08 LumenZ Lighting LED 3.000 VC Seed / Angel
2/13/08 Lumenergi Lighting Ballasts 3.000 VC Series A
2/20/08 Albeo Technologies Lighting LED 1.500 VC Series A
5/3/04 Starfire Systems Inc Wall Coating 0.800 VC Series A
7/18/06 Glacier Bay Inc Wall Vacuum Insulation 8.000 VC Series A
5/1/07 GigaCrete Inc Wall EPS 5.000 VC Series A
11/15/07 Serious Materials Wall Drywall 52.000 VC Pre-IPO round
6/25/08 Aspen Aerogels Inc Wall Nanotechnology 102.000 VC Pre-IPO round
7/17/07 SAGE Electrochromics Inc Windows Electrochromic 16.000 VC
313.500
Source: New Energy Finance, retrieved July 2008.
Demand-Side Energy Efficiency Deals: 2003-2008

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 Primary sector Organisation Stockmarkets Country name Date announced/ Abstract Post money New equity Total offering Deal status Transaction type
completed value ($) raised ($) size ($)

Efficiency: Itron Inc NASDAQ Global United States 6-May-08 Itron, US-based smart grid technology provider, plans to 300 m Announced/filed Secondary
Demand Side Select Market raise over USD 300m in a secondary offering on the
(ITRI) NASDAQ Global Select Market.
Efficiency: MicroPlanet TSX Venture United States 22-Apr-08 MicroPlanet Technology Corp, US-based maker of energy 7.8 m Announced/filed OTC
Demand Side Technology Corp Exchange (MP) efficient electrical products, plans to raise CAD 8m (USD Secondary/PIPE
(formerly HF 7.8m) in a private placement.
Capital Corp)

Efficiency: Odyne OTC Bulletin United States 27-Mar-08 Odyne, US-based developer of plug-in electric hybrid 7m 7m Completed OTC
Demand Side Corporation Board (ODYC) vehicles, has raised USD 7m in gross proceeds through a Secondary/PIPE
PIPE.
Efficiency: SatCon NASDAQ Global United States 1-Jan-08 SatCon, a Boston-based electrical power conversion and 25 m 25 m Completed Private Investment
Demand Side Technology Corp Market (formerly control devices developer, received USD 25m from in Public Equity
NASDAQ-NM) institutional investors through a private placement. (PIPE)
(SATC)

Efficiency: Orion Energy NASDAQ Global United States 20-Dec-07 Orion Energy Systems, US-based designer and 330 m 74 m 100 m Completed IPO
Demand Side Systems Market (formerly manufacturer of energy efficient lighting systems and
NASDAQ-NM) controls, has completed its USD 100m IPO on the Nasdaq
(OESX) stock market.

Efficiency: Catalytic Solutions AIM (London) United States 20-Dec-07 Catalytic Solutions, US-based technology developer and 9.5 m 9.5 m Completed Secondary
Demand Side Inc (CSI) (CTS) manufacturer, raised USD 9.5m to fund the acquisition of
Engine Control Systems.
Efficiency: Comverge Inc NASDAQ Global United States 14-Dec-07 Comverge, the US-based demand response provider, 594 m 44.1 m 150.8 m Completed Secondary
Demand Side Market (formerly raised USD 24.3m in net proceeds after closing its
NASDAQ-NM) previously postponed secondary offering on the NASDAQ
(COMV) Global Market.

Efficiency: Rubicon NASDAQ Global United States 15-Nov-07 Rubicon Technology, a maker of sapphire substrates for 93.8 m 93.8 m Completed IPO
Demand Side Technology Market (formerly LEDs and integrated circuits, has floated on the NASDAQ.
NASDAQ-NM) The Initial offering of 6.7m shares at $14 per share will
(RBCN) raise $93.8m for the company.

Efficiency: ZAP OTC Bulletin United States 12-Nov-07 ZAP, the US-based advanced transportation technologies 5m 5m Completed OTC
Demand Side Board (ZAAP) company, has raised USD 5m through the sale of new Secondary/PIPE
shares to Al-Yousuf Group, the Dubai based vehicle
distributer.
Efficiency: Odyne OTC Bulletin United States 29-Oct-07 Odyne, the US-based hybrid electric vehicle systems 3.2 m 3.2 m Completed OTC
Demand Side Corporation Board (ODYC) developer, has received USD 3.2m in a private Secondary/PIPE
placementin the form of 10% senior secured convertible
notes and warrants from investor David Gelbaum.

Efficiency: Lime Energy OTC Bulletin United States 6-Jun-07 Lime Energy raises a total of $5m issuing convertible 5m 5m Completed OTC Convertible
Demand Side (formerly Electric Board (LMEG) notes.
City Corporation)

Efficiency: Vectrix AIM (London) United States 24-May-07 Vectrix, an electric scooter company with major product 265 m 73.6 m 73.6 m Completed IPO
Demand Side Corporation (VRX) MAXI Scooter, raised USD 66.2m through an IPO on AIM,
to ramp up sales and marketing of its MAXI Scooter,
further develop its dealer network, accelerate R&D and
finance future products tooling.
Efficiency: Universal Display NASDAQ Global United States 22-May-07 Universal Display Corporation raises USD 40.6m with a 40.6 m 40.6 m Completed Secondary
Demand Side Corp. Market (formerly secondary offering. Universal Display develops and
NASDAQ-NM) licenses OLED technology.
(PANL)

Page 69 of 81
 Primary sector Organisation Stockmarkets Country name Date announced/ Abstract Post money New equity Total offering Deal status Transaction type
completed value ($) raised ($) size ($)

Efficiency: Linear Technology NASDAQ Global United States 24-Apr-07 US integrated circuit manufacturer completed proposed 1700 m 1700 m Completed Convertible
Demand Side Corp Select Market private placement of USD 1.7bn of convertible note.
(LLTC)
Efficiency: Comverge Inc NASDAQ Global United States 18-Apr-07 Comverge completed on 18 April 2007 its USD 124m IPO 332.5 m 110 m 124 m Completed IPO
Demand Side Market (formerly on NASDAQ and started trading under the ticker 'COMV'.
NASDAQ-NM)
(COMV)

Efficiency: Lime Energy OTC Bulletin United States 30-Mar-07 Lime Energy raises $3m in share offering. 3m 3m Completed OTC
Demand Side (formerly Electric Board (LMEG) Secondary/PIPE
City Corporation)

Efficiency: Itron Inc NASDAQ Global United States 1-Mar-07 NEX constituent and US energy management software 235 m 235 m Completed Private Investment
Demand Side Select Market provider Itron sold 4.1m common shares to ten institutional in Public Equity
(ITRI) investors and raised USD 235m. (PIPE)

Efficiency: Baldor Electric New York Stock United States 31-Jan-07 Baldor Electric Company, which markets, designs, and 850 m 850 m Completed Convertible
Demand Side Company Exchange (NYSE) manufactures industrial electric motors, drives and
(BEZ) generators, closed the USD 350m common stock offering
and USD 550m 8.625% senior unsecured notes issue due
15 Feb 2017.
Efficiency: Nexxus Lighting, NASDAQ-CM United States 7-Dec-06 Super Vision International Inc. raised $9.0m in a private 8.4 m 9m Completed Private Investment
Demand Side Inc. (formerly SCM) placement of stock. Super Vision International was in Public Equity
(NEXS) renamed Nexxus Lighting Inc in 2007. (PIPE)

Efficiency: Catalytic Solutions AIM (London) United States 6-Dec-06 Catalytic Solutions raised USD 2.0m from 7 undisclosed 2m 2m Completed Private Investment
Demand Side Inc (CSI) (CTS) accredited investors. in Public Equity
(PIPE)

Efficiency: Catalytic Solutions AIM (London) United States 22-Nov-06 12,870,000 shares were offered at GBP 1.23 (USD 2.33) 150 m 30.2 m 30.2 m Completed IPO
Demand Side Inc (CSI) (CTS) raising proceeds of GBP 15.8m (USD 30.2m) that will be
used in relation to the acquisition of Applied Utility
Systems.
Efficiency: Power Integrations NASDAQ Global United States 30-Oct-06 Pinksheets-listed US circuits supplier, Power Integrations, Completed Share registration
Demand Side Inc Market (formerly resumes trading on the NASDAQ on 30 October under the
NASDAQ-NM) ticker symbol POWI.
(POWI)

Efficiency: Odyne OTC Bulletin United States 18-Oct-06 Hybrid engine maker Odyne Corporation went public in a 3.1 m 3.1 m Completed OTC Reverse IPO
Demand Side Corporation Board (ODYC) reverse merger with Roseland, N.J.-based shell company
Technology Integration Group.
Efficiency: Lime Energy OTC Bulletin United States 4-Aug-06 Electric City decided to delay a proposed rights offering to 29.4 m Postponed/cancell OTC
Demand Side (formerly Electric Board (ELCY) holders of the Company's common stock to raise USD ed Secondary/PIPE
City Corporation) 29.4m after Labor Day in order to ensure stockholders
returning from summer holidays have the opportunity to
carefully evaluate the offering.
Efficiency: Itron Inc NASDAQ Global United States 4-Aug-06 Itron raised approximately USD 345m for acquisition or 345 m 345 m Completed Convertible
Demand Side Select Market investment in business products or technologies that are
(ITRI) complementary to its own, and general corporate purposes
as well.
Efficiency: Power Integrations NASDAQ Global United States 2-Aug-06 Power Integrations was delisted from NASDAQ because Completed Delisting
Demand Side Inc Market (formerly the company did not meet a deadline to become current in
NASDAQ-NM) its regulatory filings.
(POWI)

Page 70 of 81
 Primary sector Organisation Stockmarkets Country name Date announced/ Abstract Post money New equity Total offering Deal status Transaction type
completed value ($) raised ($) size ($)

Efficiency: Lime Energy OTC Bulletin United States 5-Jul-06 Electric City raised gross proceeds of USD 17,875,000 17.9 m 17.9 m Completed OTC
Demand Side (formerly Electric Board (ELCY) through the sale of shares of common stock in a private Secondary/PIPE
City Corporation) placement to fund the acquisition of Parke P.A.N.D.A.

Efficiency: Microfield Group OTC Bulletin United States 3-Jul-06 Microfield Group raised USD 15m through a private 15 m 15 m Completed OTC
Demand Side Inc Board (MICG) placement for general working capital and further Secondary/PIPE
developement of the EnergyConnect business acquired by
Microfield in Oct 2005.
Efficiency: Lime Energy OTC Bulletin United States 12-Jun-06 Electric City announced its intention to list on the OTCBB Completed OTC Share
Demand Side (formerly Electric Board (ELCY) after delisted from AMEX. registration
City Corporation)

Efficiency: Lime Energy American Stock United States 9-Jun-06 Electric City has announced its intention to delist from Completed Delisting
Demand Side (formerly Electric Exchange (AMEX) AMEX after being advised it was no longer in compliance
City Corporation) (ELC) with listing standards.

Efficiency: International New York Stock United States 8-Jun-06 International Rectifier Corporation (NYSE:IRF) announced 750 m Postponed/cancell Convertible
Demand Side Rectifier Exchange (NYSE) that, due to adverse market conditions, the company has ed
Corporation decided to withdraw its previously announced private
offering of 750m aggregate principal amount of convertible
subordinated notes due 2013.

Efficiency: Power Efficiency OTC Bulletin United States 31-May-06 Power Efficiency, a developer and manufacturer of 1.5 m 1.5 m Completed OTC Convertible
Demand Side Corporation Board (PEFF) advanced energy savings technologies for electric motors,
(PEFF) increased the USD 1m convertible debt financing to USD
1.5m.
Efficiency: PowerSecure American Stock United States 10-Apr-06 Metretek Technologies has completed USD 28.2m 219.8 m 28.2 m 33.6 m Completed Secondary
Demand Side (formerly Metretek Exchange (AMEX) placement of common shares.
Technologies Inc) (MEK)

Efficiency: MicroPlanet TSX Venture United States 3-Mar-06 MicroPlanet Technology Corp raised CAD 3.35m (USD 15 m 3m 8.7 m Completed OTC
Demand Side Technology Corp Exchange (MP) 2.95m) though its original target was to raise CAD 10m Secondary/PIPE
(formerly HF (USD 8.7m) announced in Jan 2006.
Capital Corp)

Efficiency: Lime Energy American Stock United States 30-Nov-05 Electric City has entered into a definitive loan agreement 5m 5m Completed Convertible
Demand Side (formerly Electric Exchange (AMEX) with Laurus Master Fund for funding of a four year, USD
City Corporation) (ELC) 5.0m convertible term loan.

Efficiency: eMagin OTC Bulletin United States 20-Oct-05 eMagin Corporation, a maker of visual data equipment for 9.1 m 9.1 m Completed OTC
Demand Side Corporation Board (EMAN) near-eye virtual imaging systems using OLED displays Secondary/PIPE
raises USD 9.14m with by issuing stock.

Efficiency: Advanced NASDAQ Global United States 4-Aug-05 AnalogicTech completed the initial public offering of 409.6 m 90 m 106 m Completed IPO
Demand Side Analogic Market (formerly 10,600,000 shares of common stock at USD 10.00 per
Technologies Inc NASDAQ-NM) share.
(AATI)

Efficiency: Itron Inc NASDAQ Global United States 19-May-05 Itron Inc placed 1,720,000 of its common shares to raise 849 m 62.4 m 62.4 m Completed Secondary
Demand Side Market (formerly USD 62.4m.
NASDAQ-NM)
(ITRI)

Efficiency: MicroPlanet TSX Venture United States 6-May-05 Microplanet Technologies, has completed a reverse-listing 5.4 m 5.4 m Completed OTC Reverse IPO
Demand Side Technology Corp Exchange (MP) on the Toronto Venture Exchange by merging with HF
(formerly HF Capital. The transaction has raised USD 5.4m from
Capital Corp) undisclosed investors. The new company is named
Microplanet Technologies Corporation.

Page 71 of 81
 Primary sector Organisation Stockmarkets Country name Date announced/ Abstract Post money New equity Total offering Deal status Transaction type
completed value ($) raised ($) size ($)

Efficiency: Lime Energy American Stock United States 4-May-05 Electric City (ELC), a US-based developer, manufacturer 5.6 m 5.6 m Completed Private Investment
Demand Side (formerly Electric Exchange (AMEX) and integrator of energy savings technologies, announced in Public Equity
City Corporation) (ELC) the closure of a series of transactions in which it raised (PIPE)
gross proceeds of USD 5.6m.

Source: New Energy Finance, retrieved July 2008.

Smart-Buildings Deals: 2003-2008

Organisation Country Primary sector Date announced/ Lead investors Other investors Abstract Total invested ($) Funding type Post money
completed valuation ($)

Saddlehorn United States Efficiency: Energy- 21-Feb-07 Low Carbon Low Carbon Accelerator has invested USD 3.0m in 3 VC - Series A / First 7 m
Smart Buildings Investors Ltd Saddlehorn, equal to a 43% holding in its raised round
investment capital.

GigaCrete Inc United States Efficiency: Energy- May-07 Craton Equity Energy-smart buildings materials developer GigaCrete has 5 VC - Series A / First
Smart Buildings Partners raised USD 5m in series A funding from Craton Equity round
Partners.

DryKor Holdings Inc United States Efficiency: Energy- 27-Oct-03 Challenge Fund DryKor raised USD 8.0m in it's third round of funding for 8 VC - Series C /
Smart Buildings Etgar, RockPort development and research in the US. Third round
Capital Partners,
SAGE United States Efficiency: Energy- 17-Jul-07 Walden VentureInc
Good Energies Applied Ventures Glass manufacturer Sage Electrochromics Inc has raised 16 VC - Series B /
Electrochromics Inc Smart Buildings LLC, NV Bekaert SA (USD 16m) in series B funding. Good Energies, Applied Second round
Ventures LLC and N.V. Bekaert took part in the funding.

Source: New Energy Finance, retrieved July 2008.

Page 72 of 81
 Appendix C: Suppliers of Energy Services
Demand-Side Energy Services Companies
Company Name Growth Annual Energy Management Energy Demand Services Public /
Rate (%) Revenue ($MM) Services Revenue Efficiency Response (Supply-side) Private
($MM) Revenue Revenue Revenue
($MM) ($MM) ($MM)

EMCOR Group Inc. 18.5% $6,785.20 $3,773.20 $3,773.20 $0.00 $0.00 Public

Facilities Solutions Group 18.5% $306.40 $306.40 $306.40 $0.00 $0.00 Private
NovaTech Energy Services Group, Inc. 18.5% $12.00 $12.00 $12.00 $0.00 $0.00 Private
GreenTech Energy Services 18.5% $8.20 $8.20 $8.20 $0.00 $0.00 Private
California Retrofit, Inc. 18.5% $4.50 $4.50 $4.50 $0.00 $0.00 Private
Energy Conservation and Supply, Inc. 18.5% $2.30 $4.50 $4.50 $0.00 $0.00 Private
Essential Energy Service, Inc. 18.5% $4.50 $4.50 $0.00 $0.00 Private
Earthwell Energy Management, Inc. 18.5% $3.50 $3.50 $3.50 $0.00 $0.00 Private
National Energy Services, Inc. 18.5% $2.80 $2.80 $2.80 $0.00 $0.00 Private
Southern Energy Technologies 18.5% $0.10 $2.40 $2.40 $0.00 $0.00 Private
Energy & Environment LLC 18.5% $2.00 $2.00 $2.00 $0.00 $0.00 Private
Financial Energy Management, Inc. 18.5% $2.00 $2.00 $2.00 $0.00 $0.00 Private
Imbue Technology Solutions, Inc. 18.5% $0.50 $1.20 $1.20 $0.00 $0.00 Private
ESCO Energy Services Company 18.5% $1.10 $1.10 $1.10 $0.00 $0.00 Private
DDC Systems Service Company 18.5% $1.00 $1.00 $0.00 $0.00 Private
Enerlight Inc. 18.5% $0.50 $1.00 $1.00 $0.00 $0.00 Private
Lighting Efficiency Specialists, Inc. 18.5% $1.00 $1.00 $0.00 $0.00 Private
Building Energy Solutions & Technology 18.5% $0.90 $0.90 $0.90 $0.00 $0.00 Private
Energy and Power Solutions 18.5% $0.10 $0.90 $0.90 $0.00 $0.00 Private
ibcontrols, inc. 18.5% $1.80 $0.60 $0.60 $0.00 $0.00 Private
Aelux 18.5% $0.70 $0.50 $0.50 $0.00 $0.00 Private
Eastern Energy Solutions, LLC 18.5% $0.30 $0.30 $0.30 $0.00 $0.00 Private
International Energy Conservation 18.5% $0.20 $0.20 $0.00 $0.00 Private
Lighting Solutions Associates, LLC 18.3% $0.20 $0.20 $0.00 $0.00 Private
Legacy Energy Management Solutions 18.4% $1.00 $0.99 $0.01 $0.00 Private
LIME Energy 16.0% $57.20 $19.50 $18.14 $0.00 $1.37 Public
I.C. Thomasson Associates, Inc. 18.3% $20.00 $20.00 $18.40 $0.00 $1.60 Private
DMJM Harris 18.0% $53.50 $12.00 $9.60 $0.00 $2.40 Public

Page 73 of 81
 Demand-Side Energy Services Companies (continued)
Company Name Growth Annual Energy Management Energy Demand Services Public /
Rate (%) Revenue ($MM) Services Revenue Efficiency Response (Supply-side) Private
($MM) Revenue Revenue Revenue
($MM) ($MM) ($MM)
Performance Consulting Group, LLC 18.0% $3.10 $5.00 $4.00 $0.00 $1.00 Private
Quest Energy Group 18.0% $0.10 $0.20 $0.16 $0.00 $0.04 Private
Optimira Energy Solutions 17.9% $55.80 $41.85 $0.00 $13.95 Private
Pritchett Controls, Inc. 17.9% $4.20 $3.40 $2.55 $0.00 $0.85 Private
Temsco 17.9% $1.00 $0.75 $0.00 $0.25 Private
Burns & McDonnell 17.8% $127.80 $56.00 $39.20 $0.00 $16.80 Private
Comverge Inc. 16.1% $77.20 $27.20 $18.71 $5.71 $2.77 Public
SmartWatt Energy, Inc. 17.7% $1.20 $4.20 $2.80 $0.00 $1.40 Private
Demand Management Institute, Inc. 17.3% $0.10 $1.00 $0.67 $0.05 $0.28 Private
Ameresco 17.5% 31.40 $378.50 $227.10 $0.00 $151.40 Private
Ozark Energy Services, Inc. 17.5% $0.40 $0.30 $0.18 $0.00 $0.12 Private
Energy Systems Group 17.4% $100.00 $122.80 $67.54 $0.00 $55.26 Private
APS Energy Services 17.3% $15.70 $15.70 $7.85 $0.00 $7.85 Public
Facilities Performance Services 17.3% $14.40 $7.20 $0.00 $7.20 Private
Atlantic Energy Solutions 17.1% $0.10 $1.90 $0.86 $0.00 $1.05 Private
Noresco 17.0% $21.50 $150.00 $60.00 $0.00 $90.00 Public
Energy Advantage 16.2% $0.50 $5.10 $2.04 $0.51 $2.55 Private
Princeton Energy Systems 17.0% $1.20 $1.20 $0.48 $0.00 $0.72 Private
EMO Energy Solutions 17.0% $0.90 $0.90 $0.36 $0.00 $0.54 Private
Frontier Associates, LLC 16.8% $6.00 $2.70 $0.90 $0.00 $1.80 Private
PRES Services 16.8% $0.90 $0.90 $0.30 $0.00 $0.60 Private
EnergySolve 15.9% $5.00 $5.50 $1.38 $0.55 $3.58 Private
Sieben Energy Associates 16.6% $1.10 $1.10 $0.28 $0.00 $0.83 Private
Nexant, Inc. 16.5% $14.90 $13.80 $2.76 $0.00 $11.04 Private
Prenova 15.6% $8.70 $8.70 $1.31 $0.87 $6.53 Private
EnerVision 16.3% $0.10 $0.50 $0.05 $0.00 $0.45 Private
Celtic Energy 16.2% $0.50 $0.04 $0.00 $0.46 Private
U.S. Energy Management, Inc. 16.0% $9.90 $0.00 $0.00 $9.90 Private
Summit Energy 16.0% $5.60 $0.00 $0.00 $5.60 Private

Page 74 of 81
 Demand-Side Energy Services Companies (continued)
Company Name Growth Annual Energy Management Energy Demand Services Public /
Rate (%) Revenue ($MM) Services Revenue Efficiency Response (Supply-side) Private
($MM) Revenue Revenue Revenue
($MM) ($MM) ($MM)
Onsite Energy Corporation 15.0% $2.90 $0.00 $0.36 $2.54 Private
Mach Energy 16.0% $1.50 $0.00 $0.00 $1.50 Private
Entelrgy LLC 16.0% $1.00 $0.00 $0.00 $1.00 Private
Energy Related Services Corp 16.0% $0.50 $0.00 $0.00 $0.50 Private
Abraxas Energy Consulting LLC 16.0% $0.40 $0.00 $0.00 $0.40 Private
MCEnergy, Inc. 16.0% $0.30 $0.00 $0.00 $0.30 Private
Skye Energy 16.0% $0.10 $0.00 $0.00 $0.10 Private

Source: Frost and Sullivan, 2008; Dun & Bradstreet, 2009.

Equipment Manufacturers with Marketing Services

Company Name Growth Annual Energy Management Energy Demand Services Public /
Rate (%) Revenue ($MM) Services Revenue Efficiency Response (Supply-side) Private
($MM) Revenue Revenue Revenue
($MM) ($MM) ($MM)
Comfort Systems USA Energy Services 18.4% $1,328.50 $898.70 $862.75 $0.00 $35.95 Public
Honeywell International, Inc. 17.9% $36,556.00 $2,994.70 $2,246.03 $0.00 $748.68 Public
Johnson Controls 18.5% $38,062.00 $2,363.90 $2,363.90 $0.00 $0.00 Public
Siemens Building Technologies 17.9% $546.80 $1,008.40 $756.30 $0.00 $252.10 Public
TAC America 17.4% $89.20 $1,362.00 $749.10 $0.00 $612.90 Private

Source: Frost and Sullivan, 2008; Dun & Bradstreet, 2009.

Page 75 of 81
 Utility Companies
Company Name Growth Annual Energy Management Energy Demand Services Public /
Rate (%) Revenue ($MM) Services Revenue Efficiency Response (Supply-side) Private
($MM) Revenue Revenue Revenue
($MM) ($MM) ($MM)
Advantage IQ 16.0% $47.30 $0.00 $0.00 $47.30 Private
Alliant 16.6% $3,681.70 $263.00 $65.75 $0.00 $197.25 Public
BlueStar Energy Services 16.5% $171.10 $171.50 $34.30 $0.00 $137.20 Private
Chevron Energy Solutions 17.7% $22.10 $260.00 $174.20 $0.00 $85.80 Private
Consolidated Edison, Inc. 16.5% $13,583.00 $1,383.00 $276.60 $0.00 $1,106.40 Public
Constellation Energy Group, Inc. 16.0% $19,818.30 $211.90 $31.79 $10.60 $169.52 Public
Direct Energy 16.5% $40.20 $1,645.00 $329.00 $0.00 $1,316.00 Private
Integrys Energy Services 16.5% $60.30 $24.70 $4.94 $0.00 $19.76 Public

Pacific Gas & Electric Company Utility Services 16.1% $14,628.00 $264.70 $52.94 $13.24 $198.53 Public
PEPCO Energy Services 16.0% $1,900.00 $2,309.20 $184.74 $69.28 $2,055.19 Public

Source: Frost and Sullivan, 2008; Dun & Bradstreet, 2009.

Pure-play Demand Response

Company Name Growth Annual Energy Management Energy Demand Services Public /
Rate (%) Revenue ($MM) Services Revenue Efficiency Response (Supply-side) Private
($MM) Revenue Revenue Revenue
($MM) ($MM) ($MM)
Enernoc 8.5% $60.80 $0.00 $58.98 $1.82

Source: Frost and Sullivan, 2008; Dun & Bradstreet, 2009.

Page 76 of 81
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