Why Investors Are Wary of Energy Efficiency and What Will Boost their Confidence


Credit: David Sanderling

Credit: David Sanderling

If public enthusiasm were money, the energy efficiency industry would be loaded with capital. From world leaders to celebrities to the common folk, everybody champions saving energy these days.

Unfortunately, public enthusiasm isn’t what attracts money; investor confidence does. And despite all of the public support for energy efficiency, investors remain wary.

It’s easy to understand their skepticism when you consider a building retrofit from an outsider’s perspective. Each project is unique, engineering is often complex, and no clear standards exist for calculating energy savings. Gauging risk becomes difficult; investors aren’t always sure what they are getting into.

“Right now we are serving up 31 flavors. Every energy efficiency project is something unique. However, investors only eat vanilla. It doesn’t matter if you put a bowl of chocolate ice cream in front of them. All they know is that it’s not vanilla. This forces them to treat every transaction as unique which significantly increases transaction costs on each investment,” said Matt Golden, senior energy finance consultant for the Environmental Defense Fund.

So how can the industry serve up vanilla, boost investor confidence, and increase deal flow?

In a recent interview, Golden explained that standardization is the key; investors want the equivalent of a business or real estate appraisal pack. “They need to be able to see on paper that a project, and associated cash flow, is based on consistent methods that will produce consistent and reliable returns.”

To achieve that end, EDF decided to bring together a range of experts to hash out protocols for commercial energy efficiency projects, as part of its Investor Confidence Project.

The result is what Golden describes as a “recipe book” to develop an investor-ready energy efficiency project. Now available and recently tested in Connecticut, the “recipe book” assembles into a framework the best practices, existing technical standards, data sets, certifications, engineering requirements, and documentation that go into a successful project.

Here is how it can be used: A project developer follows the protocols, and then an independent third party conducts a review to be sure the protocols are met. This takes the pressure off investors and turns diverse projects into something the market can understand.

“It is a standard documentation package that you can then bring directly to investors. They will know what they are looking at and can have confidence in how the data that feeds into their underwriting process was derived,” he said.

Matt Golden

Matt Golden

Now investors have the necessary information to manage performance risk, whether those investors are energy service companies, insurance providers, or the most common investor in the commercial marketplace – the building owner.

The approach should help increase deal flow, decrease transaction costs, and improve confidence that savings are real – an essential near-term goal to attract capital and get more energy efficiency projects developed, Golden said.

But the “recipe book” may serve an even larger purpose as the energy efficiency industry evolves beyond the single-building retrofit into new business models to achieve scale. Already, several players are creating portfolios of buildings and aggregating savings to sell into capacity or capital markets. Some are creating virtual power plants.

The protocols offer investors a way to grasp the value this kind of portfolio offers in its entirety.

Golden said it’s similar to the way investors look at other asset classes such as mortgage-backed securities. “Everybody who takes out a mortgage is not exactly the same, but they conform to a set of requirements,” he said.

Similarly, if energy efficiency projects conform to a set of requirements, investors can evaluate performance at the portfolio level. They are spared doing due diligence on each building within the portfolio.

Energy efficiency turns into something that looks more like a financial product. “And with financial products or insurance products investors are betting on the curve – it is about understanding the yield for a portfolio,” he said.

Golden added: “You can’t bet on uncertainty. Long-term, this exercise is about turning uncertainty into manageable risk and unlocking access to lower cost capital.”

EDF’s Investor Confidence Project is now working on making its protocol available through a group of allies: ESCos, financial companies, engineers, software companies, organizations and others. More information on the Investor Confidence Project is here. To join as an ally or learn more, contact Golden at matt@efficiency.org.


Elisa Wood About Elisa Wood

Elisa Wood is an editor at EnergyEfficiencyMarkets.com. She has been writing about energy for more than two decades for top industry publications. Her work has been picked up by CNN, the New York Times, Reuters, the Wall Street Journal Online and the Washington Post.


  1. The reason that energy efficiency projects are poorly considered (and rightly so) is most do not perform well. Energy service companies primarily make their money by placing a margin on the construction project. This offers an incentive to make energy construction projects as large as possible to increase their revenues. Protocols are all well and good, however at the end of the day there is one performance metric you can’t fake; “Did the monthly utility spend go down, or not?” The farther one gets away from this metric, the harder it becomes to sell efficiency. Your client should clearly see the results of your energy work on their monthly utility bills, else you did not produce savings. No matter what a complex equation on a power point slide may show to the contrary.

  2. @Vince: I agree results at the meter is where it is at. But here a few questions to ponder:

    1) What happens if end uses change (say an office is converted to a trading floor, or worse, a data center). What happens if a year is unusually hot or cold?

    2) As an investor, which includes building owners, finance firms, ESCOs, and many others putting money to work on EE projects, their investment case is based on a prediction of future results – they can’t wait for the bills to see if they saved energy, and then decide to invest. Investors need a way to identify a conforming project and its projected cash flows, and have confidence in that data to make an informed investment decision with manageable risk.

  3. Energy efficiency is like weight loss. Much intangible and imeasurable on the ballance sheet. How do you measure tenant retention, comfort, reduced environmental impact, conservation or resources for the future. Investors have little interest in intangibles, as they only appreciate financial gains day by day. By the way few have any experience with energy on their resume. Why is the country fat. Because there is junk food everywhere. No one cares about health effect of the bean counters who invest in the junk food outlet. Neither do the consumers. If they cannot care for their own health in what they eat, why should they care about energy conservation.

    • Jim Gunshinan says:


      But consistent efforts to, for example, to change what food and drinks are available in schools has shown positive results. Kids in general in some areas are not as overweight as they used to be. Big changes take big, across the board efforts. That is what Matt is saying about efficiency investment. Investors have to have confidence that consistent efforts bring about consistent results.

  4. chungha cha says:

    I am a finance guy interested in attracting investors into building energy efficiency projects. I also am an part owner in a building energy modeling company to analyze consumption and energy saving investment returns here in Korea. Would love to hook up and explore ways of working together. Cha

  5. I agree also with Vince, but maybe instead of doing the project with these Energy Service Companies, maybe it could be done by smaller local contractors with financing from PACE if there is an investor fear of not a large enough return because of a possible seasonal weather change or change of tenant.
    Maybe these investors should then focus on industrial energy efficiency projects. It then is not weather dependent. The volume of energy consumed will most often be much greater and at a steady volume. Estimating investment returns can be picked to the week, or the month.

  6. Matt makes a good point- anyone making an energy efficiency investment at the facility-level needs to slice down the transactional friction. However, I’d like to remind folks that this standardization matters too as it has implications for bringing new and cheaper capital into energy efficiency retrofits. If you look at a lot of big pension funds you’ll see that their own real estate portfolio often is chock-full of Energy Star buildings; they know there is a financial return in improving their own buildings. However, if you want to find a pension fund investing in energy efficiency loans like they invest in car loans or mortgages you’re going to be hard pressed to get beyond a handful of examples. Part of it is a matter of scale (we need more projects) but part of the problem is helping investors understand these projects. They’re not going to go out and finance individual projects, they need a big package of numerous projects that a ratings agency can look at and rate– that requires standardization of the sort ICP is working on. We’ve laid this out in our report, Power Factor (http://www.ceres.org/resources/reports/power-factor-institutional-investors2019-policy-priorities-can-bring-energy-efficiency-to-scale/view) and have some recommendations on a portfolio of policies that can overcome the challenge of scale and standardization. Efforts like ICP will be a key piece.

    • Gentlemen, all good points. I respectfully suggest that it is hugely important to understand the drivers of your energy costs BEFORE you consider embarking on an energy project. Once you know what your significant drivers ( variables ) are, you will be in a excellent position to predict future performance. If energy projects are implemented for a commercial building, of most any type except a data center, the biggest drivers will be weather related. Probably 70% or better will be attributed to this single variable. If a manufacturer, energy consumption typically goes by energy inputs of the various products. Meter each assembly line individually to arrive at an energy cost per item then multiply the number of products per assembly line for that month and you will be pretty close to actual consumption. If your product mix changes, more of product X instead of Y, just change that input for the month. Very few folks know how their buildings perform before they do a project so it becomes very difficult to predict performance after the fact. Also, the shorter you make the project, the less variability there is and therefor less risk for investors. One of the problems we often see is a 15 year project payback that has multiple changes after only a few years. We have seen companies paying for energy projects for buildings that have been torn down or sold. Five years should be the longest term I would recommend to a client for an energy project. That would be a simple payback of 4.5 years with .5 years of savings to cover finance costs.

  7. Standardized documentation protocols is a good idea, but it won’t take away the fundamental issue that every building IS unique, and actual use of the building and its systems changes over time, so quantifying benefits in a traceable way is complex and often not worth the expense. We talk about energy savings, but in many cases we are really considering “avoided costs” – what future costs are avoided even when a new wing is added, a second shift is added, a storage space is converted to a data center, etc. The core problem, as I see it after 30+ years designing energy cost reduction projects, is three-fold: 1) owners of buildings either have no financial stake in energy costs or do not have the financial resources (or backing of the organization’s financial managers) to implement projects that they themselves know make sense; 2) operating costs are not treated like other investment opportunities, so a project with an ROI of 50% in building operations is ignored while a new marketing initiative with an ROI of 18% gets generously funded; and 3) those who operate buildings are not considered valuable assets and so there is insufficient investment in their training and insufficient recognition of their accomplishments. These obstacles are more cultural than financial. The fact remains that one of the best returns on investment available today to any organization that pays their own energy costs is in the energy efficiency of their facilities. Nevertheless, these institutional obstacles negate much potential progress.

  8. Jim Gunshinan says:

    I want to make another point. Investors poured big money into internet startups that did things like come up with new ways to sell dogwood over the net. It wasn’t because the investors thought that efficient delivery of dog food was a good investment. They did know that the web site would be viewed by thousands or millions of people, and therefore would be an attractive venue to dog food manufacturers.

    What does this have to do with investing in energy efficiency? I don’t know! Can someone help me finish my thought?

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  1. New Protocol Will Help Create Investor Confidence in Small-Scale Energy Efficiency Retrofits

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