EEbizModels 0309

March 2009
NEW BUSINESS MODELS FOR

ENERGY EFFICIENCY
Authored by:
Bob Hinkle, Entrepreneur in Residence and
Steve Schiller, Entrepreneur in Residence
New Business Models for Energy Efficiency
Executive Summary
Energy efficiency (EE) is recognized as the simplest, fastest, least expensive and lowest risk resource
to meet growing energy demand. EE measures improve a firm or household’s financial position by
reducing expenses and enhancing reliability and performance of key energy consuming equipment,
while also reducing all consumers’ exposure to grid outages. Prudent investment in EE measures
in existing buildings can save end-users money and earn investors an attractive return. Further, the
environmental benefits of EE are significant, well documented, and widely recognized as the lowest-
cost approach to achieving large-scale greenhouse gas (GHG) reductions.
Over the last 30 years, per capita electricity consumption in the United States has grown over 45%, while
California’s per capita usage has remained flat.1 This divergence began in the 1970s when California first
implemented large-scale EE programs. Although these efficiency programs have generated considerable
economic and environmental benefits, there remains a large amount of untapped energy savings.2 This
paper outlines innovative concepts for how California & the U.S. can overcome key barriers to the
broad-based implementation of EE retrofits at residential, commercial, and industrial facilities.
The central framing concept this paper advances is the need for aggregation to unlock the potential
of EE: financial aggregation of projects to improve investor returns; technological aggregation to address
multiple retrofit opportunities at once; and geographic aggregation to access the broadest possible range
of buildings, engage local support to drive retrofits aggressively, and develop the workforce to make
retrofits possible at the scale contemplated here.
Recommended solutions to advance aggregation and achieve maximum energy savings in retrofit
markets include new financial products, new business models, and supporting public policy efforts.
Financial Products
• Enhanced utility on-bill EE financing options that include the delivery of technical services by
third parties;
• Financing large-scale EE projects at commercial and industrial facilities using power purchase
agreement (PPA)-style efficiency services agreements (ESA);
• Funding EE improvements through contractual assessments (property taxes) that remain with a
property until they are paid off, regardless of changes in ownership;
• EARN equity notes that finance EE transactions in owner-occupied residential real estate.
Business Models
• Portfolio development and implementation of EE projects by building profile or geographic area;
• Comprehensive, whole-building retrofits;
• Expansion of the availability of EE services and the pool of qualified contractors through green
jobs and community-based capacity building initiatives.
1
© CalCEF Innovations White Paper - March 2009
Supportive Public Policies

• Increasing the availability of on-bill financing options across customer classes and technology
types;
• Directing public funds for EE projects, including new federal stimulus money, towards revolving
loan pools accessible at the municipal level;
• Strengthening requirements under the California Solar Initiative to directly link the receipt of solar
incentives to the implementation of comprehensive EE measures;
• Promotion of green leasing structures that align the interests of building owners and tenants;
• Guarantee of energy savings by utilities to stimulate EE investment within selected customer
groups;
• Requirement of energy audits and disclosure of results concurrent with the refinancing or sale of
homes;
• Developing transparent market mechanisms and procedures that allow investors to monetize the
environmental attributes from EE projects.
The solutions discussed herein emphasize a set of selected financial products and emerging business
models and do not address issues such as consumer behavior, energy infrastructure, and utility rate
design. Our colleagues at the American Council for an Energy-Efficient Economy, National Action Plan
for Energy Efficiency Leadership Group, the Clinton Climate Initiative, the Federation of American
Scientists, the Energy Programs Consortium, the Center on Wisconsin Strategy, and other organizations
are putting forth potential answers to these and other key EE issues.
While this white paper stands on its own, a draft version of it also served as a discussion guide for the
December 2, 2008 “Energy Efficiency Technology Impact Summit 2.0,” hosted in San Diego by the
California Clean Energy Fund in conjunction with the UC Davis Energy Efficiency Center, Sempra
Energy, CleanTech San Diego, and the UC Davis Center for Entrepreneurship. The objective of the
session was to explore potential business and policy solutions discussed in the white paper, develop
further innovative approaches to addressing the efficiency challenge, and form consensus around which
actions hold the most promise. CalCEF Innovations and its partners in this effort continue to explore
ways to deploy these ideas in pilot form throughout California, and welcome ongoing comments and
support from interested stakeholders.
2
I. Introduction and Working A significant gap exists between the estimated market
potential of energy savings and what business-as-usual
Assumptions would yield. To capture the large volume of energy savings
projected in market studies, and to meet the increasingly
The mission of CalCEF Innovations is to identify and aggressive efficiency targets being put forth at the state
address issues impacting the long-run transformation of and federal levels, a variety of new business solutions and
the energy economy towards sustainability, including the financing options need to be developed and implemented
formation of enterprises, the continued flow of capital to overcome key financial, market, policy, and technical
into technologies and infrastructure, and the broadening barriers.
of popular support for the clean energy transition. In
this paper, undertaken as part of our Entrepreneurs-In- The technology exists today to meet the need for greatly
Residence program, we examine and posit novel financial expanded EE. While continued innovation in efficiency is
tools, business models, industry partnerships, and public essential to the sustainable energy future, the analysis that
policies to achieve unrealized EE gains. follows assumes that the suite of proven, readily-available
efficiency technologies is sufficient to address the majority
Energy efficiency is a relatively low-cost, high-value of the remaining savings potential in California.
opportunity that has been extensively exploited to the
benefit of California ratepayers and the environment. Certain markets for EE remain under-served, for reasons
Lower transaction costs and economies of scale, however, that are well known. Entities promoting and implementing
tend to drive most activity toward large-scale projects EE understandably emphasize markets and customer
in the MUSH (municipalities, universities, schools, and classes that are most readily accessible, have well-established
hospitals) markets. Disparate and fragmented markets, procurement procedures, and offer opportunities for large
such as residential, small commercial and small industrial blocks of energy savings. Other, smaller opportunities,
opportunities, although representing large potential savings while in aggregate offering large savings potential, are
in aggregate, have proven more difficult to access. However, under-addressed, for reasons such as dispersed decision
potential savings must be achieved in all market segments making, intolerance to payback periods, and high customer
if California is to meet its energy and climate goals. acquisition costs per unit of energy saved and revenue
generated. These markets, in general, include retrofit
Efficiency measures in existing buildings, if implemented opportunities in the residential, commercial and small
aggressively, can have an outsized impact on greenhouse industrial contexts.
gas emissions as compared to a focus on new construction.
In addition to this key working assumption, the following Successful aggregation strategies can help overcome many
components frame our effort: of these key historical barriers. Achieving scale is a critical
issue for any new business but is particularly acute in the
The large potential for expanded EE in California, and EE marketplace, which is characterized by a large number
throughout the U.S., is undisputed. In this paper, we rely of small projects that involve the installation of numerous
heavily on the extensive work done by national groups like types of equipment at facilities with differing operational
the American Council for an Energy Efficient Economy parameters and energy demand profiles.To achieve sufficient
(ACEEE), California energy agencies, and local electric scale in the EE industry, a strategy is required that allows
and gas utilities to clearly identify remaining opportunities for the aggregation of individual projects, technologies,
to expand EE deployment. These analyses have been service offerings, and investments into a larger and more
subjected to rigorous multi-party assessment, and while cohesive combination of opportunities.
certain details may be disputed, we take their high-level
conclusions as given: the potential for further efficiency Support from policy-makers for innovative methods to
gains is substantial, despite California’s and other leading address these challenges is robust. The commitment to
states’ records of aggressive efficiency deployment. California’s loading order of preferred energy resources
continues to manifest itself across the spectrum of resource
3
planning, legislation and regulatory decision

making.3 Increasingly, California’s model is 17,000
100%
considered an example for the nation. In light of 16,000
this, we expect that solutions addressing under- 15,000
served but high-value efficiency opportunities, 14,000
if properly constructed, will find support in the
13,000 100%
policy context.
12,000
11,000
The new California regime of “decoupling plus”
is sufficiently flexible to allow enhanced third-party 10,000
participation in efficiency programs. California’s 9,000
GWh
recent move to establish earnings incentives for 8,000
out-performance against savings targets promises to 7,000 42%
raise the importance of efficiency deployment as a 6,000 100%
key utility strategy.4 The structure of this incentive 37%
5,000
program, however, appears sufficiently flexible to
4,000
allow for enhanced third-party participation in
3,000
the areas of finance and service delivery, while still 41%
allowing investor-owned utilities (IOUs) to book 2,000
performance against regulatory benchmarks. 1,000

While further rule development may be needed, 0
Market Economic Market Economic Market Economic
and careful crediting across a range of benefits Potential Potential Potential Potential Potential Potential
will be required, we believe the proposals for Industrial Commercial Residential
third-party participation described here are
Source: CA EE Potential Study, Itron, September 2008
consistent with this new incentive structure. Note: Market Potential shown above is based on the “mid-restricted” scenario.
Figure 1 Electricity Savings Potential (GWh) for California Investor

Continued large-scale implementation of rate-payer and Owned Utilities 2007 – 2016
publicly funded EE programs is critical. The significant
level of energy savings achieved through utility programs II. The Marketplace for EE in
in California across the entire spectrum of customers is
well documented, including the strong performance of California
the 2006-08 program portfolio of California IOUs. Going
forward, investor- and publicly-owned utilities need to The environmental benefits of EE are significant, as noted
continue their aggressive development and deployment of by the McKinsey Global Institute,5 which singles out
efficiency programs. Private service providers, financers, EE as the lowest-cost measures to achieving large-scale
equipment manufacturers, trade associations, contractors, greenhouse gas (GHG) reductions.
and other EE industry stakeholders will increasingly need
to work in concert with utilities and policymakers to meet A variety of new business solutions and financing options
the state’s growing energy challenges. can bridge the large gap between achievable energy savings
under market current conditions (i.e., market potential)
and the theoretical or economic potential for total savings.
This gap was identified as part of recent updates to the
California Energy Efficiency Potential Study6 and are
illustrated in Figures 1 and 2.
4
2,276 GWh per year of energy savings which

400 100%
is equivalent to approximately 4.5% of total
375 annual industrial electricity consumption.8
350 By 2016, industrial end-users also have the
325
market potential to save 92 million Therms
of natural gas, which is equivalent to 3% of
300
annual industrial natural gas use.9 Key end-user
275 segments include manufacturing, food &
250 beverage, hi-tech electronics, chemicals, and
Millions of Therms
225 pharmaceuticals.
200
Commercial: Commercial end-users
175 account for 38% of total electricity use and
150 25% of natural gas use in California.10 The
100%
125
market potential for electricity savings in
the commercial sector is 4,700 GWh, which
100 24% 71%
is equivalent to approximately 4% of total
75 annual commercial electricity consumption in
50 100% California.11 By 2016 the commercial sector
25 33% has the market potential to save 15 million
Therms of natural gas, which is equivalent to
0
Market Economic Market Economic Market Economic less than 1% of annual statewide commercial
Potential Potential Potential Potential Potential Potential
natural gas use.12 Key customer segments
Industrial Commercial Residential
include office buildings, reail, warehouses,
Source: CA EE Potential Study, Itron, September 2008
Note: Market Potential shown above is based on the “mid-restricted” scenario.
health care facilities, and schools.
Figure 2 Natural Gas Savings Potential (Millions of Therms) for California Residential: In 2008, residential end-users accounted
Investor Owned Utilities 2007 – 2016
for 32% of California’s electricity use and 36% of natural
gas consumption.13 The statewide market potential for
The existence of a considerably large gap between the residential electricity savings by 2016 exceeds 6,000 GWh/
economic potential for energy savings and what is being year and 93 million Therms, which is equivalent to 6.5% of
achieved in California is due in part to the focus of the total annual residential electricity consumption and 2% of
ESCO (energy service company) industry on a narrow annual residential gas use.14
slice of the EE market at tax exempt (TE) / municipal
sector facilities. In other market segments, particularly Note that the savings potentials described above are
the residential sector, opportunities for additional energy expressed in terms of market potential, consistent with
savings have been forfeited due to a historical focus on state planning standards, rather than the larger economic
utility programs and technical services that implement potential;note also the wide gap between these two measures,
individual EE measures rather than integrated solutions. particularly in the Industrial and Commercial sectors. This
further illustrates the importance of new business models
IIa. Overview of the Savings and policy strategies, such as those described below, that
will shrink the gap between these two methods of assessing
Potential in California the potential for expanded EE. For more detail on the EE
savings potential in California, see Appendix A.
Industrial: The industrial sector represents almost 20%
of total electricity use and over 30% of natural gas use in
California.7 The industrial sector has a market potential for
5
IIb. Market Participants by the large transaction size of investments in the TE muni
sector (often greater than $5 million) and standardized
Service Providers procurement procedures that have been in place for decades,
which helps streamline ESCO project development efforts.
The successful implementation of EE projects and programs A byproduct of this narrow business focus is that ESCO
requires the integrated delivery of numerous services and sales and business development practices are designed to
products from private and public sector stakeholders and meet the needs of public sector customers and are not easily
non-governmental organizations. Below is an overview adapted to meet the longer project development cycle
of the key players who are currently engaged in the and more business process-driven needs of private-sector
development of efficiency programs and the provision of clients. Although ESCOs provide a performance contract
technical and financial services to the EE marketplace. that guarantees a portion of a project’s annual energy
savings output, they rarely finance deals using their own
Electric and gas utilities in California offer a diverse funds. The majority of ESCO-implemented projects
portfolio of EE programs for residential, commercial, and are financed using a capital lease16 or are self-funded by
industrial end-users that include providing energy audits, customers.
financial incentives and rebates to install EE equipment,
as well as conducting outreach and capacity-building Energy Service Providers (ESPs) consist of small-and
activities that raise awareness regarding the economic and medium-sized firms that offer a range of technical and
environmental benefits of EE. Over the three year cycle engineering services to identify and implement EE
from 2006 through 2008, California IOUs spent $2.2 projects. ESPs are differentiated from ESCOs in that
billion on EE programs. In July 2008, the IOUs filed their they are independent firms not associated with a specific
EE program applications with the CPUC for the 2009 to technology and typically do not provide long term
2011 period that totaled $3.7 billion. In October 2008, the performance guarantees due to a limited tolerance for
CPUC asked the IOUs to revise their program applications risk exposure and small balance sheet. ESPs that serve the
to be more aggressive and better aligned with the California commercial and industrial markets typically structure their
long term EE strategy. Revised applications were filed in business offerings around an individual EE measure and
March 2009 and in their final approved form could total cover a limited geographic area. In many instances, ESPs
in excess of $4 billion. Although utility EE programs in act as subcontractors on ESCO-implemented projects and
California are among the most comprehensive and well accordingly have a similar geographic footprint to ESCOs
funded in the nation, to achieve the bold targets set forth themselves. Lighting contractors are a subset of ESPs that
by the CPUC, programs will need to be augmented by an have a strong presence in the commercial sector as well as
increased level of participation by local service providers. the TE muni market. There are few dedicated ESPs that
focus on the residential EE market. In general, technical
Energy service companies (ESCOs) are large services provided by residential contractors focus on
energy services firms that provide turnkey engineering, individual efficiency measures, often foregoing the added
procurement, and construction solutions to implement EE energy savings that would be achieved by integrating
projects. ESCOs offer performance contracts, primarily multiple EE measures.
long-term guaranteed energy savings agreements, and
have the technical and financial resources to carry out Financiers and Project Developers
complex design / build EE projects as well as the ability
to provide ongoing maintenance and monitoring services. There are a number of financial institutions providing
The vast majority of projects implemented by ESCOs are capital to the EE market, primarily as part of projects at
in the municipal or TE markets, including public entities TE / municipal facilities that support the market focus of
and private, not for profit groups. Data from a Lawrence ESCOs. Financial institutions have offered little more than
Berkeley National Laboratory (LBNL) study reveals that capital leases, in part because of a reluctance to carry any
the TE muni market accounts for more than 80% of total risk associated with recovering the residual value of EE
ESCO investment activity.15 This focus is driven in part equipment, which are fixtures of customers’ facilities and
6
have a limited or non-existent secondary resale market. and the foci of the market participants described above
In addition, very few financial institutions have specialized is a hurdle in and of itself, numerous sector-specific
capabilities and core competencies in the EE market. As barriers also limit the widespread adoption of EE.
such, the majority of traditional financial institutions are
unable to fully support the underlying structuring and Industrial Sector: Despite having significant EE
development of EE projects. potential, there are several hurdles that hinder the ability to
achieve energy savings at industrial facilities, including:
Trained Workforce • Budget Priorities: Corporate capital budgeting
processes place EE in direct competition with other
One of the limitations to increased EE activity is a core priorities, such as investments that expand
shortage of human resources, both in the private sector production, increase throughput, and or maintain overall
(engineering, construction, maintenance, financial analysis, plant reliability. End-users often lack the budget to
and program design and implementation) and in the public self-finance EE investments and, aside from traditional
sector (measurement and verification, project assessment, capital leasing options, have limited outside financing
permitting, research, development, and deployment). To solutions available to them.
grow the pool of people and EE-related capabilities requires
collaborative efforts of government entities, employers and • Business Interruption: Industrial facilities place
unions, technical societies, and both conventional and heavy emphasis on optimizing manufacturing
non-conventional members of the education community. processes and ensuring continuous operation of plant
This implies training people who are just entering the assets, thereby posing a challenge to efficiency project
workforce, and retraining people who shift careers, implementation.
and expanding the perspective, trade skills, and service • Cost-Benefit Analysis: The ratio of upfront costs
offerings of existing EE professionals. Current relevant (conducting an energy audit, establishing M&V
examples include the PG&E Power Pathways17 training protocols, arranging financing) to the total cost of
and apprenticeship program and the Laney College Green implementing EE measures is high versus short-term
Jobs Corps partnership with the City of Oakland. To stay savings.
competitive and relevant, trade unions and individual firms • Extended Payback Periods: Industrial firms have a
are training their members and employees. short-term horizon for investments and typically require
projects to have rapid positive return on investment. A
III. Barriers to Market recent survey conducted by Johnson Controls revealed
that more than half of the industrial executives and
Development managers that they interviewed would require an EE
project to have a payback period of less than three years,
Despite the broad array of market participants in the which most do not.18
California EE marketplace, their activities have been
largely confined to a relatively narrow band of services Commercial Sector: Barriers to the adoption of EE
that are tailored to the needs of public sector, tax exempt, equipment and practices at commercial facilities include:
municipal customers. While it is true that local utilities • Split Incentives: Split incentives between the
and state agencies offer programs that serve industrial economic interests of property owners, franchises,
and large commercial customers, large portions of the facility managers, and tenants—particularly acute in
market remain underserved. Limited financial products the commercial real estate industry—prevent a building
and business solutions are available to meet the needs owner or landlord from incurring the front-end costs
of key small commercial and residential customers, associated with purchasing EE equipment because they
groups that represent a significant portion of the EE do not bear the burden of paying energy bills for their
savings potential in California. Although this disconnect property.
between market segments with the largest EE potential
7
• Hurdle Rates: Similar to industrial end-users, large barriers to their implementation, and a review of
commercial customers often have limited internal strategies and actions that can lead to their widespread
funds to implement facility upgrades and therefore utilization.
require a high rate of return to proceed with any EE
investments. As illustrated in Figure 6 below, although each solution is
• Financing Up-Front Costs: Limited financial designed to cover different individual customer segments,
products and providers exist that reduce the first cost of as a whole, they span the entire spectrum of energy savings
commercial EE projects. opportunities.
The selection of these business solutions was driven by their

Residential Sector: Existing barriers that limit the abilities to: a) address the underserved market segments; b)
implementation of efficiency measures in residential achieve scale in a timely manner; c) immediately deploy
buildings include: existing EE technologies; d) bolster existing ESCOs and
• Long Payback Periods: There is a reluctance of ESPs to enter new markets; and e) help lead to the creation
homeowners and renters to invest in EE measures that of new service providers who can fill existing voids in the
may not match up with their known time horizon for EE marketplace.
remaining at a property.
• Lack of Residential Contractors: Few vendors In order for these business solutions to meet California’s
have the ability to identify and implement multiple energy savings targets, a series of supporting market-based
EE measures, often resulting in missed opportunities public policy initiatives must be implemented that provide
to increase the level of savings and cost effectiveness the capacity to achieve EE on a massive scale.
associated with taking a more integrated approach.
• Small Project Size: The large number of low-dollar IVa. Innovative Financial Products
value projects distributed amongst a massive market of
individual residential customers makes transaction costs Financial and Geographic Aggregation: Contractual
a significant fraction of any single job, thereby reducing Assessments – Residential & Small Commercial
its profitability for financiers and contractors.
Overview: Passed in July 2008, California Assembly Bill
• Lack of Support for Whole Envelope Retrofits:
(AB) 811 allows efficiency improvements to be financed
Utility incentive programs typically focus on single
from contractual assessments on existing properties (i.e.,
EE measures, failing to capture benefits of multiple
property taxes). Specifically, local cities and municipalities
integrated upgrades.
can finance EE projects by issuing a bond (or raising funds
• Lack of Information and ‘Efficiency Ethic’: through other means) to pay for initial installation costs
While a vast majority of Americans express a desire for with repayment made through tax rolls.20 Despite its recent
investment in efficiency,19 beyond early adopters, those enactment, several cities are already incorporating AB 811
who take concrete action to use EE is relatively small. contractual assessments into their EE and renewable energy
initiatives, such as Chula Vista, Palm Desert, Santa Monica,
IV. Emerging Financial and Berkeley.
Products, Business Solutions, Under AB 811, a local agency within a city or county
and Market-Enabling Public can form an assessment district that has the authority to
levy property to finance EE or renewable energy-related
Policies improvements. Loans under AB 811 are secured by a
property tax that remains with a property until paid off,
What follows is an overview of the selected financing regardless of changes in ownership.21 A key element of AB
products and business solutions, a summary of existing 811 is that it can be utilized only for existing properties.
8
Barriers to Contractual Assessments: Although AB Financial Aggregation: On-Bill Financing (OBF)

811 can help remove first cost hurdles to EE investments, – Residential & Small Commercial
it does not address the challenges that a local entity faces in
raising capital to fund projects and cover administrative costs. Overview: Utilities’ OBF programs have proven successful
Recent recommendations made by officials in Sonoma for residential and small business facilities in New England,
County to take a phased approach to implementing an AB California, and some Midwestern markets. The majority
811 initiative highlight the uncertainties surrounding the of existing programs allow customers to finance efficiency
availability of county-based sources of funding. Further, projects through payments on their monthly utility bill
public bonds which are utilized for AB 811-type activities and typically include the following elements:
would not be tax exempt.22 • No capital outlay to purchase and install equipment
and implement EE measures through the receipt of an
Expansion Strategies and Areas of Support: City interest-free, or low-interest loan;
and municipal agencies, in cooperation with local utilities,
should work to formally integrate property tax-based • Customer repayments are based on estimated energy
and other contractual assessments as a financing savings and are set to at a “cash flow neutral” level
option under any public, private, and utility EE and compared to their previous energy bills; and
renewable energy program. To the extent possible, any best • Ability to receive a cash rebate or incentive that can be
practices that emerge from the Palm Desert and City of utilized to lower the required loan amount.
Berkeley23 programs, and other ongoing AB 811 motivated
initiatives, should be replicated statewide. A variation of OBF known as a tariffed installation
program (TIP) uses a utility’s bill collection system to
Use alternative sources of funds to finance projects collect a charge that has been attached to the meter as
Federal stimulus funds for EE would be an ideal source a special tariff. TIPs may offer a mechanism for rented
of capital for programs to create revolving loan funds, premises where the split incentives between landlords
as they would achieve shared federal and state objectives, and tenants chronically lead to under-investment in EE.
would be quickly deployed, and would return to the local With a TIP, the obligation is borne by the meter customer,
agencies for use in subsequent rounds of EE financing. not necessarily the building owner, and current residents
Figure 3 -
Innovative Business Notes: 1) Coverage of bars indicate market applicability; 2) Darker shading within a bar indicates
Solution Coverage a stronger level of demand/fit for a given item within a market segment
of Key Customer
Segments Equity Investments in Owner-
Occupied Residential Real Estate
Enhanced Utility on-bill Financing
Efficiency Service Agreements
INNOVATIVE EE
FINANCING Contractual Assessments
PRODUCTS
AND BUSINESS
SOLUTIONS Geographic Aggregation
Whole Envelope Retrofits
Expand Services Via Green Jobs Programs
9
can feel comfortable that they will only have to pay for • Develop Customized EE Utility Programs
improvements from which they directly benefit. Likewise, Integrated With OBF designed to provide residential
TIPs provide a mechanism for building owners to install and small commercial customers with the turnkey
measures in their property that may outlast the tenure of solutions (financial and technical) that are often required
any particular tenant. Because the payment is tied to the to implement efficiency measures. Existing on-bill
meter, not the homeowner, TIPs allow for the current financing initiatives in California are typically treated
occupant to move, with the next occupant responsible in isolation from the range of EE measures available to
for repayment. As a tariff, TIPs require the support of consumers, supporting only a small subset of possible
implementing utilities and approval from the utility regimens and technologies. Developing a specialized
regulators.24 program that offers OBF as a centerpiece alongside
a suite of technical assistance would streamline the
OBF initiatives have typically been funded through a project development process for customers and could
combination of sources including internal utility funds, potentially be managed by private firms that are active
incentive monies from system benefits charges, or in small commercial market segments.
state-funded programs. Funding for the improvements • Establish partnerships between local utilities
can also come from the issuance of bonds, public funds, or and ESPs that can deliver engineering and technical
private sources of capital.25 The total cost of EE installations services to small commercial customers. Partnering
implemented through OBF programs in the U.S. ranges with a group of pre-screened firms would provide
from an average of $50,000 up to a total allowed project utilities with multiple channels to access new program
size of $250,000.26 Program requirements vary according to participants. Private services providers would benefit
available collateral or recourse to customers. For example, from being able to offer customers an OBF option, and
SDG&E and SoCalGas offer unsecured loans, while others, local utilities would benefit from having the sales and
such as First Electric Cooperative, require an equipment business development teams of partner firms identify
or property mortgage lien. SCE, SoCalGas, and SDG&E and bring customers into utility programs.
offered OBF as part of their 2006-2008 programs to
multi-family units, small businesses, and local governments. • Limit Downside Risk: utilize system benefit monies
These utilities and PG&E have proposed including OBF as to create a loan guarantee program that can attract
part of their 2009-2011 program portfolio, however, they private lenders as a source of funds for on-bill financing
do not contemplate any residential on-bill solutions.27 programs for small commercial and residential
customers.
Barriers to OBF: Utilities are generally reluctant to • Adjust cost-effectiveness requirements for
perform what are considered traditional banking functions residential EE programs that include OBF, so that
for their customers, which can force compliance with state repayment periods offered to customers are consistent
consumer lending laws, and see a risk in making loans with the time horizons required by the full range of
to customers using their own capital or ratepayer funds. customer classes that might benefit from the service.
Utilities that offer on-bill financing limit their risk by • Partner With Consumer Finance Institutions:
requiring short repayment periods, typically five years or One of the barriers to OBF is that utilities are not
less—too short for most residential projects, which have in the business of loaning money to their customers,
typical payback periods of ten years or more. OBF programs nor do they want to be. Therefore, one option is for
in the residential sector also face the added challenge of utilities to partner with banks that are in the business
having to comply with CPUC cost-effectiveness tests. of making loans and can manage the consumer credit
evaluation and lending portions of OBF. With such an
Expansion Strategies and Areas of Support: Areas arrangement, banks maintain the loans and liabilities on
of adaptation and expansion to the plans currently being their balance sheets and utilities arrange the payment
developed by the IOUs, or future iterations of on-bill mechanism, project evaluation, and marketing.
financing, include:
10
Financial and Technological Aggregation: typically prepared semi-annually or quarterly.

Efficiency Services Agreement (ESA) – Large • Performance Guarantees: To mitigate project
Commercial & Industrial performance risks, the ESA provider typically obtains a
performance guarantee from an ESCO or ESP.
Following the recent trend of the increased utilization of
power purchase agreements (PPAs) as a vehicle to finance The ESA product is well suited for end-users in the
renewable energy projects, efficiency services agreements commercial, industrial, manufacturing, private higher
(ESAs) are starting to emerge as an attractive structure to education and health care sectors. Typical project sizes for
provide comprehensive financing solutions that enable ESAs exceed $1M and include a variety of commercially
end-users to avoid the capital outlay associated with the proven EE technologies: heating, ventilation, and air
implementation of EE measures. Via an ESA, customers conditioning (HVAC), building and equipment controls,
can receive 100% financing for engineering, design, motors, pumps, process equipment, and lighting.
construction, equipment, installation, maintenance and
ongoing monitoring of EE projects. Project financing Barriers to Expansion of Energy Services
is structured as a services agreement whereby customer Agreements: The ESA is a relatively new product and
repayment is based on an agreed-upon cost of avoided requires significant front-end customer and ESCO and ESP
energy (e.g., $/avoided kWh of electricity) or share of education. The attractiveness of the ESA is constrained by
energy savings. As illustrated in Figure 7, the ESA provider the poor depreciation treatment of EE assets in commercial
finances and develops projects via contractual agreements facilities, which are typically classified as “general building”
with a customer and an ESCO or ESP. items by the IRS that are depreciated on a straight line
39-year property basis. In addition, third-party owners
Under this model, an ESA provider serves as financier and of EE assets are not allowed to claim the EPACT28 tax
owner of EE assets and partners with service providers to deduction for EE equipment in commercial buildings per
carry out required project installation and maintenance §179D of the Internal Revenue Code.
activities. Customers make regular payments (e.g.,
semi-annually) that are based on the energy and operating Expansion Strategies and Areas of Support:
savings realized by a project. ESA payments are structured to
be less than the customer’s baseline utility costs and escalate • Integrate the ESA offering into third-party-run
at a fixed rate. While the characteristics of individual deals utility programs that would provide large commercial
vary, the fundamental framework of the ESA is consistently and industrial end-users with a comprehensive set of
applied across all projects to help minimize transaction technical assistance and financial services.
costs. Key elements of projects financed using an ESA • Allow investors that hold title to EE equipment
include: installed at 501(c)(3) or state / municipal facilities
• Ownership of Project Assets: The ESA provider under an ESA to be exempt from paying state
holds title to project-related assets during the contract income tax on EE property. Third-party owners of
period. At contract end date, customers have an option solar PV are exempt from any property tax payments on
to purchase a project’s assets at fair market value. such equipment. However, even though EE is a higher
loading order priority in California, currently, even if
• Pricing: Set as a services charge based on a cost per EE property is being installed at a tax exempt facility
unit of avoided energy or share of energy savings. An under an ESA, state property taxes are still levied since
escalation schedule, based on a constant percentage rate, an outside investor owns the EE assets. This tax burden
is defined in the ESA. adds an average annual expense that is equivalent to one
• Contract Length: ESA contract periods can vary but to two percent of the total project cost and limits the
typically range from five to 12 years. applicability of the ESA in tax exempt and municipal
• Measurement & Verification: An M&V plan is markets.
set forth in each ESA contract with customers and is
11
• Foster federal action to allow EE assets to participates in the future growth of a home’s value.
receive the same depreciation treatment and tax Unlike shared appreciation loans, the EARNs represent
deduction allowances as solar and other sources a pure equity investment in a fraction of a home’s value.
of renewable energy. Specifically, in order to With an EARN, there is no lender but rather an investor
encourage installation of energy efficient technologies who is entitled to a fixed percentage of the value of the
in commercial buildings: home when the EARN matures, generally upon sale or
a. Section 168 of the Internal Revenue Code should refinancing of the home. If the home price increases, the
be amended to designate EE property installed in investor will share in the appreciation of the home. If
or on a commercial building as 5-year depreciation the home price decreases, the investor may absorb a share
property; and of the loss depending on when they exit. All EARNs
b. Section 179D of the Internal Revenue Code should are secured by a deed of trust and a perfected lien on the
be amended to extend the allowance of the EE home in second position after the mortgage(s). There are
commercial building property deduction to owners no monthly payments, and accordingly, no risk to the
of EE commercial building property who are not owner of losing their home to the investor for failing to
owners or lessees of entire buildings. make such payments.
• Conduct marketing and outreach activities to
California industry groups and business associations to EARNs can lower the monthly payment or cash out of
promote the ESA structure as an alternative source of pocket for EE installation when all or part of the installed
financing efficiency improvements. cost of retrofits is financed through an EARN instead of
a conventional mortgage or home equity loan. With EE
Financial Aggregation: EARN Notes – Residential improvements financed by an EARN, the value of a home
Sector increases and the owner’s default risk decreases due to
energy cost savings and a reduction in the amount of cash
Overview: The EARN Group developed and offers the homeowner would otherwise have expended.
EARN Equity Certificates (EARNs) for the bulk purchase
of lender-owned or REO (real estate owned) homes and For example, suppose owners of a home valued at $500,000
the restructuring of existing pre-foreclosure and troubled wish to install EE measures at a cost of $25,000 or 5% of
mortgage obligations. EARN-financed REO homes can the home value. The EARN investor funds this amount
be refurbished and made energy efficient to add value to and in exchange receives an EARN, which grants the right
the property, the community, and the environment. to receive a percentage of the home’s value at the time it
is sold. That percentage is fixed at the time the EARN
Unlike a traditional mortgage lender, an EARN investor transaction closes.
CUSTOMER
Project Installation Efficiency Service Agreement
ESCO or ESP designs and ESA Provider covers 100% of
Figure 4 – ESA installs the EE project and project cost. Repayment from
provides long-term customer is based on reduction
Contractual maintenance. in operating costs.
Structure and Key
Stakeholder Roles
ESCO or ESP ESA PROVIDER
Engineer, Procure, and Construct (EPC) and

Operation and Maintenance (O&M) agreements
ESA Provider executes long-term contract with
ESCO or ESP.
12
The investor’s rate of return and other EARN terms may be IVb. Business Model Innovations
pre-packaged to facilitate marketing and for acceptability Community-based Geographic Aggregation
to homeowners. EARNs are originated through the
existing mortgage supply chain and once issued, individual Overview: A wave of new EE business structures are
Certificates may be pooled. Certificates are now available emerging that recognize two key elements: 1) aggregating
in northern California on a limited basis and the EARN individual EE projects into a single portfolio expands
Group with Prager, Sealy & Co. are developing a secondary opportunities for creative financing solutions to overcome
market for EARN pools. historical barriers associated with small transaction size, and
2) cities (and other densely populated geographic areas)
Barriers to Expansion of EARNs: EARNs are a new that consume large amounts of energy resources offer
financing instrument with which investors and home significant business opportunities for locally motivated
owners are not yet familiar. There is no history of purchase stakeholders. City-based initiatives are well-suited for
or sales performance of EARNs. Significant industry and small- to mid-sized efficiency projects at residential (both
consumer education is required. Channels are not yet well single and multi-family), small commercial, and municipal
established, although EARN Group has had extensive facilities. Listed below is a sample of selected initiatives.
discussions with multiple financiers and municipalities in
• In 2007, a program was established in Cambridge,
California.
Massachusetts to invest $100 million in efficiency
projects at residential, municipal, and commercial
Expansion Strategies and Areas of Support:
facilities with the goal of achieving a 10% reduction in
• Work with utilities, financial institutions, and city-wide energy use, a 15% drop in electricity demand,
municipalities to seed the market: EARN Group and over 150,000 tons of avoided CO2 emissions. A
believes that cities which are likely to have 1) a high non-profit organization, the Cambridge Energy
number of REO or near-foreclosure properties, 2) Alliance (CEA), was formed to administer the program
high energy costs, 3) less efficient buildings, and 4) and provide local residents with loans to implement
communities already showing interest in sustainability projects. CEA has pre-selected a group of ESCOs to
would be the best places to enter the market. implement projects for local residents and has a strong,
• Increase self-service options and information community-based approach to originating efficiency
for homeowners: For example, EARN pricing opportunities. A key innovation by CEA is its regulatory
and education tools could be created and embedded approval to participate in regional environmental and
into EE equipment distributors’ websites. Providing capacity markets that generate added monetary benefits
homeowners with the ability to learn about EARN from efficiency projects implemented under the
financing and compare EARN financing to other program. Specifically, CEA can receive payments for
funding options for EE and renewable energy could demand reductions that it bids into the New England
accelerate market adoption. ISO Forward Capacity Market29 as well as receive
proceeds from the sale of environmental commodities
• Creation of secondary market for trading
into the Regional Greenhouse Gas Initiative.30 Part of
EARNs: Foundations and companies interested in
CEA’s mission is to monetize its participation in these
promoting EE can allocate a portion of their capital
regional markets (which are generally inaccessible to
to purchases of EARN Certificates in the secondary
individual end-users) and then use the proceeds to
market. This would enable EE equipment distributors,
provide local residents with low-cost loans and free
manufacturers and utilities to offer EARN financing,
technical assistance to implement EE projects.
knowing that they could readily sell EARNs once
• The Clinton Foundation’s Climate Change
installation was completed and savings were achieved.
Initiative (CCI) is working with 40 cities around the
world to develop and implement large-scale efficiency
projects. CCI, established in August 2006, provides
customers in selected cities with technical assistance to
13
identify and develop projects, including the ability to (EIP) which allows local property owners to apply for
receive services from major ESCOs and several large loans to install EE and RE measures that are permanently
financial institutions that are CCI partners. A unique attached to the property. This new loan program is a
feature of the CCI is its ability to provide residents of direct result of the passage of AB 811 and will make
participating cities with discounted pricing arrangements Palm Desert a proving ground for utilizing contractual
that CCI has pre-negotiated with leading manufacturers assessments to foster the implementation of EE and
and suppliers of energy-efficient products.31 CCI has renewable energy measures under city-based programs.
developed a large pipeline of efficiency retrofit projects To date, the Palm Desert program has implemented a
at municipal and commercial facilities and currently wide range of efficiency retrofit projects, predominantly
has at least four projects under construction.32 CCI in the residential sector, that have generated more than
is also starting to work with alternative financing 22 million KWh of electricity savings, seven megawatts
sources that can provide customized solutions to fund of avoided demand, and a half-million Therms of
EE and renewable energy projects. This includes the natural gas savings.37
development of a pilot project for several large office
buildings that will utilize a new transaction structure Barriers to Community-based Aggregation:
that has the potential to eliminate barriers associated Aggregation initiatives encounter the panoply of
with split incentives between property owners and traditional barriers to implementing EE retrofit projects,
tenants.33 It combines elements of a triple-net lease,34 including limited interest from financial institutions in
which obligates the tenant or lessee to cover pro-rata funding projects that are considered to have too small of
expenses such as insurance, taxes and maintenance on the a transaction size. As an example, the financial institutions
full property, with a standardized energy performance that signed on as CCI partners back in 2007 have disbursed
contract (EPC) to help overcome barriers associated with only a small fraction of the $5 billion that they initially
split incentives between property owners and tenants. pledged to support EE. Further, aggregation initiatives that
bundle numerous small projects into a large portfolio often
CCI is also advancing an initiative in a Midwestern city face challenges in raising private capital because outside
to implement EE projects at privately-owned affordable investors often lack direct recourse to the revenue streams,
housing facilities using a loan guarantee structure. assets, and underlying end-users that host EE projects.
Specifically, participating banks will receive a guarantee
on the repayment of 50% of the annual principal and Expansion Strategies and Areas of Support:
interest payments on EE projects that are implemented
• Offer Commercially Available Consumer
under the initiative. The funds to provide the guarantee
Financing: Alternative financing products should be
come from a combination of state-level EE incentive
formally integrated into aggregation programs. This
monies and outside capital from a national affordable
includes utility on-bill financing options, contractual
housing association.
assessments under AB 811, loan funds like EIP, and
• The Palm Desert Energy Partnership program35 emerging financing structures such as the ESA.
is a community-based initiative that involves the city • Enable Aggregation Financing Through
of Palm Desert, SCE, and SoCalGas. The program is Legislative Initiatives: Ongoing legislative efforts
targeting the reduction of the city’s energy use and peak in California, such as AB 170938, should be monitored
demand by 30%. Under the program, local residents and for their potential to support city-based aggregation
businesses receive customized utility incentives to replace initiatives. If passed, AB 1709 would allow a local agency
inefficient HVAC, lighting, refrigeration, and pool to levy special taxes to fund EE and renewable energy
pumping equipment.36 The program provides end-users projects. This legislation is modeled on a tax ordinance
with education on energy savings opportunities and enacted in Berkeley to finance solar installations.39 It
access to a group of pre-screened energy services firms differs from AB 811 in that it can be utilized by any
that implement efficiency projects.The city council also local agency (not just a city or country organization)
recently approved the Energy Independence Program
14
and can fund EE and renewable energy measures for therefore substantially improve the aggregate economics
new construction projects. of these projects, in comparison to the serial pursuit of
• Ensure California’s Loading Order Is Reflected technology-specific enhancements, opening the door to
in Renewable Energy Programs: Many existing more cost-effective retrofits.
city initiatives and aggregation programs were launched
with an original emphasis on encouraging solar PV Barriers to Expansion of Comprehensive Retrofits:
installations. In order to maximize the economic A number of barriers to whole-envelope or integrated
and environmental benefits of these initiatives, local retrofits are evident in the present marketplace, including:
authorities should require that EE is formally embedded • Skills Training & Education: Specialization within
into any solar program. For example, the Berkeley the trades and contractor community results in
initiative should require that EE be implemented either unfamiliarity with the full potential of EE technologies
ahead of, or alongside, any solar installation in the city. and the extent to which project economics improve
A similar requirement should be in place for programs when technologies are integrated.
like Palm Desert’s utilizing AB 811 or AB 1709 to fund • High Upfront Costs: Inability to finance the full set
local clean energy investments. of efficiency upgrades all at once forces customers to
• Account for Environmental Attributes: choose a smaller set of upgrades than is economic over
Aggregation programs in California should be the long-run, or optimal from a policy perspective.
structured to ensure that rights to all environmental • Principal / Agent Issues: The classic split incentives
attributes generated through the implementation problem, in which a customer (tenant) does not fully
of EE projects are clearly assigned under a program. receive or benefit from the implementation of EE
The pooling of environmental attributes and their upgrades.
subsequent valuation may generate added revenue
• Poor Program and Subsidy Coordination:
for a program that can be utilized to increase the cost
Uncertain or uncoordinated subsidy streams results
effectiveness and total amount of EE investments that
in burdensome paperwork or unpredictable timing of
are implemented. As demonstrated in the Cambridge
rebates to cover portions of an integrated upgrade.
initiative, the monetization of environmental attributes
from efficiency projects—particularly from projects
Expansion Strategies and Areas of Support: The
at residential and small commercial facilities—can
concept of integrated EE retrofits for smaller customer
capture marginal revenue that would otherwise be lost.
classes, while new, is gaining currency in California. The
majority of them will likely need assistance in overcoming
Technological Aggregation: Encourage Whole-
the barriers identified above. Strategies to provide
Envelope Retrofits
assistance include:
Overview: It is frequently the case that beneficial • As a priority for EE workforce development and
savings opportunities are missed during the course of “green jobs” policy (see below), ensure that efficiency
single-technology efficiency improvements. For any given providers are trained to assess the entire building
building it is likely that a number of efficiency-related envelope and present an integrated set of upgrades
improvements are possible, in areas such as lighting, HVAC, to customers in the retrofit market.
insulation, and water heating. Efficiency deployment • To further ensure that efficiency providers are skilled at
strategies that focus on specific technologies, to the integrated assessment, require that service providers
exclusion of a whole-systems approach, may leave substantial possess the necessary skills to pursue multi-retrofit
savings opportunities untouched. Moreover, transaction opportunities, in order to receive a “seal of approval”
costs associated with making the efficiency sale are often from the utility and the ability to tap ratepayers
high as a share of total project costs, particularly for smaller incentives.
customers. Positioning these customers to pursue the
• Within the context of on-bill financing and the other
maximum feasible amount of efficiency improvements can
15
innovative financial approaches described above, ensure Barriers to Workforce Development: The barriers to
that the ability to cover up-front costs includes workforce development can be grouped into two broad
all economic efficiency upgrades in a given categories. First, EE faces the same issues that education as
project. a whole faces, particularly for technical positions. These are
• As a corollary to providing utility subsidy payments a lack of student interest in the sciences and engineering,
and other monies funded by system benefits charges and weaknesses in trades training in the secondary
to efficiency providers who pursue integrated upgrades, and college / university systems. Second, interest in EE
incentive programs should be streamlined to tends to rise and fall with concerns about energy prices.
encourage multi-retrofit projects. An integrated audit Career interests can be dependent on expectations for the
should start the process, followed by a list of approved longevity of the demand for skills in the field; without
technologies, vendors and service provideres, with a sustained societal commitment to clean energy paths,
subsidies accessible via a simple, all-in-one rebate form. therefore, convincing people and institutions to invest in
EE careers could be problematic. Workers considering EE
Trained Workforce careers are also unfamiliar with the skills demanded by
these new careers, as well as the training resources available
Overview: In order to give entrepreneurs, financiers, to acquire them.
policymakers and program managers confidence that the
workforce needs of a large-scale efficiency strategy will Expansion Strategies and Areas of Support: As
be met, skills training and education must be coordinated identified in the California Energy Efficiency Strategic Plan
with the other programmatic aspects of an aggressive new (CEESP),44 workforce education and training (WE&T)
push towards EE. Training programs should impart skills is a long-term, cross-cutting activity with important
specific to the market in which graduates will operate; intersections throughout all EE segments. WE&T needs
should provide linkages directly into apprenticeship and can be best addressed by imparting appropriate skills
employment with local efficiency service providers; and at each educational level. A comprehensive WE&T
should also meet the need for skills in the public sector, approach includes the following:
such as program design, project evaluation, performance • Technical Training: Technicians and contractors
measurement and verification standards, and incentives should be certified in EE technologies and techniques.
allocation. EE courses should be a requirement for contractor
licensing and for license renewal, and city, state and
EE program managers should spend significant time and utility EE programs should require expertise-based
effort training contractors so that they fully understand certification. The California Building Performance
the programs available to each customer set. Contractors Contractors Association (CBPCA) and NYSERDA
constitute a potential sales force for energy improvement require that their contractors be certified by the Building
projects that use a financing product. The programs with Performance Institute (BPI), a diagnostics-based
the highest volume of financing assistance have strong training program endorsed by the U.S. EPA’s Home
contractor networks and regular program communication Performance with ENERGY STAR program.45
with the providers.40 For example, Manitoba Hydro has Vermont Gas performs an initial audit, and then usually
1,100 contractors and 200 retailers in their program; assigns a qualified contractor to do the work. Midwest
Viewtech Financial Services has 600 contractors in Energy creates a detailed conservation plan for the
Southern California; SMUD has 180 contractors in the customer. Efficiency Vermont trains and mentors its
Sacramento region; and NYSERDA41 has 147 contractors contractors, and provides quality checks and customer
in New York. AFC42 has 700 approved contractors in information.46 Pennsylvania Home Energy provides
Pennsylvania and dedicates staff to travel around the state financial incentives to Pennsylvania contractors and
offering contractors training in marketing techniques and consultants who wish to obtain certification to service
in the mechanics of the financing product.43 the PA Home Energy program, including residential
16
retrofit and new-building efficiency strategies. Financial projects; and support the transition from apprenticeships
incentives are provided by the West Penn Power to independent employment in the clean energy
Sustainable Energy Fund (WPPSEF), and include $200 sector.
payments to contractors and consultants that undertake
an approved training course, and $500 to service In addition to the needs and market assessments proposed
providers that perform five home energy audits within in the CEESP, we recommend the following entities
an approved time period.47 provide additional support and coordination:
• Four-Year and Graduate Colleges and Universities: • IOUs & Publicly Owned Utilities: Provide input
Relevant university and college degree programs, such for WE&T programs to address the technical and
as construction management and real estate facilities professional skills necessary to achieve the economic
management, should offer relevant curricula that potential of EE in California. Utilities should be
incorporate financing and energy economics, energy catalysts to bring efficiency into education and help
management, and electrical and mechanical engineering provide specific training courses associated with
tracks. implementing their programs, relevant curriculum and
• Adult Education and Community Colleges: All course materials, and on-the-job training for third-party
California community colleges and adult education program implementers.
organizations should offer certification and degree • Industry and Labor Organizations should co-fund
programs that focus on EE and demand side management with educational institutions, training centers, and
(DSM) across multiple market sectors. In January 2009, community-based organizations the recruiting and
the U.S. Department of Labor awarded nearly $123 training of workforce candidates for technical and
million to 68 community colleges and community-based professional careers. These could include groups such
institutions that competed successfully under the as trade associations, standards-making bodies, and
Community-based Job Training Grants Initiative. The rating organizations. In early 2008, leadership of the
grant will expand enrollment in education and training National Electrical Contractors Association (NECA)
programs such as the San Francisco Bay Area Clean met with UC Davis’ California Lighting Technology
Energy Career Project (BayCEC), which aims to provide Center (CLTC) to explore how contractors might
training and career pathways in selected clean energy accelerate the implementation of advanced control
careers. The BayCEC job training program will be led lighting technologies to meet EE goals across California.
by Skyline College in partnership with Laney College, The California Advanced Lighting Controls Training
College of Marin, the Workforce Investment Boards of Program emerged and course curriculum and materials
San Mateo and Alameda Counties, and the San Mateo were jointly developed in conjunction with Southern
Regional Occupation Program, with Solar City, PG&E, California Edison, with major support by NECA.50
Siemens and Controlco as program partners.48 Supported by the IOUs, this program will provide
• Minority, Low Income and Disadvantaged fundamental training to ensure quality installation
Communities: Individuals from low-income and system performance of advanced lighting control
backgrounds should take advantage of apprenticeship technologies. The training program is now entering the
programs that specialize in energy disciplines. For “train the trainer” phase, to be offered in 2009 through
example, the Oakland, California Green Jobs Corp, California Community Colleges and the 24 IBEW
developed by the Ella Baker Center for Human Rights, (International Brotherhood of Electrical Workers) Joint
is operating with a seed grant of $250,000 from the Apprentice Training Centers throughout California.51
City of Oakland to provide “green jobs” opportunities • Government: Federal (e.g., Department of Labor),
in disadvantaged communities.49 As part of a broad state (e.g., California Department of Education
coalition of stakeholders, the program will provide the and CalWIB) and local governments (e.g., building
skills and training needed to pursue clean energy jobs; departments) should fund recruiting and training
support apprenticeships in city-funded clean energy programs that prepare workforce candidates for technical
17
and professional careers and mandate integration of EE • Require EE upgrades as a condition of California
curriculum. Solar Initiative funding. The draft guidelines
• Community-based and non-profit organizations: established for the California Solar Inititiatve (CSI, also
Leverage programs and organizations funded to provide known as SB 1) state that to receive ratepayer-funded
education, career development and workforce training solar incentives, appropriate EE improvements must
programs (e.g., Greenlining Institute, Apollo Alliance). be made in new and existing homes or commercial
structures. CSI contains requirements related to both
the need for customers to be informed of potential
IVc. Public Policies to Support efficiency opportunities as well as for facilities
greater than 100,000 sq. ft. to have an energy audit
Aggregation in Efficiency Financing conducted. CSI also places a heavy emphasis on
and Business Models retro-commissioning (RCx).53 Specifically, any building
that is greater than 100,000 sq. ft. and that has an energy
Listed below are a series of cross-cutting polices and actions use intensity (kWh/sq ft) benchmark of less than 75,
that can support the accelerated adoption and utilization of must implement a RCx program within one year of
the financial products and business models outlined above. solar system installation. Although all of these actions
These items require a coordinated approach to implement are beneficial, required customer actions under CSI are
EE projects, including actions to be taken by policy-makers, not commensurate with the aggressiveness of statewide
regulators, utilities, service providers, financiers, and project targets for EE. Specifically, the current draft guidelines
developers. do not contain any direct link between the actual
• Assertively address issues of measurement, implementation of efficiency improvements and the
verification and ownership of savings reductions. receipt of solar incentives. Although CSI requires audits
This would enable investors to embed durable at large facilities, it does not specify the type of audit to
assumptions about the carbon value of efficiency be conducted nor does it require any customer actions
projects in their project modeling and maximize the related to the implementation of identified efficiency
role of efficiency in climate protection programs. measures. The bill also relies heavily on RCx activities,
Although EE is featured prominently in AB 32 and which, in isolation, can result in “cream skimming” that
is viewed as an essential tool to achieving statewide leaves large amounts of energy savings on the table.
emission reduction targets, there are no transparent Further, the EUI benchmark of 75 is not an aggressive
market mechanisms or sets of procedures to monetize cut-off point for action. As the draft guidelines for SB1
environmental attributes from efficiency projects. are refined over the coming months, requirements
Investments in EE could benefit greatly from the receipt regarding the level of detail in energy audits and the
of an added revenue stream generated by the sale of necessary follow-up actions by customers should be
environmental benefits. However, there exist numerous strengthened. Improved cost-effectiveness benchmarks
uncertainties surrounding fundamental aspects of should also be developed, potentially including new
monetizing environmental benefits from EE, including TRC tests to determine the economic feasibility of
who can own the carbon reductions from EE projects, efficiency measures required to receive solar incentives.
what are the associated M&V reporting standards, • IOUs should consider extending long-term (i.e.,
and what is the ability to “grandfather” existing (or five to ten years) performance guarantees to
soon-to-be implemented) projects into any future selected customers (potentially small commercial
market mechanism. Treatment of these issues will help and residential customers) that implement EE
efficiency become a core climate protection strategy. measures. The provision of utility guarantees on
Cap-and-trade auction funds could, for example, be energy savings will expand the access of customers to
used for supporting efficiency programs, codes and sources of third-party financing and expand business
standards updates, and technology RD&D.52 opportunities for small and mid-sized ESPs that could
compete more effectively with ESCOs. Key issues to
address include establishing use cases for building types
18
and climate zones, setting M&V standards, assessing the Next Steps
tolerance of IOUs, regulators, and rate payers for the
provision of long-term performance guarantees, and
establishing responsibility for their associated costs. For advocates of EE, the current surge in public interest
has been a long time coming. Even as the economy has
• As part of the Governor’s Green Building Initiative,
been weakened, private and public-sector support for
local representatives from the Building Owners
efficiency is stronger than ever, reflecting an increased
and Managers Association (BOMA), California
recognition of the cost savings, technological innovation,
Business Properties Association (CBPA), and
and environmental protection that are inherent to EE. But
the CCI should collaborate on the development
goodwill and capital are not enough to make a significant,
of a contractual structure that facilitates EE
lasting impact. To deliver on the promise of efficiency,
investment by combining key features of triple-net
new funding strategies, business models, policies, and
leases, EPCs, and Title 24 operating guidelines for
educational tools will be required. This paper has suggested
existing buildings.54 Integrating these elements into
a range of strategies and programs to address the known
leasing arrangements can align the economic interests
and emerging challenges facing serious expansion of EE.
of building owners and tenants, help owners secure
The list is long, which suggests both the scope of the
outside financing to fund EE retrofits, and mitigate
opportunity and the creativity required to address it.
project performance risks to all parties.
• The state government in Calfiornia should Although each idea discussed in this paper has merit on
consider the adoption of a mandatory home its own, linked together these ideas can exert even greater
energy rating system. Although HUD issues force in the marketplace, overcoming the fundamentally
guidelines for energy audits under select programs, disaggregated and inefficient nature of our energy system.
California should consider issuing a single uniform Stopping waste in energy is fundamentally different than
system for all energy audits completed in the state. Such supplying more of it—power plants are concentrated and
a mandate would boost participation in energy efficient conspicuous, whereas inefficient energy technologies and
mortgages by providing prospective homeowners with systems are subtly distributed everywhere in our economy.
a concrete and uniform system for evaluating the Aggregation is therefore the concept that links the ideas
energy performance of their homes. A uniform rating in this paper—financial, technological and geographic
system would facilitate accurate house pricing that aggregation of savings opportunities to attract investors’
includes energy performance, reinforcing efforts in the attention and address a range of inefficient practices and
GREEN Act of 200855 to include EE in appraisals. This technologies at once.
would promote financial incentives to consumers for
completing EE improvement projects and reduce risk Aggregation can take many forms, utilizing some or all
to both lenders and borrowers. of the tools identified in this paper. As an example of
• The state government in California should consider aggregation in practice, consider the following: to truly
requiring energy audits and disclosure of results implement California’s Loading Order of preferred energy
concurrent with home sales and refinancings. resources, the state might require an efficiency audit and
This would enable buyers to account for energy use and upgrade every time a property changes hands, or solar PV is
lifecycle costs in their financial decisions, removing the placed on a rooftop. Such pairing would showcase a large
barriers of unfamiliarity, inadequate initiative, and lack set of investment opportunities for efficiency financiers
of resources. The positive correlation between EE and that would be more compelling than a series of discrete
higher home values is well documented, thus providing transactions over an unspecified period.
an incentive for both property owners and realtors
alike. Monetary incentives could reduce the financial Policy makers could offer financing tools to homeowners
burden of home energy audits. For instance, California that reduce the up front cost of efficiency upgrades to
could follow states such as New Jersey, New York, and zero, such as on-bill financing or a lien against property
Connecticut by directly subsidizing energy audits.56 tax payments. Private financiers could step forward to
19
supply capital to utility on-bill programs, thereby keeping Other public funds could train the workforce needed to sell
the utilities out of the banking business, or to communities efficiency to various end-users, and to assess disaggregated
with a property tax or shared equity strategy. Commercial savings opportunities inside diverse facilities. Private capital
and industrial customers could receive similar offerings could be deployed behind the highly predictable earnings
from power purchase agreement-style efficiency services of energy services agreements, the more variable shared
agreements that reduce upfront costs, and provide new equity instruments with their potential for appreciation,
sources of revenue with predictable, consistent returns to and to support on-bill financing and property-tax strategies
financial sponsors. with the backing of utility and government partnerships.
The model of aggregation in practice requires the combined
At the same time, large pools of retrofit opportunities can forces of policy, technology and finance to work in close
be identified and bundled together at state and community coordination. Policies can require that efficiency happen,
levels, utilizing green jobs corps and traditional utility as in the mandatory audit example above, but progress
programs to address split incentives that separate building will stall if up front financing barriers are not addressed.
owners from the energy consumers within them. Facility Similarly, progress can be made in advancing discrete
owners would bear the responsibility of optimizing technologies, such as lighting, but vast savings potential will
efficiency, but this responsibility would be matched with be missed if the workforce trained via green jobs programs
the tools to reduce these upfront costs to zero. Cost savings cannot assess multiple technical opportunities at once.
can be shared between owners and tenants. And investors may be motivated by the obvious potential
returns from energy savings initiatives, but they will remain
Crucially, whenever an efficiency retrofit is attempted, on the sidelines if barriers such as misaligned incentives
programs would address all savings opportunities at once keep them from reaching the customer.
—an example of technological aggregation in practice.
Green jobs training and utility programs should therefore The challenge therefore has less to do with technological
impart the full range of skills needed to make meeting innovation and more to do with structures of business and
these comprehensive retrofits possible. For leased property, policy coordination. We hope that the ideas developed in
unpredictable tenancy patterns could be treated with a set this paper are beneficial to that important effort.
of policy and market options. Depending on the context,
the responsibility for the efficiency upgrades would stay CalCEF is proud to continue to sponsor and develop a
with the building, to be paid off by the next tenant or number of the ideas expressed in this paper, in particular
remain the property of the efficiency investor as an asset the business models of the Efficiency Services Agreement
on its balance sheet. and EARN Certificates, and the policy reforms around
accelerating the California Loading Order, the last in
Large pools of public and private capital would be partnership with our colleagues at UC Davis. As part of our
incentivized to partner with these business model and EIR program we will incubate and (through the California
policy innovations. Public funds that are designated for Clean Energy Fund) potentially invest in, business models
efficiency deployment, including the substantial sums and technologies that address the core challenges explored
deriving from the American Recovery and Reinvestment in our white paper series, and will advance policy initiatives
Act of 2009, could be structured as revolving funds, that support the industry without favoring particular
establishing a base of capital that states and communities participants within it. We welcome the active collaboration
can use to fund on-bill financing and tax assessment-based of our colleagues in the clean energy field.
programs. These funds would be repaid via shared savings
in the reduced energy bills that result, and could then be
redirected to new efforts, rather than simply depleted after
their first use.
20
About CalCEF Innovations

The mission of CalCEF Innovations is to address issues
impacting the long-run transformation of the energy
system towards sustainability, including the formation of
enterprises, the continued flow of capital into technologies
and infrastructure, and the design of markets and policy
strategies for the sustainable energy transition. CalCEF
Innovations leads the California Clean Energy Fund’s
development of novel finance, policy, and technology
mechanisms to accelerate the growth of clean energy
markets through a variety of programs and activities.
These include our Entrepreneurs-in-Residence program
developing solutions to key market and policy issues,
academic and industry affiliations such as the UC Davis
Energy Efficiency Center, the California CleanTech Open
Alumni Program, and our innovation partnerships with
university, national and private research labs.
On a regular basis, CalCEF Innovations invite leaders

of extraordinary vision, capacity and experience to
contribute to the industry’s knowledge base by focusing
on a topic of critical importance to the advancement of
the clean energy economy. In addition to progressing
important solutions, the EIR program identifies, develops
and networks current and future industry leaders. The
range of EIR topics pertains to gaps and barriers plaguing
a specific aspect of clean energy finance, technology, policy,
or market behavior.
Through our ongoing Convening Series, our Annual

Conference, Executive Education for Policy Makers, and
the CalCEF Angel Network, CalCEF Innovations also
initiates timely conversations across policy, technology and
finance that are absent in the evolving debate around clean
energy and climate change.
21
Endnotes
1. Itron, “California Energy Efficiency Potential Study,” September 2008. http://www.itron.com/pages/news_articles_individual.asp?nID=itr_008890.xml
2. Ibid.
3. State of California Energy Action plan. http://www.energy.ca.gov/energy_action_plan/index.html
4. California Public Utilities Commission, “Shareholder Risk / Reward Incentive Mechanism for Energy Efficiency Programs,” http://docs.cpuc.ca.gov/
PUBLISHED/FINAL_DECISION/73172.htm
5. McKinsey & Co., “Curbing Global Energy Demand Growth: The Energy Productivity Opportunity,” May 2007. http://www.mckinsey.com/mgi/publications/
Curbing_Global_Energy/index.asp
7. California Public Utilities Commission, “California’s Long-term Energy Efficiency Strategic Plan,” September, 2008. http://www.californiaenergyefficiency.com/
index.shtml
8. Energy savings data from Itron, 2008 as a percentage of industrial electricity use in 2006 as published on the California Energy Commission’s online energy database.
http://www.deeresources.com.
9. Ibid.
10. California Public Utilities Commission, “California’s Long-term Energy Efficiency Strategic Plan,” September 2008. http://www.californiaenergyefficiency.com/
index.shtml
http://www.deeresources.com
12. Ibid.
13. California Public Utilities Commission, “California’s Long-term Energy Efficiency Strategic Plan,” September 2008. http://www.californiaenergyefficiency.com/
index.shtml
http://www.deeresources.com
15. Lawrence Berkeley National Lab, “Survey of the U.S. ESCO Industry: Market Growth and Development from 2000 to 2006.” http://eetd.lbl.gov/ea/EMS/
reports/62679.pdf LBNL, May 2007. Survey results indicate the breakout of ESCO investment is: municipal/state government, universities, colleges, schools,
hospitals (58%), federal government (22%), commercial (9%), industrial (6%), residential (3%), public housing (2%).
16. Under US accounting standards, a capital lease is a lease which meets at least one of the following criteria: ownership of the asset is transferred to the lessee at the
end of the lease term; the lease contains a bargain purchase option to buy the equipment at less than fair market value; the lease term equals or exceeds 75% of
the asset’s estimated useful life; the present value of the lease payments equals or exceeds 90% of the total original cost of the equipment. Following the GAAP
accounting point of view, such a lease is classified as essentially equivalent to a purchase by the lessee and is capitalized on the lessee’s balance sheet. http://
en.wikipedia.org/wiki/Capital_lease
17. http://www.pge.com/careers/powerpathway/
18. Johnson Controls, “Johnson Controls Energy Efficiency Indicator,” March 2008. http://yourenergyforum.com/blog-mt/pdf/FinalReportNorthAmerica.pdf
19. American Climate Values Survey, ecoAmerica, October 2008
20. Fuller, Marrian, Stephen Compani Portis, and Daniel M. Kammen, “Toward a Low-Carbon Economy: Municipal Financing for Energy Efficiency and Solar Power,”
Environment Magazine, January 2009.
21. Ibid.
22. Sonoma County AB 811 Feasibility Analysis and Business Plan Working Draft, January 2009.
http://www.countygsa.com/images/AB_811_Business_Plan_Final_Draft_ad-hoc_comments.pdf
23. http://www.berkeleyfirst.renewfund.com/
24. Fuller, Merrian, “Enabling Investments In Energy Efficiency,” California Institute for Energy and Environment, September 2008.
25. Ibid.
26. CalCEF analysis and conversation with SDG&E
27. CPUC filings and discussion wiht SDG&E
28. http://www.efficientbuildings.org/about_the_provision.html
29. http://www.iso-ne.com/markets/othrmkts_data/fcm/index.html
30. http://www.rggi.org/home
31. http://www.clintonfoundation.org/explore-our-work/#/clinton-climate-initiative
32. Interview with Clinton Climate Initiative personnel, 5 November 2008
33. Ibid.
34. Net leases require the tenant to pay, in addition to the fixed rent, some or all of the property expenses which normally would be paid by the property owner. These
include expenses such as real estate taxes, insurance, maintenance, repairs, utilities and other items. The precise items that are to be paid by the tenant are usually
specified in a written lease. For properties that are leased by more than one tenant, such as a shopping center, the expenses that are “passed through” to the tenants
are usually prorated among the tenants based on the size (square footage) of the area occupied by each tenant. The term “Net Lease” is distinguished from the term
“Gross Lease”. In a net lease, the property owner receives the rent “net” after the expenses that are to be passed through to tenants are paid. A triple net lease is a
lease agreement on a property where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance on the property in addition to any
normal fees that are expected under the agreement (rent, etc.). In such a lease, the tenant or lessee is responsible for all costs associated with repairs or replacement of
the structural building elements of the property. http://en.wikipedia.org/wiki/Net_lease
35. http://www.settosave.com/
36. Selected utility incentives offered via the Palm Desert program have been set at higher levels than in other locations in SCE’s and SoCal Gas’ service areas.
22
© CalCEF Innovations White Paper - February
March 2009
2009
37. Data provided by the Energy Coalition, a group that helps manage the Palm Desert program.
38. Seufert, Tim, “Financin the Green,” NBS, August 2008 http://www.nbsgov.com/PUBLICATION_Finacing_Green.pdf and
http://www.californiataxdata.com/A_Mello_Roos/index.asp
39. http://www.berkeleyfirst.renewfund.com/
41. New York State Energy Research and Development Authority
42. AFC is a EE loan administrator for NYSERDA, as is Energy Finance Solutions (EFS). http://www.getenergysmart.org/
44. http://www.energystart.gov/index.cfm?fuseaction=new_homes_partners.showHomesSearch
46. Ibid.
47. http://www.pahomeenergy.com/
48. Community-Based Job Training Grants, http://www.doleta.gov/Business/Community-BasedJobTrainingGrants.cfm. Laney College, in partnership with Lawrence
Berkeley National Laboratory, is broadening and deepening its curriculum for building science and engineering technicians in the commercial building sector. A
new two-year program emphasizes energy-efficient and high-performance building operations, building automation systems, energy management, and sustainability
practices. It was supported by a State Chancellor’s Office Economic Workforce Development (EWD) Industry Driven Regional Collaboratives grant and a National
Science Foundation Advanced Technology Education renewal grant. http://www.laney.peralta.edu/apps/comm.asp?$1=30151
49. http://www.ellabakercenter.org/index.php?p=gcjc_green_jobs_corps_press_conf
50. http://aboutlightingcontrols.org/Education_Express/accr_orgs.php
51. Jim Filanc, Southern Contracting
52. Schiller, Steve, et. al. “Energy Efficiency and Climate Change Mitigation Policy”, ACEEE Summer Study on Energy Efficiency in Buildings, Asilomar Conference
Center, Pacific Grove, CA, August 17–22, 2008.
53. RCx activites focus on low-cost energy savings opportunities typically involving enhancements to the operation and maintenance of existing mechanical equipment,
lighting, and control systems. RCx services are intended not only to optimize how existing equipment and systems operate, but also to optimize how these systems
function together.
54. Penafiel, Karen “BOMA ‘greens’ lease guidelines,” Sustainable Industries, April 2008. http://www.sustainableindustries.com/commentary/17369284.html
55. The GREEN Act of 2008, H.R. 6078, sponsored by Rep. Ed Perlmutter [D-CO]. http://www.govtrack.us/congress/bill.xpd?bill=h110-6078
56. Wald, M. L., “Energy efficiency: how to gauge it,” New York Times, May 1982. Retrieved February 2009. http://tinyurl.com/cbvxjj
57. Incremental cost is defined as the difference between the cost of standard equipment and energy efficient equipment (e.g., cost of a standard electric motor and a
DOE certified premium motor).
58. A TRC test is utilized to determine the cost effectiveness (often from a regulatory perspective) of implementing an EE measure or program. TRC tests take into
account the net costs and benefits of an EE measure or program from the perspective of both a customer and the implementing utility.
59. California Energy Commission, “California Commercial End-Use Survey” (CEUS), March 2006. http://www.energy.ca.gov/ceus/
60. In a “gross lease,” the tenant pays a gross amount of rent, which the landlord can use to pay expenses normally associated with ownership, such as utilities, repairs,
insurance, and (sometimes) taxes or in any other way as the landlord sees fit.
61. California Energy Commission, “California Commercial End-Use Survey” (CEUS), March 2006. http://www.energy.ca.gov/ceus/
62. Ibid.
63. Health Facilities Management and American Society for Healthcare Engineering. http://www.hfmmagazine.com/hfmmagazine_app/jsp/articledisplay.
jsp?dcrpath=HFMMAGAZINE/Article/data/07JUL2008/0807HFM_FEA_CoverStory&domain=HFMMAGAZINE
65. Ibid.
66. CPUC Rule D.07-10-032. Zero net energy is defined as a building that uses no more energy over the course of a year than its produces through solar power or
other renewable sources of energy production.
67. Xenergy, Inc., “California’s Secret Energy Surplus: The Potential for Energy Efficiency,” The Energy Foundation and the Hewlett Foundation, September 2002.
http://www.ef.org/documents/Secret_Surplus.pdf
68. California Public Utilities Commission, “2009 – 2020 California Statewide Energy Efficiency Strategic Plan,” January 2008. http://www.californiaenergyefficiency.
com/docs/plancomments/DRAFT%20CEESP--FOR%20SERVING%2002-08-08.pdf
23
Appendix A
Compressed Air
II. The Marketplace for EE in Fans
California Drives
Pumps
Energy efficiency, particularly in California, is recognized Lighting
as the simplest, fastest, least expensive and lowest risk
Cooling
resource to meet growing energy demand. EE measures
Process
improve a company’s profitability by reducing expenses,
enhancing reliability of key energy consuming equipment, Heating
and reducing exposure to grid outages. Further, the Refrigeration
environmental benefits of EE are significant as noted by
the McKinsey Global Institute5 which singles out EE as the Industrial Electricity Saving by
lowest cost solution to achieving large-scale greenhouse gas End-use (Market Potential)
(GHG) reduction.With the aggressive statewide EE targets
that have recently been set, California is making a heavy
bet on the ability to capture increasingly large amounts of
energy savings as listed below.
• California Air Resources Board’s goal to reduce
statewide GHG emissions by 25 million tons by
2020 through the reduction of 32,000 GWh and 800 HVAC
million therms through EE;
Boiler
• California Pubic Utilities Commission’s energy Process
savings target for IOUs for 2012 through 2020 of
16,000 GWh and 620 million therms from EE
programs.
In order to achieve the large energy savings targets

Industrial Natural Gas Saving by
being increasingly put forth in California, a variety of End-use (Market Potential)
new business solutions and financing options need to
be developed. These solutions can bridge the large gap Figure A1 Market Potential for Electricity and Natural Gas Savings by Industrial
End-use for California IOUs 2007 – 2016
between achievable energy savings under market current
conditions in (i.e., market potential) and the economic
potential for savings identified as part of recent updates
to applicability, feasibility, and availability. This estimated
to the California Energy Efficiency Potential Study6 and
economic potential is independent of efforts necessary
illustrated in Figures 1 and 2.
to capture this level of savings, including the removal of
any associated market barriers. The Market Potential is
IIa. Overview of the Savings based on the “Mid Incentive Restricted” case developed
by Itron in the California EE Potential Study and reflects
Potential in California
the total energy savings that reflect an achievable “business
as now” scenario. This market potential scenario was
In Figures 1 and 2, Economic Potential is defined as the
developed to reflect a scenario in which incentives are set
total energy savings associated with the assumed adoption
equal to the average level offered by utilities in 2006 and
by end-users of all cost effective efficiency measures subject
the full incremental cost of purchasing energy efficient
24
March 2009
2009
HVAC
Lighting HVAC
Misc. Lighting
Refrig Misc.
Food
Water Heating
Commercial Electricity Saving by

Residential Electricity Saving by
End-use (Market Potential)
End-use (Market Potential)
HVAC
Misc. HVAC
Food
Water Heating
Commercial Natural Gas Saving by Residential Natural Gas Saving by

End-use (Market Potential) End-use (Market Potential)
Figure A2 Market Potential for Electricity and Natural Gas Savings Figure A3 Market Potential for Electricity and Natural Gas Savings
by Commercial End-use for California IOUs 2007 – 2016 by Residential End-use for California IOUs 2007 – 2016
equipment.57 A further economic constraint was placed on focus of the ESCO (energy service company) industry
this market potential by assuming that only EE measures on a narrow slice of the energy efficiency market at tax
with a total resource cost (TRC) of 0.85 or greater are exempt (TE) / municipal sector facilities. In other market
implemented.58 segments, particularly the residential sector, opportunities
for additional energy savings have been forfeited due to a
The results of the statewide market potential study historical focus on utility programs and technical services
underscore that, even by continuing aggressive utility that focus on individual EE measures rather than the
incentive programs in California, a large number of implementation of integrated EE solutions.
customers will not implement economically viable
efficiency projects due to the prevalence of numerous market To capture the significant remaining level of potential
and financial barriers.The existence of a considerably large efficiency savings in California, barriers related to
gap between the economic potential for energy savings and financing, existing business models, policies at the state
what is being achieved in California is due in part to the and federal level, as well as customer understanding of EE
25
March 2009
2009
opportunities need to be addressed. Below is a summary of • Retail customers account for approximately 32% of
the residential, commercial, and industrial market segments total electricity consumption and 37% of natural gas use
that are the focus of this paper. Each segment contains in the commercial sector in California51 and encompass
its own unique set of opportunities and constraints that a wide range of end-users, such as lodging, pharmacy
need to be considered when developing new EE business chains, warehouses, grocery stores, restaurants, and big
solutions, strategies, and policies. box retail facilities that are typically larger that 50,000
square feet. Key efficiency measures include lighting
Industrial: The industrial sector represents almost upgrades, HVAC improvements, refrigeration projects,
20% of total electricity use and over 30% of natural and control systems.
gas use in California.9 Key end-user segments include • Hospitals and healthcare facilities account for
manufacturing, food & beverage, hi-tech / electronics, approximately 7% of electricity use and 14% of natural
chemicals, and pharmaceuticals. Volatile energy prices and gas use in the commercial sector.62 End-users in this
increasing global competition have heightened interest in customer group are also facing rising energy costs as
EE, but investment considerations relating to production evidenced by an American Society for Healthcare
in core business areas often trump making any potential Engineering survey that found more than 90 percent of
efficiency improvements. The California EE potential healthcare facilities nationwide reported higher energy
Study estimates that the industrial sector has a market costs over the previous year, and more than fifteen
potential for 2,276 GWh/year of energy savings which is percent saw a jump in energy costs of more than 25
equivalent to approximately 4.5% of total annual industrial percent.63 Energy efficiency opportunities at hospitals
electricity consumption.10 By 2016, industrial end-users and healthcare facilities include upgrades to HVAC
also have the market potential to save 92 million Therms of systems, waste heat recovery, control systems, high
natural gas which is equivalent to 3% of annual industrial efficiency lighting, and bio-waste management.
natural gas use.11 These results illustrate EE’s ability to limit
annual growth in energy consumption, which is a highly Other major commercial end-user groups include secondary
significant accomplishment given increased production schools, colleges, universities and refrigerated warehouses,
and growing energy demand over time. As illustrated in which account for a majority of the remaining statewide
Figure A1, pumps and motors are a key end use area for energy consumption California. The market potential for
energy savings with a large potential for added savings electricity savings in the commercial sector is 4,700 GWh,
from lighting, compressed air, heating, cooling, and energy which is equivalent to approximately 4% of total annual
management & control systems. Natural gas savings center commercial electricity consumption in California.18 The
primarily on boiler optimization, controls, sizing, and California EE Potential Study also estimates that by 2016
maintenance as well as process burners and process related the commercial sector has the market potential to save
heat recovery measures. 15 million Therms of natural gas which is equivalent to
less than 1% of annual statewide commercial natural gas
Commercial: Commercial end-users account for 38% of
use.19 As illustrated in Figure A2, lighting represents the
total electricity use and 25% of natural gas use in California.12
largest end-use savings potential in absolute terms. HVAC
Listed below is a summary of key selected customer groups
potential represents a significant portion of the total savings
that represent a major portion of electricity consumption
as does refrigeration and food end use measures.64 Large
in the commercial sector:
areas of savings for natural gas involve HVAC and food end
• Office buildings account for almost 25% of total uses such as ovens and fryers.
electricity use and 13% of total natural gas use in the
commercial sector and have widespread potential for Residential: In 2008, residential end-users accounted
high efficiency lighting and HVAC upgrades.59 Optimal for 32% of California’s electricity use and 36% of natural
energy efficiency projects are at owner-occupied gas consumption.21 The statewide market potential for
buildings, facilities in which a single tenant leases a lot residential electricity savings by 2016 exceeds 6,000 GWh/
of space, or building tenants under a gross lease;60 year and 93 million Therms which is equivalent to 6.5% of
26
March 2009
2009
total annual residential electricity consumption and 2% of

annual residential gas use.22 The realization of this level of
energy savings potential will play a major role in achieving
California’s goal of keeping the growth rate of per capita
energy consumption flat between now and 2018. As
illustrated in Figure A3, lighting efficiency accounts for
the majority of energy savings, while HVAC and water
heating measures account for other potential natural gas
savings.65
Going forward, residential energy efficiency initiatives in

California will be developed with the aim of achieving the
CPUC’s recently established goal of “Zero Net Energy.”66
That ruling seeks to combine the implementation of
EE measures and design features with clean on-site
distributed generation, resulting in residences that have
zero net purchases of energy from the local utility grid.
New construction represents roughly 10 to 15 percent
of the estimated achievable energy savings potential in
California.67 For existing residential buildings, the CPUC
is targeting a 40% reduction in energy use by 2020.68
27
Glossary
AB – Assembly Bill GWh – GigaWatt hours
ACEEE – American Council for an Energy Efficient IBEW – International Brotherhood of Electrical Workers
Economy IOU – Investor Owned Utility
AFC – AFC First Financial Corporation, a provider of ISO – Independent System Operator
the EnergyLoan program, a residential financing
program for energy related home improvements. HPwES – Home Performance with Energy Star
AMI – Area Median Income HVAC – Heating,Ventilation, and Air Conditioning
Berkeley FIRST – Berkeley Financing Initiative kW – KiloWatt
for Renewable and Sustainable kWh – KiloWatt Hour
Technology LBNL – Lawrence Berkeley National Laboratory
BPI – Building Performance Institute LCC – Life Cycle Cost
BOMA – Building Owners and Managers Association MMARV – MuniMae Renewable Venture
CalWIB – California Workforce Investment Board NPV – Net Present Value
CBPA – California Business Properties Association M&V – Measurement and Verification
CBPCA – California Building Performance Contractors MECO – Maui Electric Company
Association
MUSH – Municipalities, Universities, Schools, and
CEA – Cambridge Energy Alliance Hospitals
CEESP – California Energy Efficiency Strategic Plan MW – MegaWatt
CEELF – California Energy Efficiency Loan Fund MWh – MegaWaatt Hour
CEMF – Clean Energy Municipal Financing NYSERDA – New York State Energy Research and
CIEE – California Institute for Energy and Environment Development Authority
CPUC – California Public Utilities Commission OBF – On-Bill Financing
DSIRE – Database of State Incentives for Renewables & PAYS(R) – Pay As You Save Program
Efficiency PG&E – Pacific Gas & Electric
DSM – Demand Side Management PPA - Power Purchase Agreement
EEM – Energy Efficient Mortgage RCx – Retro-Commissioning
EFS – Energy Finance Solutions REO – Real Estate Owned
EIM – Energy Improvement Mortgage RD&D – Research, Development & Deployment
EIP – Energy Independence Program RIC – Retail Installment Contract
EPACT – Energy Policy Act of 2005 SMUD – Sacramento Municipal Utility District
EPC – Energy Procurement Contract TE – Tax Exempt
EPC – Energy Programs Consortium TIP – Tariffed Installation Program
ESA – Energy Services Agreement TRC – Total Resource Cost
ESCO – Energy Service Company VEIC – Vermont Energy Investment Corporation
EUI – Energy Use Intensity VGS – Vermont Gas Systems
FEC – First Electric Coop VSECU – Vermont State Employees Credit Union
FICO – Fair Isaac Corporation WE&T – Workforce Education and Training
GHG – Greenhouse Gas WPPSEF – West Penn Power Sustainable Energy Fund
GW – GigaWatt
28

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March 2009

NEW BUSINESS MODELS FOR

Supportive Public Policies

planning, legislation and regulatory decision

participation in efficiency programs. California’s 9,000

performance against regulatory benchmarks. 1,000

Figure 1 Electricity Savings Potential (GWh) for California Investor

2,276 GWh per year of energy savings which

The selection of these business solutions was driven by their

Barriers to Contractual Assessments: Although AB Financial Aggregation: On-Bill Financing (OBF)

Enhanced Utility on-bill Financing

Efficiency Service Agreements

Whole Envelope Retrofits

Expand Services Via Green Jobs Programs

Financial and Technological Aggregation: typically prepared semi-annually or quarterly.

Engineer, Procure, and Construct (EPC) and

About CalCEF Innovations

On a regular basis, CalCEF Innovations invite leaders

Through our ongoing Convening Series, our Annual

In order to achieve the large energy savings targets

Commercial Electricity Saving by

Commercial Natural Gas Saving by Residential Natural Gas Saving by

total annual residential electricity consumption and 2% of

Going forward, residential energy efficiency initiatives in

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