Can Wall Street Turn a Profit on New Strategies for Bundling Efficiency?

Doing more by using less.
Nov. 30 2012 5:30 AM

How To Make a Bundle on Energy Efficiency

Wall Street’s new strategy for investing in good deeds.

(Continued from Page 1)

Those who have attempted to finance residential energy-efficiency improvements in a big way have had a tough go. In a particularly ambitious attempt, launched in 2008, laws have been passed in some two dozen states allowing governments to slap an additional levy on the property-tax bills of homeowners or commercial-building owners who want to upgrade their property to make it more energy-efficient. The owners take out a loan for the cost of the project; the money they fork over through the added levy goes to repay the loan. But other market players have cried foul. 

In 2010, the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, the home-mortgage packagers, protested that the residential portion of the program put taxpayer-backed mortgages at risk. Its reasoning: Property taxes generally must be repaid before a mortgage when a house is foreclosed. Advocates of the program disagree, and the fight continues before regulators and in the courts. But it has stunted the program’s growth.

Wall Street now is considering more advanced approaches. One is to amalgamate money from institutional investors, such as unions and pension funds, into managed funds that would bankroll energy-efficiency upgrades at buildings across the country. The funds then would become, in essence, energy middlemen for the buildings. The owners of the buildings, in return for the upgrades, would pay the funds an agreed monthly amount based on the buildings’ electricity use. The banks’ bet is that those fees would outweigh the banks’ costs: costs both for the new equipment and for the reduced amount of electricity that the banks would have to buy from the local grid to keep the lights on in the newly energy-efficient buildings.

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“The Wall Street guys are looking to put together funds to invest in this stuff,” says Mark Zimring, a veteran of Deutsche Bank's convertible-bond department who, in a sign of the times, now is a program manager at the federal government’s Lawrence Berkeley National Laboratory, in Berkeley, Calif., working with governments and utilities to ramp up innovative financing methods for energy efficiency and renewable energy across the country. “We’re throwing lots of ideas and lots of capital at this space.”

Big, complex barriers stand in the way of building this market. One is getting the market’s various players to agree on common standards for measuring a home’s energy performance. Another is improving the accuracy of computer models that predict how a given energy-efficiency improvement actually will affect a home’s energy use. A third is ensuring there’s robust, accurate data predicting how a specific reduction in a home’s energy bills is likely to affect the ability of the homeowner to repay an energy-efficiency loan. Resolving all of these questions, market players say, is crucial to bringing down the cost of energy-efficiency financing—and thus to making the energy-efficient improvements happen. “We need better data,” says Matt Golden, a California consultant who has long worked on scaling up residential energy-efficiency improvements. “This is what it really takes to get the market going.”

Citigroup’s Vierengel is pushing to be out front. Since he began looking earlier this year into securitizing home energy-efficiency loans, he says, he has had to do plenty of “spadework” to build a case. He has been mining data about the past performance of energy-efficiency loans, an effort to convince the agencies that rate prospective securitized debt that the pools of energy-efficiency loans he wants to float will be relatively safe investments. “No one has done it yet,” he says of this new twist on bankrolling energy-efficiency upgrades. “But, come next year, I think we’ll be there.”

Jeffrey Ball is scholar-in-residence at Stanford’s Steyer-Taylor Center for Energy Policy and Finance. He was environment editor at the Wall Street Journal.

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