Meet the $100 billion market of energy efficiency financing

Blog Post | February 17, 2016 - 10:00 am
By Brian Stickles , Senior Research Analyst, Finance Policy

As the stock market soared to new heights after the Great Recession, so too did energy efficiency financing. Our new paper, Energy Efficiency Finance: A Market Reassessment provides an overview of structures that are working in the energy efficiency finance industry today, which markets still remain elusive, and what opportunities the future may hold.

Energy efficiency financing has come a long way in the last few years. In a 2011 paper, ACEEE cataloged a burgeoning industry still trying to find its feet in the wake of financial collapse. That paper introduced the types of institutions, structures, and prominent players in a growing and changing industry and outlined impediments to future growth.

Five years later, there are still underserved markets, but many more instances of success and scale. Multiple sectors of the industry, such as green and efficient buildings, hybrid and electric cars, ENERGY STAR®- certified IT equipment, and the energy service company (ESCO) industry have matured into multi-billion dollar segments.

Successful financing mechanisms share a number of similarities: these areas build upon financing products with well-established ties to the larger capital markets, the lending is well integrated into the program designs and provides critical support for the sales process, and the financing programs often provide ancillary benefits outside of just offering capital.

All of this adds up to an estimated $100 billion of annual loan originations in the United States alone.

While there is a lot to celebrate, there remains room for improvement. Solving the question of how to best serve low-income and multifamily housing markets has been a vexing challenge for the financial services market for decades, so it may be of little surprise that these segments still face significant hurdles in securing financing for energy efficiency investments. Financing in this area has been limited by concerns about borrowers’ ability to repay loans and collateral values if they should default, but several pilots have shown great promise, albeit at a modest scale.

The small-commercial market is another area where promise surpasses current lending activity. New models, such as one-stop shops that help guide small business owners through the numerous financing options available, offer great hope. Other options, such as commercial PACE, could be more effective with the right nudge.

While challenges exist for some areas, so do new tools. Green bonds, now a $30 billion market, offer new methods of reaching investors, particularly through pensions, which have largely been untapped by the efficiency finance market. In the nation’s capital, demand for DC Water’s inaugural green bond was so high it was able to get better terms and extend the maturities to better match the useful life of the investments—in this case, to 100 years.

If energy efficiency finance can build on the momentum of past success and continue to innovate, who knows how much more money will be invested or, more importantly, saved.

Joel Freeling contributed to this post.