[Senate Hearing 112-528]
[From the U.S. Government Publishing Office]
S. Hrg. 112-528
ENERGY EFFICIENT BUILDING RETROFITS
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
TO
REVIEW INNOVATIVE NON-FEDERAL PROGRAMS FOR FINANCING ENERGY EFFICIENT
BUILDING RETROFITS
__________
JUNE 28, 2012
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the
Committee on Energy and Natural Resources
_____
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75-808 PDF WASHINGTON : 2012
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
RON WYDEN, Oregon LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana JAMES E. RISCH, Idaho
MARIA CANTWELL, Washington MIKE LEE, Utah
BERNARD SANDERS, Vermont RAND PAUL, Kentucky
DEBBIE STABENOW, Michigan DANIEL COATS, Indiana
MARK UDALL, Colorado ROB PORTMAN, Ohio
JEANNE SHAHEEN, New Hampshire JOHN HOEVEN, North Dakota
AL FRANKEN, Minnesota DEAN HELLER, Nevada
JOE MANCHIN, III, West Virginia BOB CORKER, Tennessee
CHRISTOPHER A. COONS, Delaware
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
McKie Campbell, Republican Staff Director
Karen K. Billups, Republican Chief Counsel
C O N T E N T S
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STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Borrelli, Sheri, Senior Business Development Professional, The
United Illuminating Company, Orange, CT........................ 15
DeBoer, Jeffrey D., President and Chief Executive Officer, The
Real Estate Roundtable......................................... 24
Franken, Hon. Al, U.S. Senator From Minnesota.................... 1
Leeds, Susan, Chief Executive Officer, New York City Energy
Efficiency Corporation, New York, NY........................... 18
Rodgers, William A., Jr., President and Chief Executive Officer,
GoodCents Holdings, Inc., Atlanta, GA.......................... 10
Smith, Derek, Chief Executive Officer, Clean Energy Works Oregon,
Portland, OR................................................... 7
Sundstrom, David E., Auditor-Controller-Treasurer-Tax Collector,
County of Sonoma, Santa Rosa, CA............................... 3
APPENDIXES
Appendix I
Responses to additional questions................................ 51
Appendix II
Additional material submitted for the record..................... 71
ENERGY EFFICIENT BUILDING RETROFITS
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THURSDAY, JUNE 28, 2012
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:31 a.m. in room
SD-366, Dirksen Senate Office Building, Hon. Jeff Bingaman,
chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
The Chairman. OK, why don't we go ahead and get started.
Good morning. Today we're going to have a panel of experts talk
to us about a variety of programs used across the country to
finance energy efficient building retrofits. This is
particularly an important topic for commercial building owners,
but also for residential building owners. That's according to a
recent survey from the Institute for Building Efficiency at
Johnson Controls. They did a sixth annual global survey and
concluded that more commercial building owners are turning to
energy efficiency. They continue to seek tax credits,
incentives, and rebates to assist with those efficiency
improvements.
More than half of the 3500 building owners and operators
worldwide said that improving their public image and increasing
the value of their buildings were important factors leading
them to consider energy efficiency.
We have 6 witnesses today to describe their programs for
building efficiency retrofits and to discuss best practices for
financing these retrofits. We hope to learn how best to ensure
that private capital is available to finance projects through a
variety of financing mechanisms.
Before we start, Senator Franken has had a keen interest in
this subject for some time and I know he wanted to make a
statement. So let me defer to him.
STATEMENT OF HON. AL FRANKEN, U.S. SENATOR
FROM MINNESOTA
Senator Franken. Thank you, Mr. Chairman. Thank you for
holding today's hearing on financing energy efficient
buildings, and thank you all to all the witnesses for sharing
your expertise.
There are so many reasons why energy efficiency in building
retrofits makes sense. Retrofitting buildings can pay for
itself by saving homeowners and businesses money on energy
bills. Retrofits create jobs in manufacturing and construction
and engineering. They improve the work environment of the
retrofitted building, attract and retain tenants, and can bring
whole neighborhoods back to life. Of course, retrofits cut
energy waste and carbon emissions. Basically, it's win-win-win.
That's why last October I started an initiative promoting
energy efficiency retrofits called ``Back to Work Minnesota.''
I've been partnering with leaders in my State, Governor Dayton,
local chambers of commerce, businesses, utilities, and
nonprofits. Together we've been spreading the word about the
benefits of energy efficiency and connecting building owners to
the resources that can help them retrofit their buildings.
Interest in energy efficiency is spreading across
Minnesota. In November the city of Edina, Minnesota, set up the
first commercial Property Assessed Clean Energy program, or
PACE program, outside of California. In December I attended the
ribbon-cutting ceremony of Edina's first PACE-funded solar
panel installation project at the Edina Grandview Tire and Auto
Shop.
Likewise, cities and towns across the State are
retrofitting public and private buildings with local revolving
loan programs and utility rebates. Just this month, the Iron
Range Resources Board created a pilot business retrofit program
in Hibbing, Minnesota, and by the fall the Minnesota Department
of Commerce will finalize a new program to provide standardized
and guaranteed energy-saving performance contracts with energy
service companies, or ESCO's, like Johnson Controls, which the
chair mentioned in his opening statement, making it easier for
the State to retrofit its buildings, saving taxpayers money.
Despite all this movement in Minnesota, there are still
financing barriers, as you all know. I don't think I'm telling
the panel anything they don't know, what we've been doing in
Minnesota. There are still financing barriers holding many
building owners back from retrofitting. So I'm eager to hear
what today's witnesses think we can do to further promote
retrofits that both save money and create jobs.
Thank you, Mr. Chairman.
The Chairman. Thank you very much.
I'd just point out that there's a long tradition here in
the Senate of inviting experts from around the country and then
telling them what they already know. So we are good at that.
Senator Franken. I really revere the traditions of the
Senate.
[Laughter.]
The Chairman. We know you do. We appreciate your carrying
them on.
Let me introduce our 6 panelists. Mr. David Sundstrom, CPA,
is with SCEIP, the SCEIP program. Is that the right
pronunciation?
Mr. Sundstrom. ``SKIPE.''
The Chairman. ``SKIPE'' Program Administrator, in the
County of Sonoma in Santa Rosa, California.
Mr. Derek Smith is the CEO of the Clean Energy Works Oregon
in Portland, Oregon. Thank you for being here.
Mr. William Rodgers is President and CEO of GoodCents in
Atlanta, Georgia. Thank you for being here.
Ms. Sheri Borrelli, Senior Business Development
Professional with The United Illuminating Company in Orange,
Connecticut. Thank you for being here.
Ms. Susan Leeds is Chief Executive Officer with the New
York City Efficiency Corporation in New York.
Mr. Jeffrey DeBoer is the President and CEO of the Real
Estate Roundtable and has testified here several times before.
So we appreciate all of you being here.
Why don't we just take you in that order, and we will
include your full statements in the record, but if you would
take about 5 minutes each and give us the main points you think
we need to try to understand about this set of issues, we would
be anxious to hear your thoughts.
Mr. Sundstrom.
STATEMENT OF DAVID E. SUNDSTROM, AUDITOR-CONTROLLER-TREASURER-
TAX COLLECTOR, COUNTY OF SONOMA, SANTA ROSA, CA
Mr. Sundstrom. Honorable Chairman Bingaman, members of the
committee: Thank you so much for this opportunity to be here to
share with you our experience with our SCEIP program, also
known as Sonoma County Energy Independence Program. It is a
PACE program, which stands for ``Public Assessed Clean
Energy.'' It was the first in the Nation. I am pleased to have
this opportunity to discuss our program, a model of multi-
jurisdictional public-private partnership for financing energy
efficient and renewable energy retrofits for the betterment of
our communities.
PACE is a local government initiative that allows property
owners to finance energy efficiency, water conservation, and
renewable energy projects for their homes and commercial
buildings. Qualifying property owners finance those
improvements through a property tax assessment which is repaid
over a course of up to 20 years. PACE financing spreads the
cost of the improvement, such as insulation, energy efficient
boilers, new windows, or solar installations, over the expected
life of the improvement.
The method of financing is intended to allow the repayment
obligation to ensure transfer--will automatically transfer to
the next property owner when the property is sold. PACE
programs have been authorized by the legislatures of the
District of Columbia and 28 States, including many States
represented by members of your committee.
Sonoma County, which has long been a progressive leader in
the area of energy and environmental stewardship, immediately
identified PACE as a tremendous strategic opportunity to help
us reduce our greenhouse gases and promote energy economy
improvements by local property owners, and to provide jobs,
many jobs, in the local green construction industry.
Sonoma County and the Sonoma County Water Agency have
jointly pledged $60 million of local funds to launch the
program, making it the largest PACE program in this Nation.
SCEIP has proven itself to be very popular and effective. After
3 years of operation, SCEIP has received 2400 applications for
financing. Those applications have seen more than $89 million
in local energy improvements, of which more than $62 million
have been approved and nearly $57 million of projects have been
already completed. Approximately $6.7 million of these
assessments have been paid off, freeing up those funds for
future projects. In addition, the $62 million invested locally
has energized the creation of an active energy efficiency
community and has generated more than 145,000 man-hours of
construction work within the job market.
SCEIP has coordinated with other State and local energy
programs to provide our community with a one-stop approach for
customers to come in and facilitate energy efficiency and
renewable energy investments.
Despite the impediments imposed by the Federal Housing
Finance Agency, albeit we're moving along, albeit at a much
slower pace. We now have 1700 property owners participating in
the program and in the last 3 years those property owners have
completed more than 1600 energy retrofit projects and 1,000
solar installations. This has been producing about 7.7
megawatts of energy for these residents, making Sonoma County
the highest kilowatt-hour per capita solar energy production in
the country.
The proposed rule by FHFA does allow us for submittal of
alternatives. One alternative for the program, adding
acceptable underwriting criteria to the program. It was our
belief that H.R. 2599 is predicated on the very criteria being
called for by FHFA. Programs established under 2599 guidelines
should mitigate FHFA guidelines. We continue to hope that FHFA
will revise its proposed rule to allow us to continue with the
SCEIP program. We certainly would appreciate any assistance
your committee could give us in pursuing H.R. 2599.
In conclusion, through collaboration with government,
business, and nonprofit partners, Sonoma County has been able
to forge ahead with a financially sustainable program that
furthers our community's strategic priorities of environmental
sustainability and local economic vibrancy. In doing so, the
program has become a shining example of government innovation
and collaboration. We look forward to continuing to expand our
efforts in the commercial sector and within underserved
communities, and to reaching a resolution with FHFA so that
property owners can continue with PACE financing retrofits
without the threat of foreclosure.
Thank you.
[The prepared statement of Mr. Sundstrom follows:]
Prepared Statement of David E. Sundstrom, Auditor-Controller-Treasurer-
Tax Collector, County of Sonoma, Santa Rosa, CA
Introduction
Honorable Chairman Bingaman, Ranking Member Murkowski, and Members
of the Committee, thank you for this opportunity to appear before you
today as you examine ``Innovative non-federal programs for financing
energy efficient building retrofits.'' My name is David Sundstrom, and
I serve in the elected position of Auditor, Controller, Treasurer and
Tax Collector of Sonoma County, California. I also serve as the
administrator of the Sonoma County Energy Independence Program, known
as SCEIP, which is the leading Property Assessed Clean Energy (PACE)
program in the nation. I am pleased to have this opportunity to discuss
the Sonoma County Energy Independence Program, a model of multi-
jurisdictional and public-private partnership for financing energy
efficient and renewable energy retrofits for the betterment of the
community.
PACE Explained
PACE is a local government initiative that allows property owners
to finance energy efficiency, water conservation and renewable energy
projects for their homes and commercial buildings. Qualifying property
owners finance improvements through a property tax assessment which is
repaid over the course of up to 20 years. PACE financing spreads the
cost of improvements, such as insulation, energy efficient boilers, new
windows, or solar installations, over the expected life of the
improvement. The method of financing is intended to allow the repayment
obligation to transfer automatically to the next property owner when
the property is sold. PACE Programs have been authorized by the
legislators of the District of Columbia and twenty-eight states,
including many states represented by members of this Committee.
Growth of the Sonoma County Energy Independence Program
Sonoma County, which has long been a progressive leader in the area
of green energy and environmental stewardship, immediately identified
PACE as a tremendous strategic opportunity to help us reach our
greenhouse gas reduction goals, promote energy efficient improvements
by local property owners, and provide jobs in the local ``green''
construction industry.
Sonoma County and the Sonoma County Water Agency jointly pledged
$60 million of local funds to launch the program, making it the largest
PACE program in the nation. SCEIP has proven itself to be very popular
and effective: after three years of operation, SCEIP has received 2,400
applications for financing. Those applications have been for more than
$89 million in local energy improvements, of which more than $62
million have been approved, and nearly $57 million have been disbursed
to projects that are already completed. Approximately $6.7 million of
these assessments have been paid off, freeing those funds for
additional projects. In addition, the $62M invested locally has
energized the creation of an active energy efficiency and renewable
energy construction market and has generated more than 145,000 man-
hours of construction work within the local job market.
SCEIP has coordinated with other local- and State-funded energy
efficiency programs to provide our community with a one-stop-shop
approach to pursue and facilitate energy efficiency and renewable
energy investments.
Despite impediments imposed by the Federal Housing Finance Agency,
property owners continue to join the Program, which now has over 1700
participating property owners. In the past three years, those property
owners have completed more than 1600 energy efficiency projects and
1000 solar installations which total more than 7.7 megawatts of clean,
renewable solar photovoltaic energy. This has given Sonoma County one
of the highest kilowatt-hour per capita solar energy production rates
in the country.
We continue to seek long-term financing through the bond market,
securitization, and private placement, to enable SCEIP to grow,
allowing the energy and water conservation improvements to continue as
long as there is a demand. We have also attracted private capital for
particular projects. In one such case, SCEIP facilitated funding for a
$1.6 million solar installation on a major commercial complex through
private capital provided by CleanFund, which recently also assisted in
the financing of a commercial PACE project in Senator Franken's home
state of Minnesota.
Partnership for Success
The energy community continues to be an active partner in our
efforts to promote sustainability. Energy audits help to ensure the
best choice in technology and allow for measureable environmental
results arising from the program. Currently, commercial properties are
required to conduct an energy evaluation, and the program strongly
encourages energy audits for residential participants as well - the
cost of which can be included in the financing provided through the
program. Our use of Department of Energy grants channeled through the
California Energy Commission over the last year has allowed us to
implement several major program improvements, all focused on making
participation in SCEIP easier, faster and more valuable for the
property owner.
Bringing PACE to Scale
The U.S. Green Building Council reports that the building sector
accounts for almost half of the greenhouse gas emissions in the United
States annually.\1\ The United States Environmental Protection Agency
reports that this is spread approximately equally between residential
buildings and commercial buildings.\2\ The White House Recovery Through
Retrofit report found that home energy retrofits have the potential of
reducing home energy bills by $21 billion annually, paying for the
retrofits over time.\3\ A recent report by the Rockefeller Foundation
estimated that $279 billion could be invested annually across the
residential, commercial, and institutional market segments, yielding
more than $1 trillion of energy savings over 10 years and creating more
than 3.3 million cumulative job-years of employment.\4\ In short,
energy retrofits have enormous potential. A concerted push toward
sustainable energy investment will reduce greenhouse gas emissions,
save energy, benefit American homeowners and businesses through cost
savings, and create and sustain millions of jobs.
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\1\ Announcement dated 5/7/2007, http://www.usgbc.org/News/
PressReleaseDetails.aspx?ID=3124.
\2\ http://www.epa.gov/ttnchie1/ conference/ei17/session5/
knowles.pdf
\3\ http://www.whitehouse.gov/assets/documents/
Recovery_Through_Retrofit_Final_Report.pdf
\4\ http://www.rockefellerfoundation.org/ uploads/files/791d15ac-
90e1-4998-8932-5379bcd654c9-building.pdf
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Obstacles to Residential PACE
The enthusiastic response we received from the community on the
launch of our Program and the continued interest we receive from the
community demonstrates the community's desire for a retrofit program
that offers a low up-front cost, transferable on sale option. However,
the Federal Housing Finance Agency has challenged PACE programs because
it believes PACE programs, which create a lien comparable to property
taxes and other assessment liens, create risk for Fannie Mae and
Freddie Mac due to the financing's seniority over the property's first
mortgage. FHFA has recently proposed a rule on PACE programs
essentially directing Fannie Mae and Freddie Mac to ensure that their
mortgage documents permit immediate foreclosure on any property where
the owner agrees to a PACE funded retrofit-whether or not the property
owner is current on their mortgage and has a sterling payment history.
Our own statistics demonstrate that the FHFA's fears are
groundless. In fact, PACE participants are significantly less likely to
default on their mortgage payments\5\ and more likely to make their tax
payments than property owners as a whole. The FHFA indicates that there
is insufficient evidence to validate this result, yet firmly blocks new
programs and prevents gathering the very evidence that would satisfy
its concerns. In the House, HR 2599, setting out parameters to ensure
PACE programs address the FHFA's concerns, has been submitted by a
bipartisan group of Congress Members, and we hope that your Committee
would support a similar effort in the Senate.
---------------------------------------------------------------------------
\5\ There are only 16 reported mortgage defaults out of over 1600
properties in the County's PACE program-under one percent,
significantly below the County average.
---------------------------------------------------------------------------
The proposed rule issued by the FHFA also allows for the submittal
of alternatives. One alternative cited was having programs with
acceptable underwriting criteria. It is our belief that HR 2599 is
predicated on the very criteria being called for by the FHFA. Programs
established under HR 2599 guidelines should mitigate FHFA concerns. We
continue to hope that the FHFA will revise the proposed rule if
presented with a program that meets the underwriting criteria they
believe are needed to protect property owner and mortgage holder
investments. We would greatly appreciate any assistance that you could
provide in reaching a compromise with FHFA, such as incorporating the
underwriting criteria cited in HR 2599.
Conclusion
Through collaboration with government, business, and non-profit
partners, Sonoma County has been able to forge ahead with a financially
sustainable program that furthers our community's strategic priorities
of environmental sustainability and local economic vibrancy. In doing
so, the program has become a shining example of government innovation
and collaboration. We look forward to continuing to expand our efforts
in the commercial sector and within underserved communities, and to
reaching a resolution with FHFA so that property owners can proceed
with PACE funded retrofits without threat of foreclosure.
Thank you again for the opportunity to appear before you today and
describe our successful, and replicable, Program. I am happy to answer
any questions from members of the Committee.
The Chairman. Thank you very much.
STATEMENT OF DEREK SMITH, CHIEF EXECUTIVE OFFICER, CLEAN ENERGY
WORKS OREGON, PORTLAND, OR
Mr. Smith. Mr. Chairman, members of the committee: My name
is Derek Smith. I am CEO of Clean Energy Works Oregon, based in
Portland, Oregon. I'd first like to acknowledge Senator Wyden
for his leadership on energy and other issues, and especially
for his support, and in fact the whole Oregon delegation has
been very supportive of us, including your other colleague,
Senator Merkley.
I'd also like to acknowledge our board chair, Jeremy Hayes,
who's in the audience with me here today.
Clean Energy Works Oregon is in the residential energy
sector, which, as you know, represents about 20 percent of our
Nation's energy consumption. Clean Energy Works is a private
nonprofit organization that accelerates the delivery of home
energy remodels. We bring citizens together with private
contractors and private lenders to help them get their home
upgraded for energy efficiency. We then bundle the energy
savings for the utility sector and we report the economic
development outcomes for our public sector investors.
Over the past 2 years, our results include: 1800 homes
remodeled for energy efficiency; 800 workers receiving
paychecks, including 180 direct construction new hires, in a
sector that in Oregon recently suffered a greater than 50
percent decline in employment; average wages of $21 an hour
across multiple trades, from insulation installers to HVAC
technicians to electricians to plumbers; market growth of 5X;
30 percent annual energy savings per home, generating over
$500,000 annually into the pockets of participating citizens;
$25 million in economic development; and 4 to one leverage on
our Federal investment, primarily from private capital lenders.
All of these numbers are rising on a daily basis.
We've been able to accomplish this because of the support
from the U.S. Department of Energy, the State of Oregon, Energy
Trust of Oregon, city of Portland, local governments, and the
Rockefeller Foundation, and because of the entrepreneurial
spirit of our 50 contractors and 4 lenders in rural and urban
communities throughout Oregon.
We're proving a model where public sector investment
delivered alongside private and utility capital into energy
efficiency pays dividends toward important American values:
energy independence from volatile fossil fuel markets, small
business growth, revitalization of our housing market; and
creation of local jobs that can't be outsourced and that can
pay family supporting wages to historically disadvantaged
populations, including women, minorities, and veterans.
Here's what we're learning and what we'd like to convey to
you this morning. First, the utility sector, while a critical
player, is in a limited position to value the full set of
benefits that are derived from energy efficiency. for example,
economic development. Therefore, current utility investment
alone is not sufficient to get the gains we need. Restructuring
of the sector and its business model should be explored.
Two, private capital is widely available and does not
appear to need ongoing credit enhancement, at least for the
residential sector. What's needed to unlock private capital is
smart program design, good quality control, and robust data
that can inform capital markets. As you know, many financial
institutions are sitting on cash and getting pressure from
shareholders to earn returns. The government does not need to
be and shouldn't be the capital provider for this sector. Our
experience is that local credit unions and regional banks are
the pathway toward larger scale investment.
Third, the housing appraisal industry is beginning to
recognize the value of energy efficiency improvements. We are
making a dent in the turnaround of our housing economy.
Four, consumers respond to rebates. We believe rebates
above utility incentive levels are extremely effective and
needed to lift the industry and transform the market, at least
until home valuations routinely recognize the value of energy
efficiency improvements.
Last, private businesses are aiming their resources toward
this growing market. What these businesses need to continue
investing is the predictability of knowing that the market will
be supported and sustained.
Looking forward, we expect this market to stabilize and
reduce its dependence on public investment. We expect in Oregon
that State-level investment will recognize the value of job
creation by assuming the next position of key financial support
for further market development. We have built a model that does
not rely on Federal investment to survive.
So how can the Federal Government help? Given that
utilities are regulated locally, the Federal Government can
promote industry standards that cut across State lines, like
the measurement of non-energy benefits.
The Federal Government can continue to engage the real
estate community with development of tools like the Home Energy
Score so there is transparency to consumers about energy costs
of homes.
Finally, the Federal Government can promote the value of
energy efficiency. Imagine a national advertising campaign that
links energy efficiency to patriotism, like the Victory Gardens
campaign from World War II.
In closing, I would like to thank you for your hard work in
creating solutions for our energy challenges and for your
support of energy efficiency as a key piece of the puzzle going
forward. Thank you.
[The prepared statement of Mr. Smith follows:]
Prepared Statement of Derek Smith, CEO, Clean Energy Works Oregon,
Portland, OR
Thank you for the opportunity to present to the Committee on Energy
and Natural Resources. I'd first like to acknowledge Senator Wyden for
his leadership on energy and other issues, and especially for his
support of Clean Energy Works Oregon. We are grateful for the support
of the Oregon Delegation, including your other colleague, Senator
Merkley.
Clean Energy Works Oregon is in the residential energy sector,
which, as you know, represents about 20% of our nation's energy
consumption.
Clean Energy Works is a private, non-profit organization that
accelerates the delivery of home energy remodels. We bring citizens
together with private contractors and private lenders to help them get
their home upgraded for energy efficiency, and we ensure quality
control and service throughout their project. We bundle the energy
savings for the utility sector and we report the economic development
benefits to our public sector investors.
Over the past two years, our results include:
1800 homes remodeled for energy efficiency
800 workers receiving paychecks, including 180 direct
construction newhires-this is in a sector of our economy that,
in Oregon, recently suffered a greater than 50% decline in
employment
Average wages of $21/hour across multiple trades-from
insulation installers to HVAC technicians to electricians to
plumbers
Market growth of 5x
30% average energy savings per home, generating over
$500,000 annually into the pockets of participating citizens
$25 million in economic development
Four-to-one leverage on our Federal investment, primarily
from private capital lenders
All of these numbers are rising on a daily basis.
We've been able to accomplish this because of the support from the
US Dept. of Energy, State of Oregon, Energy Trust of Oregon, City of
Portland, local governments and the Rockefeller Foundation.
We're proving a model where public sector investment delivered
alongside private capital into energy efficiency pays dividends toward
important American values:
Energy independence from reduced reliance on volatile fossil
fuel markets
Small business growth
Revitalization of our housing market
Creation of local jobs that can't be outsourced and that can
pay family supporting wages to historically disadvantaged
populations including women, minorities and veterans
Here's what we're learning and what we'd like to convey to you:
1. The utility sector, while a critical player in this
market, is in a limited position to value the full set of
benefits that are derived from energy efficiency. For example,
economic development is not and cannot be fully valued by
utility capital. Therefore, current utility investment alone is
not sufficient to get us the gains in efficiency we need.
Restructuring of the sector and its business models should be
explored.
2. Private capital can be unlocked, is widely available, and
does not appear to need ongoing credit enhancement. What's
needed to attract private capital is smart program design, good
quality control, robust data and ongoing financial support from
the public sector. As you know, many financial institutions are
sitting on cash and getting pressure from shareholders to earn
returns. The government doesn't need to be - and shouldn't be-
the capital provider for this sector. Incidentally, our
experience is that local credit unions and regional banks are
the pathway toward larger-scale investment. As demand and
predictability grow, the Wall Street banks will join in, and a
national market will emerge.
3. The housing appraisal industry is beginning to recognize
the value of energy efficiency improvements. We are making a
dent in the turnaround of our housing economy. Once this starts
to happen on a more predictable basis, demand will be steady.
4. Consumers respond to rebates. We believe rebates above
utility incentive levels are extremely effective and needed to
lift the industry and transform the market, at least until home
valuations routinely recognize the value of energy efficiency
improvements (very similar to Cash for Clunkers).
5. Private businesses are aiming their resources toward this
growing market. Many of our contractors tell stories of
reorienting their focus 3-4 years ago away from new home
construction toward remodeling for energy efficiency. And they
are seeing significant year-over-year growth. What these
businesses need to continue investing is the predictability of
knowing this market will be supported and sustained.
Looking forward, we expect this market to stabilize and reduce its
dependence on public investment. We expect, in Oregon, that State-level
investment will begin to recognize the value of job creation in this
sector by assuming the next position of key financial support for
further market development. We have built a model that doesn't rely on
Federal investment to survive. However, it would be welcome, and it is
clear that the combination of public sector capital alongside ratepayer
dollars and private capital is a key to success of mobilizing a
national energy efficiency industry.
So how can the Federal government help?
Given that utilities are regulated locally, the Federal
government can promote industry standards that cut across state
lines, like the measurement of non-energy benefits and
universal data exchange protocols.
The Federal government can continue to engage the real
estate community with development of tools like the Home Energy
Score so there is transparency to consumers about energy costs
of homes.
The Federal government could continue to invest financial
resources in the emergence of the nascent energy efficiency
industry, which holds tremendous promise as a valuable
component of a 21st century energy policy that recognizes
American job creation in balance with energy independence from
the increasingly volatile commodity markets for fossil fuels.
And, finally, the Federal government can promote the value
of energy efficiency. Imagine a national advertising campaign
that links energy efficiency to patriotism, a la the Victory
Gardens campaign from World War II.
In closing, I would like to thank you for your hard work in
creating solutions to our country's energy needs, and for your support
of energy efficiency as a key piece of the puzzle going forward.
The Chairman. Thank you very much.
Mr. Rodgers, go right ahead.
STATEMENT OF WILLIAM A. RODGERS, JR., PRESIDENT AND CEO,
GOODCENTS HOLDINGS, INC., ATLANTA, GA
Mr. Rodgers. Mr. Chairman, members of the committee: My
name is Bill Rodgers and I am the President and CEO of
GoodCents Holdings. GoodCents is headquartered in Atlanta,
Georgia, and has provided operations in over 20 States and in
Canada just in the past year. I thank you for the opportunity
to testify before you today on the very important topic of
energy efficiency.
Energy efficiency programs can and do exist independent of
Federal financing and incentives. Our company has been in
existence for over 30 years and our continued growth over that
period is clear evidence of the role market forces can have in
driving energy efficiency programs.
During that time, we have provided multiple types of demand
side management programs, such as energy efficiency, to over
150 investor-owned utilities, cooperatives, and municipalities,
as well as their customers. We have over 400 employees focused
daily on assisting businesses and residents in conserving and
better utilization of their energy requirements.
Our involvement covers the full spectrum of services, from
initial program design to the critical marketing services
targeted at customer education and enrollment into the
programs; to the field implementation and the ultimate
measurement and verification of the actual savings achieved,
which is used to report back to the respective regulatory
bodies.
With the focus of this hearing to review non-Federal
programs for financing energy efficient building retrofits, I
would like to review a few items. While there are several
alternatives to replace or supplement Federal funding and
support of various programs, such as performance contracting,
equipment-based loans, on-bill financing, and the type, there
is a key driver to the ultimate success of these programs.
Essentially, where we have experienced the greatest level of
achievement in terms of customer acceptance and collaboration
is in States where clear standards have been established.
In our experience, the most successful programs are those
in which States establish energy efficiency resource standards
and then allow the marketplace to develop the best methods to
achieve those goals. The collaboration comes through a strong
alignment of interests of the State, regulators, utilities,
commercial and industrial businesses, and the residents, along
with the private sector service provision.
Programs are developed that properly focus on maximizing
the energy savings through targeting the effective rate of
return on the investments made through these various retrofit
projects.
Energy efficiency remains America's cheapest, cleanest, and
readily deployable energy source when compared to any other
supply side generation, where costs have continued to rise. We
can reduce the costs for both the consumer and the utility,
eliminate pollution, and create green jobs, all without Federal
dollars.
A current example of such an initiative is being delivered
across the State of Indiana. In 2009, the State of Indiana
joined many other States to establish long-term Energy
Efficiency Resource Standards. These standards set forth energy
savings targets with very specific timetables for achievement.
Once the standards were established, Indiana undertook an
exhaustive effort to review their options for that achievement.
Their model evaluated the need for a true partnership of all
stakeholders in order to achieve their ultimate goals.
They established a Demand Side Management Coordination
Committee of the Indiana Utility Regulatory Commission made up
of representatives from each of the utilities, local
municipalities, and consumer groups throughout the State. They
went to the marketplace to bid and ultimately select an
independent third party administrator for the statewide
initiative.
Our company GoodCents was selected to reduce energy use by
more than 1.2 million megawatt hours over just the first 2
years of the contract period. Branded ``Energizing Indiana,''
the initiative is a united effort by the State, participating
utilities, businesses, and consumer organizations to offer
energy efficiency programs that will benefit communities across
the State.
This extensive, statewide suite of 5 core energy efficiency
programs includes: commercial and industrial retrofits;
residential home energy assessments; income-qualified
weatherization services; lighting expansion through over 300
retail participating outlets across the State; and energy
education programs and commercial building assessments for
Indiana schools.
The power of offering an integrated approach most
definitely drives additional benefit and savings for the
customers. The Energizing Indiana program has also created a
significant number of new jobs for Indiana residents. The
program will directly hire over 150 positions directly out of
the Indiana work force. In addition, when efficiency
improvements are made as a result of the assessments that are
done, the work is performed by local professionals, which means
that the dollars stay in the local community.
Similar to our efforts in Indiana, many other States have
established their own energy efficiency resource standards.
Once these goals and standards have been set, they then
developed the proper alignment between all of the stakeholders
to drive toward their aggressive goals. This allows for the
best thinking to be put toward the market-based program
requirements versus establishing Federal prescriptive programs
that become very difficult to effectively deliver. Costs of
these programs go through the regulatory system for proper
review and inclusion in the local rate structure. The market
ultimately drives the programs, the participation, and the
returns once those standards have been established.
Thank you for your time.
[The prepared statement of Mr. Rodgers follows:]
Prepared Statement of William A. Rodgers, Jr., President and CEO,
GoodCents Holdings, Inc., Atlanta, GA
GoodCents Overview
Mr. Chairman and members of the Committee on Energy and Natural
Resources, my name is Bill Rodgers and I am the President and CEO of
GoodCents Holdings, Inc. GoodCents is headquartered in Atlanta, Georgia
and has provided operations in 20 states and Canada over the past year.
I thank you for the opportunity to testify before you today on the
important topic of energy efficiency.
Energy efficiency programs can and do exist independent of federal
financing and incentives. Our company has been in existence for over 30
years and our continued growth over that period is clear evidence of
the role market forces can have in driving EE programs. During that
time we have provided multiple types of Demand Side Management programs
such as energy efficiency to over 150 Utilities and their customers.
Our Utility customers include Investor Owned, Co-operatives and
Municipalities. We have over 400 employees located across our country
and in Canada who wake up each and every morning focused on assisting
businesses and residents in conserving, and better utilization of,
their energy requirements. Our company partners with both electric and
gas Utilities to deliver the most effective programs targeted at
reducing their energy footprint. Just samplings of some of the programs
we deliver are:
Facility Audits (both residential and commercial)
Income Qualified Weatherization
Equipment Efficiency Studies
Retrofit Programs for Commercial and Industrial
Lighting
H.V.A.C.
Equipment (motors, drives, refrigeration etc.)
Trade Ally Network development and management
Energy End Use Studies
Our involvement covers the full spectrum of services: From initial
program design, focusing on the delivery of the required or targeted
savings; to the critical marketing services, targeted at customer
education and enrollment into the programs; to the field implementation
and the ultimate measurement and verification of the actual savings
achieved which is used to report back to the respective regulatory
body. With the focus of this hearing to review non-federal programs for
financing energy efficient building retrofits, I would like to review
several items. While there are several alternatives to replace or
supplement federal funding and support of various programs (such as
performance contracting, equipment based loans, on-bill financing,
etc.) there is a key driver to the ultimate success of these programs.
Essentially, where we have experienced the greatest level of
achievement in terms of customer acceptance and collaboration is in the
states where clear and precise standards have been established. In our
experience the most successful programs are those in which a state
establishes Energy Efficiency Resource Standards (EERS) and then allows
the marketplace to develop the best method to achieve those goals.
To date, 26 states have established EERS.
The collaboration comes through the strong alignment of interests
of the state, regulators, Utilities, commercial and industrial
businesses and residents, along with the private sector service
provision. Programs and models are developed that properly focus on
maximizing the energy savings through targeting the effective rate of
return on the investments made through various retrofit projects..
Energy efficiency remains America's cheapest, cleanest, and fastest
energy source when compared to any other supply side generation where
costs have continued to rise. We can reduce costs for both the consumer
and utility, eliminate pollution and create green jobs all without
federal dollars. A current example of a successful Initiative that
doesn't require any federal financing is being delivered across the
State of Indiana.
Energizing Indiana Overview
In 2009, the State of Indiana joined many other states, and since
that time many others have followed, to establish long-term Energy
Efficiency Resource Standards (EERS). Please see the map of the current
State EERS on page 16 of this testimony. These standards set forth
energy savings targets with specific timetables for achievement. Once
the EERS were established, Indiana undertook an exhaustive review of
their options for achievement. Their model evaluated the need for a
true partnership of all stakeholders in order to achieve their ultimate
goals. They established a Demand Side Management Coordination Committee
(DSMCC) of the Indiana Utility Regulatory Commission (IURC) made up of
representatives of each of the Utilities, municipalities and consumer
groups in the state. They went to the marketplace to bid and ultimately
select an Independent Third Party Administrator for their statewide
initiative. GoodCents was selected and entered into a contract targeted
to reduce energy use by more than 1.2 million MWh over the first two
contract years of 2012 and 2013. Branded ``Energizing Indiana,'' the
initiative is a united effort by the state, participating Utilities,
businesses and consumer organizations to offer energy efficiency
programs that will benefit communities across the state.
This extensive, state-wide suite of five core energy efficiency
programs includes: Commercial & Industrial Prescriptive program on the
most energy consuming equipment and process improvements, Residential
Home Energy Assessments, Income-Qualified Weatherization Services,
Residential Lighting expansion through over 300 participating retail
locations, and both Energy Educational Programs and Commercial Building
Assessments for Indiana Schools.
As administrator, GoodCents is coordinating, managing, implementing
and reporting on this core suite of programs designed to meet the
annual energy savings goals identified for each participating Utility.
In addition, the Utilities also offer other ``Core Plus'' programs
directed toward expanding to an even greater suite of energy efficiency
services that GoodCents works to educate the ultimate customers on the
combined value. GoodCents has built a world-class team of experienced
professionals from across the state and is managing the program from
four Indiana offices in Indianapolis, Merrillville, Fort Wayne, and
Evansville.
GoodCents believes that by consolidating energy efficiency programs
into one core initiative, Energizing Indiana has the power to benefit
many Utility customers; from industry to businesses, and schools to
homeowners. The power of offering an integrated, more tailored approach
most definitely drives additional benefit and savings for the
customers. We see other states following Indiana's lead of program
consolidation because of the efficiency and continuity gained by the
scale of operations. One of the most important operational components
of these Utility-sponsored programs is the focus on energy savings
data-gathering, retention, and validation attributable to each Utility
customer.
The Energizing Indiana program has also created a significant
number of new jobs for Indiana residents; the program has to date
directly hired over 100 management, administrative, and technical
positions from the Indiana workforce. In addition, when a business or
home makes efficiency improvements as a result of assessment programs,
the work is performed by local professionals; that means dollars spent
stay in the community.
Approach to Market
Through years of experience, GoodCents has identified a variety of
tools that are effective in engaging customers and changing their
behavior resulting in optimal program enrollment. The key to a
program's success is establishing a strong marketing campaign that
spans across multiple marketing channels and provides multiple touches
to Utility customers to increase both awareness and activity. In
addition, it is essential to develop an enrollment channel that is easy
and convenient for customers to use.
Effective marketing is the key to robust participation. GoodCents
has a complete array of marketing capabilities including print
collateral design and production, social marketing programs (community
engagement programs, social media implementation, local enrichment
programs, etc.), and electronic communications to include website
development, landing pages, email campaigns, and online program
administration. In many programs, incentives are used to drive higher
response rates through both direct mail and community enrichment.
GoodCents also works with Utilities to establish program awareness
through social marketing platforms and pushes to engage local
newspapers for additional support. In addition we use resources such as
social media sites like Facebook, Twitter, and YouTube to raise
awareness of the energy efficiency and demand response programs.
GoodCents works with the Utility to build a program webpage that
provides program information and allows the customers to enroll. In
addition, we piggy-back some program marketing approaches with any of
the Utility's current and future media campaigns or marketing efforts.
When working within the energy efficiency business the key to
gaining both commercial and residential customer acceptance is in
educating them as to the benefits of the programs, allowing them to
understand the financial impact and return on their investment as well
as working to make the process participation simple.
Types of Programs Delivered
Demand Response Programs
load control programs
For more than three decades, GoodCents has been a valued partner
for Utilities implementing demand response programs. In addition to
advanced and emerging smart grid technologies, the Company installs and
commissions a wide array of demand response devices, including
communicating thermostats, water heater and pool pump controllers, and
internet gateways, across a range of protocols and communications
mediums. Active programs being delivered in California, Georgia,
Illinois, Indiana, Kentucky, North Carolina, Ohio, Oklahoma, South
Carolina and Virginia. Recently completed programs were also in Nevada
and Washington.
home area networking
Home area networks connect all aspects of the home to best
understand how and where and to what degree energy is being used. A
home area network is a network of energy management devices, digital
consumer electronics, signal-controlled or enabled appliances, and
applications within a home environment on the home side of the electric
meter. GoodCents utilizes its decades of experience in demand response
and working inside the home to leverage the optimal solutions for our
customers in establishing the most effective home area networks to
allow for maximum understanding of usage. We work with our Utility
clients to identify, enroll and implement the networks as well as
analyze the data for meaningful future program usage. Current programs
in Arizona and Texas.
advanced metering infrastructure
GoodCents' Advanced Metering Infrastructure offering combines smart
meter deployment, infrastructure component installation, proprietary
scheduling and routing applications, and customer call centers. The
combined offering ensures the most efficient deployment of smart grid
programs, and positions GoodCents as an important link between the
Utility and its customers.
Energy Efficiency Programs
income qualified weatherization
GoodCents' Income-Qualified Weatherization programs utilize a
combination of a well-defined, standardized in-home measure
installations process and a solid, long-standing analytic software
tool. Our program delivery may include combustion safety testing,
blower door guided air sealing, arranging for attic insulation, and
providing conservation education and encouraging adoption of energy
efficiency measures. Active programs are being delivered in Florida,
Indiana, North Carolina and Virginia.
residential energy assessments
GoodCents believes that on-site energy assessments provide the best
opportunity to reshape the energy usage habits of all customers. Our
highly trained and experienced technicians perform detailed site
surveys and work closely with the customer to install energy efficiency
measures as determined by the Utility and their customers.
Along with installing measures, we are also capable and equipped to
conduct in-out testing for implementation-style assessments such as
weatherization, duct repairs, ceiling insulation and more. GoodCents
generally uses six common elements for on-site energy efficiency
programs, pre-visit and authorization, home health and safety,
installed measures, energy audit inputs, energy audit analytic engine,
and homeowner's energy report. Active programs are being delivered in
Indiana, Ohio and West Virginia.
six common elements of goodcents on-site energy efficiency programs
Commercial & Industrial Energy Assessments
GoodCents' Commercial and Industrial programs include prescriptive
and custom incentive structures that reward participants with monetary
incentives based on their installation of energy efficiency equipment
upgrades. These upgrades include lighting, motors and pumps, HVAC, and
potentially other equipment such as ENERGY STAR transformers and
efficient package refrigeration. Incentives will be provided for one-
for-one replacements, retrofits and new installations of qualified
equipment.
The objectives of the C&I Prescriptive Program are to:
Lower electric energy consumption in the C&I market sector.
Help C&I customers decrease their overall energy costs.
Build market-based activity that captures near- and long-
term energy and demand savings.
Encourage equipment vendors and contractors to actively
promote and install energy efficient technologies for their C&I
customers.
To assist C&I customers in reducing their electric energy costs,
the GoodCents team provides program participants with technical
assistance accessible through Resource Managers working directly with
their site as well as a toll-free customer service line. The technical
assistance can include helping to understand the return on their
potential investments, answering general questions regarding the
program, evaluating available program incentives, verifying program
eligibility, and/or connecting them with potential local installation
contractors that are familiar with and participating in the program.
Active Programs are being delivered in Indiana, Kentucky, North
Carolina, Ohio, South Carolina, Virginia and West Virginia.
rebate programs
The goals of the rebate program offered by GoodCents are to provide
Utilities and their customers with an avenue to reduce energy and
demand requirements, save money on electric bills, and meet reduction
goals set forth by state legislatures and commissions. To accomplish
these goals, the GoodCents rebate program offers a complete turn-key
offering from the marketing aspect through rebate check processing. Our
rebate offerings can either be fully customizable or a standard
prescriptive based program. Similar active programs as listed in the
commercial energy assessments.
Conclusion
Similar to our efforts in Indiana, many other states have
established their own Energy Efficiency Resource Standards. Once these
goals and standards have been set they then developed the proper
alignment between the state, regulators, local communities, Utilities,
industrial and commercial businesses and the residential customers to
drive towards their aggressive goals. This allows for the best thinking
to be put towards the market-based program requirements versus
establishing federal prescriptive programs that become difficult to
realize ultimate success. Costs of these programs go through the
regulatory system for proper review and inclusion in the local rate
structures. The market ultimately drives the programs, participation
and returns once the standards are established.
The Chairman. Thank you very much.
Ms. Borelli, go right ahead.
STATEMENT OF SHERI BORRELLI, SENIOR BUSINESS DEVELOPMENT
PROFESSIONAL, THE UNITED ILLUMINATING COMPANY, ORANGE, CT
Ms. Borrelli. Thank you. Good morning, Mr. Chairman,
Senator Murkowski, members of the committee. Thank you for the
opportunity to appear before you today to discuss financing
energy efficient building retrofits. My name is Sheri Borrelli
and I represent The United Illuminating Company. UI is an
investor-owned electric distribution company serving
approximately 300,000 customers in southern Connecticut. UI
also administers energy efficiency programs funded by a 3 mil
per kilowatt hour charge that is referred to as the Connecticut
Energy Efficiency Fund.
I am here today to familiarize you with the Small Business
Energy Advantage Program. This is one of our many programs that
we serve as administrator of the Efficiency Fund. This program
has been designed to provide cost-effective turnkey energy
services to various types of small businesses.
This program features a network of vendor contractors
provided by UI that provide energy efficiency proposals and
services to our customers. These contractors provide a no-
obligation energy evaluation identifying the potential energy-
saving retrofit measures, the available incentives, and various
financing options. These proposals will include dollars from
the Efficiency Fund for a portion of the cost of the
installation as it is determined by the energy savings that
will be achieved. The greater level of comprehensive a project,
the higher the incentive.
The objective is to offer the customer a proposal where
there is no or little out of pocket expense and create a
positive cash-flow scenario, which results in lowering their
electric bill. Another benefit is that once the loan is paid
off, usually within 3 to 4 years, the customer will be--the
customer's bill will be less, reflecting the efficiency
upgrades.
Although the program itself is a critical delivery
mechanism, the innovative part of the program is the financing
with the convenience of on-bill financing. The loans to the
customer are interest-free. Interest-free loans are possible
since the interest expense of 6.3 percent is bought down by the
Efficiency Fund. Repayment of the loan is made as part of the
customer's electric bill.
To quality for the loan, the customer must have a good
utility bill repayment history for the most recent 6 months.
The most unique feature about the loan payment is the source of
capital. UI provides the funds that are loaned to the customer.
The Efficiency Fund is used as a loan loss reserve fund,
allowing UI to recover any losses from the defaulted loans
pending quarterly review from the Public Utility Regulatory
Authority.
The interest paid to UI on the outstanding loans to UI's
after-tax cost of capital, a mix of debt and equity, is the
same rate the utility would earn on investments on the
distribution system equipment.
Although we operate a very innovative financing program, we
are not resting on our laurels. We are working with the Clean
Energy Finance and Investment Authority in Connecticut, which
is operating as a green bank to identify other sources of
capital that might be beneficial to our customers. Among these
opportunities is a commercial version of the Property Assessed
Clean Energy. We are looking toward developing a portfolio
approach to providing our customers with financing solutions
for energy efficiency projects.
UI has a strong tradition of offering successful energy
efficiency programs and the long-proven success of our small
business model has been replicated nationally and researched
internationallyl. If replicated, this program can also result
in job creation on a national scale.
Thank you for inviting me here today to testify.
[The prepared statement of Ms. Borrelli follows:]
Prepared Statement of Sheri Borrelli, Senior Business Development
Professional, The United Illuminating Company, Orange, CT
This testimony is being presented on behalf of The United
Illuminating Company (UI), an investor owned electric distribution
company in Connecticut. UI administers energy efficiency programs
funded by a 3 mil per kilowatt hour charge that is referred to as the
Connecticut Energy Efficiency Fund. The program being discussed is the
Small Business Energy Advantage Program offered to customers since the
year 2000. This program has been designed to provide cost effective,
turn key energy services to various types of small businesses. The
program features a network of vendors contracted by UI that provide
energy efficiency proposals and services to the customers. These
contractors provide a no obligation energy evaluation identifying the
potential energy saving retrofit measures, the available incentives and
various financing options. These proposals will include incentive
dollars from the Efficiency Fund for a portion of the cost of the
installation as determined by the energy savings achieved. The
objective is to offer the customer a proposal where there is no or
little out of pocket expense and create a ``positive cash flow''
scenario, which results in lowering their electric bill.
Mr. Chairman, Senator Murkowski and Members of the Committee, thank
you for the opportunity to appear before you today to discuss financing
energy efficient building retrofits. My name is Sheri Borrelli, and I
represent The United Illuminating Company. United Illuminating (UI) is
an investor owned electric distribution company serving approximately
300,000 customers throughout seventeen (17) towns and cities in
southern Connecticut. UI also administers energy efficiency programs
funded by a 3 mil per kilowatt hour charge that is referred to as the
Connecticut Energy Efficiency Fund. The Energy Efficiency Fund was
created in 1998 with the purpose of helping small and large businesses,
homeowners and renters to promote, encourage, and facilitate the
adoption of energy efficient technologies and behaviors. The programs
are designed to help customers manage their energy usage and cost.
These energy efficiency programs offered through the Energy Efficiency
Fund play a vital economic role for Connecticut.
I am here today to familiarize you with one of the programs we
operate as part of our role of program administrator for the efficiency
programs, the Small Business Energy Advantage program. Since its
inception in 2000, this program has been designed to provide cost
effective, turn key energy services to the various types of small
businesses within UI's service territory. Some examples of qualifying
small business would be ``various mom and pop'' stores, houses of
worship, retail spaces, convenience stores, gas stations, restaurants,
apartment building common areas and non-profit organizations.
Typically, these businesses will have an average monthly electric
utility bill from $150.00 up to $25,000.00 if they are a small
manufacturing company. The program features a network of vendors
contracted by UI that provide turn key energy efficiency proposals and
services to the customers. These contractors provide a no obligation
energy evaluation identifying the potential energy saving retrofit
measures, the available incentives and various financing options. These
proposals will include incentive dollars from the Efficiency Fund for a
portion of the cost of the installation as determined by the energy
savings achieved. The more comprehensive a project, the higher the
incentive, for example a lighting only project incentive may be
approximately thirty (30%) and for a comprehensive lighting,
refrigeration and Heating Ventilation and Air Conditioning (HVAC)
project incentives may be forty (40%) to fifty (50%). In most cases,
these comprehensive projects max out at the fifty (50%) incentive level
for multiple technologies. Zero (0%) financing with on bill repayment
is available to all qualified customers.
The objective is to offer the customer a proposal where there is no
or little out of pocket expense and create a ``positive cash flow''
scenario, which results in lowering their electric bill almost, if not,
immediately and the energy savings achieved each month offsets the
payment. Another benefit is that once the loan is paid off (usually in
3 or 4 years), the customer's bill will be less reflecting the
efficiency upgrades that were installed. The minimum loan amount
offered to the customer is $500, and the maximum loan is $100,000.
Another appealing feature of the Small Business Energy Advantage
Program is the ability to offer a loan term up to forty eight (48)
months. (an example of a recent project comparing pre and post
installation consumption is included as part of this testimony).
Although the program itself is a critical delivery mechanism, the
innovative part of the program is the financing with the convenience of
on-bill repayment. The loans to the customer are interest free (0%).
Interest free loans are possible since the interest expense of 6.3% is
bought down by the Efficiency Fund. Repayment of the loans is made as
part of the customer's electric bill. The loan qualification is a good
utility bill repayment history for the most recent six months. The
loans are fully transferrable and assumable. This particular feature is
noteworthy especially since eighty (80%) of our customers enrolled in
this program are tenants.
The most unique feature about the loan program is the source of the
capital. The utility, UI, provides the funds that are loaned to the
customer. The Efficiency Fund is used as a loan loss reserve fund,
allowing the utility to recover any losses from defaulted loans pending
quarterly review by Connecticut's Public Utilities Regulatory Authority
(PURA).
The interest paid to the utility on the outstanding loans is UI's
after tax cost of capital (a mix of debt and equity) the same rate the
utility would earn on investments on distribution system equipment. By
making investments in energy efficiency appear similar to traditional
utility investments, the utility is encouraged to invest in energy
efficiency.
Although we operate a very innovative financing program, available
to our Municipal customers as well, we are not resting on our laurels.
We are working with the Clean Energy Finance and Investment Authority
in Connecticut, an innovative ``Green Bank'' to identify other sources
of capital that might be beneficial to customers. Among those
opportunities is a commercial version of Property Assessed Clean Energy
(PACE). The PACE model may prove to be beneficial in certain
circumstances. We are looking toward developing a portfolio approach to
providing customers with financing solutions for energy efficiency
projects.
UI has a strong tradition of offering energy efficiency programs,
and the long term proven success of our Small Business Model has been
replicated nationally and researched internationally, and our vendor
network, if replicated could result in job creation on a national
scale.
The impact of financing for energy efficiency for small businesses
can be shown through these statistics, approximately ninety-four (94%)
of our customers qualify for the financing, and of this percentage,
fifty (50%) decide to participate. In contrast, for those who do not
qualify for the financing less than twenty (20%) participate. With the
combination of incentives and 0% financing we have been able to empower
the small business community to take the initiative to move to energy
efficiency and in doing so we are able to utilize utility funds for the
benefit of both the customers and the utility.
Thank you for inviting me to testify today. I would be happy to
answer any questions you may have.
The Chairman. Thank you very much.
Ms. Leeds.
STATEMENT OF SUSAN LEEDS, CHIEF EXECUTIVE OFFICER, NEW YORK
CITY ENERGY EFFICIENCY CORPORATION, NEW YORK, NY
Ms. Leeds. Thank you for inviting me here today.
The New York City Energy Efficiency Corporation's mission
is to help New York City achieve its energy and climate action
goals by catalyzing an energy efficiency retrofit financing
market for private building owners. We focus on financing
commercial and multi-family retrofits in buildings of over
50,000 square feet.
Energy efficiency retrofits require up-front capital
investment and the payback happens over time. Although up-front
costs and lack of financing are often cited as barriers, I must
emphasize that the availability of financing is only one
component of what is necessary to ensure retrofit growth.
Demand is also critically necessary, as is information on
building energy use and retrofit performance.
Barriers to energy efficiency finance differ by building
segment, but it is generally true that there must be a credible
source of repayment. The flow of financing for commercial
retrofit projects is hampered by the absence of collateral with
significant value in the event of default and by borrowers who
are not by their nature creditworthy entities with strong
balance sheets. High transaction costs, limited performance
data, and preexisting liens on real property are complicating
factors.
What is NYCEEC's strategy to address this challenge? We are
a nonprofit public-private partnership. We are an example of
the type of specialized organization that is necessary to
develop effective energy efficiency financing programs, which
we believe involves managing both energy efficiency technical
risk and real estate finance risk and capturing data on the
financial value of energy efficiency investments.
We are partnering with private financial institutions to
leverage our core capital of approximately $40 million,
primarily from Federal stimulus funds, for greatest impact. We
are piloting new financial products that we believe are
replicable at scale. This work is generally not being
undertaken by the private financial sector, primarily due to
high transactions costs, unproven revenue streams, and a
currently conservative credit culture.
We are using two main strategies. We are providing credit
enhancement in the form of loan loss reserves to mitigate risks
that lenders currently won't accept; and we are also offering
loans where capital for retrofits is scarce, high cost, or
unavailable.
We are currently working with 3 specific financing
products. Energy services agreements have historically been
used by the ESCO industry, along with performance contracting,
to finance retrofits. We are applying a modification of this
approach to the commercial real estate sector, which we call
``ESA Version 2.0,'' in which a third party project sponsor
invests in the energy savings potential in a building directly,
although they do not own that building. This is a sophisticated
approach that makes the most sense for capital-intensive
projects.
Unsecured lending for retrofits is not new and is primarily
applicable to high credit quality borrowers, such as the MUSH
sector. We believe this is an important tool, but not a
solution for scaling retrofit financing for commercial
buildings.
Energy efficient mortgages allow building owners to borrow
specifically for building retrofits on top of a conventional
loan. This may be achieved by increasing the base loan amount
at the time of refinancing or by providing a supplemental loan
in conjunction with the first mortgage.
Conventional mortgage lenders are not providing this form
of finance today. By providing credit enhancement to mitigate
savings risk and by bringing energy efficiency technical
expertise to lenders, we are helping lenders systematically
incorporate retrofits into the mortgage lending process. We
believe this is a highly scalable solution.
Programmatic approaches that we are not currently deploying
but would like to in the future include PACE for commercial
buildings and on-bill financing programs implemented through
the regulated utilities.
What have we learned so far? We commenced operations 1 year
ago. We have closed transactions and are working on many more.
There is demand for the financing products that we support.
However, base demand for retrofit investment is an issue. This
means that more information and education is required to propel
building owners to act. Lenders generally require some form of
credit enhancement to finance most commercial energy efficiency
projects. Individual transactions costs are high. Thus it is
critically important to promote programmatic approaches.
The retrofit market is highly fragmented and no one
financing product will suit the needs of all owners and major
tenants. There is need for both modification of standard
financial products and for new and innovative approaches.
My observation is that most policy drivers for building
retrofits are happening at the municipal and State level. That
said, NYCEEC would not exist without Federal stimulus funding.
What can the Federal Government do to help? Consider
adjusting tax policy with the objective of driving demand for
commercial retrofits through tax incentives. Encourage the
GSE's to develop energy efficiency lending strategies. Expand
efforts to aggregate and provide public access to data on
retrofits and building energy performance. Finally, provide
continued financial support through Federal grant funding to
emerging programs that are demonstrating success.
Thank you.
[The prepared statement of Ms. Leeds follows:]
Prepared Statement of Susan Leeds, Chief Executive Officer, New York
City Energy Efficiency Corporation, New York, NY
Introduction Thank you for inviting me to testify on innovative
non-federal programs for financing energy efficient building retrofits.
My name is Susan Leeds, and I am the Chief Executive Officer of the
New York City Energy Efficiency Corporation. I have worked in energy
efficiency financing for the past four years in various capacities
including advocacy, consulting, financial transaction execution, and
business management. My prior professional experience spans capital
markets, municipal finance and financial guaranty insurance.
The New York City Energy Efficiency Corporation - we call ourselves
``NYCEEC'' - was created as an independent non-profit corporation by
New York City's Office of Long-term Planning and Sustainability. Our
mission is to help New York City achieve its energy and climate action
goals by catalyzing energy efficiency retrofit financing markets for
private building owners. We were created because our City leaders
believe that New York City residents can reap economic and
environmental benefits through greater investment in energy efficiency
in existing buildings, and that insufficient financing is a barrier to
such investment.
What is the potential for energy efficiency investment?
Retrofitting commercial buildings to make them more energy
efficient is widely acknowledged to have multiple benefits to building
owners, occupants and the community at large. Yet actual investment in
energy efficiency measures remains well below potential.
In March 2012, the Rockefeller Foundation and the Deutsche Bank
Group published a report, titled, ``United States Building Energy
Efficiency Retrofits, Market Sizing and Financing Models.''\1\ This
report provides a ``snapshot'' of the current investment potential in
building retrofits of $279 billion dollars or approximately 3 trillion
BTUs of annual energy savings, with $97 billion of this investment
potential residing in the commercial and institutional building
sectors. Studies vary in methodology, but in comparing these figures to
the U.S. energy efficiency potential study published by McKinsey in
2009, we find reasonable consistency.\2\
---------------------------------------------------------------------------
\1\ Note that this analysis is based on an assumption of 30% energy
savings in buildings built before 1980. Fulton, Mark and et al.
``United States Buiding Energy Efficiency Retrofits: Market Sizing and
Financing Models.'' The Rockefeller Foundation and Deutsche Bank
Climate Change Advisors, March 2012.
\2\ Granade, Hannah Choi and et al. ``Unlocking Energy Efficiency
in the U.S. Economy.'' McKinsey & Company, July 2009. http://
www.mckinsey.com/client_service/ electric_power_and_natural_gas/
latest_thinking/ unlocking_energy_efficiency_in_the_us_economy.
---------------------------------------------------------------------------
Figure 1.* What is the energy efficiency investment potential?\3\
---------------------------------------------------------------------------
* All figures and tables have been retained in committee files.
\3\ Fulton 7.
---------------------------------------------------------------------------
However, actual investment is significantly lower. According to
research published by Bloomberg New Energy Finance, approximately $18-
20 billion was invested in energy efficiency projects in the U.S. in
2010.\4\ An estimated $3.5 to 5.5 billion of this amount is direct
spending by homeowners, landlords, small business owners, real estate
companies and corporations. Approximately 25% (or $4.5-5 billion) was
funded through debt financing-primarily municipal debt associated with
energy performance contracting. Innovative financing approaches, which
comprise NYCEEC's core mission, accounted for only 3% of non-owner
equity funding sources.
---------------------------------------------------------------------------
\4\ Hesser, Theodore Gates. ``Is debt financing opening up for
energy efficiency?'' Energy Smart Technologies-Built Environment-
Research Noe. Bloomberg New Energy Finance, 25 April 2012.
---------------------------------------------------------------------------
Figure 2. What is the actual level of energy efficiency investment?
(2010)\5\
---------------------------------------------------------------------------
\5\ Hesser 2.
---------------------------------------------------------------------------
What is the role of financing?
Energy efficiency retrofits require upfront capital investment, and
the payback happens over time in the form of energy cost savings and
improved property values. The ``upfront cost'' factor and lack of
targeted financing options for building efficiency projects are
consistently cited as barriers to the growth of energy efficiency
retrofit markets.\6\
---------------------------------------------------------------------------
\6\ For the past six years, Johnson Controls has conducted an
annual, global Energy Efficiency Indicator survey that tracks the
energy priorities and investments by executives from the commercial,
industrial and institutional sectors. The survey results have
consistently cited limited capital availability as the most significant
barrier to businesses undertaking energy efficiency investments. In
2012, there were 1,139 respondents in the U.S. and Canada. There were
nearly 3,500 respondents worldwide in 2012. ``Energy Efficiency
Indicator Survey: U.S./Canada Results.'' Johnson Controls Institute for
Building Efficiency, 2012. .
---------------------------------------------------------------------------
In Johnson Controls' 2012 ``Energy Efficiency Indicator Survey,''
U.S. and Canadian executives cited a lack of funding as the most
significant barrier to undertaking energy efficiency investments (37%),
followed by insufficient payback/return on investment (21%). \7\
---------------------------------------------------------------------------
\7\ Johnson Controls Institute for Building Efficiency 2012.
---------------------------------------------------------------------------
As previously mentioned, in 2010, only 25% of the total U.S. energy
efficiency expenditure was financed via debt, and this was concentrated
among high credit quality institutions. In comparison, the $16 trillion
U.S. housing market is financed 60% via debt through mortgages. We
conclude that a paucity of financing is likely to prevent energy
efficiency investment from reaching its full potential.
That said, I must also emphasize that availability of financing
options is only one component of what is necessary to ensure increasing
throughput of retrofit activity across building sectors. Demand is also
critically necessary, which in my experience must be supported by local
policy drivers, a skilled workforce, including a robust energy audit
profession, information on building energy use and retrofit
performance, and effective service delivery business models for project
implementation.
Why is so little capital provided to this sector through financing
today?
Barriers to energy efficiency finance differ by building segment.
However, it is generally true that there must be a credible source of
repayment, either through a strong balance sheet or supported by assets
with collateral value. The flow of financing for commercial retrofit
projects is hampered by the absence of collateral with significant
value in the event of default (in contrast to mortgage or auto
lending), and by borrowers who are not creditworthy entities (these are
often limited liability entities in the commercial real estate sector).
Further, high transactions costs, limited performance data and pre-
existing liens on real property are additional complicating factors.
Split incentives, and in some regions, low energy prices reduce the
economic feasibility of projects.
The chart** below enumerates various barriers relevant to financing
energy efficiency projects in large buildings:
---------------------------------------------------------------------------
** All charts have been retained in committee files.
---------------------------------------------------------------------------
What is the strategy of New York City Energy Efficiency
Corporation?
NYCEEC is structured as a non-profit, public-private partnership,
as reflected in our Board structure. We are an example of the type of
specialized organization that is necessary to undertake the development
of effective energy efficiency financing programs, which we believe
involves managing both energy efficiency technical risk and real estate
finance risk, and balancing policy objectives with the need to prove
and capture data on demonstrable financial value of energy efficiency
investments.
Figure 3. What is NYCEEC?
Our goal is to partner with private financial institutions to
leverage our core capital for greatest impact. While there are many
government sponsored programs that promote energy efficiency, NYCEEC is
novel because we are operating as a non-profit specialized financing
entity-with an ethos that balances risk management with customer-
service.
We are filling gaps in the availability of capital, and piloting
partnerships and financial products that we believe are replicable,
eventually at scale. This work is generally not being undertaken by the
private finance sector (with the exception of certain CDFIs\8\),
primarily due to high transactions costs, unproven revenue streams and
a current reticence on the part of many financial institutions to
participate in innovative financing structures (within means of
mitigating credit risk). We are generating a return on our capital,
albeit calibrated to our non-profit, mission purpose. We seek to
maximize energy efficiency investment within our community by
attracting commercial lenders to the sector.
---------------------------------------------------------------------------
\8\ Community Development Financial Institutions
---------------------------------------------------------------------------
NYCEEC is using two main strategies to improve the availability of
financing for building retrofits. We are providing credit enhancement
to mitigate risks that commercial and mortgage lenders are currently
unwilling to accept, and incentivize lenders to attribute value to
energy efficiency investments. We are also offering loans (often in
partnership with commercial lenders) to innovative applications of
energy services agreements and unsecured or partially secured
transactions, in cases where capital for technically sound energy
efficiency investments is scarce, high-cost or unavailable.
Figure 4. NYCEEC's strategy
What are the innovative financing approaches?
I am going to briefly discuss five financing approaches that have
merit for supporting the development of retrofit markets. We are
working with three of these products at present: energy services
agreements, energy efficiency mortgages, and unsecured lending. This
reflects what is feasible today in New York City (without additional
regulatory or legislative action) and what we believe has the greatest
applicability to the building stock we are targeting: primarily
multifamily, commercial and to a lesser extent, institutional buildings
in NYC.
First, I want to share my observation that the energy efficiency
retrofit market is highly fragmented. There is no one predominant or
obvious approach to financing that will suit the needs of all owners
and major tenants. Market segmentation is absolutely necessary and not
well-defined at this moment.
There is need and opportunity for both modifications of standard
financial products that can responsibly accommodate the retrofit
process, and for new and innovative approaches that are specifically
designed to facilitate investment in energy efficiency retrofits. There
is important transactional activity underway representing initial
progress in both of these categories of activity.
Energy Services Agreements--have historically been used by the ESCO
industry, along with performance contracting, to finance retrofits. The
innovation we are interested in developing is applying a modification
of this approach to the commercial real estate sector, which we call
``ESA Version 2.0''. In the ESA 2.0, a third party project sponsor
funds the cost of improvements. These companies (and their capital
sources) effectively invest in the energy savings potential in
buildings directly, although they do not own the buildings. To varying
degrees, they may assume the risk that the energy efficiency retrofit
project will perform as expected and benefit from some or all of the
``savings upside''. Often, ESA payments from building owners are
considered to be operating expenses, as opposed to debt payments per
se. This is a sophisticated approach that, generally speaking, seems to
make the most sense for capital intensive projects, e.g., chillers,
boilers, electrical and control systems, automated energy management
systems, certain envelope measures and co-generation.
Unsecured lending--for energy efficiency projects and equipment is
not new, and is primarily applicable to high credit quality borrowers
including MUSH sector entities and high-quality corporates. This
category includes commercial loans that are either unsecured or are
flexible with respect to collateral, accepting equipment or collateral
arrangements other than first or second liens on real property, and
equipment finance including leasing arrangements. We believe that this
is an important tool in our toolbox, but not a solution for scaling
retrofit financing across the full range of commercial buildings.
Energy efficient mortgages--allow building owners to add borrowings
specifically for building retrofits on top of a conventional mortgage.
This may be achieved by increasing the base loan amount at the time of
a refinancing to accommodate the cost of specific energy efficiency
improvements, or by providing a supplemental first or a second lien
loan for this purpose in conjunction with the first mortgage. Bloomberg
New Energy Finance espouses the high potential of energy efficient
mortgages, `` . . . .the potential market for energy efficiency debt
derived through energy efficient mortgages is greater than any other
financing mechanisms . . . , and could theoretically total up to $270bn
in outstanding energy efficiency debt on top of the $13.5tn US mortgage
market.\9\
---------------------------------------------------------------------------
\9\ Hesser 7.
---------------------------------------------------------------------------
Few if any conventional mortgage lenders are providing this form of
finance today. By providing credit enhancement to mitigate the risk of
that retrofit measures won't achieve projected cost savings, and by
bringing technical expertise with respect to best practices for energy
efficiency implementation to lenders, NYCEEC's goal is to help lenders
systematically incorporate the value of energy efficiency-related
operating savings (and additional value attributes) into the mortgage
lending process. This is a potentially highly scalable solution in that
it is based on a modification to standard lending practices that are
commonly used to finance buildings across various building sectors.
Furthermore, we believe that this approach has good applicability in
low- to moderate-income communities.
Programmatic approaches that we are not currently deploying (but
may in the future) include PACE commercial and on-bill financing
programs through the regulated utilities.
Property assessed clean energy (PACE)--programs employ the ability
of local governments to assess properties for improvements that have
public benefit. Given appropriate state-enabling legislation, this
assessment capability can provide a voluntary mechanism that permits
property owners to finance clean energy improvements, including
efficiency improvements, on individual properties. The assessment is
attached to the property, not the owner, and is paid back through the
property tax system. The assessment has the same status as property
taxes, and therefore is empowered to attach a lien to the property in
the event of nonpayment that is senior to any existing mortgage debt.
Assuming adequate demand for retrofit investment, the biggest issue in
relation to uptake of this model is likely the requirement for lender
acknowledgement or consent. PACE commercial programs all require some
form of it, and this creates a barrier that many owners may not care to
deal with, and some mortgage lenders may reject.
On-utility bill financing--takes advantage of the important
relationship that a utility already has with its building owner
customers, and utilities often seek to increase penetration of existing
energy efficiency programs by offering to finance measures on the
utility bill. In essence, the upfront cost of efficiency upgrades is
financed through a repayment charge on the monthly utility bill. In
tariffed programs, the charge is tied to the meter, so the tariff stays
with the property when the customer moves; in loan programs, the
repayment is tied to the customer, so must be repaid at property sale.
According to Bloomberg New Energy Finance, ``scaling on-bill
lending.will require programmes to break away from rate-payer coffers,
and tap into outside credit from the capital markets.''\10\ Our
research concludes that most existing on-bill programs are active
primarily in the single-family residential building markets, although
both New York State and California (and possibly others) are piloting
effort to promote this financing mechanism for commercial properties.
---------------------------------------------------------------------------
\10\ Hesser 11.
---------------------------------------------------------------------------
Figure 5. Innovative financing approaches for commercial retrofits
in New York City (NYCEEC's assessment)
Figure 6. Bloomberg New Energy Finance's assessment of innovative
financing approaches\11\
---------------------------------------------------------------------------
\11\ Hesser 3.
---------------------------------------------------------------------------
Figure 7. Bloomberg New Energy Finance's view of the highest
potential financing solutions\12\
---------------------------------------------------------------------------
\12\ Hesser 4.
---------------------------------------------------------------------------
What is our experience so far?
NYCEEC commenced operations one year ago. We have closed
transactions and are in-discussions on many more. Highlights of our
learning to date include:
We are seeing demand for the financing products we are
offering across a range of building segments including
commercial, multifamily, retail, hospitality and health care.
However, base demand for retrofit investments is an issue -
this means that more information and education is required to
propel building owners to act. We are also anticipating
increased demand as the full effect of local regulation -
primarily as the local laws and regulations implemented as part
of New York City's Greener, Greater Buildings Plan take effect.
Almost all lenders require some form of credit enhancement
to finance energy efficiency projects for all but the most
credit-worthy borrowers.
Individual transactions costs are high, and thus is it
critically important to promote programmatic approaches.
Few financial institutions are willing to invest in
developing and integrating the engineering expertise with the
specialized finance expertise that is required to implement
effective retrofit financing programs in the commercial sector.
To take this step, institutions must perceive strong local
demand drivers.
No one financing product is likely to dominate, particularly
in the commercial sector. What federal support is appropriate
and needed to ensure success?
My observation is that most of the policy drivers for building
retrofits are happening at the municipal and state level. Retrofit
markets are primarily local-and to an extent regional-markets, and need
to be supported at these levels. That said, NYCEEC could simply not
exist without Federal stimulus funding. What can the federal government
do to help promote the development of energy efficiency financing
markets?
Provide continued financial support through federal grant
funding to emerging programs such as NYCEEC that are
demonstrating success;
Promulgate learning and promote the sharing of experience
and best practices among local and regional energy efficiency
financing programs;
Consider adjusting tax policy (by revising 179D so that it
works better for existing buildings; by providing accelerated
depreciation for retrofit capital equipment; by allowing
efficiency improvements to qualify as real estate under REIT
regulations; by including tenant-driven as well as owner-driven
approaches) with the objective of driving demand for retrofits
through tax incentives, and improving the balance of tax
subsidy directed at renewables with that directed at energy
efficiency, as such subsidy is currently more weighted towards
renewables although there is a strong argument that energy
efficiency is more cost effective;
Encourage the GSE's to develop energy efficiency lending
strategies.
Continue and expand efforts to aggregate and provide public
access to data on building energy performance, energy
efficiency retrofit activity and performance, tenant energy
consumption, and municipal initiatives on benchmarking and
disclosure.
An area for future consideration may be developing pathways for the
integration between building retrofit and energy markets by encouraging
or incentivizing utilities to purchase aggregated energy efficiency in
the form of ``negawatts''.
The Chairman. Thank you very much.
Mr. DeBoer.
STATEMENT OF JEFFREY D. DEBOER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, THE REAL ESTATE ROUNDTABLE
Mr. DEBoer. Good morning, Mr. Chairman, Senators. Thank you
for the opportunity to testify here this morning. As the last
witness on the panel, I know I bear a heavy burden to be brief.
I will try to be brief and direct you to see details in my
written statement.
Let me dive right in with a few facts that I think will
underscore what Senator Franken said about this retrofit
business being a win-win in terms of saving energy, saving
money, and creating jobs.
There are over 5 million commercial and industrial
buildings in America. 85 percent of these buildings that exist
today are going to be standing in America in 2030. Commercial
buildings today account for about 20 percent of the Nation's
energy consumption. The combined average annual energy cost for
U.S. commercial buildings and industrial facilities exceeds
$200 billion. We estimate that you can save $20 billion
annually by simply improving energy efficiency in these
buildings by a mere 10 percent.
The basic tools--and Senator Franken referenced this. The
basic tools for retrofitting buildings, like efficient
furnaces, water heaters, spray foam insulators, and the like,
are manufactured here in America and obviously are American
jobs.
One other point, and it's been mentioned here, but I would
underscore: It's cheaper, obviously, to save energy than it is
to produce energy, and there are studies out there that show
that energy produced by offshore wind is about 8 times as
expensive as the equivalent amount of energy saved through
energy efficiency measures. Similar data exist for nuclear
sources and solar sources.
So the bottom line here is that government financing
programs and the like get more bang for the buck by encouraging
energy efficiency as opposed to creation of other energy, which
obviously needs to be done as well.
While there is no silver bullet to help these retrofits
from a national point of view, I do want to draw your attention
to a few items that could be done here in Congress, each of
which has bipartisan support here in the Senate. First of all,
Senator Bingaman, I know you and other members of the
committee, Senator Snowe and others, are looking at section
179D, which would improve the existing tax deduction for making
buildings more energy efficient. We applaud you for that, hope
that it can be enacted some time soon.
The DOE loan guarantee program which was put in place in
2005, but to date has focused on high-risk and expensive
programs like solar, wind energy. There is a bill, S. 1000 that
Senators Shaheen and Portman have, which would allow DOE to get
into less risky, less expensive building retrofit loan
guarantees, capped at $10 million. We think that would go a
long way.
Senator Bennet and Isakson have a bill which would
encourage greater information sharing and the use of appraisals
to determine the value of energy improvements in buildings and
we think that is something that should be done.
There is also another bill that is here in Congress that
Senator Bennet is developing, that would better align
commercial owners, landlords if you will, with the tenants and
their energy usage to make sure that there's a good exchange of
information here. That would go a long way to help building
owners manage their properties more energy efficiently.
Those steps would help directly on retrofitting. I would
say, however, that to have successful retrofits at any level
you have to have a more robust commercial real estate market in
general. The commercial real estate market nationwide continues
to have some difficulties in terms of overall macro financing.
We would encourage you to take a look at a bill that Senator
Menendez and Senator Enzi have that would encourage greater
foreign investment in U.S. equity markets. We think that some
of that equity that will come in, that will allow buildings to
transition out of their sort of purgatory state today back into
the marketplace, some of that capital will in fact be used to
help retrofit buildings.
Finally in this area, Senators Leahy and Grassley have a
bill to extend this EB-5 program, that allows foreign capital
to come in to create development so long as jobs are created in
return. That program expires in September. Senators Leahy and
Grassley want to extend that. We think it would be a good
positive thing to do.
So I will end by saying these are some actions that could
be done nationally that would help support some of these State
programs and help the real estate markets and financing in
general.
So thank you again for the opportunity, Mr. Chairman.
[The prepared statement of Mr. DeBoer follows:]
Prepared Statement of Jeffrey D. DeBoer, President and CEO, The Real
Estate Roundtable
(i) introduction
Chairman Bingaman, Ranking Member Murkowski, and Members of the
Senate Energy and Natural Resources Committee, thank you for the
opportunity to testify at this hearing on ``Financing Efficient
Buildings.''
I am Jeffrey D. DeBoer, President and CEO of The Real Estate
Roundtable (www.rer.org). The Roundtable represents the leadership of
the nation's top privately owned and publicly held real estate
ownership, development, lending and management firms, as well as the
elected leaders of the major national real estate industry trade
associations. Collectively, Roundtable members hold portfolios
containing over 5 billion square feet of developed property valued at
over $1 trillion; over 1.5 million apartment units; and in excess of
1.3 million hotel rooms. Participating Roundtable trade associations
represent more than 1.5 million people involved in virtually every
aspect of the real estate business.
Our nation faces significant economic, employment, and energy
challenges. One way to address these challenges is by upgrading the
nation's commercial building infrastructure through energy efficiency
``retrofits.'' These projects will get Americans back to work with jobs
that will stay in the United States, save businesses billions of
dollars a year in utility bills, and help secure our country's energy
future. The following ``fast facts''\1\ from the Environmental
Protection Agency, the Energy Information Administration, and other
sources confirm that the Committee is correct to consider policies that
will leverage private sector financing to retrofit our existing
commercial building stock--and spur job growth in the process:
---------------------------------------------------------------------------
\1\ http://www.energystar.gov/ia/business/ challenge/learn_more/
FastFacts.pdf; http://yosemite.epa.gov/opa/admpress.nsf/
8b770facf5edf6f185257359003fb69e/ 1603327c9023eb8c852579dd005e3385.
There are over 5 million commercial buildings and industrial
facilities in the U.S.
As much as 85% of commercial buildings that exist today will
still be standing in 2030.\2\
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\2\ PlaNYC, ``Greater Greener Buildings Plan''; http://www.nyc.gov/
html/gbee/dpwnloads/pdf/ greener_greater_buildings_plan.pdf
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Commercial buildings account for about 20% of the nation's
energy consumption, and as much as 80% of energy consumption in
urban areas.
The combined average annual energy costs for U.S. commercial
buildings and industrial facilities is $202.3 billion.
About $20 billion can be saved if the energy efficiency of
commercial buildings and industrial facilities improves by 10%.
The basic tools to retrofit buildings - like efficient
furnaces, water heaters, and spray foam insulation-are
manufactured here in the United States and not in China,
Germany, or elsewhere overseas.\3\
---------------------------------------------------------------------------
\3\ http://green.blogs.nytimes.com/2010 /03/12/made-in-the-u-s-a-
efficiency-materials/.
---------------------------------------------------------------------------
Saving energy is cheaper than producing energy. Our country
must pursue an ``all of the above'' energy policy, but it is
important to recognize that efficiency is the lowest-cost
resource available to move our nation towards energy
independence. Simply put, the cost of a kilowatt hour of energy
saved is cheaper than the cost of an equivalent kilowatt hour
of energy produced:
COSTS OF SAVING ENERGY vs. PRODUCING ENERGY
------------------------------------------------------------------------
Technology Costs (per kilowatt hour)
------------------------------------------------------------------------
Energy Efficiency 2-3 cents\4\
------------------------------------------------------------------------
Wind 9 cents\5\
------------------------------------------------------------------------
Geothermal 10 cents
------------------------------------------------------------------------
Advanced Coal 11 cents
------------------------------------------------------------------------
Advanced Nuclear 11 cents
------------------------------------------------------------------------
Solar PV 21 cents
------------------------------------------------------------------------
Offshore Wind 24 cents
------------------------------------------------------------------------
\4\ Costs of saved energy (``CSE'') per kilowatt hour (``kWh'') for
energy efficiency programs range from 2 cents to 3 cents per kWh. See
American Council for an Energy Efficient Economy, 11Saving Energy Cost-
Effectively: A National Review of the Cost of Energy Saved Through
Utility-Sector Energy Efficiency Programs'' (Sept. 1, 2009), available
at http://www.aceee.org/research-report/u092.
\5\ Costs for all power generation sources in table provided by U.S.
Energy Information Administration, ``Levelized Cost of New Generation
Resources,'' Annual Energy Outlook 2011, available at.http://
www.eia.gov/oiaf/ aeo/electricity_generation.html (provides ``Total
System Levelized Cost'' for various ``Plant Type(s)'' in dollars per
megawatt hour (``mWh'')). For purposes of table conversion: mWh/1000 =
kWh.
All of these technologies have their role in a comprehensive
national energy policy, and will keep America globally competitive in
the race for innovation, create jobs, and reduce dependence on foreign
oil. But in allocating scare government resources, policy makers should
consider that financing programs like tax incentives and loan
guarantees get more ``bang for the buck'' when they are geared to
encourage energy efficiency measures, as opposed to assisting new
energy production through clean fossil fuel or renewable energy
technologies.
According to a report\6\ released this past Monday by the
Building Owners and Managers Association (BOMA) International,
the expenditures that sustain office building operations-
management, maintenance, repairs, building services and
utilities-generate significant, continuous and growing
expenditures that support local businesses, create job demand,
and contribute significantly to U.S. gross domestic product
(GDP):
---------------------------------------------------------------------------
\6\ ``Where America Goes to Work: The Contribution of Office
Building Operations to the Economy'' (2012), available at http://
www.boma.org/Resources/news/ pressroom/Pages/pr062412.aspx.
--For each dollar of office building expenditures, the U.S. economy
gains $2.57. And for every one of those dollars, nearly 20
jobs not related to the building itself are supported.
--$79.7 billion in office building operating expenditures
contributed $205.1 billion to GDP in 2011 - equivalent to
the State of California's annual budget.
--As a result of the $79.7 billion expenditures for office
operations, 1.6 million indirect jobs were created across
all sectors of the economy, about the same number employed
by McDonald's worldwide. This is in addition to the
estimated 2.2 million jobs directly related to the on-site
management and operations of buildings.
The Real Estate Roundtable's members are at the vanguard of
innovation in making our built environment more energy efficient. For
example, 14 companies represented through The Roundtable are
``partners'' and ``allies'' in the U.S. Department of Energy's Better
Buildings Challenge\7\ and have agreed to showcase projects that lead
the way for successful retrofits throughout the real estate sector. Our
members routinely distinguish their buildings as ``top of class''
performers by receiving the ``ENERGY STAR'' label and also garner
``Partner of the Year'' recognition from the U.S. Environmental
Protection Agency.\8\ Among our many members who have demonstrated
sustained commitments to energy efficiency are Anthony E. Malkin, the
Chair of our Sustainability Policy Advisory Committee and the President
of Malkin Holdings, who is responsible for the groundbreaking retrofit
of the Empire State Building\9\; and T. Patrick Duncan, the President
and CEO of USAA Real Estate Company, which recently collected its
eighth award from EPA for energy efficiency and has been ranked fifth
in the Americas in the Global Real Estate Sustainability Benchmark.\10\
The Roundtable thus has considerable experience with retrofit projects
and how to finance them, and we appreciate this opportunity to share
our perspective.
---------------------------------------------------------------------------
\7\ See http://www4.eere.energy.gov/challenge/; http://www.rer.org/
2011/ PUBLIC-PRIVATE_INVESTMENTS_IN_ENERGY_EFFICIENCY_-
_December_2,_2011_Roundtable_Weekly.aspx
?terms=better+buildings+challenge.
\8\ See http://www.energystar.gov/
index.cfm?fuseaction=labeled_buildings.locator; http://
www.energystar.gov/
index.cfm?fuseaction=pt_awards.showawardlist&year=2012.
\9\ See http://www.esbnyc.com/
sustainability_energy_efficiency.asp; http://apps1.eere.energy.gov/
news/news_detail.cfm/ news_id=12387.
\10\ See http://www.bizjournals.com/sanantonio/ news/2012/03/06/
epa-to-honor-usaa-real-estate-once.html.
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(II) SUMMARY--SIX STEPS FOR TO SPUR FINANCING FOR EFFICIENT BUILDINGS.
There is no single ``silver bullet'' to encourage retrofit
financing, much less a simple solution to inject more equity capital
and encourage more debt financing in the real estate sector. But the
Senate can and should take immediate action in this arena. The
Roundtable suggests six steps Congress can take right now to further
the goals of greater energy efficiency in commercial buildings,
invigorate real estate activity in markets across the country-and most
importantly, boost the optimism of American businesses and workers by
making a serious dent in unemployment figures that have been too high,
for too long.
The Roundtable's first ``four steps'' directly address policies to
spur more activity in energy efficiency financing. Our last two
suggestions will have major, positive impacts to improve the economic
condition of U.S. real estate markets broadly, and will have a ripple
effect to generate more capital to invest in building retrofits.
(1) Extend and Reform the 179D Tax Deduction for Energy
Efficient Commercial Buildings--Congress should extend and
reform the tax deduction for energy efficient commercial
buildings at Section 179D of the Internal Revenue Code.
Chairman Jeff Bingaman (D-NM) and Senator Olympia Snowe (R-ME)
have carefully studied this incentive for months, and have
developed a thoughtful proposal to improve the deduction's use
to mobilize more existing building retrofits. When they
introduce their bill to extend and modify the 179D deduction,
it should be enacted swiftly.
(2) Authorize DOE Retrofit Loan Guarantees--Congress should
enact the loan guarantee provisions in S. 1000, the ``Energy
Savings and Industrial Competitiveness Act'' co-sponsored by
Senators Jeanne Shaheen (D-NH) and Rob Portman (R-OH).
President Bush signed the Department of Energy's loan guarantee
program into law in 2005, but to date it has focused on high
risk (and expensive) solar, wind, and nuclear projects. S. 1000
would specifically authorize DOE loan guarantees for less risky
and less expensive building retrofits, with modest federal
credit support projected to leverage far greater multiples of
private sector funding.
(3) Pass Legislation to Encourage Real Estate Appraisals that
Value Energy Efficiency--The Roundtable's members report that
real estate owners, lenders, and appraisers need to be better
coordinated when valuing properties to account for energy
efficiency attributes. S. 1737, the ``Sensible Accounting to
Value Energy Act,'' is sponsored by Senators Michael Bennet (D-
CO) and Johnny Isakson (R-GA). This bill includes important
provisions to encourage better information sharing among real
estate professionals so that energy efficiency is more
consistently, accurately, and fairly valued when appraising
commercial and other real estate.
(4) Pass Legislation to Align Commercial Landlords and
Tenants on the Goals of Energy Efficiency--A building can be
retrofitted with the latest efficiency technologies but still
not perform as designed, or result in optimal energy savings as
much as those technologies would otherwise allow. This is
because leased spaces may be ``over built'' at the time of new
fit-outs to provide more energy capacity than a tenant needs,
or because building occupants may have behaviors that
unnecessarily waste energy. Senator Bennet is working on
important legislation to encourage non-regulatory standards--
with no budgetary impact - to get commercial landlords and
tenants on the same page when it comes to energy efficiency.
Upon its introduction, the bill should be studied by the
Committee and enacted as soon as possible.
(5) Encourage More Foreign Investment in U.S. Real Estate-
FIRPTA Reform and EB-5 Authorization--Foreign equity capital is
a significant and largely untapped source to help increase
depressed property values in domestic real estate. Injecting
greater foreign investment into U.S. real estate markets may be
channeled to encourage retrofits, and help overcome the barrier
of up-front capital costs that remains the biggest impediment
to energy efficiency projects. Congress should thus pass S.
1616, the ``Real Estate Investment and Jobs Act'' introduced by
Senators Robert Menendez (D-N.J.) and Mike Enzi (R-WY) which
has also garnered the support of 25 co-sponsors. S. 1616 would
reform the Foreign Investment in Real Property Tax Act
(``FIRPTA'') and correct the discriminatory treatment of
foreign investment in U.S. real property that presently exists
under the tax code. In a similar vein, Congress should pass S.
3245, introduced by Senators Patrick Leahy (D-VT) and Charles
Grassley (R-IA), to permanently authorize the EB-5 immigrant-
investor regional center program. EB-5 grants lawful permanent
residence in the U.S. to foreign nationals who make investments
of $1 million (or $500,000 in high unemployment areas) in
domestic real estate and other business projects. These
investments must be demonstrated to create jobs in the U.S.
Permanent EB-5 authorization will allow the 225 regional
centers across the country that manage this program to
coordinate with the real estate community and efficiency
advocates so that investment funds can be used to help finance
retrofits.
(6) Conduct Oversight to Curb the Recent Rise in GSA
``Holdover'' Leases--In light of the recent troubles and
changes in leadership at the General Services Administration
(GSA), Roundtable members are reporting a trend in federal
lease ``holdovers'' whereby the GSA is simply extending leases
on a month-to-month basis after they expire. Congress should
conduct oversight to ensure that GSA leasing practices operate
efficiently so buildings with departing federal government
tenants can be re-positioned in a manner that allows for long-
term capital improvements like energy upgrades.
Each of these six steps for immediate congressional action is
discussed in more detail below. However, a properly functioning real
estate financing market is a prerequisite to a functioning retrofit
financing market. I appreciate this opportunity to provide the
Committee with a short overview on the current economic state of
affairs in the commercial real estate sector, which will add context
for the immediate topic at hand regarding policies to finance efficient
buildings.
III. GENERAL ECONOMIC BACKGROUND ON REAL ESTATE CONDITIONS\11\
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\11\ More detail on the current economic conditions of the U.S.
real estate market is described in The Real Estate Roundtable's 2012
Annual Report, ``Managing Risks & Opportunities'' (published June
2012), available at http://www.rer.org/Advocacy/
2012_Annual_Report.aspx.
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Since the start of the Great Recession in 2009, property values
have declined to the extent that up to half of all commercial mortgages
are estimated to be ``underwater,'' with outstanding mortgage debt
exceeding asset values. Meanwhile, nearly $1.4 trillion in commercial
real estate loans that were originated before the recession will come
due in the next three years. As this outstanding debt matures, property
owners will have difficulty refinancing in the current tight credit
markets particularly in light of decreased property values, with the
specter of default facing many properties.
There is anxiety in the real estate and lending sectors as to where
all of the debt financing and equity capital will come from to retire
this maturing debt. (On-going Eurozone turmoil and its effect on
skittish markets here at home aggravates the situation.) Moreover,
simply satisfying the outstanding trillion-plus loans would only bring
real estate markets to a relative place of normalcy and avoid waves of
foreclosures. Vastly greater sums of additional capital are needed to
grow the economy and create jobs. There is consensus that a tremendous
amount of potential equity investment capital is in the hands of
foreign investors. These funds must be brought into U.S. markets now,
to staunch the threat of current loan defaults and then help sustain a
more accelerated pace of economic growth. Infusions of equity and
credit are necessary to re-set the real estate, lending, and capital
markets so transactions can move forward to refinance struggling
assets.
Political uncertainty is compounding the commercial real estate
sector's wary economic outlook. The business community is concerned
that the paralysis on Capitol Hill will continue for the rest of this
year and beyond, and that Congress will not deliver certainty and
progress to Wall Street and Main Street on tax, spending, budget,
health care, and other significant policies. The Senate's recent
bipartisanship on infrastructure and agriculture legislation provides
signs for optimism. We strongly encourage this Committee to continue
down the path toward consensus energy and fiscal policies to jump-start
the lackluster recovery once and for all.
Not surprisingly, executives participating in The Real Estate
Roundtable's most recent, 2Q-2012 ``Sentiment Survey''\12\ reflect the
industry's economic and political circumspection. While signaling a
general lack of confidence in the outlook for the rest of this year,
the Sentiment Survey also portrays a bifurcated recovery for commercial
properties. So-called ``gateway'' cities have come back strong while
smaller, more mainstream markets still struggle.
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\12\ See http://www.rer.org/ContentDetails.aspx?id=12241.
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There is improved access to functioning liquidity and improving
values (particularly for ``Class A'' assets) in cities like New York,
Washington, D.C., Boston, San Francisco, and Chicago. Contrast this to
still-weak capital formation and lackluster fundamentals elsewhere
around the country. Smaller, more mainstream real estate markets across
the U.S. continue to face big challenges.
More directly on the topic of today's hearing and issues
surrounding capital investments in building improvements, the sustained
financial pressure on property owners and lack of credit availability
has led to deferral of maintenance and upgrades on existing properties.
Meanwhile, development of new projects outside of urban growth centers
has trickled to a standstill-all resulting in national jobless figures
that preclude robust recovery. The potential for commercial real estate
defaults to derail a fragile economic recovery, particularly in non-
gateway markets, and lead to even further job losses, bank closures and
business retraction, is very real. The need to address these matters is
imperative.
As part of the solution to get Americans back to work while also
helping to generate real estate construction and transactional
activity, The Roundtable appreciates this opportunity to offer our
priorities to encourage financing for efficient buildings.
IV. SIX STEPS FOR CONGRESS TO SPUR FINANCING FOR EFFICIENT BUILDINGS
(1) Extend and Reform the 179D Tax Deduction for Energy
Efficient Commercial Buildings.
The tax deduction at Section 179D of the Internal Revenue Code
encourages energy efficiency in building design, construction, and
operations. 179D covers private sector commercial buildings that
generate rents and income like offices, stores, hotels, warehouses,
plants, and apartments. It also covers government buildings like
schools, hospitals and military facilities. The 179D deduction is a
technology-neutral incentive that does not pick ``winners and losers.''
It encourages retrofit projects and not specific products. It gives
building owners the opportunity to select the best mix among a suite of
measures to achieve optimal energy efficiency gains.
Section 179D was first enacted in the 2005 Energy Policy Act,
extended in 2008, and is scheduled to expire at the end of 2013. While
the deduction has resulted in some success (especially to encourage
lighting upgrades), 179D has not yet lived up to its full potential to
encourage ``deep'' retrofits due to the costs and regulatory complexity
associated with upgrading multiple building systems including heating
and cooling, hot water, windows, and insulation. The Roundtable wholly
supports the work of Chairman Jeff Bingaman (D-NM) and Olympia Snowe
(R-ME) who have carefully studied the deduction to gain a better
understanding of how it has worked in the marketplace, and how it can
be improved. Their proposal to reform the Section 179D deduction would,
among other things:
--Measure energy savings for retrofits compared to the existing
building's baseline--For purposes of the tax deduction, the
Bingaman-Snowe proposal measures savings by comparing how
much energy a building consumed before a retrofit, and then
comparing how much energy is consumed after a retrofit.
This logical ``before-and-after'' comparison makes sense
for existing buildings with a track record of energy use,
where a retrofit plan may qualify for the deduction based
on actual and verified reductions in energy usage
intensity.
--Award performance by linking the amount of the tax deduction to
energy savings achieved--Under the Bingaman-Snowe proposal,
the amount of the incentive would increase with greater
energy savings. This ``sliding scale'' approach will
encourage ambitious projects while also rewarding projects
that achieve meaningful yet more moderate levels of energy
savings.
--Make the tax incentive useable for a broad range of building
efficiency stakeholders and building types, including
REITS--Many buildings cannot use the 179D deduction because
their ownership structures, like Real Estate Investment
Trusts (REITS) and Limited Liability Partnerships (LLPs),
cannot make use of conventional tax incentives. The full
amount of the deduction that considers such entities'
special tax requirements should be available for REITS and
other similar holding structures. Additionally, in order to
make the incentive useable for more buildings, the building
owner should be allowed to allocate the tax deduction to
other parties responsible for the retrofit such as an
architect, engineer, tenant, source of financing, or energy
services company that may guarantee improved performance.
Of course, extension and modification of Section 179D will get
caught up in the broader discussions of tax reform, budget policy, and
re-examination of tax incentives generally. As Congress deliberates
these important matters, it should keep in mind two points that favor
179D's extension and modification. First, Section 179D offers a tax
deduction, and not a tax credit. As former Senator Don Nickles
testified at hearing earlier this month to the Senate Finance Committee
on energy tax policy, law makers must carefully distinguish between the
need for tax credits which may operate as subsidies, compared to more
favored tax deductions which are expensed as part of ordinary business
operations.\13\ Second, 179D corrects a flaw in the tax code whereby
businesses are allowed to immediately deduct utility bills as part of
their ordinary operating expenses - but retrofits investments can only
be depreciated over long periods of time as capital expenses. More
inefficient structures with higher utility bills may thus benefit from
a larger tax deduction compared to buildings that use less energy. 179D
aligns the code so that it awards long-term capital investments to save
energy, as opposed to the operating expenses deduction that can
otherwise be claimed for wasted energy.
---------------------------------------------------------------------------
\13\ See stream of June 12 Senate Finance Committee hearing, ``Tax
Reform: Impact on U.S. Energy Policy,'' oral testimony of The Hon. Don
Nickles, available at: http://www.finance.senate.gov/hearings/hearing /
?id=990f1101-5056-a032-5202-6921d68e8769 (at the 26:53, 75:50, and
102:01 marks).
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The 179D tax deduction is a critical incentive not only because it
will deploy innovation in energy efficient commercial buildings, but
will also lower unemployment. An analysis\14\ commissioned jointly by
the Natural Resources Defense Council, The Real Estate Roundtable, and
the U.S. Green Building Council, estimates that over 77,000
construction and related jobs will be created by the changes to 179D
suggested by Senators Bingaman and Snowe. In keeping with their
thoughtful reform proposal, The Roundtable strong encourages extension
and modification of the 179D tax deduction.
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\14\ See Table 8, p. 12 at: http://c4bb.org/wp-content/ uploads/
PeriFINALForRelease06-10-11.pdf
(2) Authorize Department of Energy Loan Guarantees for
---------------------------------------------------------------------------
Building Retrofits
Senators Jeanne Shaheen (D-NH) and Rob Portman (R-OH) are to be
commended for their bipartisan work on S. 1000, the Energy Savings and
Industrial Competitiveness (``ESIC'') Act, which this Committee passed
by an 18-3 vote in July 2011. Section 202 of S. 1000 would authorize
credit enhancement from the Department of Energy (``DOE'') to support
and leverage private sector financing for building retrofit
projects.\15\ The Roundtable has long-advocated that DOE's current loan
guarantee program should be used to assist lenders and building owners
with the capital expenses associated with energy upgrades. Accordingly,
we strongly encourage enactment of the ESIC Act's financing title.
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\15\ Companion legislation (H.R. 4017, the ``mart Energy Ac'') is
pending in the House, introduced by Reps. Charles Bass (R-NH) and Jim
Matheson (D-UT).
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The Roundtable recognizes the controversies associated with DOE's
loan guarantee program following the Solyndra investigation. We
believe, however, that S. 1000 gets the loan guarantee program back on
track as it was initially envisioned and created by both Republicans
and Democrats in 2005.\16\ Section 202 is carefully constructed so as
to limit DOE's exposure to financial risks in the event of a borrower's
default on a retrofit obligation, as follows:
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\16\ The DOE loan guarantee program was created as Title XVII of
the 2005 Energy Policy Act (H.R. 6, 109th Cong.). It passed the House
on April 21, 2005 by a 249-183 vote, and the Senate on July 28, 2005 by
an 85-12 vote. President Bush signed it into law on August 8, 2005.
--S. 1000 does not pick technology ``winners and losers'' by
favoring the manufacture of any particular product or
technology--Rather, S. 1000 is technology neutral, and
supports retrofit projects and not products. The bill lets
building owners in the market decide what types of
efficiency measures it should install as part of a retrofit
project, as best suited to lower energy consumption in
their buildings.
--S. 1000 incorporates underwriting and due diligence requirements
for retrofit financing--The bill directs DOE to develop
guidelines that ``shall include . . . measures to limit
the exposure of the Secretary to financial risk in the
event of default,'' like the borrower's ability to re-pay a
retrofit debt and the value of the underlying collateral
supporting the loan. To implement the loan guarantee
program for retrofits, S. 1000 directs DOE to develop
underwriting criteria that assess a borrower's
creditworthiness, the building's loan to value ratio, and
the building's history and expectations in generating
rental and other income, among other factors.
--S. 1000 would provide credit support for successful retrofit
projects guaranteed to result in energy savings--The bill
directs DOE to consider private sector, third-party
guarantees of energy savings after a retrofit is
implemented, and whether those savings will pay for project
costs over time. S. 1000 provides that DOE (and taxpayers)
do not bear the ``performance risk'' of whether a project
will succeed and result in energy savings. Rather, third-
party contractors responsible for the retrofit like DOE-
approved energy services companies-but not DOE itself-would
bear risks that installed energy efficiency measures will
perform as designed. In this way, the transaction can be
structured so as to amortize retrofit financing through
measured and verified energy savings accrued over time.
--S. 1000 places an upper limit on the amount of federal credit
support--The bill states that the maximum amount of
financial risk that DOE can bear for any single retrofit
project is $10 million. In contrast, the direct loan (not a
loan guarantee) given to Solyndra left taxpayers on the
line for $528 million after the solar company's default.
--S. 1000 provides financial support for retrofits through loan
guarantees - not through loans, grants, subsidies, or hand-
outs--Loan guarantees will provide an incentive to leverage
far greater amounts of private sector investment in
building retrofits, so real estate, lending, and energy
services firms have their own ``skin in the game.'' It has
been estimated that a $200 million federal loan guarantee
investment in retrofits would leverage as much as $2
billion in private sector financing.
--S. 1000 would provide credit support for proven building retrofit
projects that already have a track record of success--We
have case studies on the success of retrofits, such as the
Empire State Building, showcase projects associated with
the Better Buildings Challenge, and the experiences of
EPA's ``Partner of the Year'' winners, among others.\17\
Retrofits pose far lower risks for federal guarantee
support compared to unproven manufacture of certain
renewable products, where the market may be heavily
influenced by subsidies provided by foreign competitors.
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\17\ See notes 7-9.
Moreover, Congress should consider the impact of S. 1000 as a jobs
creator. The Real Estate Roundtable, in conjunction with the U.S. Green
Building Council and the Natural Resources Defense Council, estimates
that a loan guarantee program like the one authorized by the ESIC Act
can create up to 25,000 American jobs.\18\
---------------------------------------------------------------------------
\18\ See Table 8 at http://c4bb.org/wp-content/ uploads/
PeriFINALForRelease06-10-11.pdf. The American Council for an Energy
Efficient Economy (``ACEEE'') estimates that the total impact of S.
1000 on employment (not just the loan guarantee title) would be 80,000
jobs created by 2020, and 159,000 jobs by 2030. See http://aceee.org/
white-paper/shaheen-portman.
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In short, enactment of S. 1000's bipartisan retrofit loan guarantee
title will provide a transformative platform to finance efficient
buildings, lower energy consumption, and get construction workers back
on the payroll. We urge Congress to pass it.
(3) Pass Legislation to Encourage Real Estate Appraisals that
Value Energy Efficiency.
The Roundtable has long advocated for better information sharing
between appraisers, building owners, and lenders to ensure adequate and
consistent assessment of energy efficiency's effect on property values.
S. 1737, the Sensible Accounting to Value Energy (``SAVE'') Act
sponsored by Senators Michael Bennet (D-CO) and Johnny Isakson (R-GA),
includes provisions that encourage parties to a real estate transaction
to share energy efficiency information in the context of asset
valuation. Discussions this spring among The Roundtable, the Appraisal
Institute, and other organizations have built wider support for this
concept.
High-efficiency equipment and better building operations may
increase the value of commercial real estate. Yet stakeholders from all
perspectives--lenders, appraisers, building owners and managers, and
energy efficiency advocates--suffer from the lack of data regarding the
monetary benefits that energy efficiency components can bring to real
estate values. Better information sharing will help monetize any added
values from efficiency equipment and platforms deployed in buildings,
which in turn can spur greater investments in retrofits.
The SAVE Act would establish rules so that appraisers, owners and
lenders have timely access to information that may be relevant to the
efficiency, conservation, and renewable energy features of real estate.
These include: building labels or ratings; installed appliances;
blueprints and construction costs regarding retrofit projects; utility
bills; energy benchmarking data; third-party verifications of a
property's energy performance; and financial or other incentives
regarding installed high-performing components and systems. If such
information is consistently shared as an industry best practice, over
time a greater number of comparable assets will be available for
appraisers to evaluate energy efficiency features when determining
market value.
Banks may thereby assess the financing risks associated with
projects that will save money through energy savings, and develop
lending products specifically to underwrite retrofit investments.
Accordingly, as another appropriate measure for Congress to spur
financing for highly efficient buildings, it should enact the SAVE
Act's provisions to provide better information regarding energy
efficiency attributes in the process real estate valuation.
(4) Pass Legislation to Align Commercial Landlords and
Tenants on the Goals of Energy Efficiency
A commercial building can be retrofitted with the latest efficiency
technologies but still not perform as it was designed to achieve
optimal energy savings. This is because spaces leased by tenants may be
``over built'' at the time of new fit-outs to provide more energy
capacity than a tenant needs, or because building occupants may have
behaviors that unnecessarily waste energy.
Legislation proposed to date has focused on how real estate owners
and developers may lower energy consumption. But this is only part of
the issue. Office tenants like data centers, law firms, trading floors,
financial services firms, restaurants, and retail stores use a lot of
energy. Based on the Empire State Building's retrofit experience,\19\
tenants can consume between 50%-70% of their structures' total energy.
Choices made by office tenants in designing and operating within leased
spaces thus have great impact on U.S. energy consumption.
---------------------------------------------------------------------------
\19\ See note 9.
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Accordingly, we encourage Congress to consider legislation that
gets office landlords and tenants on the same page with regard to
energy consumption in commercial buildings. We are pleased that Senator
Michael Bennet (D-CO) is developing a bill that will take a market-
driven, non-regulatory approach to align building owners and their
lessees to cooperatively reduce demands on the grid. Among other ideas,
Senator Bennet's legislative concept is developing solutions to:
--Overcome Energy Consumption Data Barriers--In many cases,
commercial property owners are unable to get the data to
tell them how much energy their entire building consumes.
This is because tenants control access to the energy meters
in the spaces they lease. The utility serving the Chicago
area, Commonwealth Edison, has overcome this significant
data obstacle. An amendment to existing law (Public Utility
Regulatory Policies Act [PURPA]) could establish a non-
binding standard favoring the ComEd model. Utilities would
be encouraged to provide aggregated ``whole building''
energy consumption information in a manner that fully
safeguards tenant privacy concerns in their energy data,
without increasing prices on consumers.
--Creates Opportunities for Voluntary ``Tenant Star'' Recognition--
The Environmental Protection Agency's ENERGY STAR program
for commercial buildings has been operating for over a
decade and is widely embraced by commercial building
owners. It is a huge success, and certified buildings
typically use 35 percent less energy than average buildings
and cost 50 cents less per square foot to operate.\20\ Many
Roundtable members and other large commercial building
owners and managers strive for the ENERGY STAR label to
distinguish their assets as ``top of class.'' Senator
Bennet's bill concept would provide EPA with the tools
necessary to bring the program to the next level with
tenant oriented certification for leased spaces. Today's
ENERGY STAR is based on whole-building recognition. The
imminent bill would deliver the data set needed to likewise
recognize efficient tenant-leased spaces within a building.
The synergy of ``Tenant Star'' spaces within ``ENERGY
STAR'' buildings could transform--in a non-regulatory way--
how commercial real estate owners and their tenants think
about energy efficiency and dramatically lower energy use
throughout the built environment.
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\20\ See http://www.energystar.gov/ index.cfm?fuseaction=labeled--
buildings.locator; http://www.energystar.gov/
index.cfm?c=evaluate_performance.bus_portfoliomanager_intro.
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--Develop Replicable Standards for New Tenant ``Fit-Outs.''--
Commercial tenants are most likely to make structural
investments in the areas they occupy when they enter into
new leases, or renew leases for longer terms. We thus want
to encourage high-performance design and construction of
leased spaces at the point of new ``fit-outs'' that suit
tenants' needs, but are not ``over-built'' to encourage or
allow wasted energy use. The imminent bill is developing a
proposal for industry stakeholders to assist the Energy
Department in studying and developing replicable standards
for high performance new tenant fit-outs.
Sound energy policy must take a holistic approach by considering
the consumption and behaviors of office tenants and other building
occupants. The Roundtable applauds Senator Bennet for his leadership to
educate and align commercial building landlords with their tenants, so
they may cooperate to make even deeper cuts in energy consumption
attributed to the commercial real estate sector as a whole. When his
bill is introduced, we recommend that the Committee study it carefully
and take the necessary steps to move it toward enactment.
(5) Encourage More Foreign Investment in U.S. Real Estate:
FIRPTA Reform and EB-5 Authorization
The economic and political stability of the United States
historically has attracted foreign investment capital to our real
estate markets. The recent decline in the value of the dollar compared
to other key currencies has made U.S. real estate even more attractive.
Unfortunately, so far in the recovery, new equity investment from both
foreign and U.S sources has been skewed to a handful of urban
``gateway'' markets and large trophy assets. This propensity has
bifurcated property values, with large market, large asset values
recovering, while overall asset values have remained depressed and
distressed property values have generally continued to slip.
Law makers must consider policies to attract new sources of equity
capital from Europe, Asia, and the Americas, which in turn would help
bridge the massive ``equity gap'' complicating the refinancing of
hundreds of billions in commercial mortgages (and threatening a new
wave of foreclosures). Injections of foreign investment capital in
domestic real estate can, incidentally, also be used to finance energy
efficient buildings.
To stimulate more foreign investment in U.S. real estate, The
Roundtable offers two areas where Congress should act immediately.
First, it should enact pending legislation to reform the Foreign
Investment in Real Property Tax Act. Second, it should enact
legislation to permanently re-authorize the EB-5 program for immigrant
investors. Both are discussed in further detail below.
(a) FIRPTA Reform
The commercial real estate industry is united in its view that the
Foreign Investment in Real Property Tax Act of 1980 (``FIRPTA'')
dramatically disrupts the rational allocation of foreign capital into
the U.S. real estate sector. Commercial real property markets in the
United States need an infusion of equity at this time, not a tax regime
that deters foreign investment.
FIRPTA is a significant barrier to non-U.S. investors. In contrast
to the general U.S. tax law exempting foreign investors' gains from
U.S. stocks, bonds, and other securities, the United States imposes a
high rate of taxation on foreign investment in U.S. real property. The
U.S. tax rate on gains from such direct and indirect ownership of U.S.
real property can exceed 50 percent, particularly when the branch
profits tax regime applies to such transaction. Further, a non-U.S.
investor who is subject to tax under the FIRPTA regime has a filing
obligation with the Internal Revenue Service. Non-U.S. investors view
the Internal Revenue Service as a highly intimidating force--much more
so than the taxing authorities in most other jurisdictions. Thus, the
filing obligation mandated by FIRPTA is a significant burden and
deterrent to U.S investment from the perspective of foreign investors.
Indeed, the U.S. commercial real estate market has slipped to third in
the race for global funds behind the United Kingdom and now Germany. In
the absence of FIRPTA reform, potential foreign investors in U.S. real
estate may choose to invest elsewhere - either in real property in
countries overseas that have less onerous tax regimes, or in other
types of U.S. corporations.
Our nation needs to compete more effectively for global capital,
and the tax code should not be a barrier to foreign investment in U.S.
real estate. Additional foreign equity investment would greatly assist
community banks and other financial institutions now holding mortgages
on U.S. properties, help address the ongoing residential housing
foreclosure crisis, and directly lead to job creation and ultimately
stimulate our economy's overall recovery.
FIRPTA is an idea whose time has come and gone, and, were it
fiscally feasible, should be abandoned in its entirety. The Roundtable
recognizes, however, that budgetary constraints may make it difficult
to repeal FIRPTA at this time. Reasonable, cost-efficient reform is
still possible, and The Roundtable strongly urges steps be taken to
address the negative effects of FIRPTA. In particular, the ``Real
Estate Investment and Jobs Act'' (S. 1616)\21\ has been introduced by
Senators Robert Menendez (D-NJ), Mike Enzi (R-WY) and has support from
25 co-sponsors. It takes a measured approach to FIRPTA reform and
would:
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\21\ Companion legislation (H.R. 2989) is pending in the House,
introduced by Reps. Kevin Brady (R-TX) and Joe Crowley (D-NY).
--Withdraw IRS Notice 2007-55--S. 1616 would reinstate an IRS
position to allow redemptions and liquidating distributions
to be treated the same as sales of stock in the case of a
domestically controlled Real Estate Investment Trusts
(REITs). Before 2007, such distributions generally were
treated as sales of REIT stock, and not subject to U.S.
tax. In 2007, The IRS issued Notice 2007-55 which concluded
that such distributions should be treated as sales of real
estate and therefore subject to FIRPTA. Until the issuance
of the Notice, there was no reason for foreign investors to
believe that liquidating distributions by REITs, as with
the liquidating distributions of any other corporation,
should be treated as anything other than sales of stock.
The IRS's position has caused considerable consternation in
the foreign investor community, has severely constrained
continued foreign investment in U.S. real estate, and
should be withdrawn.
--Increase the amount of stock minority shareholders can hold
without triggering FIRPTA tax--Presently, a foreign
shareholder owning five percent or less of a publicly-
traded U.S. real property company, including a REIT, is
exempt from FIRPTA on a sale of the corporation's stock. In
addition, a foreign shareholder owning 5 percent or less of
a publicly-traded REIT is exempt from FIRPTA on the receipt
of a capital gain distribution attributable to the sale or
exchange of a U.S. real property interest. There are
numerous investors around the world who own just fewer than
5 percent of these companies' stock, but despite their
willingness to invest in U.S. companies, won't dare to go
over that threshold for fear of being ensnared by FIRPTA.
S. 1616 would increase from 5 percent to 10 percent the
exemption level threshold and apply it to investors in
certain widely held investment vehicles.
FIRPTA reform is not far afield from the topic of today's hearing.
Increased foreign equity investment in commercial real estate will
provide real property owners with much-needed capital to successfully
refinance maturing loans and engage in new projects to improve existing
assets. The untapped availability of foreign investment capital would
be used to invest in our nation's building infrastructure, and provide
a source of funding for innovative energy efficiency retrofits. In
short, without a functioning real estate finance market we will not
have a functioning retrofit financing market. FIRPTA reform and
enactment of S. 1616 would help achieve both objectives.
(b) EB-5 Authorization
Another vehicle to encourage more foreign investment in domestic
real estate is the EB-5 ``immigrant-investor'' program. It is scheduled
to expire on September 30, 2012. The Roundtable urges Congress to move
on pending legislation that would permanently authorize this program.
Established in 1992, the EB-5 program deploys foreign investment as
a means to spur job growth while simultaneously affording eligible
foreign investors the opportunity to become lawful permanent residents
of the United States. Roundtable members have used EB-5 as an important
source to assemble funds for development projects that create well-
paying American jobs. The program has grown dramatically in recent
years and has nationwide impact; the U.S. Citizenship and Immigration
Service has approved 225 regional centers that distribute foreign
investment capital in 45 states.\22\ In 2011, the EB-5 program was
estimated to create and/or save 25,000 American jobs and generated
direct investment of over $1.25 billion. Furthermore, EB-5 is revenue
neutral, as program costs are offset by the fees charged in issuing
permanent residency visas. Because there is no taxpayer impact, EB-5
has been extended with bipartisan support since its inception.
---------------------------------------------------------------------------
\22\ See http://www.uscis.gov/portal/site/ uscis/
menuitem.5af9bb95919f35e66f614176543f6d1a/
?vgnextoid=d765ee0f4c014210VgnVCM100000082ca60aRCRD&vgnextchannel=
facb83453d4a3210VgnVCM100000b92ca60aRCRD.
---------------------------------------------------------------------------
The Roundtable sees potential in EB-5 as a means to aid retrofit
financing. Foreign investments received through the program may be
directed to assist with the up-front capital expenses to underwrite
energy efficiency projects. In considering whether to extend and/or
permanently authorize the program, Congress has the opportunity to
encourage EB-5 regional centers to distribute investments to projects
that do not simply spur economic development, but also make our
nation's building stock more energy efficient.
S. 3245, introduced by Senator Patrick Leahy (D-VT) and co-
sponsored by Senator Chuck Grassley (R-IA),\23\ would make the EB-5
regional center program permanent and thus ensure stability for
investors, entrepreneurs, and stakeholders that develop and finance
real estate. Congress should pass this bill, and we encourage the
Committee to further consider how the EB-5 program may synergistically
advance our national goal of energy independence.
---------------------------------------------------------------------------
\23\ Companion legislation (H.R. 2972) is pending in the House.
Congress Should Conduct Oversight to Curb the Recent Rise in
---------------------------------------------------------------------------
GSA ``Holdover'' Leases
Roundtable members report a growing issue with the largest
commercial office tenant in the country--the federal government. The
General Services Administration (``GSA'') is responsible for managing
the federal buildings portfolio, which includes over 7,100 leased
properties. GSA's actions thus register a significant impact in
commercial real estate markets across the country.
When a tenant--in this instance the GSA--continues to occupy its
leased premises after the term has ended, it is said to ``hold over.''
While holdovers often result in short term extensions for government
convenience, they have a deleterious effect in the marketplace and
create uncertainty about the future operations of a commercial
building. GSA's default position as a holdover freezes the ability of
landlords to re-position their assets and market their properties to
prospective new tenants. Federal leasing uncertainties also place
building owners in precarious situations with their lenders, and
unnecessarily shift the burden of cost and risk to the private sector.
A vacant or severely underutilized building has a limited income stream
and lenders may thus harshly assess the asset's credit worthiness.
Making matters worse is the backlog of congressional approval required
for prospectus-level leases worth more than $2.7 million a year.
Holdovers are not standard practice in the commercial real estate
industry. In the private sector it is commonplace for tenants to
provide several years advance notice of their intention to vacate or
renew a lease prior to expiration. As a result of holding over, the GSA
immediately pays the direct penalty of higher lease rates as short-term
extensions are generally 25-50% above standard market rates. Not only
does the GSA pay significantly higher rates for short-term tenancy, but
by deviating from standard practices of advance notice of intention
prior to lease expiration, it also deprives itself of the opportunities
to pursue the full range of options available in the marketplace.
For the immediate issue at hand, an unreliable federal leasing
process impedes capital improvements in building efficiency upgrades.
Commercial landlords dealing with federal holdover tenancies will lack
access to predictable income and financing streams necessary to fund
retrofit investments. Moreover, with spaces frozen to accommodate GSA
holdovers, there is no chance to design or construct new fit-outs for
state-of-the art tenant installations.
Congress's recent and ongoing investigations into the GSA should
also consider solutions to break the holdover backlog. And, Capitol
Hill should do its own part by approving prospectus leases as
expeditiously as possible. More efficient and predictable federal
leasing protocols in line with typical end-of-term notification
practices will stabilize and correct commercial real estate markets--
and establish the fundamental conditions that are necessary for private
sector landlords and tenants to explore long term investments such as
retrofit improvements.
V. CONCLUSION
To conclude, The Real Estate Roundtable recommends six actions
Congress should take now to spur financing of efficient buildings:
(1) Reform the 179D tax deduction for energy efficient
commercial buildings specifically to encourage existing
building retrofits.
(2) Authorize a DOE loan guarantee program spur private
sector retrofit financing.
(3) Enact legislation to establish information sharing
practices so that building owners, appraisers, and lenders can
more consistently consider energy efficiency attributes when
valuing real estate.
(4) Enact legislation that creates voluntary programs and
recognition platforms to encourage commercial tenants to
cooperate with their landlords and achieve lower energy
consumption in buildings.
(5) Lower barriers to foreign investment capital in U.S. real
estate by reforming FIRPTA and permanently authorizing the EB-5
immigrant investor program--thereby making more funds available
to finance building energy upgrades.
(6) Conduct oversight of GSA commercial leasing practices to
curtail ``holdover'' tenancies, so buildings can be re-
positioned in the market when federal leases expire and attract
financing that could be used for capital investments like
retrofits.
Thank you again for this opportunity to testify on behalf of The
Real Estate Roundtable on the important topic of energy efficiency
financing. I look forward to answering the Committee's questions.
The Chairman. Thank you. Thank you all for very, very good
testimony. There's a lot of innovative things that you've
talked about that we need to understand better.
Let me just start with a few questions. Ms. Leeds, you
indicated that the effort you're making there in New York is
something you think is eminently scalable, I think you said. I
gather it could be used to faciitate commercial retrofits
throughout the country. Could you describe a little more how
you think that could happen? Do you think the Federal
Government needs to be doing something that it's not doing to
cause this to be, what you're doing, to be replicated
elsewhere? Or do you think that the private sector can get that
done?
Ms. Leeds. In our experience, the Federal stimulus funding
that we have as our core capital is essential to being able to
do the work that we are doing. That said, I think the job rests
primarily with private capital and that those who consider
providing public funding into these programs need to carefully
identify those sectors in which it is really necessary for
credit enhancement.
I spoke of the energy efficient mortgage as being a very
scalable opportunity and I believe that is something that can
be replicated nationwide. This is something that really
leverages off of an existing financing tool, and with the right
expertise and the right motivations many mortgage lenders can
incorporate this into their general practices.
The other mechanisms that----
The Chairman. This would be in the form of a supplemental
mortgage in addition to the base mortgage that the property
owner has, is that the idea?
Ms. Leeds. We are working on two versions of this. One is a
refinancing. At the point of time of refinancing, the base loan
is increased by an amount that is required to fund energy
efficiency retrofit measures with a demonstrable savings
stream. The second is to add a supplemental loan, which can be
done either in the form of a supplemental first or a second
lien loan, and that is an approach that is being used with
lenders who hold the first mortgage in their current portfolio.
So I think that this is something that could be done in the
here and now, although I do believe that other approaches,
other innovative approaches that we and others are working on,
will eventually achieve scale. I think it will be a slower
process.
The Chairman. Let me ask about rebates. I think one of you
talked about--maybe, Mr. Smith, did you talk about rebates as
an important part of the program?
Mr. Smith. I did.
The Chairman. Could you describe how that works? I can
understand the positive cash idea, where you basically persuade
a residential homeowner to go ahead with retrofits and can see
a benefit in their utility bills. How does the rebate thing
work in your experience?
Mr. Smith. We in Oregon are doing deep retrofits of
residential buildings that are averaging about a $12,000
investment per home. So these are multiple trade jobs, where
we're replacing hot water space heat and doing a full
insulation wrap. So it's a very involved project and a big cost
for the consumer.
We also have very low energy prices in Oregon, and there's
quite a variance across the country, as you know, in energy
prices. So rebate levels need to be looked at based on what the
utility sector is deploying in the current market and what the
project cost is and where the customer is going to come out
financially.
With larger rebates, the general philosophy is--and we have
many contractors who've been in the market and who really
understand the consumer intimate transaction and decisionmaking
process. For us in our market, it's about $2500 at least that
is needed to motivate consumers to get to the level of making a
$12,000 investment.
The utility sector--my point that I was making was that the
utility sector in our market, in the projects that I'm
describing, are deploying about $1,000, right around there.
It's not enough. It's not enough to motivate consumers. So my
message is, if we believe that there are other benefits beyond
energy efficiency at this much demand to doing this work, and
what I'm arguing is the economic developments are very real, we
have very strong results, then it might be worth an investment
from market actors, perhaps governments, who care about
economic development, because we're not going to get there
exclusively with utility sector investment. Demand could go
from this [indicating] to this [indicating] if we add a little
more juice in the form of a rebate, and that might need to be
sourced from capital that values the economic development
returns.
Over time, I think that the importance of rebates will go
down as market adoption increases, as consumers value energy
efficiency remodels just like they would a kitchen remodel or a
bathroom remodel, and it becomes part of the conversation and
the decisionmaking process of what you do in your home, and
especially as the real estate markets value energy efficiency
improvements and the sale price. But until then, I think it's a
promotional industry and I think we need to respond
accordingly.
The Chairman. Let me defer to Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman. I appreciate
the comments from all the witnesses this morning.
I think we've all recognized, as several of you have said,
that the cheapest energy source that we have out there is
increased efficiency. I think we recognize that, despite all
the talk and all that we have done up to this point in time,
we're probably the most wasteful Nation when it comes to our
energy consumption. We don't really think about it. We keep
this room too cool in my opinion. I'm from Alaska; it's too
cool. We keep the lights on too long. We're in a Federal
building. We should be setting the standard. I think generally
we do a poor job. We try at the household level.
But I think part of what we're dealing with is just a lack
of understanding or a lack of appreciation in terms of how much
savings truly can be realized as individuals, as families, as
small business people in our environment.
So the question--and Mr. Smith, Mr. Rodgers, you both spoke
to this a little bit: How do we do a better job of educating
the consumer about the value of energy efficiency, so that we
start to make a real pronounced difference? Mr. Rodgers, you've
described the program in Indiana and what you're doing there. I
guess the question is can you take that Indiana example and
spread that across the country? Is it important to have a
national program? Is it better to allow the States and the
local communities to focus on this?
I'd like to hear some input there, and I'd like you to
address a little bit about how we deal with it on the rural
side. I know that in your experience there in Indiana you've
got some big box stores, you can find some economies of scale.
I've got a lot of little villages where residents are paying
over 40 percent of their income for their energy costs, as
compared to the national average, which is somewhere between 3
and 6. Can this be translated to rural America as well? So your
comments, please?
Mr. Rodgers. Great. Senator, I think when we--I'd address
that in a couple of ways. First, I think, in regards to the
educational component, in each and every program that we're
involved in probably the biggest challenge is in putting forth
essentially a branding, marketing, and educational component of
the programs to really meet, whether it's a commercial facility
or a resident, at their point of need and understanding how the
energy that they are using is impacting them economically.
So that educational--if you can make that linkage, like we
are doing in Indiana in the case of Energize Indiana, starting
out at a larger branding component and driving very
specifically down to the individual resident--we are moving to
try and educate them to understand how having your temperature
at this setting or having the lights on at a certain level, how
that directly translates into the money that it costs them at
the end of the month, because when you think about it virtually
everything we do in society is an immediate transaction. In the
case of your energy bill, you don't know about it until the end
of the month, so it doesn't go hand in hand with the activity
that you're performing.
So that educational component becomes a very big element in
getting people to understand and to participate much better. So
I think that educational component can happen across every
State, can be supported definitely from a Federal perspective
of really working with the States and businesses to allow that
understanding to be elevated much greater than it is today.
When you spoke in regards to the rural part of our country,
while sometimes that can be a challenge, I think the
opportunities definitely exist to be able to work within those
communities both in the assessment of their properties and
understanding how energy is being utilized there, as well as
leveraging technology. So if they are not near a big box retail
outlet, as an example, to be able to understand the impact of
more efficient equipment or more efficient lighting or whatever
the case may be, we can leverage and utilize technology to link
them in for, one, that understanding, and two, the actual
transaction can take place via technology as well.
So we have had a lot of success in really pulling in rural
America to feel like they are right in the middle of these
programs much more than they have been in the past.
Senator Murkowski. Mr. Smith, did you have anything you
wanted to add to that?
Mr. Smith. Yes, if I may. First, I very much appreciate
your comment on waste. This is about waste and we can do a much
better job, and we're all proving that, I think.
How do you motivate consumers? I think you have to meet the
consumer where they are. Historically, energy efficiency has
been sold as save kilowatts. That's not what consumers respond
to. What we try to do is take a very consumer-based marketing
approach and sell this based on the benefits to the consumer,
which is a more comfortable home or, as Senator Franken
mentioned, a better work environment. That's the way this has
to be sold.
In different communities, that message might be applied
slightly differently. In Klamath Falls, a waste message plays
much better than in Portland, where it might be reduce your
environmental footprint, that goes along with the make your
home more comfortable.
As far as rural markets, what I would add there is that in
our case the Bonneville Power Administration, the Federal
agency, supplies energy to a lot of these small consumer-owned
utilities and they rely on that. Yet each of these little
utilities has their own approach to an energy efficiency
program. We need to be better, much less fragmented. We need to
have much better common standards.
We're proving we can deploy and serve in rural and urban
markets and we can have a marketing approach that works, we can
have a contractor development approach that works. If we had
consistent incentive levels and program delivery standards, I
don't think it really matters if it's rural or urban. There are
some real fuel delivery challenges, but from a marketing
standpoint I think we can do it.
Senator Murkowski. Thank you, Mr. Chairman.
Mr. Smith. Thank you.
The Chairman. Senator Franken.
Senator Franken. Thank you, Mr. Chairman. Thank you for
calling this hearing, and thank you, all the witnesses.
I was especially struck with the testimony of a number of
you who said this will not--this doesn't require Federal
dollars. I know you said that, Mr. Smith. Mr. Rodgers, you
talked about that.
When I first started this initiative in Minnesota, it was
about 9 or 10 months ago. I said to my staff: We're not going
to have any money to create jobs. It's essentially looking like
that, what's going to happen in Congress. Let's find a way to
create jobs without spending any money, almost a perpetual
motion machine. No one had ever heard of this.
What is it? It's retrofitting, because the energy savings
pays for the retrofit. In the mean time, you're putting to work
people in the construction business, who have been the hardest
hit during this recession. You're putting to work
manufacturers. In Minnesota, we have manufacturers that make
great geothermal pumps. We have manufacturers who make the most
efficient HVAC. We have ESCO's like Honeywell and Johnson
Controls. We have others.
We have--I at these conferences have had testimony from
counties that have done retrofits and are saving $900,000 a
year in electricity. It pays for itself if you do it right.
What I love about it is that we're not talking about spending a
dime of Federal money. You can do this without spending a dime
of Federal money and yet create American jobs and lower our use
of energy and our carbon footprint. As I said, it's win-win-
win, as Mr. DeBoer said.
My question is--and many of you spoke to it, which is--I
think, Mr. Sundstrom, in your written testimony you said that
this has the potential to create 3.3 million jobs across the
country. What can Congress do? You've all spoken to it, but
let's have a discussion about what kinds of things Congress can
do to accelerate this to create these jobs and to create these
great work environments, to create economic activity? Those
people who are working will be spending money in America. The
money stays here.
What kinds of things? Some of you have talked to them, but
I'd like to have a little bit of a discussion here, but not so
long that I don't get to ask another question, or you can talk.
OK, Mr. Sundstrom?
Mr. Sundstrom. If I could start very briefly--I realize
this is not the Banking Committee, but we really need some help
with FHFA. If FHFA continues with its rules and it passes that
rule, which is due in about 30 days now--there's about 15 days
that have passed so far during the exposure period.
Senator Franken. This is about PACE?
Mr. Sundstrom. This is about PACE, yes.
Senator Franken. This is about them not putting PACE in
first position?
Mr. Sundstrom. Right.
Senator Franken. OK.
Mr. Sundstrom. PACE, of course, is not a loan. It's an
assessment.
Senator Franken. Right.
Mr. Sundstrom. So under the laws of most States it belongs,
along with other assessments----
Senator Franken. So basically, for everyone listening--let
me see if I've got this right. Basically--and we have this in
Minnesota. So a PACE thing is basically, it's almost like a
property tax. In other words, the county government, the city
government, can help a commercial building, say, make a
retrofit and, instead of that building, the owner of that
building, paying in front, it's added on sort of as an
assessment.
Mr. Sundstrom. It's an assessment.
Senator Franken. Right. So what you're talking about is
whether the Federal Government, the FHFA, will recognize that
as what it is, which is that you pass that on. If you sell the
building, you pass that on, that assessment on, to the next
owner, and that basically if there is a default somewhere along
the line, that that gets paid off to the city before the
mortgage. That's the problem in light of the obvious big
problem we had.
Mr. Sundstrom. Yes, sir. Right now, as I mentioned, H.R.
2699 has a lot of accommodations for PACE programs, which the
FHFA we would hope would want to accept. They include a little
bit more rigorous qualification for loan. I believe it's 85
percent loan to value. They require established energy savings
to be proved as the loans are being--as the assessments, excuse
me, are being granted.
Your help in pushing for 2699 or, even better, would be if
we could somehow exert some level of influence over FHFA to
accept the language in 2599 before implementation, would be
most helpful to us.
Senator Franken. OK. Sorry that we got into this detail. I
know that when we get in the weeds on these things this sounds
very complicated. It sounds complicated, and I guess they are,
but it's doable. It's all doable. It's not rocket science.
So I'm done. My time's over. But we'll come back to this,
and excuse me for getting into this. But that's the nature of
these things, and you all know that. You all know that the
nature of these things is you have to discuss it for more than
a couple minutes.
But the thing is, let me just say that for different kinds
of buildings--and you talk about MUSH, which is municipals,
universities, schools, and hospitals, and we all know that
acronym who are interested in this subject. There are different
models for different kinds of buildings and maybe different
States, etcetera, etcetera. But this can be done and it should
be done and it must be done.
Mr. Chairman, thank you.
The Chairman. Thank you very much.
Senator Shaheen.
Senator Shaheen. Thank you, Mr. Chairman. Thank you to you
and Ranking Member Murkowski for calling the hearing today, and
to all of you for testifying and for the really excellent work
that you're doing on the ground.
My personal belief is that energy efficiency is not only
all of the things that everybody's testified to, but it's also
a way to bridge some of the differences on our energy strategy
in this country, because it doesn't matter whether you support
oil and gas, fossil fuels, or whether you support wind and
solar; energy efficiency benefits us all. It benefits every
region of the country.
So I think it's from that perspective a very good place to
start with an energy strategy for the country. Notwithstanding
that we're talking about non-Federal financing for energy
efficiency programs, the fact is, as we have just talked and
Mr. DeBoer pointed out very clearly, there are a number of
things that we can be doing here in Congress that help promote
energy efficiency in a way that's I think very good for the
country.
I appreciate Mr. DeBoer's raising S. 1000, which Senator
Portman and I have been working on for over a year. I think
it's one of those pieces of legislation that could help promote
energy efficiency around the country. I was pleased that the
American Council for an Energy Efficient Economy analyzed the
legislation and said that by 2020 it could save consumers $4
billion and create about 80,000 jobs. So the jobs--this is, as
everybody has said, a real win-win for everybody.
Let me ask you, Mr. DeBoer, because I know that you have
your fingers on what's happening in the real estate industry.
One of the challenges that has been alluded to by many of you
is how we quantify savings from energy efficiency and how do we
get lenders to look at that and be able to include that in
calculations around lending on this issue.
I wonder if you could talk about the challenge that is
presented by that data issue and how we can address that.
Mr. DeBoer. Thank you. There is a huge problem, I think,
between utilities, between tenants in buildings and between
owners on getting a comprehensive sort of holistic picture of
the energy use, how it's being used, what steps might be taken
within an individual building to reduce energy consumption.
To the point from Senator Murkowski about how can we get,
for example, users of energy to be more responsive, one item
that we've been working on separate from S. 1000 with Senator
Bennet to approach a market-driven approach to a bill that
would give--now there is an Energy Star award for buildings,
for example, for building owners, and we know that buildings
that have an Energy Star use about 35 percent less energy than
one that doesn't.
We would like to take that to the next level and give sort
of a tenant-based Energy Star, if you will, to incentivize
tenants to save energy. We think that that would encourage
people to do things. We also need to have better data sharing
between the utilities and the owners on how much energy is
being used, where it's being used. Different tenants obviously
use different levels of energy. A large trading floor in a
tower in Manhattan is burning an awful lot more than an office
building somewhere else around the country. So we need to share
that data.
It frequently surprises people when we say that there is a
barrier between utilities, owners, and lessees on how this
energy is being used. The Chicago area has a great example of
where there's been a sharing of information. We urge people to
take a look at that.
The one other item that I think we'd like to see are these
general appraisal rules, and we think the appraisal industry is
very willing to help in this area, to give credit for making
energy efficiency improvements in buildings. We ought to have
more credit. We ought to be working more together, and there's
legislation that would do this.
Most of what I'm talking about again echoes Senator
Franken. We're not talking about spending Federal dollars here.
We're talking about breaking down barriers for communication,
sharing information, allowing people to do things, and
incentivizing them in this market-based approach. So just a
couple of ideas, I guess.
Senator Shaheen. Thank you.
I don't know if anyone has anything to add to that? Ms.
Leeds?
Ms. Leeds. Thank you. I agree with you wholeheartedly that
the need for data is critical, and I feel that our experience
shows that, with respect to the lender process and how lenders
are actually using information to adjust their practices, this
field is really quite nascent.
There's a considerable amount of lender education that
needs to happen. There need to be concerted efforts to track
data that shows the actual performance of retrofits, that helps
people understand the financial benefits, both in terms of
savings, but from a lender's perspective in terms of risk
mitigation, that retrofits can offer; and that there needs to
be, I believe, some encouragement, pressure, and assistance in
data gathering efforts.
We are working with one study that was funded by
philanthropy and a group associated with Deutsche Bank
Foundation that tracked retrofit performance in affordable
multi-family properties over several years based on an ACERTA
program and the weatherization assistance program in New York.
This information has provided a basis for us to work with two
lending organizations, one local New York City lender and also
a national lender, to develop energy efficiency retrofit
financing programs.
More of this type of information would be extremely
helpful, I believe, to the lending community, coupled with some
pressure to get them to act.
Senator Shaheen. Thank you. My time is up, but I'm sure
you're all aware that there's a DOE innovation hub in
Philadelphia that's trying to develop data on building
efficiency, that hopefully will help add to this debate
significantly.
The Chairman. Senator Wyden.
Senator Wyden. Thank you very much, Mr. Chairman.
To the witnesses, let me apologize. Suffice it to say, even
by Washington, DC, standards, this has been something of a
rollicking day here in the Nation's capital. So I appreciate
your patience.
Mr. Smith, we're particularly proud of you. I think the
Clean Energy Works program and the trailblazing effort that
you've led, which of course is part of our tradition, is really
special because you have been able to accomplish what
essentially folks in the Congress just dream of. You have
brought the utilities together, small business folks together,
the State public utility commission, our lending institutions,
urban and rural folks together, for an effort to promote clean
energy and particularly prime the energy efficiency pump.
This is especially important right now, because I think
it's pretty obvious that the well for taxpayer-financed
incentives for a variety of energy technologies is running dry
really at every level of government. So if anything, it's more
important than ever to try to put the premium on innovation, to
put the premium on innovation particularly as it relates to
energy efficient investments.
It's of course easier said than done, but clearly to find a
way to bring these investments to homes, buildings, and
factories means that you've got to look at a variety of new
approaches. That's what we've done in our State. It really
began with the bottle bill, and particularly relevant, just 10
years ago we started the Oregon Energy Trust and that brought a
surcharge on utility bills to finance energy efficiency and it
has saved Oregonians about $800 million so far. So it's
generating real savings as we chart the path to a cleaner and
more energy efficient future.
So I want to ask you specifically about how we really began
that effort and particularly the role that on-bill financing
plays in your program. With customers repaying energy efficient
loans on their monthly utility bills, the first question
everybody asks is: How in the world did you get the utility
companies to go along with this? Because I want to see if we
can build, as we have often, on this Oregon model, bringing the
players together.
Tell us a little bit, first of all, how you were able to
get the utility companies to go along, and how you built this
coalition that has in effect grown and become widely accepted,
where in most places you can't get these folks to even talk to
each other, let alone come together around a program you're
talking about.
So start with utility companies and how you built this
coalition?
Mr. Smith. Thank you, Senator. Thank you. I mentioned your
leadership before you entered the room and we couldn't be here
without you. So we really appreciate that.
I really appreciate the point of supporting innovation. I
think that's--to Senator Franken's point or question, that is
really what the government can do, I believe, is to support
these innovations that are going on out there.
On-bill started in Oregon over 3 years ago. We have
progressive utilities by comparison to other parts of the
country. We're very lucky to have that. But the reality is that
using their bill for repayment of loans is not what they're in
the business of doing. It presents some risks to them.
So they were compelled to do so through State law that was
sponsored by Representative Jules Bailey and others in the
State legislature and passed by the State in 2009. That law as
it was being developed was built with a broad stakeholder
engagement process, where we had contractors, utilities,
lenders, everybody involved, as you mentioned. That is sort of
the Oregon way, which you of course champion.
It's through that broad stakeholder engagement that we're
going to get these solutions. That's the only way we're going
to get to the real innovation that leads to ways that these
things actually work.
What we have experienced with on-bill is the utilities have
been wonderful and supportive of really cataloguing the
challenges with this on a day to day basis. There's
information-sharing challenges. There are challenges with
trying to get payment of capital into the utility--not into the
utility, but collected by the utility and then back to the
lender. There's a lot of intricacies with this type of
approach, and it doesn't also solve every solution that there
is. On-bill is important and it's one segment of the population
that has a solution to this larger problem, but we really need
to get a bunch of lenders involved. We need to have multiple
loan products that serve multiple needs.
Senator Wyden. Let me, if I might, because my time--I'm
just a few seconds over. Mr. Chairman, could I just ask one
additional question?
The Chairman. Go right ahead.
Senator Wyden. Even though you generated significant
private sector support, you did get some government help at the
beginning.
Mr. Smith. We did.
Senator Wyden. Why don't you--and if any other panel member
wants to get into this--get into the question of, based on your
experience, how long do you thnk programs like Clean Energy
Works are going to require a role for government? In other
words, in a time of dwindling resources--and I very much share
Senator Franken's view on this effort to spark innovation. I
think that's exactly where we want to be. We're still going to
find a lot of programs needing a bit of governmental support in
order to get out of the gait.
How long do you, and perhaps other witnesses want to chime
in on this, how long do you see that taking in terms of getting
to the point where you have critical mass and you don't have
Federal and State support, which is going to be hard to
generate right now? How do you get there?
Mr. Smith. I do respect very much the budget decisions that
you all need to make, very large decisions. I think what we're
trying to build here is a performance-based model, where we are
showing that the investment, public investment, actually
results in real returns, and we have the data to share that. So
as you make decisions, you might consider looking at where you
actually know you're going to get proven returns in economic
development, if it's economic development that you want.
If we want to support this industry and grow it because we
believe in the returns that we've all said are win-win-win,
then it does require some--or it can benefit--we can accelerate
those outcomes through further investment. I believe more lies
right now on the rebate side to get consumers involved, because
until home valuations and property valuations recognize in real
estate transactions the improvements made by energy efficiency
I think we're going to need further investment.
I think it's maybe--it's really hard to guess. There's a
lot of markers that we need to watch. But 3 years I think is
what we feel the real estate industry needs to turn around and
really recognize these improvements. We need market adoption to
grow such that people talk about doing energy efficiency
remodels like they would a kitchen remodel or a bathroom
remodel.
Senator Wyden. I'm way over my time. If any of you would
even for the record furnish a written answer to the question of
how long in your judgment--Mr. Smith thought maybe 3 years--how
long you think it takes to get to critical mass so that the
government support can go by the board.
Mr. Chairman, thank you for the extra time.
Mr. Smith. Thank you, Senator.
The Chairman. Senator Murkowski, did you have some
additional questions?
Senator Murkowski. Let me just ask. On whole building
retrofits, you've got the commercial side of it, you've got the
residential or the private side. Assuming that from the
financing perspective it's different in how you approach the
financing for the commercial--and Ms. Leeds, you spoke to
that--what kind of incentives do we need, if any, for the whole
building retrofit for private owners?
I throw that out to the whole. Ms. Leeds, if you want to
start.
Ms. Leeds. I will just briefly mention that I believe the
most important driver we have the benefit of having in New York
City is the city's Greener Greater Buildings plan, which
involves benchmarking and eventually mandatory audits and retro
commissioning for buildings of over 50,000 square feet. This is
not an incentive, but it is a set of local laws that promulgate
information about energy use and put in play competitive forces
that we believe will drive more building owners, larger
building owners, to adopt energy efficiency measures.
Senator Murkowski. So you've got a mandatory audit on all
private buildings over a certain size?
Ms. Leeds. Private buildings over 50,000 square feet, there
is a mandatory audit, ASHRAE Level 2 energy audit, and retro
commissioning measures. This is being phased in over a period
of years. Every building will need to do it once every 10
years.
Mr. DeBoer. Senator, if I could.
Senator Murkowski. Mr. DeBoer.
Mr. DeBoer. I think it's important to recognize that
building owners everywhere want to make their buildings more
energy efficient. It's better for their bottom lines. It's
better for their business. They want to do it. But what we're
talking about here is beyond simply putting in a light switch
that goes off when people leave the room or changing out the
lighting.
In order to achieve deep energy efficiency, we need to have
deep retrofits. These are very complicated, costly endeavors.
So one thing that needs to be done if we're going to have a tax
deduction--and there is one in current law, 179D, as the
chairman well knows--it should work, and mechanically it
doesn't work now, and there are some simple ways to make it
work that would incentivize people to do these deeper
retrofits.
On the financing side of things, we're not talking about
direct loans. We're talking about guaranteeing a small part of
a loan that could then be levered to a larger loan that a
private owner could then do a deep retrofit. So there's a lot
of relatively minor things that could go a long way to
encourage these kinds of heavy benefits that could come out
there. Many members of the committee have bills and we support
them, we support them all.
Thank you.
Senator Murkowski. Thank you, Mr. Chairman.
The Chairman. Senator Franken, did you have some additional
questions?
Senator Franken. I do. First of all, on the lighting here
in this room. The reason it's so bright--and I don't know--I
think the ranking member knows this--I used to be in show
business, and they have this--these lights are for TV. Even
though they----
Senator Murkowski. We're not here for TV.
Senator Franken. I know. I know that we're not here for TV.
But we do have C-SPAN sometimes. Evidently there are members of
the Senate who have egos and they do like the TV. Even though
we're not on C-SPAN today, they just don't want Senators to
come in here and see the lights dimmer and say: Oh, well, it's
hardly worth it; I'm not on TV. So that's why it's so bright
today. I just wanted to explain that. That's from my experience
in a different business.
This is to anybody. Minnesota, like other States, has an
energy efficiency resource standard requiring it to reduce
energy use by 1.5 percent a year, to be that much more
efficient. To meet the standard, Minnesota utilities are
offering rebates or low interest loans to help homeowners and
businesses retrofit their buildings. From what I've seen in
Minnesota, the standard has turned utilities into efficiency
partners who support retrofits, and that's why I'm looking for
a Federal energy efficiency standard that is in part modeled
after these State programs. There's a lot of States that have
this, I think a majority.
A Federal energy efficiency standard can help incentivize
energy efficiency savings and encourage the use of innovative
financing mechanisms to achieve these savings. This is for Mr.
Rodgers or for anyone. In your written testimony, Mr. Rodgers,
you mentioned that you've seen the greatest level of efficiency
achievement in States with energy efficiency standards. In
fact, you highlight a success story in Indiana. Can you
elaborate on that and explain how a Federal standard could
expand those kinds of achievements? For the rest of the panel,
could you comment on whether energy efficiency standards have
helped encourage the use of innovative financing mechanisms?
Mr. Rodgers. Yes, thank you, Senator. One of the things
that we experience with these standards is it does bring out
the best in who we are. When we have a challenge and a specific
goal to put out there to meet, it does require all of the
stakeholders that are involved to come to the table and have
discussions so as to achieve that. So it's the regulators, it
is the utilities and business that all come together to bring
out the best in our thinking, bring out the innovation that is
necessary.
There are over 25 States, as you have stated, Senator, who
have established these standards and have made tremendous
strides in the energy efficiency measures that they have put
into place.
So I think, with a lack of standards, there isn't that
motivating factor to really bring everyone together. So to the
extent that there could be Federal involvement in helping to
set a broader standard----
Senator Franken. When I talk to utilities in Minnesota,
they're eager. They're looking for these things.
Mr. Rodgers. Absolutely.
Senator Franken. To help meet their standard.
Mr. Rodgers. Absolutely. In the case of Indiana, we have 5
investor-owned utilities. All come to the table, working
strongly together to achieve those standards. As you said,
sometimes it's difficult to get all the right folks around the
table, but these standards are what it takes to make that
happen.
Senator Franken. I hope we can consider a Federal standard.
I'll move to something that Mr. DeBoer was talking about,
if others don't mind not being able to ask a last question. You
mentioned the 179D tax deduction for commercial building
retrofits and how powerful they are as tools, helping building
owners invest in energy efficiency. However, I've heard from
religious groups and nonprofits, as well as real estate
investment trusts, or REITs, in Minnesota that would like to
retrofit their buildings, but don't have tax equity and
therefore can't take advantage of these incentives.
If the tax deduction were transferable to a third party,
like a retrofit contractor, the contractor could reduce the
price of the retrofit based on the benefit of the tax
deduction. That could help people with little or no tax equity
take advantage of the Federal incentive and therefore retrofit
their buildings.
Would making Federal tax incentives transferable to third
parties in your view open up more retrofitting opportunities?
Mr. Rodgers. Consistent with my statement about being
brief: Yes. It would very much help.
Senator Franken. Thank you.
Mr. Rodgers. Because, as you said, there are a number of
types of ownership structures that can't take advantage or use,
is probably a better word, not ``take advantage,'' but make use
of the available deduction. Being able to allocate it, whether
it's to engineers or appraisers or to other entities that are
in the refitting, retrofitting business, yes, it would be very,
very powerful.
Senator Franken. I've got some other questions, but I've
got like 12 seconds. I am so happy that you called this. This
is so important. This is really an opportunity for us to create
jobs. A lot of the Federal help--and when I talk to this energy
efficiency standard, the Federal help doesn't have to be about
us spending Federal dollars necessarily. Of course, tax being--
opening a tax advantage there is.
But so much of it can be about just making it possible to
do these things, just actually encouraging and helping and
getting out of the way in some cases, get out the way. So I
want to thank this panel for doing the work that you're doing,
I really do. I want to thank the chair and the ranking member
for facilitating this hearing.
The Chairman. Thank you very much.
Senator Murkowski, did you have anything else you'd want
to----
Senator Murkowski. No, I'd just thank all of you.
The Chairman. Let me thank the panel as well. We will take
your full statements and pore through them and try to find what
action items we can that we can move ahead on here. I think
this has been a very useful hearing. I thank Senator Franken
for continuing to keep a focus on this. I think it's a very
important question.
Senator Franken. Mr. Chairman, would you like me to explain
again about the TV lights and why?
The Chairman. We would, we would. We're very anxious to
hear.
Senator Franken. Why Senators like being on TV?
The Chairman. We would be very anxious to----
Senator Murkowski. Will you explain the cold temperatures,
too?
Senator Franken. Actually, when there are a lot of people
in the room with the TV cameras, it warms up.
Now, today we don't have that. We don't have that. But you
don't want the Senators walking in, it being dim and warm, and
saying: There's no TV today; I'm not going to show up.
Senator Murkowski. I'm going to keep that in mind.
The Chairman. We'll keep that in mind, and thank you very
much.
That's the end of our hearing.
[Whereupon, at 10:55 a.m., the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
Responses of Derek Smith to Questions From Senator Bingaman
Question 1. How important are tax incentives to stimulating
commercial building efficiency retrofits? Are there specific incentives
we should enact?
Answer. Our experience is more in the residential sector so I will
defer to other witnesses on questions 1-4.
Question 2. Government policy makers have been trying to stimulate
large scale efficiency retrofit commercial building industry for more
than three decades, but experts say that mandates may be required to
stimulate the real estate industry to perform large scale energy
efficiency retrofits in the commercial sector, other than a few high
profile trophy buildings. Do you agree or disagree that mandates will
be required for the commercial sector to do large scale retrofits? What
are the alternatives?
Question 3. How can utilities be encouraged to adopt the successful
small commercial and industrial program that was described by Ms.
Borrelli from United Illuminating? The combination of turnkey service,
cost-effective incentives and zero -interest financing has been very
effective in Connecticut and Massachusetts. These programs should be
implemented across the country. How can we replicate these programs?
Question 4. Ms. Leeds of NYCEEC cited a study published by the
Rockefeller Foundation which estimated the potential for energy
efficiency in institutional buildings at about $25 billion. However,
NAESCO`s testimony (for the record) states that this estimate is low by
a factor of four, based on studies performed by the Lawrence Berkeley
Labs. Do you agree that the potential market for energy efficiency in
institutional buildings approaches $100 billion? If not, what do you
see as the potential market and barriers to meeting the potential for
energy efficiency in buildings?
Question 5. You say in your testimony that, ``We have built a model
that doesn't rely on Federal investment to survive''. How does your
model work? Is it replicable?
Answer. We believe the residential energy efficiency sector
requires more public investment before it can become self-sufficient.
As I mentioned in my testimony, I would estimate further public
investment on a three-year horizon. My intention with this statement
was to say we are not reliant on Federal investment beyond ARRA. That
said, we would welcome it and we believe we are demonstrating the
economic development value of further public investment through data on
job creation, small business growth, citizen energy savings, private
capital leverage, housing value increases, etc.
Our post-ARRA model is to transition from Federal investment to
State investment. We are featured in Oregon Governor John Kitzhaber's
10-Year Energy Action Plan as an example of an effective public-private
partnership that is worthy of consideration for further State
investment. Our operational focus is to continue to bring down
transaction costs currently covered by subsidy and to use additional
State investment for consumer rebates to buy down project costs. We
have data that shows that rebate levels above utility incentive levels
drive additional consumer demand, which leads to significant
incremental economic development. We call this ``performance-based
economic development,'' wherein public institutions know their
investments will provide returns because they are founded on solid
data.
We believe our model is replicable. The thrust of a well-
capitalized and sustained market over the next several years is a
collaborative investment approach by the utility, public and private
sectors. Clean Energy Works Oregon serves as the intermediary and
capital aggregator between these sectors.
Responses of Derek Smith to Questions From Senator Murkowski
Question 1. In your opinion, should the federal government be
investing in efficiency? If so, what is the proper role of the federal
government for these types of retrofits?
Answer. Unequivocally, yes. The jobs can't be outsourced, small
businesses grow, citizens save money, the country reduces its reliance
on volatile fossil fuel markets, and more.
The Federal government can play several important roles, as noted
in #2 below.
Question 2. Within your testimony you list several opportunities
for the Federal Government to pursue as it pertains to energy
efficiency. What do you believe would be the option that would have the
most return on improving energy efficiency and why?
Answer. I honestly believe that the most important role the Federal
government can play is as chief advocate for a collective commitment to
energy efficiency--from setting common data standards (e.g., on energy
and non-energy benefits) across state lines to catalyzing private
sector engagement to encouraging citizen awareness to demonstrating
leadership by reducing energy waste in public buildings (as you, Sen.
Murkowski, pointed out in your remarks).
Additionally, on citizen engagement, I suggested in my testimony a
reference to the Victory Gardens rallying cry by the Federal government
during WWII. We should link energy efficiency to patriotism.
Question 3. Please further elaborate on the role that the State of
Oregon is playing in incentivizing efficiency.
Answer. The Oregon Dept. of Energy has invested in CEWO. Its
contributions in consumer rebates, private lender credit enhancements
and other areas are spelled out in the attached overview.
Gov. Kitzhaber featured CEWO in his draft 10-Year Energy Action
Plan (see attached). We are in discussions with the State about
investing in further consumer rebates to generate ``performance-based
economic development'' returns from the energy efficiency sector.
The State also provides various tax incentives and promotes
supporting legislative and statutory actions.
Question 4. Is there a silver bullet to lower energy consumption?
If not, what are options to put into the mix?
Answer. Ongoing consumer education is critical and often overlooked
by utility programs. Smart customer management should constantly offer
new technologies (e.g., smart meter appliances) to participants in home
weatherization programs, for example. Ensuring quality work--through
contractor certification and worker training--is also an important
element of ensuring permanence of energy savings.
Response of Derek Smith to Question From Senator Wyden
Question 1. Even projects like Clean Energy Works, which use
private financing, needed government financing to get started. Given
the modest pace of the economic recovery, which limits the amount of
secondary lending for things like energy efficiency, how long do you
think programs like Clean Energy Works will require support? In other
words, when do you think these sorts of programs will get to a critical
mass, and where federal and state support are no longer needed?
Answer. The key challenge for this sector is that utility capital
can only value the energy savings returns from energy efficiency. It
explicitly, by PUC charter, can not value all the non-energy benefits.
Until this structural issue is addressed, we face a world where public
capital must ``fill the gap''.
As I mentioned in my testimony, I think the horizon might be
roughly three years. The markers of transformation that will herald
this transition include:
Steady, growing consumer demand wherein consumer consider
energy remodels along with kitchen and bath remodels
The real estate community recognizing the value of energy
efficiency in home valuations
Contractor capacity, including on sales and marketing, is
sufficient to drive demand in a competitive market without
rebates needed as a promotional hook
CEWO has figured out how to engage private lenders without credit
enhancement. We feel very strongly that Federal dollars may be most
effectively targeted toward consumer demand and contractor capacity
rather than support for lenders
______
Responses of David E. Sundstrom to Questions From Senator Bingaman
Question 1. How important are tax incentives to stimulating
commercial building efficiency retrofits? Are there specific incentives
we should enact?
Answer. Although in my role as Auditor Controller Treasurer Tax
Collector of the County of Sonoma, and Administrator of our local
Property Assessed Clean Energy (PACE) program we have no direct
experience with federal tax incentives, we are aware of their
importance in motivating property owners towards retrofitting their
property. Informed tax professionals working with commercial building
owners and building performance professionals can best define the
return on investment impacts to a business.
One particularly difficult segment of the market to stimulate to
embrace energy efficiency upgrades is the multifamily housing sector. A
large percentage of multifamily housing units are owned by real estate
investment trusts, whose mission is to enhance the profits of the
partners in the trust. Because the building owner does not pay the
energy bill, there is no motivation, without proper incentives or
mandates, to upgrade the property. An excellent analysis entitled
``U.S. Multifamily Energy Efficiency Potential by 2020'' can be found
at: http://www.benningfieldgroup.com/docs/
Final_MF__EE_Potential_Report_Oct_2009_v2.pdf. That study on
multifamily housing concludes on p. 5: ``We estimate that the
achievable potential (the economic potential further bounded by
reasonable expectations of budgets and adoption rates) by the year 2020
is over 51,000 gigawatt-hours of electricity and over 2,800 Million
therms of natural gas (or the equivalent for those regions that use
other fuels). That is roughly equal to the output of 20 average sized
coal power plants and the entire non-power plant natural gas usage of
California, Oregon, and Washington. The potential savings would have a
value of nearly $9 Billion annually to property owners and tenants,
compared to current energy costs of over $31 Billion.''
We would urge the Committee to consider methods of stimulating this
particularly difficult segment of commercial properties toward
efficiency upgrades.
Question 2. Government policy makers have been trying to stimulate
large scale efficiency retrofit commercial building industry for more
than three decades, but experts say that mandates may be required to
stimulate the real estate industry to perform large scale energy
efficiency retrofits in the commercial sector, other than a few high
profile trophy buildings. Do you agree or disagree that mandates will
be required for the commercial sector to do large scale retrofits? What
are the alternatives?
Answer. While this is not my particular area of expertise, because
of my role as Administrator of our PACE program we believe a
combination of mandates and incentives may be required to motivate
efficiency upgrades. As explained in Response No. 1, some areas of the
market, particularly multifamily housing, are very difficult to reach.
Commercial property owners will consider upgrades if the upgrades
financially benefit them, financing is available, and existing lenders
support, or at least do not oppose, that decision. Some combination of
rewards and mandates may be necessary to drive efficiency upgrades and
motivate property owners that do not directly bear the energy costs of
a building.
Question 3. How can utilities be encouraged to adopt the successful
small commercial and industrial program that was described by Ms.
Borrelli from United Illuminating? The combination of turnkey service,
cost-effective incentives and zero-interest financing has been very
effective in Connecticut and Massachusetts. These programs should be
implemented across the country. How can we replicate these programs?
Answer. To the best of our knowledge, while both of these programs
are very successful, they are also highly subsidized. Over time, we
need to transition to programs that can operate with little or no
subsidy and utilize private capital so that the scale is not limited to
scarce government funds. PACE provides a vehicle for that approach, in
both the commercial and residential sectors.
In the experience of Sonoma County, program success has rested on
the foundation of strong political will based on established county-
wide community climate and local power generation goals.
Sonoma supports the replication of a one-stop-shop local energy
independence upgrade program model to:
Leverage existing and develop local relationships among
local government agencies, business, education, non-profits,
utilities, trade organizations, etc., engage in a collaborative
operational mode;,
Minimize consumer confusion by leveraging branding
opportunities;
Focus local workforce balancing and development to stimulate
the local economy;
Design and delivery quality assurance in the evolving
building performance and renewable generation industry;
Maximize rebates and incentive;--Deliver unbiased extensive
education and outreach from the perspective of a not for profit
organization; and
Facilitate the pairing of fund sources through partnerships
and the delivering of a financial clearing house to consumers.
A model for replication could include operational funding of the
local government/not for profit agency by local public good utility
charges, leverage rebates of utilities, maximize tax incentives from
the federal government, to educate consumers, develop the clean energy
workforce and facilitate the pairing of private funding sources with
projects, including through the PACE model. We believe our model is
replicable, as demonstrated by the establishment of a PACE program at a
very reasonable cost, and completion of a PACE project in Encina,
Minnesota, using documents and methodology developed by Sonoma County.
Question 4. Ms. Leeds of NYCEEC cited a study published by the
Rockefeller Foundation which estimated the potential for energy
efficiency in institutional buildings at about $25 billion. However,
NAESCO`s testimony (for the record) states that this estimate is low by
a factor of four, based on studies performed by the Lawrence Berkeley
Labs. Do you agree that the potential market for energy efficiency in
institutional buildings approaches $100 billion? If not, what do you
see as the potential market and barriers to meeting the potential for
energy efficiency in buildings?
Answer. We do not have access to the utility use data, building
square footage, and current efficiency information required to answer
this question on a national level.
In Sonoma County we completed implementation of a comprehensive
energy retrofit program for our central campus in 2010 (institutional
buildings only). This program included numerous building retrofits,
water conservation measures, solar PV installation, and the
installation of a 1.4megawatt fuel cell. The program had zero net cost
to the county from day one and debt service of the upgrades is being
paid through utility savings. The anticipated savings for the County
over the 25 year life of the upgrades is estimated to exceed $35M.
------------------------------------------------------------------------
FINANCING PLAN
------------------------------------------------------------------------
Project Cost $22,272,029
------------------------------------------------------------------------
Incentives, Grants, and Rebates (3,941,226)
------------------------------------------------------------------------
Financed Amount $18,730,803
------------------------------------------------------------------------
Estimated Interest Rate* 4.98%
------------------------------------------------------------------------
Repayment Term 16 years
------------------------------------------------------------------------
Assumed Closing/Funding Date 1/1/09
------------------------------------------------------------------------
Assumed Annual Energy Cost Escalation* 5%
------------------------------------------------------------------------
First year of positive cash flow Year 12
------------------------------------------------------------------------
Total payments $31,794,615
------------------------------------------------------------------------
Total cumulative positive cash flow after 25 $38,404,231
years (estimate life of equipment)
------------------------------------------------------------------------
Responses of David E. Sundstrom to Questions From Senator Murkowski
Question 1. In your opinion, should the federal government be
investing in efficiency? If so, what is the proper role of the federal
government for these types of retrofits?
Answer. The federal government has a key role in creating standards
and certification, such as Energy Star, as well as providing incentives
to meet those standards. In addition, the federal government can lead
the way by retrofitting its own buildings and fleets to demonstrate the
success and cost-savings in efficiency.
The federal government should, however, exercise caution. Many
components work together for a successful nationwide program. While the
government can stimulate one segment, such as manufacturing or
innovation, there must be a market at the end of the day. As discussed
above, there may be tax incentives or mandates that stimulate the
private market for upgrades. In the residential sector, there must also
be financing available to property owners. The position of the Federal
Housing Finance Agency (FHFA) on PACE programs has severely frustrated
making funding available to residential property owners, and crippled
the market for products and services. The federal government should
ensure that its various components are working in unison to promote
national policy.
Question 2. Please describe how the first lien program works within
the PACE Program. How is the PACE Community working with the lending
community to address concerns about the lien priorities?
Answer. PACE programs are authorized by state legislation enabling
local governments to establish assessment- or tax-secured programs so
that properties can be upgraded for energy efficiency or by
installation of renewable energy improvements. Legislatures have found
that there is a public purpose in having these improvements made. The
local government provides the funding which is secured by assessments
or taxes levied on the property. As with all other assessments that
repay bondholders for projects benefitting particular properties
(sewer, road, etc.), the repayment is secured by a priority lien on the
property. There are some 37,000 assessment districts in the country:
this is a well established, well accepted mechanism for funding local
improvement projects that address a public need.
A priority lien is essential in any sustainable and replicable PACE
program. As part of the PACE model, should there be a mortgage default
on a property with a PACE lien, only the amount in default (i.e., not
the entire obligation) would need to be paid upon sale of the property.
The lien would remain in place for all amounts not yet due. In
contrast, if there were no priority lien and the PACE assessment
followed the first mortgage in priority, the sale of the property by
the mortgage holder would eliminate the PACE lien in its entirety. The
public coffers can't sustain this loss; nor could we attract bond
investors in the Program at a reasonable interest rate.
When we established our PACE program, we met with numerous local
banks and worked with several national banks. For commercial
properties, banks requested that the first lender be contacted and
agree that the project made sense for the property. We have implemented
that request and numerous commercial property owners have obtained
their lender's agreement to projects. The commercial lenders generally
evaluate the cash flow: if it is positive, they have no objection to
the project. Although we believe we do not need a lender's consent to
assess a property, we are willing to restrict eligibility for
commercial properties to those that are able to work with their lender
and receive consent.
On the other hand, it is impossible for residential property owners
to obtain lender consent to the priority lien. Mortgages are bundled,
collateralized and sold. The local bank is only the servicer of the
mortgage, without power to agree to a priority lien. Local governments
contend that the priority lien does not violate any provision in
mortgages, and consent is not required, since tax and assessment liens
are anticipated in all mortgage documents. Although some banks agreed
with this position before the Federal Housing Finance Agency challenged
PACE programs, it has not been possible to resolve this issue or reach
agreement with any banks since that time. PACE jurisdictions have
expressed support for HR 2599, which balances the interest of lenders
and local governments desirous of instituting PACE programs. We hope
the Committee would consider sponsoring similar legislation in the
Senate.
Question 3. Is there value in one national program rather than each
state implementing their program such as PACE? Or is PACE better suited
for localities? Who would run such a program on the federal level?
Could you broaden your program to a larger audience, and continue to
maintain cost savings and efficiency improvements?
Answer. It may be valuable to have some national standards, such as
those established in HR2599, if doing so resolves issues with FHFA,
Fannie Mae, Freddie Mac, and lenders regulated by FHFA. National
standards may also assist if creating fungible, marketable bonds that
could be bundled for sale to investors at more favorable interest
rates. However, in our view, PACE programs should be implemented on a
local level although there could be regional cooperation for
efficiency. In Sonoma County, we have partnered with our nine cities to
deliver a countywide program.
Local implementation provides a framework to satisfy local goals
and priorities in alignment with national standards. The building of a
local partnership and collaboration model in this area benefits all
areas of local government operation and provides flexible, responsive
service to the public. Sonoma supports the replication of a one-stop-
shop local energy independence upgrade program model to:
Leverage existing and develop other local relationships
among local government agencies, business, education, non-
profits, utilities, trade organizations, etc., to engage in a
collaborative operational mode;
Focus local workforce balancing and development to stimulate
the local economy;
Design and deliver quality assurance in the evolving
building performance and renewable generation industry
including reliance on local jurisdictions' existing building
inspection procedures;
Deliver unbiased extensive education and outreach from the
perspective of a governmental or not for profit organization;
and
Facilitate the pairing of fund sources through partnerships,
and deliver a financial package to consumers.
A model for replication could include operational funding of the
local government/not for profit agency by local public good utility
charges, leveraging rebates of utilities, and maximizing tax incentives
from the federal government. The local government or entity
implementing the program can educate consumers, develop the clean
energy workforce and facilitate the pairing of private funding sources
with projects.
Response of David E. Sundstrom to Question From Senator Wyden
Question 1. Even projects like Clean Energy Works, which use
private financing, needed government financing to get started. Given
the modest pace of the economic recovery, which limits the amount of
secondary lending for things like energy efficiency, how long do you
think programs like Clean Energy Works will require support? In other
words, when do you think these sorts of programs will get to a critical
mass, and where federal and state support are no longer needed?
Answer. I am not directly familiar with the Clean Energy Works
program. Speaking from the experience of Sonoma PACE, the program
started and continues to operate without requiring any state or federal
funding. The barrier facing the potential of PACE financing is the
opposition by the FHFA and the impact to the program in the long term
financing market. Elimination of the opposition by the FHFA will open
the door for the development of local PACE models leveraging the one-
stop-shop model and partnerships with funding providers. With a grant
funded by the California Energy Commission, Sonoma prepared a
``replication kit'' which has already been used by other jurisdictions
to establish PACE programs and fund efficiency projects. We hope we
have provided valuable guidance to other local governments that will
assist in minimizing startup costs for other programs.
______
Responses of Jeffrey D. DeBoer to Questions From Senator Bingaman
Question 1. How important are tax incentives to stimulating
commercial building efficiency retrofits? Are there specific incentives
we should enact?
Answer. Members of The Roundtable's Sustainability Policy Advisory
Committee (SPAC) have long reported that one of the best ways to
stimulate retrofit projects would be a workable and usable federal tax
incentive for energy efficient commercial buildings. In that regard,
the existing tax deduction at Section 179D of the Internal Revenue Code
should be extended and improved.
Section 179D was first enacted in the 2005 Energy Policy Act,
extended in 2008, and is scheduled to expire at the end of 2013. To
date, this deduction has resulted in some limited success to encourage
lighting upgrades. However, 179D has not lived up to its full potential
to encourage ``deep'' whole-building retrofits because of the costs and
regulatory complexity associated with upgrading multiple systems
including heating and cooling, hot water, windows and roofing, and
insulation. Brenna Walraven, Former Chair of the Building Owners and
Managers Association (BOMA) International and past Vice Chair of the
Roundtable's SPAC, is the national managing director of property
management for USAA Real Estate Co.\1\ She recently reported to the
Wall Street Journal that:
---------------------------------------------------------------------------
\1\ USAA recently collected its eighth award from EPA for energy
efficiency and has been ranked fifth in the Americas in the Global Real
Estae Sustainability Benchmark. See http://www.bizjournals.com/
sanantonio/news /2012/03/06/epa-to-honor-usaa-real-estate-once.html.
USAA . . . [has] tried ``many, many times'' to find
renovation projects that could be supported by use of the
[Section 179D] deduction . . . ``In every case we modeled,
[the benefit] was less than the $50,000 to $60,000 [from
building modeling and other administrative costs] . . . ''\2\
---------------------------------------------------------------------------
\2\ See http://online.wsj.com/article /
SB10000872396390444025204577543060812237798.html.
Other SPAC members and industry leaders confirm Ms. Walraven's
experience. Even those real estate companies that have high levels of
sophistication in energy efficiency design, construction, and building
management typically find the 179D deduction--as presently structured--
too complicated and beyond their reach.
To improve and update the 179D deduction, The Roundtable wholly
supports the 179D reform proposal that Chairman Jeff Bingaman (D-NM)
and Senator Olympia Snowe (R-ME) plan to introduce. They take a
performance-based, technology-neutral approach to 179D reform that
would, among other things:
Measure energy savings for retrofits compared to the
existing building's baseline. For purposes of the tax
deduction, the Bingaman-Snowe proposal measures savings by
benchmarking how much energy a building consumed before a
retrofit, and then comparing how much energy has been saved
after a retrofit. This logical ``before-and-after'' comparison
makes sense for existing buildings with a track record of
energy use, whereby a retrofit plan may qualify for the
deduction based on actual and verified reductions in energy
usage intensity.
Award performance by linking the amount of the tax deduction
to energy savings achieved--Under the Bingaman-Snowe proposal,
the amount of the incentive would increase with greater energy
savings. This ``sliding scale'' approach will encourage
ambitious projects while also rewarding projects that achieve
meaningful yet more moderate levels of energy savings. At least
20% reduction in energy usage is the floor for qualification
under the proposal.
Make the tax incentive useable for a broad range of building
efficiency stakeholders and building types, including REITS--
Many buildings cannot use the 179D deduction because their
ownership structures, like Real Estate Investment Trusts
(REITS) and Limited Liability Partnerships (LLPs), cannot make
use of conventional tax incentives. The full amount of the
deduction should be available for REITS and other similar
holding structures that cannot otherwise use the incentive
because they have no tax liability at the corporate entity
level. Additionally, in order to make the incentive useable for
more buildings, the building owner should be allowed to
allocate the tax deduction to other parties responsible for the
retrofit such as an architect, engineer, contractor, tenant,
source of financing, or energy services company that may
guarantee improved performance.
Question 2. Government policy makers have been trying to stimulate
large scale efficiency retrofit projects for more than three decades,
but experts say that mandates may be required to stimulate the real
estate industry to perform large scale energy efficiency retrofits in
the commercial sector, other than a few high profile trophy buildings.
Do you agree or disagree that mandates will be required for the
commercial sector to do large- scale retrofits? What are the
alternatives?
Answer. The Roundtable does not believe that regulatory mandates
would be appropriate to stimulate energy retrofits. Congress has
considered ideas like regulatory energy codes and building ``labeling''
mandates that would have been administered by the U.S. Department of
Energy (``DOE''). From The Roundtable's perspective, such ``one size
fits all'' federal regulations would make little sense given the broad
diversity of assets that span the U.S. real estate stock (office,
retail, hospitals, restaurants, hotels, schools, single- and multi-
family residential, etc.); the varying stability and prosperity of real
estate markets and submarkets across the nation; and the widely
heterogeneous nature of commercial building tenants and ``plug load''
uses that have a major impact on any given structure's energy
consumption. We are thus encouraged by the trend in recent
congressional proposals that steer away from such ``command-and-
control'' approaches.
The Roundtable believes that the escalating success of voluntary
energy efficiency platforms preclude any perceived need for regulations
that target building and occupant energy consumption. As market-driven
programs gain more acceptance and traction, America's buildings are
indeed making major strides in improved their energy efficiency without
mandates. For example:
The ENERGY STAR program for buildings, administered by the
U.S. Environmental Protection Agency (``EPA''), has been a
great success since its inception in 1999.\3\
---------------------------------------------------------------------------
\3\ See ``A Decade of ENERGY STAR Buildings,'' at pp. 7-8,
available at http://www.energystar.gov/
index.cfm?c=business.bus_ES_bldgs.
--As of today's date, 18,608 facilities have earned the ENERGY STAR
``top-performers'' label covering nearly 2.9 billion of
commercial, institutional, and industrial office space in
the U.S.\4\ Buildings that receive voluntary ENERGY STAR
certifications typically use 35 percent less energy than
average buildings, and cost 50 cents less per square foot
to operate. \5\
---------------------------------------------------------------------------
\4\ http://www.energystar.gov/index.cfm
?fuseaction=labeled_buildings.locator.
\5\ http://www.energystar.gov/
index.cfm?c=evaluate_performance.bus_portfoliomanager_intro.
---------------------------------------------------------------------------
--Also noteworthy is the widespread use of EPA's ``Portfolio
Manager'' program, ``an interactive energy management tool
that allows [building owners] to track and assess energy
and water consumption across [an] entire portfolio of
buildings in a secure online environment.'' This tool
assists building owners and managers to ``set investment
priorities, identify under-performing buildings, verify
efficiency improvements, and receive EPA recognition for
superior energy performance.''\6\ Over 40,000 users
currently rely on ``Portfolio Manager'' to benchmark,
track, and assess energy and water performance in over
300,000 U.S. commercial buildings.\7\
---------------------------------------------------------------------------
\6\ http://www.energystar.gov/
index.cfm?c=evaluate_performance.bus_portfoliomanager.
\7\ https://www.energystar.gov/istar/has/
index.cfm?fuseaction=absdemo.showDemoInfo.
---------------------------------------------------------------------------
--The ENERGY STAR program's national competition, ``The Battle of
the Buildings,'' has seen exponential growth in the past
year alone. In 2011, 245 buildings across the U.S.
participated in this ``biggest loser'' type competition,\8\
where EPA provides recognition to assets that shed the most
``weight'' in terms of energy usage consumption over a 1-
year period, as measured and verified by before-and-after
Portfolio Manager inputs. For the 2012 competition, over
3,300 buildings have registered to participate\9\--an
increase of about 1250% in just a year. This year's
competition will also provide recognition to all registered
buildings that reduce energy consumption by 20% during
calendar year 2012.
---------------------------------------------------------------------------
\8\ http://www.energystar.gov/ia.business/buildingcontest/
downloads/2011_NBC_Report.pdf?d88f-f211.
\9\ http://www.energystar.gov/
index.cfm?fuseaction=buildingcontest.index.
Congress should ``do no harm'' and avoid regulatory programs and
instead foster ENERGY STAR and other voluntary platforms. Expanding the
availability and application of the ENERGY STAR label to more building
types (like retail malls) and subtypes (like large office buildings
with data centers); creating a ``Tenant Star'' program to recognize
energy efficiency in leased spaces within commercial buildings; and
fostering even deeper market penetration of Portfolio Manager, are all
better alternatives for Congress (and the agencies) to pursue instead
---------------------------------------------------------------------------
of controversial and untested mandates on the real estate sector.
Consensus-driven design and construction standards are
making our built environment more energy efficient--without any
federal building energy code. Through quantitative and
qualitative analyses, DOE has determined that successive
iterations of the ASHRAE 90.1 energy standard covering
commercial and larger multifamily buildings will achieve
greater efficiency than predecessor versions.\10\ As ASHRAE's
2010-2011 Annual report asserts:
---------------------------------------------------------------------------
\10\ 2007 version of ASHRAE 90.1 more energy efficient than 2004
version: http://www.energycodes.gov/status/ documents/Standard_901-
2007_Final_Determination.pdf. 2010 version of SHRAE 90.1 more energy
efficient than 2007 version: http://www.energycodes.gov/status/
documents/ Standard_901-2010_Final_Determination.pdf.
The latest 2010 version of 90.1 achieves more than 30 percent
energy savings over the 2004 version of the standard. Extensive
analysis work was performed by a team from Pacific Northwest
National Laboratories in support of the DOE Building Energy
Codes Program. Sixteen different building prototypes were
modeled in 17 different climate zones for a total of 272
building types and climate zone combinations. Without plug
loads, site energy savings are 32.6 percent and energy cost
savings 30.1 percent. Including plug loads, the site energy
savings are estimated at 25.5 percent and energy cost savings
24 percent.\11\
---------------------------------------------------------------------------
\11\ ``Modeling a Sustainable World,'' 2010 ASHRAE Annual report,
available at http://www.ashrae.org/home/search?k=annual%20report.
Rather than creating a first-ever regulatory building energy code
administered by a Washington, D.C. bureaucracy, The Roundtable believes
that DOE's participation in the consensus-based process of ASHRAE (and
similar bodies) should become more open and transparent to all
stakeholders. In that regard, the latest proposal offered by Senators
Jeanne Shaheen (D-NH) and Rob Portman (R-OH) in S. 1000, the ``Energy
Savings and Industrial Competitiveness Act,'' steps in the right
direction. Among other things, S. 1000 would require DOE to conduct
notice and comment procedures when it suggests building efficiency
targets in the context of the IECC/ASHRAE codes and standards
development processes; assess the cost implications, including a return
on investment analysis, of building efficiency targets; and consider
the impacts of such targets on small businesses. These improvements to
DOE's participation in consensus-based processes can encourage more
energy efficiency in buildings--with greater stakeholder support--
---------------------------------------------------------------------------
rather than federal mandates.
The single biggest obstacle to jumpstart more retrofit
projects--especially in the midst of the sluggish recovery from
the Great Recession--remains a lack of available capital for
the up-front costs to pay for building improvements. The
American Council for an Energy Efficient Economy (``ACEEE'')
recently explained:
Without access to private capital there will be limited
funding for efficiency retrofits-and the associated jobs,
energy and cost savings, and environmental benefits will not be
realized. Because capital is scarce for energy efficiency
finance programs, most use either utility or government funding
for the loans, or they rely on small banks and credit unions.
While this approach has had some success, large scale
implementation is not likely.\12\
---------------------------------------------------------------------------
\12\ See Sara Hayes, Steven Nadel, Chris Granda, and Kathryn
Hottel, American Council for an Energy Efficient Economy, ``What Have
We Learned From Energy Efficiency Financing Programs?'' Report Number
U115 (September 2011), at p. 1, available at http://
www.cleanergyfinancecenter.org/wp-content /uploads/EE-Financing-report-
ACEEE-Sept-2011.pdf.
Regulations that would purport to mandate improved energy
efficiency in buildings (such as through federal codes or labeling)
would not address the main impediment to retrofits - namely, a lack of
access to capital and financing. A comprehensive national energy policy
should therefore include tailored and modest incentives that will
leverage far greater sums of private investment capital into retrofit
projects. In particular, Congress should enact the carefully and
thoughtfully crafted reforms of the 179D tax deduction developed by
Senators Snowe and Bingaman in the Commercial Buildings Modernization
Act, and the DOE loan guarantee program for building retrofits proposed
by Senators Shaheen and Portman in the ESIC Act.
Question 3. How can utilities be encouraged to adopt the successful
small commercial and industrial program that was described by Ms.
Borrelli from United Illuminating? The combination of turnkey service,
cost-effective incentives, and zero-interest financing has been very
effective in Connecticut and Massachusetts. These programs should be
implemented across the country. How can we replicate these programs?
Answer. Our members report that success of utility-based energy
efficiency programs generally depend on how well they are capitalized.
Building owners and other consumers will access these programs but they
typically run out of money, quickly. The major barriers to more
widespread adoption of efforts like the United Illuminating program in
Connecticut and New England is the same that impedes retrofit projects
generally--that is, lack of access to investment capital.
Question 4. Ms. LEEDS of NYCEEC cited a study published by the
Rockefeller Foundation which estimated the potential for energy
efficiency in institutional buildings at about $25 billion. However,
NAESCO's testimony (for the record) states that this estimate is low by
a factor of four, based on studies performed by the Lawrence Berkley
Labs. Do you agree that the potential market for energy efficiency in
institutional buildings approaches $100 billion? If not, what do you
see as the potential market and barriers to meeting the potential for
energy efficiency in buildings?
Answer. Regardless of whether the NYCEEC or NAESCO figure is the
correct one, the potential market for building efficiency is undeniably
large and has not reached its potential. More retrofit projects will
certainly ripple throughout the construction, building ownership,
architecture and design, energy services, and real estate financing
sectors of our economy.
A sense of the economic potential that may be specifically
attributed to building retrofits is provided by the contributions of
the building operations industry generally to U.S. gross domestic
product (GDP). According to a report released last month by BOMA
International,\13\ the expenditures that sustain office building
operations-management, maintenance, repairs, building services and
utilities-generate significant, continuous and growing expenditures
that support local businesses, create job demand, and contribute
significantly to GDP. As set forth in my written statement:
---------------------------------------------------------------------------
\13\ ``Where America Goes to Work: The Contribution of Office
Building Operations to the Economy'' (2012), available at http://
www.boma.org/Resources/ news/pressroom/Pages/pr062412.aspx.
For each dollar of office building expenditures, the U.S.
economy gains $2.57. And for every one of those dollars, nearly
20 jobs not related to the building itself are supported.
$79.7 billion in office building operating expenditures
contributed $205.1 billion to GDP in 2011--equivalent to the
State of California's annual budget.
As a result of the $79.7 billion expenditures for office
operations, 1.6 million indirect jobs were created across all
sectors of the economy, about the same number employed by
McDonald's worldwide. This is in addition to the estimated 2.2
million jobs directly related to the on-site management and
operations of buildings.
Regarding retrofit market barriers: As my written statement to the
Committee explains (at pp. 5-6), a properly functioning real estate
financing market is a prerequisite to a functioning retrofit financing
market. The recession and the lackluster recovery, nagging unemployment
figures that still hover around 8%, and falling U.S. property values
have all dampened growth of the retrofit market. Sustained financial
pressure on property owners and lack of credit availability has led to
deferral of maintenance and upgrades on existing properties. Until our
nation gets to a relative place of normalcy on these macroeconomic
issues, the full potential of the retrofit market will not be
unleashed.
As explained above, the lack of up-front capital and debt financing
opportunities is the largest barrier to getting more retrofit projects
off the ground. From the federal policy perspective, The Roundtable
believes that an improved 179D deduction and a DOE loan guarantee
product-specifically geared to building retrofits--will have a
significant impact to encourage building owners and their financiers to
underwrite more efficiency upgrades.
Finally, as my written statement maintains, improving information
flow among owners, lenders, and appraisers (pp. 9-10), and encouraging
utility ``best practices'' to provide energy consumption data to owners
of multitenant buildings (p. 10), are other obstacles that can be
overcome to spur more interest in retrofits.
Responses of Jeffrey D. DeBoer to Questions From Senator Murkowski
Question 1. Please explain why you would support tax incentives
such as 179(D). How do credits and deductions differ within the tax
code? Why do you feel that this incentive makes sense and why should it
be a priority in the context of large-scale tax reform?
Answer. Section 179D offers a tax deduction-not a tax credit. Tax
deductions reduce the amount of income that is subject to taxation. The
value of a tax deduction thus depends on the taxpayer's marginal tax
rate, which rises with income. In contrast, tax credits are a dollar-
for-dollar direct reduction in a person's tax liability and hence have
the same value for all taxpayers regardless of marginal income rates.
Both types of incentives can lower the amount of taxes paid by
individuals and businesses, but each has different economic effects,
budgetary ramifications, and policy implications. As former Senator Don
Nickles testified at a Senate Finance Committee hearing last month on
energy tax policy, law makers must carefully distinguish between energy
tax credits (such as those available for wind and solar energy
production) which operate as subsidies, compared to more favored energy
tax deductions like 179D which are expensed as part of ordinary
business operations.\15\
---------------------------------------------------------------------------
\14\ By way of example: Taxpayer A and B are both in the 33% tax
bracket and they both earn $100 in income. Without any incentives, they
would each pay $33.00 in taxes. If Taxpayer A gets a $10 tax credit,
his tax liability is now $23. If Taxpayer B gets a $10 tax deduction,
her taxable income is lowered to $90 and her ultimate tax liability is
thus $30.
\15\ See streamof June 12 Senate Finance Committee hearing, ``Tax
Reform: Impact on U.S. Energy Policy,'' oral testimony of The Hon. Don
Nickles, available at: http://www.finance.senate.gov/hearings/hearing/
?id=990fl101-5056-a032-5202-6921d68e8769 (at the 26:53, 75:50, and
102:01 marks).
---------------------------------------------------------------------------
Furthermore, 179D is needed to make sure that investments in energy
efficiency improvements are properly incentivized relative to the
deduction allowed for energy use. Under the Internal Revenue Code, it
has been long-established that businesses are allowed to immediately
certain ``ordinary and necessary'' operating expenses such as utility
bills.\16\ However, building retrofit investments (through purchases of
high-efficiency equipment and materials) otherwise qualify as
``commercial income property'' that can only be depreciated as
``capital expenses'' over long periods of time--up to 39 years using
straight-line depreciation.\17\ More inefficient buildings with higher
utility bills may thus immediately benefit from a larger operating
expenses tax deduction compared to retrofitted buildings that use less
energy. 179D thus has a critical role to play in the context of
comprehensive tax reform: It aligns the tax code to properly award
long-term capital investments that save energy (thus helping building
owners bear the immediate up-front costs of retrofit projects), as
opposed to the operating expenses deduction that can otherwise be
claimed for wasted energy.
---------------------------------------------------------------------------
\16\ See http://www.irs.gov/publications/p535/ch01.html.
\17\ See http://www.irs.gov/publications/p946/index.html; http://
www.irs.gov/publications/p946/ar02.html.
---------------------------------------------------------------------------
Finally, the 179D reform proposal from Senators Bingaman and Snowe
meets the hallmarks of tax reform insofar as it is technology-neutral,
performance based, and a lever for significant private investment:
The 179D deduction is a technology-neutral incentive because
it does not pick ``winners and losers.'' It encourages retrofit
projects and not specific products. It gives building owners
the opportunity to select the best mix among a suite of
measures to achieve optimal energy efficiency gains.
The 179D reform proposal is performance-based because it
would link the amount of the deduction to energy savings
achieved. The amount of the incentive would increase under a
``sliding scale'' that will encourage ambitious projects while
also rewarding projects that achieve meaningful yet more
moderate levels of energy savings.
The 179D deduction is expected to leverage three times as
much private sector investment in retrofit projects.\18\ And,
to ensure that building owners and lenders have their own
``skin in the game,'' the maximum tax incentive available under
the Snowe-Bingaman proposal is 50% of the total cost of a
retrofit plan.
---------------------------------------------------------------------------
\18\ See Table 8 at http://c4bb.org/wp-content/uploads/
PeriFINALForRelease06-10-11.pdf.
Question 2. How do you maximize tax incentives? Where do you get
the biggest bang for the buck? Please describe how energy-efficiency
tax credits can be administratively simple and transparent.
Answer. In allocating scarce government resources, policy makers
should consider that financing programs like tax incentives (and loan
guarantees) get more ``bang for the buck'' when they are geared to
encourage energy efficiency measures, as opposed to assisting new
energy production through clean fossil fuel or renewable energy
technologies. Renewable and clean energy production technologies
certainly have their role in a comprehensive national energy policy.
But simply put, the cost of a kilowatt hour of energy saved is cheaper
than the cost of an equivalent kilowatt hour of energy produced. As
portrayed in my written statement to the Committee:
COSTS OF SAVING ENERGY vs. PRODUCING ENERGY
------------------------------------------------------------------------
Technology Costs (per kilowatt hour)
------------------------------------------------------------------------
Energy Efficiency 2-3 cents\19\
------------------------------------------------------------------------
Wind 9 cents\20\
------------------------------------------------------------------------
Geothermal 10 cents
------------------------------------------------------------------------
Advanced Coal 11 cents
------------------------------------------------------------------------
Advanced Nuclear 11 cents
------------------------------------------------------------------------
Solar PV 21 cents
------------------------------------------------------------------------
Offshore Wind 24 cents
------------------------------------------------------------------------
\19\ Costs of saved energy (``CSE'') perkilowatt hour (``kWh'') for
energy efficiency programs range from 2 cents to 3 cents per kWh. See
American Council for an Energy Efficient Economy, ``Saving Energy Cost-
Effectively: A National Review of the Cost of Energy Saved Through
Utility-Sector Energy Efficiency Programs'' (Sept. 1, 2009), available
at http://www.aceee.org/research-report/u092.
\20\ Costs for all power generation sources in table provided by U.S.
Energy Information Administration, ``Levelized Cost of New Generation
Resources,'' Annual Energy Outlook 2011, available at http://
www.eia.gov/oiaf/ aeo/electricity_generation.html (provides ``Total
System Levelized Cost'' for various ``Plant Type(s)'' in dollars per
megawatt hour (``mWh'')). For purposes of table conversion: mWh/
1000=kWh.
Question 3. You are supportive of the loan guarantee program within
S. 1000, the Shaheen/Portman bill. Please describe how the loan
guarantees in S. 1000 are similar or different from the 1703 program
from EPAct 2005 and 1705 programs from the stimulus bill.
Answer. The Shaheen-Portman bill would authorize a DOE loan
guarantee program specifically geared to building retrofit projects.
Since this program was created in 2005, its focus has been on credit
support for nuclear, renewable and other forms of energy production
that have higher degrees of financial and performance risks as compared
to building efficiency projects. Indeed, none of the ``project
solicitation'' from DOE to date have covered building retrofits.\21\
---------------------------------------------------------------------------
\21\ See https://lpo.energy.gov/?page_id=58.
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Shaheen-Portman represents sound energy policy because it would
allow the credit support program to take advantage of the untapped
potential in the building retrofit market. As I provided in my written
statement, there are over 5 million commercial buildings and industrial
facilities in the U.S.; they account for about 20% of the nation's
energy consumption; and up to 85% of commercial buildings that exist
today will still be standing in 2030; and about $20 billion can be
saved if the energy efficiency of commercial buildings and industrial
facilities improves by 10%.\22\ Congress should enact S. 1000's loan
guarantee title because it will encourage more private sector
transactional activity and liquidity to underwrite retrofits-the
primary barrier to efficiency upgrades.
---------------------------------------------------------------------------
\22\ See http://www.energystar.gov/ia/ business/challenge/
learn_more/ FastFacts.pdf; http://yosemite.epa.gov/opa/admpress.nsf/
8b770facfedf6f185257359003fb69e/ 1603327c9023eb8c852579dd005e3385;
PlaNYC, ``Greater Greener Buildings Plan'': http://www.nyc.gov/html/
gbee/ downloads/pdf/ greener_greater_buildings_plan.pdf
---------------------------------------------------------------------------
Moreover, Shaheen-Portman represents sound financing policy - and
would correct errors that came to light through recent investigations
into DOE's loan guarantee program. Legislation pending in the House
finds, among other things, that ``the portfolio of projects the [DOE]
included in the loan guarantee program were higher risk investments
that private capital markets do not generally invest in,'' and that
``most of the projects had little `skin in the game' from private
investors.''\23\ S. 1000 contains myriad provisions that address these
very concerns such as:
---------------------------------------------------------------------------
\23\ H.R, 6213, ``No More Solyndras Act'' (findings (13) and (14),
available at http://thomas.oc.gov/cgi-bin/bdquergy/ D?d112:6:./temp/
bdYBAB::/bss/.
S. 1000 incorporates underwriting and due diligence
requirements for retrofit financing--The bill directs DOE to
develop guidelines that ``shall include . . . measures to
limit the exposure of the Secretary to financial risk in the
event of default,'' like the borrower's ability to re-pay a
retrofit debt and the value of the underlying collateral
supporting the loan. To implement the loan guarantee program
for retrofits, S. 1000 directs DOE to develop underwriting
criteria that assess a borrower's creditworthiness, the
building's loan to value ratio, and the building's history and
expectations in generating rental and other income, among other
factors.
S. 1000 would provide credit support for successful retrofit
projects guaranteed to result in energy savings--The bill
directs DOE to consider private sector, third-party guarantees
of energy savings after a retrofit is implemented, and whether
those savings will pay for project costs over time. S. 1000
provides that DOE (and taxpayers) do not bear the ``performance
risk'' of whether a project will succeed and result in energy
savings. Rather, third-party contractors responsible for the
retrofit like DOE-approved energy services companies-but not
DOE itself--would bear risks that installed energy efficiency
measures will perform as designed. In this way, the transaction
can be structured so as to amortize retrofit financing through
measured and verified energy savings accrued over time.
S. 1000 places an upper limit on the amount of federal
credit support. The bill states that the maximum amount of
financial risk that DOE can bear for any single retrofit
project is $10 million. In contrast, the direct loan (not a
loan guarantee) given to Solyndra left taxpayers on the line
for $528 million after the solar company's default.
S. 1000 allows for proportionate recovery by taxpayers in
the event of default--In the Solyndra situation, the taxpayers'
financial interest was completely subordinated to private
investors. S. 1000 would address this problem through a pari
passu structure if, in the event of default, taxpayers and
private investors would get repaid based on their proportionate
share of collateral interests held as security in the property.
For example: Assume a building owner owes $100, further, $90 of
it is owed to a bank that holds a prior mortgage on the
property and $10 is in the form of a retrofit obligation backed
by DOE. If there is a default, for every ten dollars that is
paid back by the owner, $9 would go to the first mortgagee and
$1 would go to DOE (assuming it is called on the guarantee). In
this manner, taxpayers and prior lien holders are treated
fairly based on their respective shares of security interests
in the property.
S. 1000 provides financial support for retrofits through
loan guarantees--not through loans, grants, subsidies, or hand-
outs--Loan guarantees will provide an incentive to leverage far
greater amounts of private sector investment in building
retrofits, so real estate, lending, and energy services firms
have their own ``skin in the game.'' It has been estimated that
a $200 million federal loan guarantee investment in retrofits
would leverage as much as $2 billion in private sector
financing.
S. 1000 would provide credit support for proven building
retrofit projects that already have a track record of success--
We have case studies on the success of retrofits, such as the
Empire State Building, showcase projects associated with the
Better Buildings Challenge, and the experiences of EPA's
``Partner of the Year'' winners, among others. Retrofits pose
far lower risks for federal guarantee support compared to
unproven manufacture of certain renewable products, where the
market may be heavily influenced by subsidies provided by
foreign competitors.
Response of Jeffrey D. Deboer to Question From Senator Wyden
Question 1. Even projects like Clean Energy Works, which use
private financing, needed government financing to get started. Given
the modest pace of the economic recovery, which limits the amount of
secondary lending for things like energy efficiency, how long do you
think programs like Clean Energy Works will require support? In other
words, when do you think these sorts of programs will get to a critical
mass, and where federal and state support are no longer needed?
Answer. The Roundtable agrees that, assuming meaningful and usable
179D incentives and loan guarantees are enacted and deployed for some
period of time, they can transform the retrofit market to the extent
they are no longer necessary because of adequate sources of private
sector financing. We think, however, that these policies need to be
adopted and implemented for at least a 5-10 year period to build such a
``critical mass'' of retrofit projects. The Roundtable also suggests
that federal agencies with responsibility for these programs must study
and report on successes/failures to Congress, so the legislature can
best decide whether and how these incentives may ultimately be phased-
out after a track record of implementation.
______
Responses of William A. Rodgers to Questions From Senator Bingaman
Question 1. How important are tax incentives to stimulating
commercial building efficiency retrofits? Are there specific incentives
we should enact?
Answer. Incentives will clearly assist with the building owners
return on investment to allow for a much higher propensity to invest.
While the energy savings and corresponding reduction in utility bills
are the most critical component, tax incentives can be an important
element toward meeting the required financial hurdles.
Question 2. Government policy makers have been trying to stimulate
large scale efficiency retrofit commercial building industry for more
than three decades, but experts say that mandates may be required to
stimulate the real estate industry to perform large scale energy
efficiency retrofits in the commercial sector, other than a few high
profile trophy buildings. Do you agree or disagree that mandates will
be required for the commercial sector to do large scale retrofits? What
are the alternatives?
Answer. Mandates can be effective if developed in conjunction with
the industry and are tied into realistic energy savings initiatives.
These mandates should deal with overall energy reduction and not
strictly those areas that deal with retrofit projects.
Question 3. How can utilities be encouraged to adopt the successful
small commercial and industrial program that was described by Ms.
Borrelli from United Illuminating? The combination of turnkey service,
cost-effective incentives and zero -interest financing has been very
effective in Connecticut and Massachusetts. These programs should be
implemented across the country. How can we replicate these programs?
Answer. When energy efficiency measures are aligned through
standard service offerings in conjunction with the utilities these type
of programs will become more prevalent across the country. Currently
most regulatory bodies view these as ``stand-alone'' programs versus
identifying energy efficiency as an overall service that allows for
more customized turn-key delivery to the customers.
Question 4. Ms. Leeds of NYCEEC cited a study published by the
Rockefeller Foundation which estimated the potential for energy
efficiency in institutional buildings at about $25 billion. However,
NAESCO`s testimony (for the record) states that this estimate is low by
a factor of four, based on studies performed by the Lawrence Berkeley
Labs. Do you agree that the potential market for energy efficiency in
institutional buildings approaches $100 billion? If not, what do you
see as the potential market and barriers to meeting the potential for
energy efficiency in buildings?
Answer. We do not have statistics on institutional buildings to
properly determine the market potential. However, when energy
efficiency services are properly identified and education is developed
to provide customers a basis to understand the savings potential I
believe the market is very significant. Most likely closer to the
NAESCO's estimates.
Question 5. Is the United Illuminating commercial and industrial
program one that your company could implement in other states?
Answer. Yes, programs like this would be adaptable to other
markets.
Responses of William A. Rodgers to Questions From Senator Murkowski
Question 1. In your opinion, should the federal government be
investing in efficiency? If so, what is the proper role of the federal
government for these types of retrofits?
Answer. The investment made should center on the efficiency of
federally owned properties. Beyond that it would be beneficial to work
to establish the standards and policy necessary to encourage the
inclusion of efficiency practices and programs in the marketplace. This
would include working with the states and utilities to develop
efficiency standards that will have a direct positive impact on the
ability to increase the level of efficiency related projects to drive
to a higher degree of energy savings across the country.
Question 2. Please describe how your program in Indiana differs
from the weatherization program.
Answer. The Weatherization Assistance Program was focused on income
qualified households and delivered through a number of community action
agencies. It was prescriptive in who and how the work was to be
performed and as such there was a significant challenge in the
understanding and execution of the program to the houses. Some of the
concerns of that program were that the utilities, which provide the
energy services, were not in the loop and a majority of the key
industry service providers were prevented from participating and
delivering services. In our Indiana program one of the programs we do
deliver is an Income Qualified Program that also qualifies customers
based on household income level. The main difference is in the
coordination with the utilities, the clarity of education and
communication with the customers and ultimately the impact to the house
based on the services provided.
Question 3. How do you ensure success within your program (i.e.
energy savings, reduced costs in weatherizing a home, etc.)? How do you
measure success?
Answer. Success in all of our programs that we deliver is based on
the energy saved from the activity that is performed. Based on the type
of program, the equipment involved and the actual services performed
the energy saved is determined and consolidated to understand the
overall impact in the market. We then provide an evaluation,
measurement and verification process which statistically validates the
actual savings achieved.
Question 4. How would you characterize the key drivers of this
program?
Answer. The key drivers of the Indiana program center on a few
critical areas.
i. Open and clear communication with the utilities covering
the parameters of the program as well as regular measurement
studies
ii. Strong branding and educational campaign to allow for the
marketplace to understand and ultimately participate in the
programs
iii. Clarity of communication with the customer regarding the
services to be provided, status of activity and closure of all
work performed
iv. Detailed reporting of all activities including the energy
saved and services performed to allow for critical analytical
work to be performed to predict future impact
Response of William A. Rodgers to Question From Senator Wyden
Question 1. Even projects like Clean Energy Works, which use
private financing, needed government financing to get started. Given
the modest pace of the economic recovery, which limits the amount of
secondary lending for things like energy efficiency, how long do you
think programs like Clean Energy Works will require support? In other
words, when do you think these sorts of programs will get to a critical
mass, and where federal and state support is no longer needed?
Answer. There are a number of organizations similar to Clean Energy
Works across the country that do a tremendous job at developing
relationships between stakeholders that advance the efforts of energy
efficiency. Ultimately any type of Federal support should target
education programs versus execution. The execution component must be
supported by the marketplace and all of the stakeholders must
understand the economic drivers and impact to lend their support. That
type of support will ensure the longer term health of these types of
organizations and their ability to be self-supported.
______
Responses of Sheri Borrelli to Questions From Senator Bingaman
I am glad to be able to further address the Committee through my
written responses to your questions submitted to me for the record and
to elaborate on innovative non-federal programs for financing energy
efficient building retrofits. My responses are highlighted in bold
format below your question.
Question 1a. How important are tax incentives to stimulating
commercial building efficiency retrofits? Are there specific incentives
we should enact?
Answer. Tax incentives may be helpful if properly designed and
implemented to stimulating a viable, sustainable commercial building
efficiency retrofit market. Any tax incentives should be created in an
equitable manner for all commercial property owners with a duration
that extends beyond one to two years. The following describes one
potential scenario.
A structured energy tax incentive based on predicted cost savings
from energy efficiency retrofits for commercial building improvements
is only beneficial to the industry if it has long term sustainable
effects. Tax incentives applied to energy projects should be maximized
for longer periods of time so the investment in the retrofit benefits
the customer. Targeted tax incentives may also be applied towards
specific energy conservation projects. This type of tax incentive would
be instrumental in stimulating commercial building efficiency
retrofits. The level of tax incentive can be tiered relative to the
level of energy reduction achieved. For example, a thirty percent (30%)
energy reduction would achieve a higher tax incentive than a ten
percent (10%) reduction, etc. These tax incentives can be issued as a
tax credit following one year of energy tracking after efficiency
upgrades are installed and based on the comparison to the twelve (12)
month usage prior to installation of upgrades. This type of tax
incentive will keep the customer in business, attract new businesses
(market growth), create jobs, and boost the economy.
Question 1b. Government policy makers have been trying to stimulate
large scale efficiency retrofit commercial building industry for more
than three decades, but experts say that mandates may be required to
stimulate the real estate industry to perform large scale energy
efficiency retrofits in the commercial sector, other than a few high
profile trophy buildings. Do you agree or disagree that mandates will
be required for the commercial sector to do large scale retrofits? What
are the alternatives?
Answer. Investing in energy efficiency commercial retrofits on a
large scale could be one of the most cost effective measures new and
existing buildings could participate in to reduce energy consumption.
Reducing the amount of consumption and operational costs for building
owners in these buildings are goals that can be set. Mandates for
uniform adherence to an efficient building code could be a strategy.
Other alternatives to such mandates are energy efficiency targeted
tax incentives, innovative financing, performance contracting, and
building labeling or rating. These mechanisms are already being
practiced or are being developed. These mechanisms reduce payback
periods, can increase incentives and create a supportive Energy State/
Federal Bill.
Question 2a. How can utilities be encouraged to adopt the
successful small commercial and industrial program that was described
by you from United Illuminating?
Answer. The United Illuminating Company's Small Business Energy
Advantage (SBEA) Program model has served as a template for program
design in other states, and has earned international recognition. The
success of the program hinges on appropriate incentive levels, on bill
financing, and contractor management and it experiences a low loan
default rate. In order for other states to implement the SBEA program
there has to be a commitment on all levels: from the utility to be able
to reduce generation costs and retain the small business customer base;
from the vendor infrastructure being in place to offer an incentive and
the zero percent (0%) financing being backed by the utility company. In
addition, there also has to be a commitment by the customer to
undertake the no cost energy audit, complete the simple application,
etc. When this has been completed, the customer realizes no upfront
costs, a cash neutral or cash positive transaction and an energy
efficient retrofit.
Question 2b. The combination of turnkey service, cost-effective
incentives and zero-interest financing has been very effective in
Connecticut and Massachusetts. These programs should be implemented
across the country. How can we replicate these programs?
Answer. The United Illuminating Company can help other states with
their efficiency goals and standards and program design and be used as
a resource for other utilities who wish to adopt UI's practices. We
continually make ourselves available as a resource to other utilities,
states and/or countries that seek assistance with designing their
programs or establishing efficiency goals and standards.
Recognizing that efficiency goals and standards will vary from one
utility and state to another, efficiency goals and standards may be
ambitious and/or costly to achieve and require going beyond ratepayer
funds. Our financing model is a sensible means to help meet these
goals. We have kept it simple. The financed incentive can cover 100
percent of the upfront cost, or it may make an efficiency investment
cash-flow neutral or cash-flow positive. It is paid to the customer
immediately and typically there are no funds paid up-front. The zero
percent (0%) interest rate and on bill financing is possible with
utility shareholder funds. In addition, we have attractive terms for
repayment of the loan. Financing is critical to getting energy
efficiency projects done in the commercial sector.
Another important aspect of our program that could easily be used
as a template is the vendor structure. All vendors use standard
software for savings calculation and determining incentive awards. If
replicated, the utility should limit the number of contractors to those
who are skill certified, background checked, trained and evaluated on a
regular basis. We have the capability to enter a lead, qualify the
customer for financing, perform the audit, approve the proposal and
present documentation to the customer for signature in the same day.
Question 2c. Ms. Leeds of NYCEEC cited a study published by the
Rockefeller Foundation which estimated the potential for energy
efficiency in institutional buildings at about $25 billion. However,
NAESCO`s testimony (for the record) states that this estimate is low by
a factor of four, based on studies performed by the Lawrence Berkeley
Labs. Do you agree that the potential market for energy efficiency in
institutional buildings approaches $100 billion?
Answer. Yes.
If not, what do you see as the potential market and barriers to
meeting the potential for energy efficiency in buildings?
Responses of Sheri Borrelli to Questions From Senator Murkowski
Question 1a. In your opinion, should the federal government be
investing in efficiency?
Answer. Yes, it is the lowest hanging fruit to accomplish energy
saving goals.
Question 1b. If so, what is the proper role of the federal
government for these types of retrofits?
Answer. Increasing our nation's energy efficiency creates jobs,
saves businesses and consumers money, and increases economic
productivity by providing appropriate targeted tax incentives and
defined goals.
Question 2a. Please describe how you measure performance within the
programs you administer to ensure energy efficiency.
Answer. In accordance with Connecticut General Statute Sec. 16-245m
and Sec. 16-32f, UI submits its annual comprehensive Conservation and
Load Management Plan (Plan) for the implementation of cost effective
electric and natural gas energy efficiency programs. Along with this
Plan, the energy savings are benchmarked through the Program Savings
Document and by historical savings documentation. As a rule of thumb, a
twenty percent (20%) average reduction can be achieved through a
typical lighting retrofit from obsolete lighting to state of the art.
The savings reduction increases as a project becomes more
comprehensive.
Question 2b. Please describe the best policies and programs that
you have participated in that have motivated energy-efficiency
investments.
Answer. In part our program succeeds because of the partnerships
and alliances we form in the community to promote our programs. Our
partners have strong ties to the community since they live there and
work there. Some of the various associations we partner with to conduct
outreach are the Spanish American Merchants Association, ( SAMA) and
the Interreligious Eco Justice Network (IREJN) to reach out to houses
of worship for the SBEA Program and the parishioners for the
Residential Programs. These partnerships have substantial impact on our
program performance.
Response of Sheri Borrelli to Question From Senator Wyden
Question 1. Even projects like Clean Energy Works, which use
private financing, needed government financing to get started. Given
the modest pace of the economic recovery, which limits the amount of
secondary lending for things like energy efficiency, how long do you
think programs like Clean Energy Works will require support? In other
words, when do you think these sorts of programs will get to a critical
mass, and where federal and state support are no longer needed?
Answer. With advances in technology and energy efficiency
strategies it would be hard to define the point at which critical mass
is achieved. The advancement of technology may need programs to
continue incenting energy efficiency.
Currently, our shareholder funds capitalize the program loans, and
we receive our weighted average cost of capital which is approximately
two percent (2%) less than the allowable return on these funds.
Ratepayer funds buy the consumer interest rate down to zero percent
(0%) and provide loan loss coverage. However, if a reserve of money,
for example, a guaranteed fund mechanism replenishes the ``fund'' when
the participants repay the loan, such as state or public funds then
there would be certainty of the fund availability. The federal
government can continue to help by making businesses aware, rewarding
these customers with recognition for participation, and through tax
credits for energy savings achieved.
______
Responses of Susan Leeds to Questions From Senator Bingaman
Question 1. How important are tax incentives to stimulating
commercial building efficiency retrofits? Are there specific incentives
we should enact?
Answer. Tax incentives should help stimulate commercial building
efficiency retrofits, as they will improve the economics of any given
project. However, non-economic barriers also exist. Tax incentives are
absolutely important and useful, but I do not believe that enacting tax
incentives alone will significantly change the pace of retrofit
activity, (unless they are very rich incentives).
I strongly advocate for federal tax incentives for existing
commercial and multifamily buildings as one step that the federal
government can and should take that will have a positive impact on the
pace of retrofits. Congress should extend and reform Section 179D of
the Internal Revenue Code so that it is a more effective incentive for
retrofitting commercial buildings. (There are detailed proposals and
analysis that exist on this matter; the Real Estate Roundtable and the
Natural Resources Defense Council (among others) have analyzed this
matter and can supply details.) Further consideration should be given
to providing accelerated depreciation for retrofit capital equipment,
to allow efficiency improvements to qualify as real estate under REIT
regulations, and to including tenant-focused incentives, as well as
owner-focused incentives. The level of federal incentives directed
towards energy efficiency implementation in buildings is far lower than
those directed at wind and solar technologies; although there is a
strong argument that energy efficiency investment in buildings is more
cost-effective. At a minimum, the playing field between efficiency and
renewables incentives should be leveled.
Question 2. Government policy makers have been trying to stimulate
large scale efficiency retrofit commercial building industry for more
than three decades, but experts say that mandates may be required to
stimulate the real estate industry to perform large scale energy
efficiency retrofits in the commercial sector, other than a few high
profile trophy buildings. Do you agree or disagree that mandates will
be required for the commercial sector to do large scale retrofits? What
are the alternatives?
Answer. I agree that mandates will be required for the majority of
the commercial sector to undertake comprehensive retrofits.
I also believe that without mandates, short-term payback efficiency
investments (12-24 months) will often be made in the Class A commercial
sector and by financial strong institutional buildings.
However, significant gains in more comprehensive energy efficiency
investments across the majority of the commercial, multifamily and
institutional sectors are very unlikely to occur without mandates.
Without mandates, there will likely remain a wide variance in building
energy performance with energy ``hogs'' continuing to be found even in
the Class A commercial sector. Furthermore, I believe that other
sectors such as multifamily, Class B or C commercial and less credit-
worthy institutions will definitely underinvest even in short-term
payback efficiency measures without mandates.
A range of mandates is possible, with varying stringency, including
(1) mandatory benchmarking, (2) code upgrades and enforcement
improvements, (3) required efficiency implementation for major or
partial renovations, (4) clean fuel requirements, (5) mandatory
auditing, (6) mandatory retro commissioning, and (7) required
efficiency measure implementation, etc.
The recent experience of New York City in implementing mandates in
a dense urban environment should be studied when considering how to
accomplish effective mandates. NYC chose to focus on the largest
buildings (over 50,000 square feet) and to implement a suite of
mandates with a range of compliance deadlines that the real estate
sector in NYC was able to digest. See http://www.nyc.gov/html/
planyc2030/html/about/ggbp.shtml for details.
One important feature of this suite of policies is mandatory
benchmarking which requires buildings to report their energy
consumption and makes this information publicly available. Although the
cost of complying with this law is minor for building owners, it is
likely to spur competition with regard to the energy performance of
buildings. See http://www.nyc.gov/html/gbee/html/plan/
ll84__scores.shtml for NYC's recent report analyzing its first year of
benchmarking data.
Another important feature of NYC's ``greener greater buildings
plan'' is the establishment of the New York City Energy Efficiency
Corporation with the goal of improving access to financing for
retrofits projects for commercial building owners who need or want it.
[See www.nyceec.com.]
I strongly urge you to review the approach that NYC has taken and
to follow the results that are produced. It goes without saying that
these policies would need to be adjusted for smaller cities and
communities, and for other parts of the country. I remain convinced
that efficiency is best mandated at the local, or possibly state,
level. This is due to variations in climate, energy market dynamics,
energy prices and resources, utility regulation, real estate market
conditions, prevalent building lease and ownership structures, and
other local factors (including culture) around the country. Although I
strongly believe that these local conditions suggest that mandates
cannot be uniform around the country, I believe that there is much that
the federal government can do to encourage or require such regulation.
I am happy to provide you with names and contact information of the
relevant policy makers in New York City who crafted the local mandates,
if that is of use.
The alternatives to mandates are incentives (such as tax, utility,
and state incentives), well-designed utility programs, education,
marketing and outreach initiatives, and efforts such as the federal
Weatherization Assistance Program (which has provided economic
assistance for many multifamily retrofit projects over the years).
These approaches do stimulate specific energy efficiency projects;
however, they have not had the effect of transforming our commercial
building stock to realize its full efficiency potential. My research
and experience leads me to believe that such alternatives have an
important positive effect, but are not sufficient alone, and that well-
crafted and well-enforced mandates are required.
An alternative that has not been discussed extensively is the
``negawatt'' approach. In this model, utilities would pay for energy
efficiency as a resource, as opposed to offering demand-side incentives
for efficiency implementation. Efficiency aggregators would be
responsible for developing efficiency projects in existing buildings
(much like wind developers develop wind farms), and would sell this
resource back to the grid. Over the years, a few utilities have
experimented with variations on this approach, but there has been no
major push to attempt to implement such a strategy.
Question 3. How can utilities be encouraged to adopt the successful
small commercial and industrial program that was described by Ms.
Borrelli from United Illuminating? The combination of turnkey service,
cost-effective incentives and zero-interest financing has been very
effective in Connecticut and Massachusetts. These programs should be
implemented across the country. How can we replicate these programs?
Answer. Replicating successful utility programs that combine
services, incentives and no-cost financing is a laudable goal. There
are definitely examples of successful programs including these
features, but they are not widespread across the country. One issue
with widespread implementation of these utility programs is likely
cost, as well as the leadership of state utility regulators. The fact
that the business model of most investor-owned utilities is not
conducive to energy efficiency is a barrier.
Zero-interest financing for efficiency projects has cost associated
with it for utilities offering this type of program, and such cost must
be supported and approved by utility regulators. Working with the
Regulatory Assistance Project to educate and influence state utility
regulators may be fruitful. I am not knowledgeable about the ways in
which the federal government can organize and coordinate with state
utility regulators, but this type of communication and coordination is
probably necessary for more widespread implementation of the types of
programs used in Connecticut and Massachusetts.
Question 4. Ms. Leeds of NYCEEC cited a study published by the
Rockefeller Foundation which estimated the potential for energy
efficiency in institutional buildings at about $25 billion. However,
NAESCO`s testimony (for the record) states that this estimate is low by
a factor of four, based on studies performed by the Lawrence Berkeley
Labs. Do you agree that the potential market for energy efficiency in
institutional buildings approaches $100 billion? If not, what do you
see as the potential market and barriers to meeting the potential for
energy efficiency in buildings?
Answer. Energy efficiency potential studies can vary widely, based
on the assumptions made and the objective of the study. Economically
feasible potential can be different from technical or theoretical
potential. In any case, it is true that the potential for efficiency in
institutional buildings remains high, and will not be static. New
technologies to improve building efficiency will continue to emerge.
The built environment is dynamic as well. Construction projects are
undertaken for a wide variety of reasons--but generally not for
efficiency sake alone.
Barriers to meeting potential are well-documented. Efficiency
investment is not typically a priority for most organizations and
institutions. Other barriers include (1) low awareness and attention,
(2) limited organizational capacity / competing priorities for scare
organizational resources, (3) lack of trust in savings projections and
lack of relevant, sector-specific, reliable data on savings
projections, (4) upfront cost, (5) lack of low-cost, long-term
financing, (6) split incentives (although this generally does not apply
to institutions), (7) disruption of ongoing operations, among others.
Basically, in marketing energy efficiency implementation, you are
asking organizations to undertake construction projects in their
facilities that are not strictly necessary.
Finding the right opportunities to introduce efficiency investment
is critical. When equipment fails, when a moderate or extensive
renovation is taking place, when another construction project is being
considered, when refinancing is occurring-there are the points in time
when efficiency must be introduced into the process. Our building stock
will become significantly more efficient when efficiency investment is
routinely ``baked into'' these other events and processes, and when the
barriers to undertaking efficiency at the time of these events and
during these routine processes are removed.
Another important point in relation to understanding potential
accurately is that measurement of the actual level of efficiency
investment activity seems to me sparse. Not only should we be
effectively measuring economically feasible potential--which we need to
do on an ongoing basis and for specific building sectors-but we should
also be attempting to measure the level of actual energy efficiency
investment activity taking place.
Responses of Susan Leeds to Questions From Senator Murkowski
Question 1. In your opinion, should the federal government be
investing in efficiency? If so, what is the proper role of the federal
government for these types of retrofits?
Answer. Yes, the federal government should be investing in
efficiency. It is cost-effective, creates jobs, reduces our use of
foreign-sourced fuels, and improves our environment. It generally pays
for itself.
First and foremost, comprehensive efficiency investment should be
happening in all federal facilities, buildings and organizations.
For non-federal facilities and entities, the federal government can
incentivize efficiency investments by private building owners (through
tax incentives and other mechanisms) and can provide both information
and education to the market. Levers for driving the utility sector
towards greater implementation of, and incentives for, energy
efficiency investments should be explored. My personal belief is that
mandates are necessary to ensure an efficient building stock, and that
such mandates are best implemented by state and local governments. That
said, the federal government could do a lot to assist states and
municipalities in crafting the right suites of policies for increasing
investment in the energy efficiency of existing buildings.
Finally, many impactful energy efficiency programs around the
country are strengthened and enabled by federal grant funds, and the
approach of funding program implementation at the local level is sound.
This type of funding is the type of federal investment that should
continue. The New York City Energy Efficiency Corporation, which is
establishing several highly effective energy efficiency financing
programs enabling numerous commercial and multifamily retrofits, would
not exist without this funding source.
Question 2. Outside of funding from the Federal Government, what
financing options have been most successful in funding energy
efficiency within your program?
Answer. Within our program, the most successful financing options
are (1) the energy services agreement ``version 2.0'' or managed energy
services agreement, (2) power purchase agreements used for cogeneration
equipment, and (3) energy efficiency mortgage financing.
Question 3. Please describe the amount of energy consumed in
buildings. Please describe how retrofits differ between residential and
commercial buildings.
Answer. Buildings (and the ``plug load'' in them) consume
approximately 40% of the world's primary energy and are responsible for
40% of global carbon emissions.
Energy efficiency retrofits are specific to each building, although
in some building sectors, it is possible to characterize retrofit
projects by ``typical'' measures. Single-family residential structures
are typically smaller, and simpler from an energy systems perspective.
Commercial buildings (including large multifamily) tend to have larger
systems, often centralized energy systems, and require a higher degree
of engineering expertise to design effective retrofit projects.
For example, whereas many residential (single family) energy
efficiency programs are prescriptive in design (directing homeowners to
a list of efficiency measures they should implement), New York City's
``greener greater buildings plan'' was designed to encourage smart and
effective retrofit investment in large commercial, multifamily and
institutional buildings (actually any buildings over 50,000 square
feet). NYC's suite of policies includes the requirement that buildings
perform an ASHRAE Level II audit to determine the efficiency measures
they should undertake. Aside from the simplest measures, it is
necessary to take this step of conducting a proper energy audit in
order to identify the specific opportunities for energy efficiency
investment in a commercial facility, and to know how to implement such
measures effectively.
Response of Susan Leeds to Question From Senator Wyden
Question 1. Even projects like Clean Energy Works, which use
private financing, needed government financing to get started. Given
the modest pace of the economic recovery, which limits the amount of
secondary lending for things like energy efficiency, how long do you
think programs like Clean Energy Works will require support? In other
words, when do you think these sorts of programs will get to a critical
mass, and where federal and state support are no longer needed?
Answer. My organization, the New York City Energy Efficiency
Corporation, is similar to Clean Energy Works, in that we needed
government funding to get started. NYCEEC was started with 100% EECBG
grant funding through the Department of Energy, and we are using both
private grants and private financing to complement this government
funding and to increase our organization's operating budget and to
supply additional capital to our energy efficiency financing programs.
We are still in the process of deploying our federal capital, which
we expect to have fully utilized by year-end 2013. It is unclear at
this moment in time whether or not we will require additional
government financing. I currently foresee the need for additional
operating support for NYCEEC - which we expect to receive from the
private philanthropic community, not government sources--for
approximately 3-4 years. Beyond this time (2016/2107) we plan to be
financially self-sufficient, in other words, our program revenue will
support our energy efficiency program operations. I wish to emphasize
that these are approximate projections/expectations based on our
experience so far, and we are a new organization that commenced
operations less than 18 months ago.
Although I believe that it is possible for NYCEEC to operate self-
sufficiently without additional government financing in the timeframe
indicated above, this does not mean that we will be optimizing our
impact and reach. If we are to grow our energy efficiency financing
program to meet the full market potential in New York City, we would do
so most effectively if we had access to additional government
financing.
Appendix II
Additional Material Submitted for the Record
----------
Statement of the American Institute of Architects
The American Institute of Architects (AIA) appreciates the
opportunity to submit this statement for the record and commends the
Committee's work on the critical issue of financing energy efficient
buildings.
Although there are numerous policies that impact financing an
energy efficient built environment, our statement focuses on an energy
efficiency tax provision, the Energy Efficient Commercial Building
Deduction, which is contained in section 179D of the Internal Revenue
Code. Set to expire in 2013, the AIA highlights the 179D deduction as
an example of one provision in the energy tax family that has had a
demonstrable effect on energy efficiency investment, domestic
manufacturing, and design and construction industry jobs.
The 179D deduction has leveraged billions of dollars in private
capital, resulted in the energy-efficient construction or renovation of
thousands of buildings, and created or preserved hundreds of thousands
of jobs in the process. It is one of the best indicators of the
positive impact extensions of energy tax incentives can have on
financing energy efficient property.
The AIA represents over 75,000 architects and emerging
professionals nationwide and around the world. As a leader in the
design and construction industry, the AIA supports incentivizing energy
efficiency in a myriad of ways, but particularly through provisions
like 179D, that have proven to be quite successful in the field.
The AIA strongly supported this provision when it was enacted as
part of the Energy Policy Act of 2005. The AIA also helped form a
partnership with other concerned stakeholders and through this
partnership, developed implementation recommendations for building
owners to obtain this tax deduction. In 2008, the AIA helped pass
legislation to extend the life of the deduction so that it covers
property placed in service by December 31, 2013. That same year, at the
AIA's urging, the IRS issued guidance on how the deduction could be
allocated to the designer.
The AIA was pleased with the initial clarification that this IRS
guidance provided, and many agencies on the federal, state and local
levels followed suit by issuing policies on the allocation of this
deduction.
In recognition of the benefits of the section 179D deduction, there
have been reform proposals offered in recent months aimed at further
enhancing the important tax benefit. The AIA supports reform of the
179D deduction that makes it simpler and more accessible. As these
discussions progress, the AIA also strongly urges Congress to consider
enhancements to 179D that would provide an effective and efficient way
to encourage investments in energy efficiency, stimulating construction
activity and jobs during this fragile time in the nation's economy.
Background on Section 179D, the Energy Efficient Commercial Building
Deduction
The Energy Efficient Commercial Building Deduction was created by
the Energy Policy Act of 2005 (Pub. L. No. 109-58), in recognition of
the fact that a substantial portion of U.S. energy consumption is
attributable to commercial buildings and to provide a tax incentive to
help offset the costs associated with enhancing their energy
efficiency. Section 179D provides a deduction for certain energy-
efficient commercial building property expenditures.
Eligible expenditures are for property which is: (1) installed on
or in any building that is within the scope of Standard 90.1-2001 of
the American Society of Heating, Refrigerating, and Air Conditioning
Engineers and the Illuminating Engineering Society of North America
(``ASHRAE/IESNA''); (2) installed as part of the (i) interior lighting
systems, (ii) heating, cooling, ventilation, and hot water systems, or
(iii) building envelope; and (3) certified as being installed as part
of a plan designed to reduce total annual energy and power costs by 50
percent or more. The deduction is effective for property placed in
service prior to January 1, 2014.
The maximum deduction is $1.80 per square foot. In the case that a
building does not meet the 50 percent energy savings requirement, a
partial deduction of $0.60 per square foot is allowed for each separate
building system that comprises energy-efficient property and that is
certified as meeting required savings targets. To encourage the public
sector to utilize these same energy efficient enhancements, the 179D
deduction also provides a federal, state, or local government owner of
a commercial building an election to allocate the tax deduction to the
primary person responsible for designing the energy efficient
enhancements installed in the building.
Building owners who take advantage of 179D not only enjoy a
deduction for qualifying levels of efficiency but also enjoy
significantly lower energy costs down the road, the benefits of leading
edge design and construction which enhances the building's long term
market value, and the benefits of a cleaner environment overall. Owners
have utilized the deduction for both new construction projects and
retrofits of existing buildings.
Although a public entity cannot take advantage of the tax proceeds
from the 179D deduction allocation, it will also receive other benefits
in the form of energy savings and market value, often totaling more
than the deduction proceeds received by the designer.
The average 179D project (typically $0.60/sq. ft. for lighting
upgrades) saves an agency an average of 20 percent on their energy
expenses. However, even in cases where there are minimal upgrades that
qualify for 179D, agencies have saved relatively large amounts.
For example, when a middle school set out to retrofit its lighting
system, an architect worked to find 12 percent energy savings just on
that single lighting system. The system then qualified for the 179D
partial lighting deduction. In return, the school saved $15,000 on its
energy bill in that year alone. It saved even more the next year, and
will continue to save each year. Over 10 years, that totals to over
$150,000, for a single school. School districts that take advantage of
179D for 5, 10, or 20 schools can save millions of dollars over 10
years, at no additional cost to them, because they can utilize the 179D
deduction to finance the additional energy savings.
This example illustrates the impact of just 12 percent energy
savings in a single school. There are hundreds of other examples of the
deduction providing even greater benefits to school districts, army
bases, civic structures, and other publicly owned buildings across the
nation.
Proposals to Improve the 179D Deduction
There have been reform proposals offered in recent months aimed at
further enhancing this important tax benefit. AIA supports commonsense
efforts that make 179D more usable, effective and simpler. As these
discussions progress, the AIA, in particular, strongly urges Congress
to consider three key improvements to 179D: (1) ensuring the ability of
pass-through entities to capture the full value of an allocated
deduction in the case of a public owner of a building; (2) enhancing
the value of the 179D deduction; and (3) allowing non-profit owners of
buildings, similar to public owners of buildings, to allocate the
deduction.
Allocating the Section 179D Deduction to a Pass-Thru Entity
The section 179D deduction provides a federal, state, or local
government owner of a commercial building an election to allocate the
tax deduction to the primary person responsible for designing the
energy efficient enhancements. In December 2010, the IRS released a
memo that effectively prevents design firms organized as partnerships
or S corporations from fully realizing the benefit of a section 179D
allocated deduction.
This problem is not merely theoretical-almost 80 percent of
architectural firms have fewer than 10 employees and a significant
number of these small businesses are organized as partnerships and S
corporations. Moreover, it is often these small and mid-size firms that
work on state and local government projects such as schools.
By way of background, an allocated section 179D deduction is a tax
deduction that does not reflect an economic cost to the recipient
taxpayer, because similar to a tax credit, the deduction provides an
incentive. The technical tax rules nonetheless treat an allocated
deduction as reflecting an economic cost to the taxpayer and
accordingly reduce partnership and S corporation taxable income and the
partners'/shareholders' basis in the partnership/S corporation (i.e.,
``outside basis'') by the amount of the allocated deduction. The
reduced outside basis may force partners and S corporation shareholders
to recognize taxable gain on the distribution of economic earnings that
were excluded from tax by the allocated section 179D deduction at the
partnership and S corporation level. The IRS memo states that, in the
absence of explicit statutory authority allowing for basis adjustments
to preserve the benefit of the deduction at the partner or shareholder
level, the technical tax rules govern. The result will be that, in the
case of many partnerships and S corporations, the benefit of the
section 179D deduction will be lost or significantly diminished. This
will harm not only these firms, but also the school districts and other
public entities who own the buildings.
In order for partnerships and S corporations to obtain the intended
benefits, it is necessary for partners and S corporation shareholders
to obtain a basis in their partnerships and S corporations that is not
reduced by an allocated 179D deduction. This issue could be addressed
by a simple modification to expressly require Treasury to issue
regulations that properly determine partnership or S corporation
outside basis in the case where the 179D deduction is allocated. Such a
clarification would provide certainty and address a widespread concern
among many small businesses that design energy efficient buildings.
Enhancing the Section 179D Deduction
The impact of the section 179D deduction has become muted over
time. The maximum deduction of $1.80 per square foot has not been
increased since the deduction was put in place in 2005 and, as a
result, has not kept pace with inflation. Moreover, as the economy and
financial markets continue their fragile recovery, the amount of
capital available for building design, construction, and renovation
continues to be limited. A recent AIA survey of architecture firms
shows that nearly two-thirds report that a lack of financing has slowed
or stopped construction projects that would create jobs. Owners are
also less likely to invest the upfront capital costs associated with
energy efficient systems, which often are somewhat more expensive to
design, build, and install than their less efficient counterparts.
In 2010, a coalition of more than 80 organizations and companies
called on Congress to increase the 179D deduction from the current
maximum allowable amount of $1.80 per square foot to $3.00 per square
foot. In the case of individual subsystems, the maximum allowable
deduction should be increased from $0.60 per square foot to $1.00 per
square foot. Bipartisan legislation was introduced in both chambers in
the 111th Congress to enhance the deduction in this way.
Enhancing the 179D deduction would provide an important source of
additional capital to stimulate building design, construction, and
renovation, driving the creation of well-paying jobs. Studies have
shown that every $1 million invested in design and construction yields
28.5 full-time jobs. Moreover, an enhanced section 179D deduction would
further incentivize energy efficiency, improve the nation's commercial
building stock, and increase energy independence.
Allocating the Section 179D Deduction in the Case of a Non-Profit Owner
of a Building
The 179D deduction allocation provision, which allows a federal,
state, or local government owner of a building to allocate the
deduction to the designer, has been used to great effect by design
professionals to encourage their public sector clients to meet the
energy targets of the deduction and then have the client assign them
the tax deduction. The result has been more energy efficient public
buildings, lower energy costs for the building owners, and tax relief
for design professionals.
In many cases, non-profit entities, such as hospitals,
universities, private schools, charities, and foundations, conduct
functions similar to state and local governments. Currently, non-profit
entities own thousands of properties across the country. Although
retrofits to these properties could result in significant energy
savings, the non-profit entities do not pay taxes and, consequently,
cannot benefit from the section 179D deduction.
The section 179D allocation provision should be expanded to provide
non-profit owners of buildings, similarly to public owners of
buildings, with the ability to elect to allocate the deduction to the
primary designer of the building. Such a provision would assist non-
profits in financing energy efficiency upgrades and would reduce their
energy costs in the longer-term.
Conclusion
The AIA appreciates the opportunity to submit this statement for
the record. As Congress considers issues surrounding financing energy
efficient property, it is important to recognize the impact the 179D
deduction has had in leveraging private capital and increasing energy-
efficient construction and renovation. Modest improvements to the
section 179D deduction would increase the effectiveness and efficiency
of this important tax policy. The AIA and its members are ready to
serve as a resource to Congress and the Committee on these and other
issues.
______
Statement of Rick Barnett, Corvallis, OR
Thank you for the opportunity to share my views on non-federal
programs for financing energy efficient building retrofits. I have been
a residential builder and efficiency advocate for 30 years. Since the
70's, building contractors have engaged in efficiency retrofits, guided
by consumer demand and the local building department. Based on their
experience with installations, contractors continue to market
insulation, efficient equipment, and reduced heat loss. The homeowner
is assured of a proper job with the building official's verification of
meeting code standards.
I appreciate your effort in gathering this cross section of
efficiency expertise, and providing an excellent status report of the
industry today. Mr. DeBoer (The Real Estate Roundtable) has succinctly
cast the untapped potential of efficiency: ``Our nation faces
significant economic, employment and energy challenges. One way to
address these challenges is by upgrading the nation's commercial
building infrastructure through energy efficiency ``retrofits''.'' I
believe that the same opportunity is available with residential
efficiency.
From this sampling of program models, I point to the United
Illuminating Company's ``Small Business Energy Advantage Program'' as
the best example of efficiency being delivered without public sector
involvement via ARRA/tax dollars, energy agencies or local tax
departments. With in-house, on-bill financing, this utility program
simply connects contractors to interested energy customers. As Ms.
Borelli, United Illuminating Company's representative, testified, ``by
making investments in energy efficiency appear similar to traditional
utility investments, the utility is encouraged to invest in energy
efficiency''. If utilities use this model for residential programs,
they will invariably improve the product being sold and their return on
investment.
The economic opportunity has been documented for many years: as
referenced in Ms. Leeds' (NYCEEC) testimony, the Rockefeller/Deutsche
Bank (2012) and McKinsey (2009) Reports outline the conservation and
employment potentials. Unfortunately, since residential retrofits were
included in ARRA, my expectation for contractor jobs has not been met.
Rather, I've seen the emergence of a new marketing and verification
system, running parallel to the historical marketing role of
contractors, and oversight role of Building Officials. Mr. Rogers
(GoodCents Holdings, Inc.) graphically identifies some of the new
administrative elements on page 12 of his testimony: only one of his
``Six Common Elements'' is about installing insulation.
The value of streamlining the new trend is not just about better
delivery of efficiency: it's also about improving the efficiency being
delivered. In the current trend, most thermal retrofits bring very
leaky homes into the range of code standards, which have caused the
need to reduce residential demand. Fortunately, existing technology is
able to produce ``net zero'', making higher standards available to
capture the economic potential.
Such a transition to high performance and lower energy bills will
be facilitated by using ``Home Performance Scoring'', where a number is
used to rate a building's measured thermal performance. With evaluation
based on a numerical score, the existing checklist-style energy code
could be simplified.
From my building experience, I believe that a better return on
investment is available from higher performing retrofits. This occurs
because thermal upgrades are labor intensive: using better materials
doesn't significantly increase the cost, but results in significantly
better performance. With an elevated private sector role, I am
confident that efficiency investments would continue improving, until
we routinely optimize the performance of our buildings. Why should we
expect anything less?
Utilities have been increasing their commitment to efficiency,
producing programs like United Illuminating Company. I agree with Ms.
Borelli's concluding statement, that utilities ``are able to utilize
utility funds for the benefit of both the customers and the utility''.
I am confident that more efficiency and construction jobs can be
delivered at a lower cost by continuing to expand utility programs.
Their private sector perspective motivates them to maximize the energy
savings per dollar invested, and fully capture the economic potential
of existing buildings.
When I talk to people about the opportunity represented by our
existing buildings, the question of capital is quickly raised. I
believe that the key to attracting an adequate flow of capital is to
get better at delivering really good efficiency. I ask the Energy and
Natural Resources Committee to encourage a new commitment by the
private sector, to unlock this residential energy asset.
______
Statement of the National Association of College and University
Business Officers
This testimony is submitted today on behalf of the National
Association of College and University Business Officers (NACUBO) which
represents chief financial officers and their staff at more than 2,100
public and nonprofit colleges and universities. NACUBO's mission is to
promote sound administrative and financial management of institutions
of higher education.
In 2009, NACUBO, in collaboration with Second Nature, published
``Financing Sustainability on Campus,'' a resource detailing a range of
financing strategies and options available to campuses responding to
the challenges of financing sustainability efforts. The full range of
financing options are examined in the publication, including internal
resources, grants, bank loans, bonds, leases, energy performance
contracts, tax incentives, power purchase agreements, energy hedges,
renewable energy certificates, and carbon offsets.
In a more recent report, ``Higher Education: Leading the Nation to
a Safe and Secure Energy Future,'' published in June of 2012 by the
National Association of College and University Business Officers,
Second Nature, and the American College & University Presidents'
Climate Commitment, the organizations explore how the federal
government can develop and enhance clean energy incentives and
investments that are specific to the higher education sector and how
these federal policy options could further stimulate deep energy-
efficiency and renewable-energy investments at colleges and
universities.
This testimony reflects the five federal policy options presented
in that report and explores how federal support, with state and local
government initiatives as well as with institutional funds and private-
sector investments can expand possibilities and mitigate or eliminate
barriers to furthering energy efficiency goals at colleges and
universities across the country.
Building on a Solid Foundation
Higher education institutions are on the forefront of advancing
efficient and renewable energy production-from wind and solar
generation, to natural gas cogeneration, to geothermal and biomass
heating and cooling systems. Equally impressive are the dramatic
measures taken to maximize the operating efficiency of campus
infrastructure. During the past decade, institutions have
systematically curtailed energy consumption through multiple rounds of
lighting upgrades, weatherization initiatives, and energy audits and
system controls, and have implemented institution-wide Energy Star
procurement policies. Buildings that adhere to advanced levels of
energy-efficient performance criteria are commonplace on many college
and university campuses. The sector has also embraced aggressive
programs for water conservation, waste minimization and recycling,
alternative-fuel vehicle fleets, and local food production-each with
direct and indirect impacts on campus energy demand.
All these changes are spurred in part by a growing environmental
consciousness among students, but they also represent higher
education's commitment to equip graduates to be future leaders and
problem solvers within a starkly different energy economy than that of
decades past. The pursuit of substantial energy savings and new energy
sourcing also reflects a strong and growing commitment to energy
efficiency among presidents and campus business administrators and a
mounting consensus that such shifts in campus operations are necessary
to contain costs. Ensuring long-term energy reliability and financial
security of the academy are crucial in advancing the educational
mission of America's colleges and universities. According to the
National Center of Education Statistics (NCES), colleges and
universities annually expend more than $14 billion in operations and
maintenance of buildings and grounds. They also expend between $6
billion and $7 billion each year on energy and utilities, about three
quarters of which is directed toward electricity generation,
transmission, and use.
Estimates from APPA, the national association representing higher
education facilities officers, suggest that America's colleges and
universities collectively own and manage more than 250,000 buildings
and heat and cool more than five billion square feet of space on a
daily basis-no insignificant expenditure. For every college and
university, stewardship of energy resources bears a direct impact on
the institution's ability to be a good steward of its financial
resources.
In many ways, institutions of higher education represent the ideal
partner to engage in advanced energy solutions.
Small-scale cities--Many higher education institutions are,
in effect, small-scale cities. Through the built infrastructure
of their campuses, colleges and universities operate as mini-
municipalities of several hundred to tens of thousands of
individuals. Many campuses have their own power plants in
addition to academic and research buildings, dormitories,
cafeterias, athletic facilities, transportation fleets, and
more.
Long-term investors--The higher education sector's long-term
perspective regarding investments, infrastructure, and
buildings, combined with its willingness to adopt new ideas and
technologies and to ``go deep'' with energy-efficiency retrofit
projects underscore the fact that American colleges and
universities can play a key role in leading the nation to
energy independence, energy security, and energy innovation.
Cross section of the nation--Geographically diverse and
serving nearly every population center across the country, U.S.
higher education institutions are ideal places to test unique
local and regional energy solutions and markets in the drive
toward energy efficiency, energy independence, and energy
security.
Learning laboratory--Higher education has a long tradition
of equipping graduates with not only the technical skills and
knowledge to meet current workforce requirements, but also the
critical problem-solving abilities to discern emerging trends
and to solve society's greatest challenges. Modeling a variety
of energy solutions on their campuses is one way colleges and
universities are preparing future scientists and civic leaders
to meet tomorrow's energy challenges and opportunities.
Job trainer--From the responsiveness of community and
technical colleges to quickly develop and introduce training
programs to retool workers' skill sets, to the systems thinking
and complex problem solving offered through immersive learning
opportunities that are a hallmark of so many residential
liberal arts campuses, to the sophisticated and cutting-edge
discovery that takes place at the nation's research
universities, the higher education sector collectively holds
the capacity to train the next generation of energy managers,
engineers, architects, scientists, and entrepreneurs.
Driver of market transformation--In addition to showcasing
to society what is possible in the realm of deep energy
efficiency, the higher education sector has the capacity to
create new and better markets for goods and services. Consider
that the U.S. higher education sector represents operational
budgets totaling $350 billion annually-about 2.5 percent of
U.S. gross domestic product (GDP). College and university
campuses not only possess the purchasing power to encourage
emerging and local energy markets, but they are also in a
position to sustain these markets.
Potential Savings in Energy Demand, Supply, and Distribution
New opportunities exist for colleges and universities to
dramatically improve their energy and fiscal stewardship by further
reducing energy consumption (demand), altering and expanding their
energy sourcing (supply), and maximizing infrastructure improvements
that address energy storage (distribution).
Demand--Opportunities for higher education to lower demand through
deep energy retrofits fall into three primary categories.
Smart labs and high-performance buildings. As a nation, the
United States takes pride in its status as a world leader in
cutting-edge research. One reason that research-intensive
institutions in particular have difficulty reducing overall
energy consumption is because today's highly sophisticated
research typically requires advanced levels of heating and
cooling, illumination, and information technology (IT)
infrastructure to support the research mission. The costs to
build highly efficient labs and retro-commission existing labs
and other campus facilities to improve their energy efficiency
are extensive, yet the potential energy savings through the
introduction of advanced efficiency measures are as dramatic.
When considering that for many research universities, two
thirds of total energy costs for the campus' core teaching and
research buildings are directly associated with their
laboratories, it makes sense to implement measures that safely
manage ``smart'' energy use. The ability to dramatically
curtail research-related energy consumption- particularly in
the thousands of university research labs across the country-
would not only lower the overall cost of research-related
education but would help maximize the federal dollars flowing
into the higher education sector for sponsored research,
thereby providing a direct benefit to taxpayers.
Illumination--Every campus, large or small, can benefit
operationally from broad incorporation of the latest
developments in advanced lighting technologies to more
efficiently illuminate everything from classrooms to parking
lots. Today's lighting retrofits go far beyond switching out
fixtures. Total redesign of lighting systems can incorporate
better spacing of fixtures and the introduction of task
lighting as well as circuits zoned to maximize daylighting and
influence occupancy behavior. This more sophisticated approach
to determining lighting requirements and efficiencies of
laboratories, classrooms, office spaces, residential settings,
and alongside roads, parking facilities, streets, and pathways
suggests that the potential for savings is not only significant
when extended across an individual campus, but is also highly
scalable across the entire higher education sector and beyond.
IT/computers--While computing and information technologies
do not account for the biggest share of campus energy
consumption, they do represent the fastest-growing energy
strain on most campuses. Growing on average at a rate of 20
percent per year, ITrelated energy costs could quickly eclipse
those of illumination if left unchecked. For instance,
computing clusters purchased with federal dollars create
excessive energy demands when the equipment is not installed in
an energy-efficient facility setting.
Supply--Expanding energy-supply options is good not only for
colleges, but for the country. Many higher education institutions are
already pursuing a diverse energy strategy centered on enhanced
efficiency and the transition to renewable and reliable clean energy
sources as a way to stabilize long-term energy costs, provide hands-on
educational opportunities for students, encourage local and regional
economic growth through development of new energy markets, and reduce
dependence on nondomestic energy supplies. Generating demand for
renewable energy should encourage continued development of related
technologies that can lower the costs of these energy sources.
Distribution--As the nation moves to increase its share of
renewable energy production, lingering challenges include the
intermittency of renewable power and the lack of an adequate energy
storage and distribution system. In many respects, colleges and
universities are in the best position to lead the country in developing
solutions to thermal energy storage and distribution because of efforts
already under way on many campuses to incorporate smart metering and
design microgrids that can transfer energy across campus infrastructure
based on demand.
While many colleges and universities have tackled the low-hanging
fruit of quick-payback energy efficiency and conservation efforts on
their campuses, deep energy-efficiency measures represent a tremendous
and as yet untapped opportunity for the higher education sector to
further reduce operational costs.
Herein lies a key role for the federal government: to assist
institutions in meeting the initial costs of pursuing advanced energy-
efficiency opportunities, infrastructure modifications, and alternate
sourcing of energy. The right mix of incentives and investment could
boost institutions over the hump of the current cost feasibility gap in
order to invest in projects that over time would yield long-term
savings dividends for taxpayers.
Five Policy Options for Fostering Energy Efficiency and Renewable
Energy at Colleges and Universities
1. Allow tax-exempt revenue bond financing to prepay power
purchase agreements.
The transition to renewable energy is most expensive for the first
5 to 10 years until projects begin to pay off. Because large-scale
power purchase agreements (PPAs) for these projects cost more
initially, one solution would be to allow colleges and universities to
pre-purchase a 20-year supply of power with low-cost capital bonds and
with flexibility to shape the debt (e.g., interestonly payments during
the early years). The opportunity to use tax-exempt revenue bond
financing for prepayment of PPAs is currently not a qualified use for
the nonprofit higher education sector, although it is available to
municipal utilities.
Many colleges and universities effectively constitute small
municipalities, replete with infrastructures, municipal services like
parking and security, and on-site energy utilities that serve an array
of customers. Investing in an institution's energy infrastructure will
yield certain, long-term fiscal benefits to taxpayers through downward
pressure on tuition and indirectly through lower federal and state
financial aid dollars spent on utility bills.
2. Develop new energy-efficiency and renewable-energy loan
options for institutions of higher education.
Colleges and universities use term loans to fund a wide variety of
projects, including energy investments. There is wide variability in
up-front and ongoing administrative costs as well as interest rates,
debt term and structure, and market conditions on bank debt. A federal
loan guarantee program and/or a federal revolving loan fund dedicated
to higher education energyefficiency and renewable-energy efforts can
take some of the variability and uncertainty off the table as
institutions embark on a long-term energy strategy.
a. Establish a federal loan guarantee program for
energy-efficiency or renewableenergy projects at
institutions of higher education--One potential
solution for financing advanced energy-efficiency and
renewable-energy projects is to provide access to
guaranteed loans. Federally backed loan guarantees are
particularly beneficial to colleges and universities
because these would prevent institutions from pushing
beyond their debt capacity limits, which could
jeopardize an institution's credit rating and adversely
impact its borrowing ability, its reputation, and its
cash flow while also increasing the cost of all
functions that depend on financing. Providing such an
option for the higher education sector to finance
energy projects would also provide real value for the
government, since there are few entities that are less
risky than public universities when it comes to
offering loan guarantees, and since the outcome would
return real savings to taxpayers.
b. Develop a federal revolving loan fund for energy-
efficiency initiatives--Revolving loan funds (RLFs) are
increasingly common on college campuses and could be
used as a model for federal investment. A revolving
loan fund provides capital for projects that create
some level of return or cost savings, such as energy-
efficiency or renewable-power projects. Some portion of
that return or savings is used to repay the fund until
the full project cost has been paid off. Repayment can
include an interest rate or be interest-free. As the
fund is replenished it can finance more projects that
meet the RLF's investment criteria. According to a
recent study by the Sustainable Endowments Institute,
more than 50 higher education institutions have at
least $66M invested in green revolving loan funds, with
an average rate of return of 32 percent. Colleges and
universities have generally found RLFs to be a
flexible, relatively lowcost, high-return mechanism for
funding energy-efficiency projects. Such a program on a
national scale would result in tremendous efficiencies
on campuses across the nation.
3. Establish, alter, and fund federal grant programs.
Section 471 of the Energy Independence and Security Act of 2007
authorized, for FY09-FY13, grants and loans to institutions of higher
education to carry out projects to improve energy efficiency.
Unfortunately, the program has never been funded. Congress should
support the overall goals of Section 471 and consider reauthorizing and
funding the program. The higher education sector recommends modifying
the program to incent state-based matching grant programs, eliminating
the $1 million limit on the maximum award, and enabling the federal
grant to support up to 30 percent of total project cost.
Additionally, the American Recovery and Reinvestment Act of 2009
created a renewable-energy grant program that is administered by the
U.S. Department of Treasury as Renewable Energy Grants, taken in lieu
of the federal, business, energy investment tax credit (ITC). Only
colleges and universities partnering with commercial developers can
benefit from the program. Eligibility should be extended to tax-exempt
entities.
4. Allow long-term charitable deductions and tax credits for
biomass and biomethane contributions.
Solar, wind, hydro, and geothermal energy are not viable options in
all parts of the country. However, biomass and biomethane, especially
in agriculturally dense communities, have proven to be practicable
options and of growing interest within the higher education sector for
combined heat-and-power applications. These systems hold great promise
not only for college and university energy generation but for
transforming the nation's energy economy. Yet, construction of a bio-
digester plant represents a huge capital investment-upwards of tens of
millions to hundreds of millions of dollars to get up and running at
scale. Likewise, assurance of a steady flow of the materials needed to
power the system is essential for embarking on such a large-scale
commitment. A change in the tax code to assign a charitable
contribution to a supplier of organic material (e.g., farm, canning
operation, cheese maker, etc.) and make it contingent on a length of
time (e.g., 10 years) would give incentive to the provider to maintain
the flow of materials and would provide reassurance regarding supply to
institutions contemplating such a major investment. Gift tax benefits
should be offered for the imputed value of source materials if donors
are willing to make a 10-year commitment.
Extending existing incentives and tax credits to biomass, biogas,
biomethane, and geothermal production in addition to wind, solar, and
hydro power solves a supply-side challenge and could make the
difference for many institutions to take advantage of readily available
renewableenergy sources in their region. Agricultural communities in
particular offer great promise for institutions to partner on projects
that would reduce consumption of and dependence on foreign sources of
energy and would open up new possibilities for domestic fuel markets.
5. Extend eligibility of clean and renewable energy bonds.
The U.S. higher education sector is a national leader in renewable-
energy purchasing and development. Colleges and universities in many
cases are exceeding state-mandated renewable portfolio standards as
part of their total power supply, some with support from Clean and
Renewable Energy Bonds. The CREB program allows entities to finance
renewable-energy projects at lower costs than traditional financing
mechanisms. Currently, private colleges and universities are not
eligible to take advantage of this tax credit bond. Extending
eligibility of this financing option to independent institutions could
boost participation in renewable-energy markets.
In conclusion, at a time when economic resurgence and job creation
remain national priorities, incentivizing investment in infrastructure
that can lead to economic productivity and markedly lower costs is not
only logical, but necessary. For public institutions in particular, it
is fiscally responsible for governments to take the steps necessary to
make every investment in energy efficiency for the properties they own.
Through bolstering incentives and investments in advanced energy
efficiency and clean domestic-energy sourcing, both federal and state
governments have the means to avoid waste and to pursue the wise use of
taxpayer dollars applied to these efforts to ensure that precious
resources are available for other critical needs.
______
NAESCO,
Washington, DC, July 10, 2012.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 304
Dirksen Senate Building, Washington, DC.
Hon. Lisa Murkowski,
Ranking Member, Committee on Energy and Natural Resources, U.S. Senate,
304 Dirksen Senate Building, Washington, DC.
Re: June 28 Hearing on Energy Efficiency Financing
Dear Senators Bingaman and Murkowski:
The National Association of Energy Service Companies (NAESCO)
appreciates the opportunity to submit these comments for the record in
the matter of the above-referenced hearing.
NAESCO has had a chance to review the testimony offered by various
parties at the June 28 hearing, and we concur with much of what the
witnesses said. We would like to amplify some of the points that they
made and offer several policy suggestions, based on the experience of
our members that collectively provide approximately $4 billion in
energy efficiency investment annually to public and private sector
building owners.
First, we agree that the potential for energy efficiency in the US
is huge, and that the nation desperately needs the kind of leadership
that your committee has demonstrated with its overwhelming bipartisan
support of common-sense energy efficiency legislation. We believe, as
several witnesses said, that energy efficiency should be the nation's
first energy resource. No other source of energy is as cheap and
plentiful as energy efficiency. The high costs and technical issues
involved with other energy sources--coal, nuclear, oil tar sands, shale
gas, etc.--demand that we make the most efficient use of every unit of
energy we have. We, therefore, urge you to press forward with
consideration and enactment of your legislation in the Senate, and to
work to convince your colleagues in the House to immediately move
similar bi-partisan approaches.
If we have any quarrel with the estimates of the potential for
energy efficiency in the US, it is that the estimates are too modest.
For example, Ms. Leeds from the New York City Energy Efficiency
Corporation (NYCEEC) cited a study published by the Rockefeller
Foundation and Deutsche Bank, which estimated the potential for energy
efficiency in institutional buildings at about $25 billion.
We believe this estimate is low by a factor of four. The federal
government has estimated that its potential energy efficiency
improvements in buildings is more than $8 billion, and federal
buildings represent a small fraction of the total square footage of
institutional buildings in the country. NAESCO, based on studies
performed by the Lawrence Berkeley National Laboratory, estimates that
the potential market in institutional buildings approaches $100
billion.
This potential, of course, equates to jobs--hundreds of thousands
of jobs in the hardpressed construction industry--as well as billions
of dollars of reductions in taxpayer expenditures for wasted energy.
Second, we would like to provide some historical context for the
status of energy efficiency in commercial buildings, and make a policy
suggestion based on this history. NAESCO member companies, NAESCO
staff, government policy makers at all levels and utility companies
have been trying to stimulate large-scale energy efficiency retrofits
in the commercial building industry for more than three decades. Our
efforts have not yielded significant results, particularly in the Class
A tenant-occupied buildings. We appreciate the fact, as Mr. DeBoer
noted at the hearing, that the commercial real estate market is in a
financial trough today, but during these three decades the real estate
industry has gone through several full boom-and-bust cycles, and there
was no noticeable uptick of energy efficiency retrofits during the boom
cycles, such as the first part of the last decade.
The problem is that the real estate industry does not believe that
increasing energy efficiency is its business. Rather, the industry
defines its business as buying and re-selling buildings. Moreover, many
landlords don't see the value of making their buildings energy
efficient as they pass on the energy costs to their tenants. We,
therefore, think that mandates are going to be required to stimulate
the real estate industry to pursue energy efficiency outside of a few
high profile trophy buildings. We know that government mandates are an
unpleasant topic these days, but the history of the real estate
industry is that they work. More than a decade ago, most jurisdictions
mandated that commercial buildings be retrofitted with fire-suppression
sprinkler systems. The real estate industry protested vigorously that
the retrofits would be financially ruinous, but a decade later the job
was done. And sprinkler systems do not pay for themselves from savings,
as energy efficiency retrofits do.
The near potential for mandates is massive. As Mr. deBoer noted in
his testimony, more than $1.4 trillion in commercial mortgages will be
refinanced in the next three years. A mandate that all new commercial
mortgages be increased to finance all of the retrofits that are
costeffective within the term of the mortgage (e.g., a five-year
mortgage would be expanded to include all retrofits that have a payback
of five years or less) would have no practical effect on the building
owners (since the retrofits would repay their costs on a cash flow
basis) but would significantly increase the value of the buildings over
their remaining life.
Third, the Committee should seek ways to encourage utilities to
adopt the very successful small commercial and industrial program that
was described by Ms. Borelli from United Illuminating, a Connecticut
utility, at your hearing. The combination of turnkey service,
substantial and cost-effective utility incentives and zero-interest
financing has been very effective in Connecticut and Massachusetts.
These programs should be implemented across the country. Utilities
should also be encouraged to investigate expanding these programs into
large buildings, many of which could be seen to be vertical
aggregations of small customers that could be serviced with the same
programs that today service horizontal (i.e., neighborhood stores and
businesses) aggregations of small customers.
In closing, NAESCO appreciates the opportunity to offer these
comments for the record, and we are ready to answer questions from you
or your staffs or to supply more information about our suggestions.
Sincerely,
Donald Gilligan,
President.
______
Statement of Malcolm Woolf, Director, Maryland Energy Administration,
and Chair, The National Association of State Energy Officials
Chairperson Bingaman and members of the Committee, I am Malcolm
Woolf, director of Maryland Energy Administration and Chair of the
National Association of State Energy Officials (NASEO). NASEO
represents all 56 of the State and Territory Energy Offices and helps
to support and leverage the work of the energy offices throughout the
nation. We are pleased to have this opportunity to discuss some of the
successes and innovations in energy efficiency retrofit financing
programs both in Maryland and other states. Prior to joining the
Maryland Energy Administration, I served as Staff Director of the
Natural Resources Committee of the National Governors Association, as
counsel on the U.S. Senate Environment and Public Works Committee and
at U.S. Environmental Protection Agency, and in private legal practice.
My message today is to highlight that America has a rich resource of
energy efficiency readily available and that States continue to be at
the forefront of innovation by developing creative, new financing
solutions to save money, enhance U.S. competitiveness, create
opportunities for the private sector and preserve the environment.
Well-established, long-running programs such as the Nebraska Dollar and
Energy Savings Loan and Texas Loan STAR programs have proven how state
programs can enable more energy efficiency retrofits by working with
the private sector to increase access to financing and reduce market
barriers. Two decades ago, these and other groundbreaking financing
programs were created to open new energy-related economic development
opportunities utilizing seed funds from the U.S. State Energy Program
and other state and federal resources. Other more recent State Energy
Office innovations, such as Maryland's financing programs, the Kentucky
Green Bank, Florida's statewide property assessed clean energy (PACE)
program, Alabama SAVES revolving loan fund, and New York's on---bill
repayment program are pushing the envelope and making great strides
towards scaling up energy efficient retrofits, and leveraging funds
through public-private partnerships with the financial community, even
as consumer, commercial, and industrial demand and confidence continues
to slowly bounce back after the most serious economic downturn in
decades.
In my home state of Maryland, Governor O'Malley led the passage of
the EmPOWER Maryland Act in 2008 to move our state to the forefront of
energy efficiency. Under his leadership, Maryland has achieved a 9.1%
reduction in per capita peak demand, which has helped keep the lights
on while avoiding the need to build a new fleet of fossil fuel peaking
plants. In addition, over 430,000 Marylanders to date have implemented
energy efficiency measures in their homes or businesses that will save
$2.6 billion over the life of the measures and avoid 880,000 metric
tons of CO2, which translates to about 180,000 cars taken
off the road.
Let me share two examples of how we are trying to overcome the
barriers with respect to financing. First, using a longstanding
revolving loan fund, Maryland has provided 70 loans worth about $20
million for energy efficiency improvements that are estimated to save
nearly $60 million in project lifecycle costs. For example, we recently
provided a $600,000 loan to improve a 26-story office building in
downtown Baltimore that, when combined with a utility rebate, will save
over $300,000 per year. Maryland has also helped local governments
update parking garage and traffic lights, hospitals achieve significant
improvements in indoor air quality, and private schools replace aging
and wasteful heating and cooling systems. Typical projects include
lighting, heating, and cooling upgrades, as well as building
optimization technologies and controls. A sister revolving loan program
focused on state buildings has achieved similar results.
Maryland has also created a loan loss reserve fund to help leverage
$15 million in private capital for unsecured residential energy
efficiency loans. In partnership with the Maryland Clean Energy Center,
we are providing affordable capital to homeowners with limited options
for overcoming the upfront cost of an energy efficiency makeover-
without relying on state tax funds.
Other State Energy Efficiency Financing Examples
The Nebraska Dollar and Energy Savings Loan program is a revolving
loan fund that the State Energy Office established in 1990, and over
the last 22 years, the program has financed over 27,000 projects (e.g.,
commercial, industry, small business, residential) totaling over $247
million, with less than $70,000 in defaults or less than a 0.03%
default rate over the program life. Of that $247 million, more than
$111 million came from the state revolving loan fund, and the rest was
financed by Nebraska banks, credit unions, and building owners,
amounting to a 1 to 1 private sector leverage on program funds. The key
to the program's success has been the active participation of the
state's participating local banks and credit unions who view the
program as a good service for their communities and customers, and
therefore good business for them. Currently 290 Nebraska banks and
credit unions offer the program at 914 locations statewide. This
flexible program has supported retrofits in Nebraskan homes,
businesses, and agriculture.
Like the Nebraska program, the Texas Loan STAR program has operated
for more than 20 years. Established in 1988, Texas Loan STAR targets
retrofits in public buildings, including state agencies, school
districts, higher education, local governments and hospitals. Over its
program life, Texas Loan STAR has funded approximately 200 loans
totaling over $280 million dollars. The program has achieved cumulative
energy savings of over $212 million dollars for state and local public
buildings. In 2001, the program was expanded to allow for the use of
energy savings performance contracts (ESPCs), which enabled private
energy services companies (ESCOs) to expand their work with public
buildings and bring their technical expertise to bear to develop more
projects on a larger scale and at lower costs.
In Kentucky, the high level of interest in the Kentucky Green Bank
has shown a large area of unmet need and opportunity in the state.
Founded in September 2009 and capitalized at $14.17 million, this
revolving loan fund completely disbursed all its funds in one and a
half years. The program aims to lower operating costs and energy and
water use without additional taxpayer burden, promote economic
development, and create new construction and energy management jobs.
Through this program, Kentucky has funded improvements at the Kentucky
School for the Blind, the Kentucky School for the Deaf, the Future
Farmers of America Leadership Training Center, and three nursing
facilities in the Department of Veterans Affairs. Many of the larger
projects were accomplished through ESPCs and working with ESCOs.
Florida recently launched a statewide commercial property assessed
clean energy or PACE program to support energy efficient upgrades for
commercial buildings and industrial facilities, which will be expanded
to residential properties in the future. This program approach
addresses two primary barriers to implementing upgrades: high upfront
costs and the owner-tenant split incentive. The voluntary statewide
program addresses those barriers by providing the upfront capital for
improvements and using assessments on the building's annual property
tax bill to serve as security and the repayment mechanism. Although
this program is too new to report results, it is a great example of the
kind of creative, practical solutions States devise. This program
relies on a public-private approach and is a potential proving ground
for PACE financing programs that other states-and federal programs-can
learn from and adapt.
In Alabama, the State Energy Office operates a hybrid revolving
loan fund/loan loss reserve program called Alabama SAVES, which
supports retrofits for private businesses. The $25 million fund is
projected to leverage up to $120 million over its program life. Each
deal is unique, which has proved essential to closing loans on larger
commercial and industrial projects, and the program relies heavily on
its private sector partners such as Philips Lighting, Metrus Energy,
Bank of America, Efficiency Finance, First Commercial Bank of
Huntsville, and a network of engaged engineers and contractors. Without
these partners and their relationships with local businesses, the
program would not have as many projects under development or as much
private sector capital leverage. Although it only launched a year and a
half ago, the program has already financed a number of projects that
have improved the competitiveness of Alabama businesses and supported
job creation. For instance, a $2.3 million loan for new high-efficiency
equipment to the Dixie Group, a carpet yarn manufacturing plant in
Roanoke, Alabama is expected to create 20 new jobs.
Recently, Alaska passed new landmark legislation-Alaska's
Sustainable Strategy for Energy Transmission and Supply, or ASSETS. The
legislation established a $125 million into a Sustainable Energy
Transmission and Supply Development Fund (SETS) to provide low-interest
loans for energy infrastructure and energy efficiency projects in
Alaska, including construction of power lines, new renewable energy
generation projects, natural gas projects, bulk fuel tanks, and energy
efficiency measures. Under ASSETS, the administering agency, the Alaska
Industrial Development and Export Authority (AIDEA), cannot finance
more than one-third of the cost of a project without additional
approval from the Legislature. This provision shows that the state
intends for the private sector to drive the development of energy
projects and leverage their own resources for the majority of a
project's needed funding. This type of public---private partnership at
the state level truly supports economic development and job creation.
Another exciting and innovative program is New York's statewide
utility on-bill repayment program. Established by New York state
legislation in 2011, the on-bill repayment program provides an easier
way for homeowners to make loan payments on energy efficient upgrades
to their homes and because the loan is tied to the meter, it is
transferrable to new owners when the home is sold. Further, putting the
loan repayment on the utility bill provides additional security for the
loan and reduces risk and interest rates. These on-bill loans are
offered as part of the overarching Green Jobs - Green New York program
and benefits from the extensive network and infrastructure that New
York has built over the last decade through its Home Performance with
ENERGY STAR program. Since November 2011, New York has been closing
more than 100 energy efficiency retrofit loans a month.
Less well known is the scale and success of the State and local
public facilities retrofit market, which exceeds $5 billion in retrofit
investments annually. This investment is accomplished almost entirely
with private sector financing linked to State Energy Office and other
state agency programs. The stream of utility bill savings from
upgrading facilities as diverse as office buildings, schools,
correctional institutions, and wastewater treatment plants pays for the
upgrade and returns additional savings. In Kansas, the U.S. State
Energy Program-supported program resulted in the upgrade of 76 percent
of the state-owned buildings. States piloted, refined, and delivered
these programs in partnership with the energy services industry through
energy savings performance contracting two decades ago, which was an
approach later adopted by the Federal agencies and others.
The above are just a few examples of the innovative financing
programs operating in states across the country. Many of these programs
are opening new opportunities for the private sector and helping to
create new retrofit businesses, spurring innovation among financial
institutions, and working with the market to motivate cost-effective
energy efficiency retrofits. NASEO has catalogued State Energy Office-
administered financing programs in an online database, which can be
found at: http://www.naseo.org/resources/selfs/.
Recommendations to Support State Energy Efficient Building Retrofits
To support and further state efforts in facilitating energy
efficient building retrofits, NASEO recommends the following:
1) Continue to support reauthorization and federal formula
funding at $125 million for the U.S. State Energy Program
(SEP). Formula SEP funding is utilized by states to create
innovative programs in a flexible manner that responds to each
state's needs. Many of the financing approaches I have touched
on today are part of larger state strategies to support and
stimulate market growth for energy efficiency. Financing on its
own is just one tool. Past experience has shown us that
programs are the most successful when access to financing is
delivered as a part of a comprehensive and well-designed
program that includes clear marketing, technical support, and
streamlined program administration. SEP is the only program
offered by the U.S. Department of Energy that allows states to
allocate funding within the guidelines and goals of the
program, in ways that are best suited to the opportunities and
resources of each state.
Furthermore, SEP is a highly successful program that has achieved
tremendous results. In January 2003 (and updated in 2005), Oak Ridge
National Laboratory (ORNL) completed a study finding that, ``The
impressive savings and emissions reductions numbers, ratios of savings
to funding, and payback periods . . . indicate that the State Energy
Program is operating effectively and is having a substantial positive
impact on the nation's energy situation'' ORNL found that $1 in SEP
funding yields: 1) $7.22 in annual energy cost savings; 2) $10.71 in
leveraged funding from the states and private sector in 18 types of
project areas; 3) annual energy savings of 47,593,409 million source
BTUs; and 4) annual cost savings of $333,623,619. These cost saving and
leveraging data are all non-stimulus results. Energy price volatility
makes the program more essential as businesses and states work together
to maintain our competitive edge.
2) Continue to support the Weatherization Assistance Program
(WAP), which employs workers in every state and county in
America, and has weatherized more than 7.1 million homes over
the past 35 years. Weatherization has proven its value and is a
highly successful and effective investment in the American
workforce. We support continued funding for the program in FY
2014 at the pre-Recovery Act level of $210 million. This level
of funding is necessary to keep the Weatherization program
operating in all of the states. We also strongly support the
addition of innovative grants, which provide incentives for
non-profit groups like Habitat for Humanity to get into the
weatherization program. We and other state partner
organizations have worked closely with Senator Coons of
Delaware in developing consensus language on innovative grants
as part of the reauthorization bill for the State Energy
Program and the Weatherization Assistance Program.
3) Continue to support the Shaheen-Portman bill. Several of
the provisions in this bill, such as enabling on-bill repayment
for rural electric co-operatives, would positively impact the
energy efficient building retrofit market.
4) Support the Sensible Accounting to Value Energy or SAVE
Act (S.1737). This proposed legislation would improve the
accuracy of mortgage underwriting used by Federal mortgage
agencies by ensuring that energy costs are included in the
underwriting process. Better valuation of energy costs and
energy efficiency in property value would make the economic
benefits of energy efficiency more obvious to consumers and
financial institutions. This would increase market demand and
aid the energy efficient building upgrade industry to scale up
and mature, creating new jobs in construction and
manufacturing.
5) Provide incentives for residential energy efficient
retrofits, otherwise known as home energy upgrades. These
incentives should support deep energy savings using a whole-
house approach and at the same time, allow for a prescriptive
path that incents individual measures such as air sealing and
furnace replacement. All work should be delivered by qualified
contractors and operate under a robust system of quality
assurance and inspection to ensure that the energy efficient
retrofits are executed to the highest quality and to protect
homeowners.
6) Finally, we recommend that the Internal Revenue Service
provide clearer guidance on Qualified Energy Conservation Bonds
(QECBs). QECBs provide a significant resource for state and
local governments to fund energy efficient building retrofits,
and while many state and local governments have taken advantage
of this resource, about 80% of these bonds are still available
for use. In NASEO's discussions with state and local
governments, frequently cited barriers include the lack of
clarity around how projects should demonstrate the required 20%
energy savings for a project, the definition of a ``green
community,'' and recognized processes for local governments to
waive unused allocations back to the state. If IRS were to
issue guidance on these three issues, it would remove these
barriers and allow for easier and greater use of these bonds.
Conclusion
In conclusion, energy efficient building retrofits present enormous
potential to achieve energy savings, increase national security and our
businesses' competitiveness, and support economic growth in partnership
with the private sector. States have been actively working in this area
for decades, and despite the challenges of implementing energy
efficiency retrofit financing programs during an economic downturn
where consumer confidence hit historic lows, the states were still able
to seize the opportunity to lay the groundwork for many innovative
programs that will continue to pay dividends years into the future and
help to scale and transform the energy efficient building retrofits
market. With continued and expanded support and funding, the states and
their private sector partners can further accelerate that
transformation.