How to Invest in Good: Energy Efficiency

This post was written by Benjamin Margolis and originally published by Mosaic.

Since President Obama declared in his State of the Union address, “Let’s cut in half the energy wasted by our homes and businesses over the next twenty years” there has been an increased focus on energy efficiency as a source of growth, both in terms of jobs and economic returns. Returns on investment (ROI) for energy efficiency retrofits can be as high as 156% and there are plenty of innovative financing methods to take advantage of these potential savings. With low-risk returns such as CDs and Tresuary Bonds nearing record lows and increased incentives for energy efficiency, there has never been a better time to invest in energy efficiency.

What is an energy efficiency investment?

Investing in energy efficiency can take many forms. More often than not, an investment in energy efficiency involves an upgrade to a home or property that gains returns through savings on energy bills. Additionally, investment can be made in equity and debt products that finance energy savings for businesses and utilities.

Invest in your home and property

Investors that own property or those that rent can purchase products and improvements that will save money and allow for returns greater than you can find in most other markets. The EPA’s energy star programprovides options for appliances and products that provide both environmental and economic benefit. Additionally, there are options for upgrading property such as retrofitting duct systems and HVAC systems. For a more complete array of options, check out DOE’s Home Energy Saverwebsite.

The best and simplest investment you can make is one you may already know about: CFL bulbs.  Yes, with the price of CFLs comparable to incandescent lights, this is a simple investment that you can make with returns upwards of 133%.  For those interested in greater lighting upgrades, LED light bulbs are rapidly coming down in price and over the long haul may be an even greater investment than CFLs

Additional product upgrades will give investors access to returns ranging from 20% to 156% according to Greenandsave.com’s Master ROI table.  These returns vary greatly based on energy prices and property characteristics, but some simple upgrades with great returns include programmable thermostats (156% ROI) or upgrading clothes washers (24% ROI).  One less conventional product that is particularly attractive from an ROI perspective is a standby power device. Standby power devices reduce “vampire load” from appliances such as TVs and computers; these devices can provide upwards of 120% ROI. 

For those interested in retrofitting their property the DOE’s Home Energy Saver website provides an energy savings calculator. Deeper retrofits provide a great return for your investment not only based on energy savings but also increased home value.  To get started, we’d highly recommend discussing your options with a contractor that understands the whole-house systems approach.  You can start by using the RESNET databaseto conduct an initial search.

How to afford home retrofits

Deeper retrofits can be expensive. Incentive programs lower costs to consumers and provide access to certain types of retrofits. To understand what you have is available in your area, you can use the Database of State Incentives for Renewables & Efficiency (DSIRE) websiteand check with your utility, who may be able to provide incentive programs for different types of retrofits. 

Additionally, other options for financing are available for homeowners (and renters) to help ease the up-front costs of retrofits and upgrades. Loans for homeowners are available with relatively low rates and can be unsecured. The PowerSaver Loanis just one example of a product available to most homeowners and offered through many contractors and local banks. 

Outside of traditional debt, other products have been created for homeowners and renters.  One example is Property Assessed Clean Energy (PACE) loans.  This is an option where loans are repaid through the property tax bill.  PACE financing has been growing very slowly since—the program was dealt a blow when Fannie Mae and Freddie Mac who refused to back mortgages bearing PACE liens—but could expand soon. It was recently shown that energy efficiency in homes reduce risk of mortgage default

Another example is utility based On-Bill Financing where energy efficiency loans are paid back directly on utility bills.  This is especially attractive when retrofits are able to decrease energy bills beyond the cost of loan payments, allowing for an immediate benefit.  Unfortunately, this option is mostly reserved for commercial customers but has been slowly rolling out to residential customers.

Taking advantage of other opportunities

Investors that do not own property or are not interested in retrofitting their property may still be able to get involved in the potential opportunity presented by energy efficiency. New financial structures and businesses in the sector are creating opportunities for investors to benefit from growth in this sector.

Publicly traded companies provide the easiest way to invest in the industry. Energy Service Companies or ESCOs provide savings contracts to businesses and utilities through innovative technology and financing mechanisms. Ameresco Inc (recently highlighted in Tom Konrad’s Ten Clean Energy Stocks for 2013) is one example of a company that offers Performance Contractsand other savings sharing business models. Additional companies that have this business model include Johnson Controls (JCI) and large players with a component are United Technologies Corp (UTX) who own Carrier Corporation (who own NORESCO) and Siemens AG (SI).

New innovations in this space are in the works. One example is a CDO for energy efficiency loans, which could give investors access to homeowner savings. Other ideas are always coming through and eventually financial innovation may lead the way towards increased energy efficiency.

So what are you waiting for?

A recent ACEEE report noted that $479-670 billion was spent in the U.S. on energy efficiency goods and services in 2010. That sounds like a lot, but McKinsey estimated that $3.4 trillion could be invested in energy efficiency with an average IRR (return) of 17%, meaning there’s plenty of room for growth. So what are you waiting for?

Learn More 

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