With rare (and Herculean) exception, traditional approaches to energy efficiency simply do not result in deep energy retrofits in the commercial building sector. There are well established, widely understood reasons why this market is “broken.”
- Most building owners pass through their building’s energy costs to their tenants—so owners see no direct benefit from investing in efficiency improvements.
- Even when building owners do pay the energy bills, commercial building owners can only “harvest” those savings for as long as they own the building—their planning horizon is typically ~5 years.
- Tenants are unlikely to invest in a building they do not own, and are unlikely to continue occupying long enough to recognize substantial savings.
In a MEETS transaction, the utility bills the building for both the traditional energy consumed and the metered energy efficiency. This (total) energy bill is then paid as it normally would be, by the building tenants in most cases. This allows the utility to pay not just an “incentive” for energy efficiency, but to value the energy itself. Put another way, the utility no longer loses the retail revenue associated with energy efficiency, completely changing the economics of the transaction for all parties. Under MEETS, energy efficiency is treated transactionally like energy generation. This allows the use of a traditional Power Purchase agreement between the utility and the party providing the capital for the retrofit. With that in place:
- An Investor (for example, an energy-focused private investment fund), delivers the capital financing required to make substantial efficiency upgrades to a building (or facility)—based on the long-term (e.g. 20-30 year) Power Purchase Agreement (PPA) with the utility for the Metered Energy Efficiency “harvested” by those efficiency upgrades.
- The Investor secures the rights in the building with a lease – the energy tenancy – with the building owner. Under it, the Investor pays the owner rent for use of the site. The payments are additional rental income for the building owner. The Investor is functionally another building tenant with a long-term lease (e.g. 20-30 year duration).
- The building owner treats the improvements the same way other conventional tenant improvements are treated. At the conclusion of the Investor’s “tenancy”, the improvements become the unencumbered property of the building owner.
- In many cases, the building owner may wish to play the role of Investor.
Building owner benefits Include:
- A more valuable building based on outside investment
- No owner capital placed at risk
- Additional rent and free cash-flow for use of their building as an energy efficiency investment vehicle
- Benefit of upgrade without going into the energy business.