How Banks Can Make Money On Energy-Efficiency Loans

By Jennifer Kho, Contributor

Energy-efficiency improvements, such as installing new boilers or roof insulation, can save building owners big bucks in the long term. A study released by the American Council for an Energy-Efficient Economy (ACEEE) on Wednesday found that energy efficiency could save consumers an average of $400 billion per year.

But the upfront costs of these improvements are often too high for owners to pay outright, and it’s also difficult to get financing for energy-efficiency improvements. That could change, thanks to a Deutsche Bank study of affordable-apartment retrofits in New York City.
Researchers found that half of the projects included in the study yielded enough energy savings to pay for themselves in 30 years or less. The study, published this week, also compiled information about the average energy savings that different types of buildings reaped from a variety of improvements.
How could that help owners get financing? Mortgage lenders don’t usually include the long-term energy savings in their home-loan calculations today, says Sam Marks, vice president for the Deutsche Bank Americas Foundation and Community Development Finance Group. Instead, all maintenance and operating expenses – including energy – usually get lumped together, with expected standard increases of 2-3 percent per year, he says.
“There’s a basic underwriting process, and there hasn’t been much interest in changing that,” he says. “The private market is not interested, right now, in doing a lot of newfangled things.”
Deutsche Bank hopes the benchmarks from its study will make it easier for lenders to determine how much money different types of projects are likely to save and will give them the confidence to include those expected savings in their loan calculations. The idea is that more financial institutions would be willing to underwrite slightly larger loans to pay for energy-efficiency upgrades – adding the cost of the upgrades to the size of the owners’ mortgages – if they’re confident that the savings from the upgrades will ultimately make up the cost.
The study also includes specific suggestions for how lenders can incorporate the energy savings into their underwriting process. Those tools could open up more financing for such improvements, and, in turn, give the energy-efficiency market a big boost. That’s because financing has long been a major bottleneck for the sector.
Ron Pernick, managing director of cleantech-research firm Clean Edge, calls the Deutsche Bank study “telling and important.” Banks, insurers and other financial players see the opportunity in energy-efficiency projects, but don’t have the financing tools and infrastructure in place to get the deals done, he says.
“In a lot of ways, energy efficiency is an unsung hero,” he says. “The cost has come down in the last couple of years and these projects pencil out. People can make money out of these projects. But it’s only going to happen if we figure out the financing.”
It’s also significant that the study focused on apartment buildings, which represent potentially larger projects than single-family homes, Pernick adds. “It’s like solar five or 10 years ago, which started out as something distributed on a home rooftop and now has increasingly gone into larger commercial, industrial and utility-scale projects too,” he says. “We’re going to move to deep-scale deployments and multiple-family retrofits, and I think it’s the right thing – that’s where you get the biggest bang for your buck.” The ACEEE study also concludes that larger energy-efficiency projects could deliver greater returns.

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