By: Aaron Lewis, Mayor’s Office of Sustainability, New York City
According to a 2012 report by The Rockefeller Foundation and Deutsche Bank Climate Change Advisors, there is a $72 billion investment opportunity in commercial energy efficiency retrofits globally that could yield 848 trillion BTUs in energy savings and reduce greenhouse gas (GHG) emissions by 175 million metric tons per year, which is approximately equivalent to the annual GHG emissions from 46 coal-fired power plants. In cities like New York, energy and GHG savings lie in the multi-family housing segment, where 67 percent of the buildings required by law to measure and report their energy usage, are multi-family buildings. That is why C40’s Sustainable Infrastructure Finance Network, brought together policy and technical energy efficiency finance experts from New York City, Boston and Washington, D.C. to share best practices and lessons learned in financing multi-family retrofits. The workshop formed part of Financing Sustainable Cities, an initiative of WRI Ross Center for Sustainable Cities and C40 Cities Climate Leadership Group, funded by the Citi Foundation, focused on helping cities develop business models that can accelerate the implementation of sustainable urban solutions.
New York City, Boston and Washington, D.C. have all set ambitious climate goals and finding business models to support large scale investment in energy efficiency is imperative to those cities achieving the highest level of energy and GHG savings. Over the course of the day and a half workshop, these cities came together to share their successful approaches and discuss possible solutions to common challenges in financing multi-family building retrofits. The models each city presented all varied, but the benefits realized in each city all went beyond energy and GHG savings. All of the programs improve the quality and comfort of multi-family housing, align with climate action and preparedness plans, attract new capital flows and invigorate economic development to create permanent green-collar jobs and training opportunities.
A common challenge faced by all cities was scaling demand. Representatives from Citi and Bank of America highlighted in the financial innovation session that increases in scale and the creditworthiness of investments are critical in unlocking capital for energy efficiency retrofits. While innovative financing mechanisms such as Property Assessed Clean Energy (PACE) have garnered more attention in recent years for facilitating investment in building energy efficiency, these energy efficiency products comprise only a small fraction of the overall commercial real estate loan pool. Greater collaboration is needed between regulators, governments, the real estate market and the financial community to help scale up existing energy efficiency finance solutions and find new solutions to overcome barriers that currently lead to a series of fragmented and small-scale projects.
Instead of dwelling on the barriers, all participants focused on exchanging advice on existing and emerging energy efficiency solutions in their cities that could be replicated in others. The New York Energy Efficiency Corporation (NYCEEC), Urban Ingenuity and Renew Boston Trust presented ground breaking and innovative work underway in each of the three cities to bring energy efficiency to scale.
Established and endowed by the NYC Mayor’s Office in 2011, NYCEEC has financed nearly $100 million of energy efficiency clean energy projects to date across 5.6 million square feet of NYC buildings – eliminating more than 616,000 metric tons of CO₂e and saving more than 19 million MMBtus of energy. Their products range from equipment loans, construction loans, energy services agreements (ESA), power purchase agreements (PPA), pre-development loans and credit enhancement solutions. NYCEEC focuses on building sectors with the greatest contribution to GHG emissions and the toughest challenges in mobilizing energy efficiency investment – namely privately-held, larger commercial and multifamily buildings (including the affordable multifamily sector).
NYCEEC highlighted their Roosevelt Landings project to showcase the flexibility of their financing solutions. Roosevelt Landings is a nine building, 1,000+ unit MF complex that installed deep efficiency improvements and cogeneration to upgrade its aging building systems and improve its bottom line. NYCEEC came into the project to analyze the financing opportunity and provide $4.5 million of debt to facilitate the $8 million project. An ESA and PPA combined financing structure was used to harness third-party capital, align incentives for optimal returns, complement existing mortgage debt and manage the complexity of the project effectively. The project has been a success; ESA and PPA revenue have exceeded projected savings and Roosevelt Landings is a more comfortable place to live.
In addition, NYCEEC has partnered with the NYC Housing Preservation and Development (HPD) to create a pre-development loan program for their Green Housing Preservation Program (GHPP), which provides forgivable and 0 percent interest for energy and water efficiency improvements and low interest loans for moderate rehabilitations. NYCEEC is a great example of a revolving loan fund making strides in advancing climate mitigation investing.
In the case of Boston, to unlock the energy and GHG savings of the $337,976,000 of potential investment in the multi-family sector, Renew Boston Trust developed a new financing model. This is an innovative financing technique that use cost savings from reduced energy consumption to repay the cost of installing energy conservation measures. For the City of Boston it was a major solution helping overcome some of the high cost and complexities multi-family building owners experience in investing in energy efficiency upgrades. The public-private partnership governed by the City of Boston ensures investment-grade projects and attracts 3rd-party project finance.
Washington D.C.’s Department of Energy and Environment (DOEE) and Urban Ingenuity, the program administrator for the DC PACE program, presented on the tremendous success they have had with PACE financing, especially what they call “CivicPACE”, a structure for non-profit building owners. PACE is a particularly attractive financing option for many multifamily properties as it offers off balance sheet funding that covers 100 percent of a project’s hard and soft costs, allowing for the long-term project economics to guide the development of a project rather than a building’s creditworthiness, traditional access to capital, or appetite for debt. This is particularly important for affordable housing developers and other non-profit institutions that may have non-traditional cash flows or ownership structures.
A particularly innovative model that is being developed in DC to finance energy and solar upgrades is a PACE-Secured Power Purchase Agreement (PPA). Typically, a PPA is a contract between two parties, one which generates electricity (the seller) and one which is looking to purchase electricity (the buyer). In the case of DC, a prominent religious institution is looking to make energy and infrastructure upgrades on several large properties. The main challenges for non-profits are monetizing the tax benefits from solar PV, using savings to finance structural work and retiring of traditional mortgage debt. The solution being developed offers $3 million in building upgrades, including a solar PACE-secured PPA for a 300 kW system. PACE improves the PPA structure by adding security for investors, reducing default risk and increasing overall project economics in the transaction. In total, the project will achieve an average annual net savings of approximately $35,000.
New York City, Boston and Washington, D.C.’s models all vary, but the benefits realized to the respective cities go beyond energy and GHG savings. All of the programs improve the multi-family housing stock, align with climate action and preparedness plans, attract new capital flows and invigorate economic development and create permanent green-collar jobs and training opportunities.
The in-depth discovery of the respective financing programs shed light on some current challenges and opportunities that the cities shared. The goal of the workshop was to not only share good practices and lessons learned, but to also set the biggest areas of focus for C40’s Sustainable Infrastructure Finance Network. A major theme that arose was finding a way to move beyond individual projects and continue to develop policies that will drive demand and bring energy efficiency to scale. In addition, the idea of developing tools to better assess, track and report on the market for energy efficiency investing was raised. The main question being asked is, “How do we know we are moving the needle on reaching our intended energy and GHG savings?” Lastly, the need for greater peer-to-peer collaboration is imperative. Cities are taking the lead on mitigating the harmful effects of anthropogenic climate change and being able to work collaboratively is the only way we will meet the intended scale to reach our climate goals. Cities are leaders, innovators and trend setters; New York City, Boston and Washington, D.C. are working on models to bring energy efficiency finance to scale and will continue to lead on the topic.
For more information, follow the links below:
www1.nyc.gov/site/sustainability/index.page
www.boston.gov/departments/environment