Toyota issued green bonds for a new Prius plant.
The energy efficiency finance market has come into its own, and is now characterizied by more than $100 billion in annual loan originations, according to a white paper released yesterday by the American Council for an Energy-Efficient Economy.
"Since rebounding after the Great Recession, the energy efficiency finance market has expanded both in volume and in sophistication," says "Energy Efficiency Finance: A Market Reassessment" by Joel Freehling and Brian Stickles.
Capital is flowing most strongly to green and efficient buildings, hybrid and electric cars, Energy Star equipment, and the energy service companies (ESCOs), says the paper.
Green buildings are attracting by far the largest amount of investment, which the report estimated to be about $100 billion annually. The paper credits the federal government, corporate conscience, and the young.
The federal government led the way by establishing energy metrics for its buildings. Corporations contributed by establishing social responsibility goals, as has a belief by employers that younger workers favor green spaces, says the paper. A drop in green premiums also has helped.
Lenders have followed their clients, a process made easier as the premium on green construction fell to very modest levels.
But interestingly, being green isn't adding a lot to the market value of buildings. Not being, green, however seems to carry a penalty. ACEEE finds that lenders assign higher risk premiums to projects that do not achieve green certifications.
What's ahead for energy efficiency finance? ACEEE has its eye on the growing use of green bonds, not only by government, but also now by corporations. Toyota issued green bond debt to fund a new Prius plant. ACEEE also noted entities purchasing the bonds now include pension funds.
Like green building, green bonds may be creating risk for those who remain entrenched in the 'brown' world.
"Many believe that as investors' appetite for green bonds grows, bonds that lack an environmental purpose, or ones that in fact harm the environment, could face limited demand, which ultimately could impact their pricing. Thus green bonds may not be sold at a premium, but "brown" bonds could face worsening prices," says the paper.
Of course, energy efficiency capital isn't flowing easily to all. Certain segments are getting left out of the boom. These include: low-income households, multifamily properties, credit-challenged local governments and small commercial properties.
When it comes to finance for the small business market, it's more important to create a positive cash flow than offer low-cost capital. The paper suggests longer amortization periods, which will "in turn allow for more-comprehensive retrofits and raise the likelihood of cash flow-positive investments."
To support growth in energy efficiency finance the paper recommends:
- Forging further ties between the energy efficiency finance and community development fields and exploring which tools developed for the socially responsible market are best suited for efficiency
- Exploring how to better use commercial Property Assessed Clean Energy (PACE) financing for the owner-occupied small commercial market and facilitating conversations about how the Small Business Administration can help to support commercial PACE, while not undermining credit quality in the SBA portfolio
- Examining how to leverage existing government funds, such as in the Retrofit Ramp-Up program, to support underserved segments such as lower-rated states and municipalities
- Tapping the growing green bond market to add liquidity and new off-takers for efficiency loans
The ACEEE paper is available for free download.
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