Joule Assets Inc. has launched the Joule Energy Reduction Assets Fund (ERA Fund), a $100 million private equity fund that will finance the installation of clean technology that generates energy savings, such as building controls, LED lighting, efficient HVAC systems, and programmable thermostats —while also providing investors with entry to the previously closed energy reductions assets market, which Joule Assets pegs at around $900 billion in size (based on McKinsey and Co. estimates).
The Joule ERA Fund will aggregate small- and medium-sized projects (costing from $50,000 to $500,000) that generate revenues from such efficiency upgrades. By aggregating these clean energy projects, Joule is seeking to make these deals more attractive to private high-net-worth investors and family foundations, COO Dennis Quinn told CleantechIQ, noting that the firm is looking to add institutional investors. To help entice investors, loans made by the ERA Fund to finance these projects will be backed by a loan-loss reserve worth anywhere from 10% to 20% of each loan. In addition, Quinn said, third-party insurers will be in place to help further mitigate risk.
The fund is positioned to investors as a “solid, low-risk product” offering returns of between 7% and 10%,” CEO Mike Gordon said in a recent interview.
Securitization To Reach Energy Efficiency Markets
2014 already has the makings of a “banner year for clean energy finance,” as the Environmental Defense Fund blog noted. “Capital investments are being made, funds developed, and securitization tools crafted — all with remarkable speed. And private capital markets are aggressively rallying around these efforts, which will only increase the momentum of our collective efforts to drive investments into essential energy efficiency and renewable energy projects.”
In fact, already this year two major efforts have been announced. Prior to the launch of Joule’s ERA Fund, there was the debut of a $100 million deal between clean-energy consumer finance company Kilowatt Financial and Citi to finance 10-12 year unsecured loans of up to $30,000 for homeowners making energy efficiency improvements to their HVAC (heating, ventilation, and air conditioning) systems, water heaters, windows, roofing, insulation, lighting, and appliances.
“… EDF believes that both of these efforts signal an important step forward” for clean energy finance.
However, the blog added that loan securitization remains critical for broad-scale deployment of clean energy, further noting that the $100 million size of the two efforts “is no accident,” because “markets broadly consider that number to be the smallest at which securitization is a viable option.”
Asset-backed securitization and secondary market creation are, in fact, “critical” for broad-scale deployment. “Securitization has the potential to exponentially expand clean energy investments to institutional investors such as mutual funds and pension funds, as well as large financial institutions looking for pooled assets. In effect, the private capital spigots will be opened with investments flowing into critical renewable energy and energy efficiency projects,” the EDF blog noted.
Obstacles do remain for these efforts, however, such as the level of complexity with regard to evaluating performance risk, “particularly on energy efficiency transactions that can be extremely complex and unique,” EDF reported, adding that it is working to address these uses through its Investor Confidence Project efforts, which are designed to standardize projects into recognizable assets and aid in the pooling of projects with manageable outcomes.
“Asset-backed securitization will give both the renewable energy and energy efficiency industries broader access to more potential investors. It will also serve to lower the cost of capital, level energy costs, and enhance market liquidity,” EDF concluded.
Joules Asset’s Quinn told CleantechIQ that the recently released Investor Confidence Project’s standardized protocol for commercial energy efficiency certainly helps Joule. “This streamlines [the fund],” he told CleantechIQ. “They did very good work and we support it because it helps investors.” The protocol is meant to do precisely that by showing resulting savings from a project by standardizing how energy efficiency projects are baselined, engineered, installed, operated and measured.
Joule’s ERA fund, he said, uses an ASHRAE based standard protocol “that everyone has agreed is the best way to measure energy-saving performance.” (The acronym once stood for the American Society of Heating, Refrigerating and Air Conditioning Engineers.)
Biggest Opportunity to Offer Solutions in Small Efficiency Markets
As for Joule’s effort, small and medium enterprises (SMEs) have not been benefitting from the huge growth the energy efficiency (EE) industry has experienced over the past two decades. Joule reached out to 3,000 energy efficiency professionals—contractors and vendors—to better understand the reasons for this.
Both CEO Mike Gordon and Quinn provided some insight gleaned from the survey results, as well as how the fund—and an interactive database that the firm has developed for contractors to use—fit into the picture during a recent webinar.
A majority (or 67 percent) of respondents noted that energy efficiency projects costing $250,000 or less “is a black hole, a real challenge for them,” Quinn said during the webinar.
Among the reasons why—these SME contractors and vendors do not have access to financing from traditional financiers because they often lack experience with smaller-scale EE projects and don’t understand the credit risks associated with these projects. Also, due diligence is costly and burdensome. Historically, it has been easier and more cost effective to finance fewer, larger projects, as opposed to aggregations of smaller projects.
Still, from the investor’s viewpoint, the “highest opportunities in energy efficiency are found here,” he added. Then, it’s a matter of “how do you crack that nut?”
Joule Assets found that contractors and vendors also face a barrage of obstacles to getting financing for their own projects. Financing is often bureaucratic, involving a lot of paperwork for third parties. There are other barriers as well, the two noted. The process of checking credit and loan servicing is relatively costly for smaller jobs. There is a confusing mix of incentives.
“We want to reduce the length of time it takes our clients [the contractors and vendors] to close their deal,” said Gordon. “If you close 100 out of 400 deals, we’re looking to help you close an extra hundred out of the 300 you don’t close.”
Joule is looking to provide “on-the-spot financing,” without the need of a third party for approval.
“For each type of project (not each particular product) that you’re integrating we will do a study,” Gordon said.
How Data Creates Value in Energy Efficiency Markets
This is where Joule Asset’s database platform that was designed alongside the fund comes into play. The database program, Quinn told CleantechIQ, is available in two formats: it can be accessed on any Internet-enabled computer via the cloud or an API (application interface) that can be plugged into the contractor’s website.
With the software database, the contractor or vendor can determine whether the Joule fund will finance a particular project. In addition, the database provides a lot more data, Quinn told CleantechIQ. “The tool guides them through the revenues and cash values of participation in demand response. For example, they can enter [into the software] their location, anywhere in the U.S., and the size of the building, and we’ll provide them with a report that shows them what is available [from DR, rebates and incentives], as well as the gross revenues.”
Quinn told CleantechIQ that HVAC control contractors are among the first groups to begin working with Joule on the new platform. “They are the early adopters, they get the business model [we are presenting to them] and see it as a new opportunity.”
On a basic level, HVAC contractors earn their revenue by selling controls to their clients. The more sales they make, the more revenue they earn. But in terms of the sales they don’t close, it’s usually because the companies “just don’t have the capital to lay out upfront even with utility rebates,” Quinn said. “This fund allows them to push it over the top,” he said.
During the webinar, Gordon further noted: “You have the pool of capital available that you can disseminate as you choose as long as it is a product type that we have approved.”
As noted, the contractor provides a loan loss reserve for each project of 10% to 20%, depending on the risk and diversity of the portfolio, as well as the contractor’s level of experience. One example quoted during the webinar: to fund a diverse number of projects, with each project costing no more than 5% of the entire portfolio (which has $10 million in total capital), the contractor only needs to provide upfront about $1.5 million of equity—that is the loan loss reserve.
The “sweet spot” on project sizes is anywhere from $10,000 to $500,000, with $50,000 to $200,000 the average.
An alternate financing model is also available in cases involving a vendor not dealing directly with the decision maker—say, they are partnered with a software company that wants to also offer something to the customer base. Joule can still accommodate such arrangements and bundle an offer to all vendors.
In addition, Joule seeks to further enhance a contractor’s project through the use of the database, as noted above, by identifying additional sources of value that the firm’s partners aren’t aware of. “The technology nowadays, with price points coming down, is opening up this area of the market,” Quinn told CleantechIQ. “The technology has gotten ahead of the commercial arrangements. The database captures the benefits. How do you control lighting better, HVAC more effectively? The enabling technologies have not been participating. All of this great capability has not been getting access to the market.”
By enabling the contractor to add more value to its services, Joule in return gets a portion of that incremental benefit that serves to further enhance the return for investors in the ERA fund.
Overall, Joule views the ERA fund and database as a win-win for all involved. “The contractors are getting a good rate of capital, we have some safety for our investors. Over and above that we are enhacing the value of projects by identifying additional sources of value that a lot of our partners are not aware of.
“As we are adding value to that contractor’s service and product offering, we take a portion of that value to enhance return for our investors which helps motivate our investors and gives [the contractor] the opportunity for more financing,” Gordon said during the webinar.
“You as a contractor are providing extra value to the consumers. The process becomes automated.”
Other Energy Efficiency Models, Funds Sprouting Up
Other efficiency models were mentioned during the webinar. Among them, the emerging energy efficiency-focused real estate investment fund, i.e., a REIT that debuted last year from Hannon Armstrong. Green banks, such as the one in New York, are offering access to funding for loan-loss reserves. And in parts of the U.S., PACE financing is available for commercial properties.
Also, Metrus Energy is offering energy service agreements: ESAs and MESAs, which take a portion of energy savings. And startup Noesis Energy is offering a web-based matchmaking service that helps building managers connect with financial institutions that will offer financial packages to pay for energy efficiency upgrades.
Outside the U.S., there have been debuts of funds similar to Joule’s ERA fund (which itself is positioned as a global product). These include Sustainable Development Capital LLP, the London-based financial advisory and investment firm, which announced a $200 million Chinese energy efficiency fund in December, the UK China Energy Efficiency Investments Fund, which it said would help bring energy efficiency technology from the U.K. to China.
And Swiss green infrastructure investment firm SUSI Partners closed its energy efficiency fund in early January with $89 million under management, exceeding expectations of a $69 million top off.