One of the obstacles facing energy-saving retrofits or construction of manufacturing systems and buildings is that up-front costs are often high, even when money is saved in the long run. But if you install a solar array that has a five-year payback time, it has a 20% annual return on investment; this far higher than the return of most stocks, and it is risk-free, since electricity prices are not going to go down--it can only get better than 20%. The same is even more true for gas-saving investments, where price volatility can be high.

Clearly there are good investments to be made here. Someone create an "Energy Bank" to make good money while helping people get over their up-front cost paranoia or genuine lack of capital. It would be slightly different from a normal bank, with less risk for the borrower and more profit for the lender. An energy bank would give people the money for their energy-efficient / on-site generation systems, and in return would get paid not a flat rate but a chunk of the energy-cost savings. The exact terms could be anything--maybe the bank gets paid 80% of the customer's resulting energy cost savings for several years until the "loan" is paid off at a profitable rate, maybe the bank gets 40% of the customer's energy cost savings in perpetuity, whatever the market will bear. Energy savings would be easy to measure for retrofits (just compare to historical usage and current energy prices), and for new construction they could be compared to national averages or other benchmarks.

The customer would be at less risk because they would only pay if they got a financial benefit from the installation, and would always get more benefit than they had to pay out. The bank would make more money than a normal loan because they could have very long-term income and because many efficiency measures are known to give great returns on investment at low risk. The perception of cost payback is often far worse than reality--as the US Green Building Council and others have pointed out, in the building industry it costs an average of 2% more to build a green building, for an average savings of 20% per year in energy costs. And if you're clever, you can reduce both up-front and long-term cost: Rocky Mountain Institute has helped companies like Interface reduce energy use of pipe/pump systems by 92% while also reducing installation cost. Such savings could be gravy on top of the rate of return from annual energy savings, but require some skill to pull off.

Energy banks wouldn't have to be independent institutions; they could be engineering consultancies--the people you hire to do your green retrofit could do it for free, and just charge you a percent of your energy savings. (This takes the product-service system to another level in green design.) Or energy banks could be departments within companies; this would ease issues of data-disclosure and trust for long-term contracts.

These banks wouldn't have to be limited to energy, either--they could be material banks, where reduced mass and/or reduced toxins would save money on purchasing or waste treatment, and the bank would get paid accordingly.

Things like this exist, except instead of an energy bank it is a company that specializes in large scale corporate or industry energy management. This is a new area in which people with the engineering know-how and manufactuing access can indeed help in reducing overhead due to energy inneficiencies and share in the savings. Global Innovative Systems (http://www.gistt.com/) is just one company that has seen the writing on the wall. I'm sure more will follow. The major obstacle will be with individual homes, as there is little to be made on individual retrofits or improvements. This might change if neighborhoods or entire apartment complexes decide to go in on saving some money. Maybe even state agencies might jump in on the game.

Posted by: Xavier on December 2, 2005 12:21 PM

This is nothing new it is called "performance contracting" in the energy management industry. The idea is to reduce a buildings energy usage and use the resulting savings of energy costs to fund the project. Johnson Controls and many others use this tool to market for new work.

Posted by: Thom Worlledge on December 2, 2005 2:26 PM

I've been thinking about this for a really long time now. It could work amazingly well in states with solar rebates, especially since the rebates are done per watt, and not as a percentage of the total cost of the system. Also it would work the best if the "energy bank" or "solar loan" company provided additional advising services to help people get better deals on there mortgage, all applicable tax breaks and refunds. In New York it would be even better if the company helped people to become energy star compliant, which would up the rebate, 50 cents a Watt. The best would be if this company was run as a NPO that reinvested all the "profits" into providing loans for more and more people, as well as investing in places where they might take a slight loss which would be subsidized by the more profitable houses. Of course in the beginning only homeowners with ideal conditions for solar panels would be approached. I could go on talking about this forever, this has been my dream since I was twelve years old. I figure it could be done well with 3 million dollars investment to be payed back in 5 years. With a good investment like this it opens up other possibilities, like helping people to roll neighborhood wireless networks, purchase rainwater collection units, start local mushroom farms. all sorts of things. This has to be done... I'm planning on getting my BA and running for Mayor (in 2-3 years), and instituting something like this in my hometown. But if anyone’s got a million dollars or so I'll put together a more detailed presentation. I’d work for an NPO doing this full-time for free. My friends and I have always dreamed of something like this.

Posted by: Matthew Broudy on December 2, 2005 5:44 PM

This does indeed seem like a great project for states -- in essence, issue "energy bonds" secured by individual liens or notes and paid off into a pool over the life of the bonds.

An opportunity for an enterprising investment banker to take to a state....

Posted by: JC on December 2, 2005 8:39 PM

The expression I heard was ESCO or energy saving companies. This is happens with commercial applications all the time, but harder to pull off for the residential sector.

For the residential sector, I think banks should step in. People re-mortgage their houses often enough. If someone already owes $150,000, why should it be a problem to tack on an extra 10%? The renovation adds value to the house. Homeowners would pay less on utilities, so the risk of default goes down slightly. The bank could pay the upfront cost and the rebate gets applied directly to the mortgage.

Posted by: Daniel Haran on December 3, 2005 7:00 AM

We're putting a direct exchange ground source heat pump in our family's new house in Canada. The savings are $1000/year vs. natural gas and $2000/ year vs oil. (CAD) The incremental installation cost is about $9000. That is about a 10 year payback factoring in interest. Those sorts of payback periods are common with performance contacting (per. honeywell) but would be more difficult in the residential sector. How do you create a convincing argument to do the up front investment when you will not see the remarkable drop in operating expenses untill you've moved into the next house? This sort of thing might be best approached on a neighborhood basis...the same model as micro-finance with groups in developing nations sponsored by the utility company where resistance electric heat is common (kwh saved is a kwh you dont' have to build) or natural gas (reducing competiton for nat gas reduces price utilities pay for nat gas to fire their brand spanking new super efficient nat gas generating plants). That takes care of electric and nat gas...the cost of oil heat is soo much higher than nat gas already so I don't know if the incentive is necessary...mind you it would make sense for the state to go here cause it would move them toward kyoto sandards and could actually generate revenue for the state while saving homeowners bucks (good luck finding another opportunity like that...) Again...a collective action with neighborhood energy contracts might aggregate revenue sufficiently to attract lender's or energy contractors' interest.

Posted by: peter tamas on December 4, 2005 11:00 AM

I agree with the comments about the greater difficulty of applying this concept to residential. In the commercial world we do this every day. There is no lack of funding and the costs to borrow money for such energy savings projects is relatively low, much lower than the shared savings schemes suggested. The market is already serving such needs.

Posted by: Dave Harvey on December 4, 2005 7:00 PM