Serious Energy launches no money down efficiency deals

Remaking an office or industrial building with energy-efficient equipment can cut utility bills and give some green cred, but often, building owners don’t want to pay the large upfront cost. To help fix this problem, Serious Energy is launching a program called SeriousCapital, which will provide upfront financing for the retrofit via a 10-year contract, with a cut of the energy savings over time going to Serious and the bank that help financed the project.

First, Serious Energy does an energy audit of the building and figures out how much savings can be made through energy efficiency retrofits (installing gear from LED lighting to efficient boilers). Then, Serious brings in the financier, guarantees a lower utility bill to the building owner, and takes over the utility payment duty for the building owner. The building owner will no longer be writing a check to the utility each month, and instead writes a check to Serious in an amount that will be lower than the utility bill.

The idea is similar to the power purchase agreements that are becoming popular in promoting solar installations on the rooftops of homes and businesses. The idea is to make solar — and now energy efficiency retrofits — more affordable by spreading the cost over time. The concept has also been widely used for building modernization projects in general long before it started to take off for solar.

A serious plan

“They don’t have to put anything down. It takes off any risk a customer might perceive,” said Claire Broido Johnson, general manager of SeriousCapital. “Customers who don’t have the capital or [who] don’t want any extra debt on their balance sheet can just sign up for the services from us, and those services include an energy reduction.”

Serious makes its money off the deal in the difference between what Serious promises to the building owner and what the retrofit really delivers. Based on Serious’ own estimates, the split is 5 percent to Serious and 95 percent to the bank, Johnson said. In a typical scenario, Serious will guarantee a 10-percent savings when it believe the energy efficiency retrofit could yield a 25-percent savings, she added. Johnson declined to say which financial institutions will finance Serious’ projects.

Companies such as Honeywell (s HON) and Johnson Controls (s JCI) have been offering similar building retrofit contracts and guarantees for a few decades now, but their customers have been mostly government agencies and schools. Governments and schools make good customers partly because their buildings tend to be large and filled with inefficient wiring, lighting and other equipment, making it possible to reap bigger energy savings with modern equipment. Public agencies also can float bonds to help pay for these upgrades.

Private businesses, on the other hand, tend to carry out smaller retrofits that they can finance themselves and expect a quicker payback for their investments.

Energy service contracts can be a great tool to popularize energy efficiency retrofits for commercial buildings, which are Serious’ targets. Serious has enlisted real estate company Grubb & Ellis, a more familiar face to building owners and managers in the country than Serious is, to help sell the retrofit package. Grubb & Ellis would get payments for lining up customers that actually sign up.

A hard sell

But reeling in those building owners and managers won’t be so easy. For one thing, they typically loathe to commit to a 10-year obligation of any kind. This mentality alone makes the energy service contract “a hard sell,” Johnson conceded.

The expectation of a quick payback period also presents a hurdle to energy service companies. Lawrence Berkeley National Laboratory has collected data on over 3,500 energy service projects spanning over 15 years, and it found that the median payback period for a private company project is three years, while for a government agency it stretches to eight years.

IDC Energy Insights has surveyed commercial building owners and managers and found they want the payback period to be no more than 12 months, said Sam Jaffe, a research manager at the market research firm. This expectation comes largely from an ingrained view that the value of a building lies in the value of the real estate, not in the efficiency and cost of operating a building, Jaffe said.

“It’s a very tough sell, and it’s mostly a cultural issue. When you describe the cost of savings and operations to them, it’s like they are deaf,” Jaffe said. Building owners also may not see an incentive to do retrofits and sign a long-term contract because they aren’t the ones to pay the utility bills, he added.

But Serious isn’t alone in marching into the commercial building market with energy service contract offers. San Francisco-based Metrus Energy, founded in 2009, is doing something similar and has completed work for defense contractor BAE Systems. The big players that have worked on energy efficiency projects for governments and schools will move in once they see a greater acceptance of the energy service model.

Serious Energy, by the way, has been offering energy auditing and monitoring software and energy-efficient windows before launching SeriousCapital.

Photos courtesy of Bosc D’Anjou via Flickr and Serious Energy