Why some energy efficiency projects fail to get going

As the 2015 United Nations Climate Change Conference in Paris winds down, let’s take a closer look at major reasons why otherwise compelling efficiency projects fail to get up and running.

First, let’s identify the biggest opportunity: commercial buildings and industrial facilities. There are 6 million in the US. They generate 45% of all greenhouse gas emissions, but 30 percent of the energy they consume is wasted. Leading culprits are lighting and heating, ventilation, and air conditioning, or HVAC, which consume 70% of all building energy.

In economic terms, even minor improvement can have major impact. For example, if the energy efficiency of commercial buildings improved 10%, the collected savings would be $40 billion per year.

This explains why cost savings continue as the leading driver of energy efficiency projects.

Biggest barriers to starting projects

According to the Institute for Building Energy, major reasons why efficiency projects stall before they start are available capital and financial criteria.

In a 2013 survey, 31% and 20% of respondents cited these reasons as blockers to efficiency projects, respectively.

My experience is similar. The issue comes up in conversations my company, Building Energy, has with customers and trade ally partners.

Lack of capital does not have to be an issue

Trade ally partners with quality efficiency projects struggle to easily connect with providers of capital, whether traditional lenders or specialized investment funds.

So predictable objections become hard to overcome.

And customers themselves don’t have time to troubleshoot. For them energy efficiency is not a core business function -- paying utility bills is simply a cost of doing business.

Step one: keep it simple. This means proactively addressing a customer’s “first cost” objection. Also, don’t wait for the issue to surface when trying to close. Address early in the process because financing is strategic, not tactical.

For example, financing can be a compelling, viable alternative to the cash-sale model because not everyone can or wants to pay cash. Perhaps the customer prefers cash from operations flow back into core functions like R&D or property, plant and equipment. Or sales and marketing.

While deserving of deeper discussion, there are two types of financing. The first is a capital lease or an equipment finance agreement, or EFA. Information is readily available for both so no need to wallow.
The second is the savings-as-a-service model. Increasingly used in LED lighting retrofits, economics are proven and easy to pencil. Typically energy only payback occurs in 36 months or less with an average contract term of 60 months.

Nuances in the model exist like savings split and requirements for “revenue grade” metering. A major benefit is no borrowing event for the customer, making this solution entirely “off balance sheet.”

Models like this represent a rapidly growing share of total energy efficiency projects.

Unraveling the mystery of internal financial criteria

Mentioned earlier was the importance of raising the financing topic early in the conversation. This will yield valuable insight from financial decision-makers early.

Common measures include internal rate of return, payback period, and return on investment. Actual metrics will vary by organization, but they are there.

Armed with this information, a well-aligned solution gets proposed. Otherwise, it is back to the drawing board, virtually guaranteeing a longer and costly sales cycle, or worse, a project that stalls.

For example, Building Energy software supports a customer’s internal effort as well as those led by trade ally partners by using real data from real buildings to make the business case. Proven, verified data eliminates guesswork so projects go from a concept to a quantified reality.

When brought together intelligently, financing combined with credible cost savings make an airtight business justification. So more efficiency projects get started faster

Interested in starting a conversation? Contact me at chris.preston@buildingenergy.com.

This wraps up my three article series inspired by 2015 United Nations Climate Change Conference in Paris. Comments and feedback, as well as suggestions from readers for future blogs, are always welcome.

Building Energy Inc. is a technology company that combines cleantech, fintech, and information technology to transform the way building owners and service providers generate successful energy and water efficiency projects. Building Energy’s cloud-based software is used to design, implement, and finance energy and resource projects by building owners and managers, energy management companies, and sustainability professionals.