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					Corporate Energy Efficiency Conference
Pew Center on Global Climate Change
Overcoming financial barriers to energy efficiency




Derek Supple
Program Director for Strategy & Innovation
Global Energy & Sustainability
April 6, 2010
Agenda



    Trends in energy efficiency attitudes & investment

    How significant a barrier is first cost?

    An on-the-ground view of customer’s financial barriers

    Corporate energy program best practices

    Emerging financing solutions



2   Johnson Controls - Overcoming Financial Barriers to Energy Efficiency
Annual Energy Efficiency Indicator

     1435              Decision makers on the front lines of energy management in
                       commercial buildings across North America

          By Role                                                                                                By Region
        Owner/                                           By Industry
      Proprietors
         11%                                               Sector
                       C-level
                     Executives
                        30%
 Facility
Managers                                                                Healthcare
                                                                          20%                                              4%
  27%
                                                        Other
                                                        33%                                                                                      5%
                VPs and                                                                                         16%
                 GMs                                                                                                            9%         13%
                                                                             Consulting/Legal                         8%             19%
                 32%                                                              9%
                                                                                                                                     4% 14%
                                                                                                                                8%

                                                                                                Manufacturing
                                        Media/                                                      7%
                                     entertainment
                                          4%                                         Finance
                                                                                        7%
                                             IT/Telcom
                                                 4%    Service Retail         Government
                                                         5%                      6%
                                                                5%



 3   Johnson Controls - Overcoming Financial Barriers to Energy Efficiency
Rebound in plans to invest in energy efficiency

            Percentage planning to make energy efficiency investments
                         over the next 12 months with…
80%
                               capital expenditures                         operating expenditures



                         64%
                                                          61%
60%                                                                                           60%
                         57%
                                                          56%                 55%
                                                                                              52%

                                                                              46%

40%
                        2007                            2008                 2009            2010

4   Johnson Controls - Overcoming Financial Barriers to Energy Efficiency
Attention to efficiency continues to rise
Energy costs, public image, climate concerns are driving investment

    65% are paying more attention to energy
      efficiency than last year
    How significant an influence are the following in your organization's energy efficiency decisions?
                                          0%               20%              40%           60%          80%            100%

            Energy cost savings
        Enhanced public image
  Government/utility incentives
     Greenhouse gas reduction
Attracting, retaining customers
          Anticipated regulation
              Existing legislation
Attracting, retaining employees
    Investor reporting demands
               Attracting tenants
                                            Extremely significant           Very significant         Somewhat significant
                                            Not very significant            Not at all significant   Not Applicable


5   Johnson Controls - Overcoming Financial Barriers to Energy Efficiency
More investment in institutional buildings

             Fraction planning to make energy efficiency investments
                          over the next 12 months with…
80%
                   capital expenditures       operating expenditures


60%


40%                                                                                        74%
                                                                            66%     70%
                                 51%
                                                               54%
20%                 41%

    0%
              Commercial (1102)                               Industrial (136)    Institutional (182)
2009 Results
6   Johnson Controls - Overcoming Financial Barriers to Energy Efficiency
Nearly 50% require a 3 year payback or less

    If your organization were to make an investment in energy efficiency,
         what is the longest payback period you would allow for ROI?
100%

    80%

    60%

    40%                                                                          Commercial (1103) - Average = 2.9
                                                                                 Industrial (136) - Average = 2.7
    20%
                                                                                 Institutional (181) - Average = 4.3

    0%
               Less          Less           Less          Less           Less       Less 10 years Would          Don't
              than 1        than 2         than 3        than 4         than 6    than 10 or more   not          know
               year          years          years         years          years     years          require
                                                                                                  an ROI
                          Industrial sector has lowest average threshold
2009 Results
7   Johnson Controls - Overcoming Financial Barriers to Energy Efficiency
Common questions and concerns

                                             We’re under a capital
 I know the savings
                                            budget freeze right now.        We can’t add debt to our
opportunity is huge.
That doesn’t mean I                                                         balance sheet unless it
     can afford it.                                                         funds investment in top
                                                                                  line growth


It today’s economy, I
need a payback less                                                         Are commercial lenders
    than one year.                                                            familiar with these
                                                                                 investments?


                                                                               Our internal cost of
Most of our space is                                                        capital is lower than what
leased, not owned.                              We may not be here          we can get in the market
                                               three years from now

8   Johnson Controls - Overcoming Financial Barriers to Energy Efficiency
Access to capital is most significant barrier

          What is the top barrier to capturing potential energy savings?

                       Capital availability                                                             40%
                               Payback/ROI                                                 30%

Dedicated attention, ownership                                                   10%

                     Technical expertise                                    8%

Landlord/tenant split incentives                                      5%
                                                                                          Institutional (180)
        Buy-in from senior leaders                                   4%
                                                                                          Industrial (136)
                            Other (specify)                       2%                      Commercial (1096)

                                                       0%             10%          20%   30%      40%      50%

2009 Results
9   Johnson Controls - Overcoming Financial Barriers to Energy Efficiency
Internal capital and incentives are main $ source
                    Which options will your organization consider
             to pay for energy efficiency and renewable energy projects
                   over the next 12 months (select all that apply)?
                                                                0%                    20%        40%          60%

                                Facilities capital budget                                                   52%

                                    Grants or tax credits                                  20%

             Energy savings performance contract                                     14%

  Energy or climate set-asides in capital budget                                9%

                 Power purchase agreement (PPA)                             8%

                             Traditional debt financing                     7%

                           Shared savings agreement                        5%

                         Utility on-bill financing (OBF)               3%

                             Capital or municipal lease                3%
                                                                                                 N = 1427
                                PACE/tax lien financing              1%

                             Energy efficient mortgage               1%

2010 Results
10 Johnson Controls - Overcoming Financial Barriers to Energy Efficiency
New financing structures are gaining ground

         Several financing options (beyond traditional debt) exist or are emerging to help
          owners overcome the first cost of deep energy retrofits and onsite renewables

          Third Party Ownership                  Owner allows 3rd party to install, own, and maintain equipment and agrees to
                                                 purchase power, energy savings, and/or environmental attributes produced
      Structures (PPA, DBOOM)                    for a fixed price and term.

                                                 Loans from utility is repaid via a surcharge on customer’s utility bill under a
          On-Bill Financing (OBF)                “tariff-based” on-bill financing program.

        Property Assessed Clean                  Special property assessment financing provided by local government funded
        Energy (PACE) Financing                  by bond sale or via “owner-arranged financing.”


                   Financing “Superchargers” (not financing models themselves)
                                                 Energy service company (ESCO) assumes risk over the project’s lifetime by
            Performance Contract                 guaranteeing energy, water, and other operational cost savings. Projects
                                                 designed so guaranteed savings ≥ financing payment obligation.

                                                 Tenants charged for sub-metered energy use under triple net lease, and
                           Green Lease           property owner allowed to pass through capital financing costs so long as
                                                 positive cash flow impact upon tenants




11 Johnson Controls - Overcoming Financial Barriers to Energy Efficiency
What is PACE financing and how does it work?

     Property                   PACE financing allows property owners to pay for energy efficiency,
                                renewable energy, and/or water efficiency projects via an additional
     Assessed                   assessment on their property tax bill over a 5-20 year term.
     Clean
                                PACE is also referred to as “tax-lien financing”
     Energy

                              Provides                                       Contractor
                              capital to                                     receives
                              fund energy                                    funds to do
                              retrofit                                       retrofit


                                Pays special                                 Capital
                                assessment                                   improvements
                                on property                                  that saves
Local Tax Entity                tax bill                Property Owner       energy costs   Contractor/ESCO


                                    Property owners in a cash flow positive position

12   Johnson Controls - Overcoming Financial Barriers to Energy Efficiency
What makes PACE financing different?

                                                  • Seniority of the investor position is ahead of other liens/debt
     Secure for investors                         • Default rate on property assessments is very low



                                                  • Seniority of lien, low property tax default rate, cure requirements and
     Lower cost of capital                          government subsidies or loan guarantees will enable low interest rates



       Transfers with                             • Doesn’t limit project simple paybacks to owner’s holding period or tenant’s
     ownership/turnover                             occupancy period. Future owners or tenants take on payments & savings



     Turns triple net lease                       • Tax assessments qualify as an eligible pass thru expense under most
      into a green lease                            triple net leases allowing property owners to pass thru retrofit costs



                                                  • The accountants and FASB must rule on this. Hearing both perspectives:
 May be off-balance sheet                           definitely off-balance sheet vs. undeniably on-balance sheet.



                          One of                     ‘s “10 breakthrough ideas for 2010”

One of                    ‘s “20 world changing ideas to build a cleaner, healthier, smarter world”

13   Johnson Controls - Overcoming Financial Barriers to Energy Efficiency
PACE model overcomes some significant challenges

                         Barriers
                        Project Cash Flow through tax lien financing                    Solutions
Scarce internal capital budget                                           Spread cost over 5-20+
                                                                    Without PACE financing Owner 1     years
                                                                       wouldn’t implement project
No access to or aversion to financing
                              Owner 1                                       • Repayment security thru senior lien
                                                                                Owner 2

 • No investment-grade Net
                       credit rating                                          position rather than borrower’s credit

 • Lack of collateralSavings that don’t fall
                      assets                                                • Backed by property, not by owner or
   under first mortgage                                                       equipment collateral
                        Assessment
 • Limited # of lenders experienced in
                    Payment                                                 • Local governments provide scale
   financing energy efficiency/renewables
                                                                            • Low rates due to security / policy
 • Rates exceed internal cost of capital
                    Year
 • Balance sheet concerns                  1      2      3      4     5     •6May be 8
                                                                                7    treated off balance sheet
                                                                                          9  10

                                                   Simple Payback                   Loan Term
Uncertain holding period                                                   Transfers upon sale, turnover
                            The PACE model doesn’t limit paybacks to owner’s holding period.
Owner / tenant split incentives                                            Qualifies as NNN pass-thru cost
                                    The assessment payments (retrofit costs) and the
                            energy savings (net cash flow) accrue to the new owner or tenant.
Skepticism re savings/ROI                                                  Contractor may guarantee savings

14 Johnson Controls - Overcoming Financial Barriers to Energy Efficiency
20 states and counting allow PACE
Local programs are spreading quickly

     Comprehensive
     PACE
     Legislation (11)                                                                                       * **
                                                                                                            *
     Limited PACE                                                                                         * *
     legislation (6)       *                                                  **                            **
                           *                                                                             **
     Pre-existing          *                       *** *                                       *         *
     authority (3)                                  *
     Legislation               ** *
                                * *
     proposed (13)                                  *
                                  *
                                  *
     No legislation in
     place yet

                                                           *                  *                      *
*    Active programs


     Emerging
*    programs

                                                               Hawaii and Florida are believed to have pre-existing authority
                                                               but have introduced HB2643 (HI) and HB 7179 (FL) just in case.


Note: list of emerging program is not exhaustive
15
Why is PACE going viral?

     Benefits to               Benefits to                    Benefits to        Benefits to        Benefits to
      Building                   Local                         Retrofit             First            ESCOs /
      Owners                  Governments                     Investors          Mortgagees         Contractors
     No upfront cash                                             Very secure       Positive cash     Game-changing
         needed                   Support local                   payback         flow improves     for private sector
                                  business and                   mechanism            property         investment
                                   job creation                                   owner’s ability
       Competitive                                                                   to service
      cost of capital                                            Securitizes          liabilities
                                                                                                    Longer payback
                                                                   energy                              projects
                                  Reduces city’s
                                                                  efficiency
       Solves credit              largest carbon                                   Increase
                                                              (2ndary markets)
     rating, collateral               footprint                                  valuation and
          issues                     segment:                                    marketability of
                                      existing                                       asset            Mortgagees
                                     buildings                 Diversification                           prefer
       May be off                                               via “pooled                           performance
      balance sheet                                                bond”             Annual            guarantees
                                                                                   assessment
     Allows owners                 Tax neutral;                                    payment is
       to pass thru                no risk to the               Federal loan        senior to         Harnesses
     retrofit costs to             general fund                guarantees are      mortgage in      markets to scale
         tenants                                                   likely            default         capital inflow




16     Johnson Controls - Overcoming Financial Barriers to Energy Efficiency
The evolution of commercial PACE
                      1st commercial PACE program: Sonoma County, CA (2009)
                      1st project: Simon Property Group’s Santa Rosa Plaza cool roof upgrade

                      Commercial program launched with March 29, 2010 application deadline
                      $3k-$210k loan sizes, 5-10 year loan periods, 5-7% rate

                      $150M in bonding capacity. Scheduled to launch in April 2010
                      More info at http://greenfinancesf.org

                      Emergency enabling legislation passed on February 16
                      Targeting vote on program approval in April (post EECBG decisions)
     Washington, DC   Expected program launch in late summer / early fall

                      Awarded ARRA State Energy Program grant to create a commercial
                      PACE program using the “owner-arranged financing” approach
                      Expected program launch in October 2010

                      Has moved up in Mayor’s office queue following Plan NYC
                      Program is currently in design phase


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