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.

suburban sprawl continues in 2006.
Housing tracts sprawl out near Palmdale, Calif.

Photograph by David McNew/Getty Images.

If you're a geek for gadgets that help you live more energy efficiently, this is a glorious time. Never before has the market so overflowed with cool new kit designed to cut the amount of juice you use—for a premium price. There are LED bulbs light years ahead of Edison’s incandescents. There are windows that darken automatically as the sun sweeps across the sky. There are sleek, smart thermostats that monitor your daily activity and adjust your home’s systems to provide only as much heating and air conditioning as the electronic brains determine you need.

Slick as they are, these devices aren’t yet making a meaningful dent in the nation’s energy consumption or in its greenhouse-gas emissions. That’s because they’re not being deployed at a large scale. Most Americans aren’t geeks for energy-efficiency gadgets. If they’re aware at all that these devices exist, they’ve decided they’re not interested in buying them—even though, over time, lower electricity bills more than pay back the extra initial expense.

There is, in short, a gap between what technologists are selling and what consumers are buying. That gap has big environmental costs, given the vast amounts of energy the United States wastes each year through leaky buildings and inefficient machines. Now, a growing cadre of savvy investors is betting there’s money to be made bridging that divide. They’re designing complex financial instruments to bankroll energy-efficiency improvements in houses and other buildings across the country. And they’re setting themselves up as the middlemen. 

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This is a potential energy revolution of the back-office sort. It’s about developing new business models rather than developing new metal. It’s wonky, opaque, and largely untested. It’s just beginning, and it still could fizzle, because scaling it up would require resolving a thicket of thorny technical and financial questions. But if it works, it could make some investors a lot of money. And, theoretically at least, it could do more for the planet than a roomful of futuristic energy-saving devices that sit, sparkling and unused, on a shelf.

Steven Vierengel, a Citigroup director and Wall Street veteran, is among the pinstriped new promoters of this energy-efficiency push. For some 15 years, he has worked at Citigroup securitizing debt, on everything from cars to industrial equipment. The drill: Citigroup finances pools of loans from the original lenders, slicing up the loans based on their different levels of default risk and then reselling the slices to institutional investors. Everyone gets a piece of the action: The original lenders receive new cash to make more loans; the institutional buyers earn interest; Citigroup gets a fee.

Earlier this year, Vierengel began eyeing the possibility of applying the securitization model to a different kind of loan: loans to consumers who invest in home energy-efficiency improvements, from better-burning furnaces to insulated windows. He expects the first round of this newfangled debt to hit the market early next year. He won’t disclose the amount he’s targeting for the first offering, but he says he hopes the market soon will grow to the point where, every year, it issues four or five pools of securitized energy-efficiency debt, each pool totaling between $150 million and $500 million. That still would be smaller than many new-car loan pools, but it would be big in the context of the energy-efficiency market. Ultimately, he hopes to crank out a steady stream of energy-efficiency securitizations, cookie-cutter style. His strategy: “Repeat, repeat, repeat,” he says. “I want to be able to show folks across the country how to deliver scale.”

Few people doubt the opportunity. For years, studies have concluded the economy is groaning under the weight of energy inefficiencies that, if fixed, would pay for themselves through reduced energy costs. In the insiders’ parlance, energy efficiency is the “low-hanging fruit” that, if picked, could provide for a more economically and environmentally sustainable energy system. 

A variety of messy market realities has left most of the low-hanging fruit unharvested. To cite just one, the fruit doesn’t grow conveniently on a single tree. It’s spread across the vast field of the national economy—a strawberry in this house’s leaky walls, an orange in that apartment building’s inefficient boiler. The potential efficiency gains are dispersed “across more than 100 million buildings and literally billions of devices,” consultant McKinsey & Co. noted in a 2009 report. “This dispersion ensures that efficiency is the highest priority for virtually no one.”

Creative financiers have tried a variety of financial tools to snag more of the fruit. In one of the more common approaches, contractors known as energy service companies guarantee commercial clients set reductions in energy use if the clients buy new energy-saving equipment. But those deals have focused on governments, schools, and hospitals—big, centralized energy users where the energy efficiencies are relatively easy to pick. The residential sector—which is massively more fragmented but, studies say, offers a collectively greater opportunity for energy-efficiency upgrades—has gone largely untouched.

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