New Third-Party Financing and Limits on Carbon Pollution
A game-changing combo to unleash U.S. industrial energy efficiency
A wave of investors are moving into the mainstream and providing a new source of financing for industrial energy-efficiency solutions in return for a share of the energy savings. This win-win scenario can cut a plant's energy costs, provide revenue to the firm providing capital, and reduce carbon pollution.
A carbon limit will unlock additional opportunities and investment
A limit on carbon pollution will motivate more industrials to capture efficiency opportunities. Third-party financing is most attractive to investors when they have positive, predictable revenues and a steady stream of customers that can be bundled together on a large scale to achieve greater efficiencies and revenues. Some third-party investors are companies that focus investing in energy-saving opportunities (sometimes known as Energy Service Companies or ESCOs). Other investors see these investments as part of their portfolio.1
Significant energy efficiency is available
Analysis by McKinsey & Company shows the U.S. industrial sector can reduce annual energy consumption 18% by 2020 with opportunities that pay for themselves.2 These energy savings can be used to attract private sector capital because investors can "own" and make a profit from the energy savings.3
How it works
First, the investor conducts an analysis of the facility and identifies efficiency solutions that can reduce energy use. The plant owner and the investor complete a contractual agreement outlining how costs and benefits will be shared between the two parties. The investor (or the investor's partner) then installs efficiency technology (covering the capital cost) and maintains the system to make sure energy is saved. The resulting energy savings is used to pay back the investor's capital investment and lower the plant's operating costs.
Case study: West Virginia Alloy, Recycled Energy Development, and Dedham Capital
Recycled Energy Development (RED) specializes in capturing waste heat in industrial applications. RED is investing over $100 million—in partnership with Denham Capital (an investment fund)—to help West Virginia Alloys improve energy efficiency at its silicon manufacturing plant.
RED is installing technology to capture the exhaust heat from West Virginia Alloy's plant furnaces and uses that heat to drive a turbine generator, which will generate over 40 MW of power. RED (and Denham) will receive a "modest" return when the project goes into commercial operation in 2012 and will split the remaining financial benefit with West Virginia Alloys.
This project will reduce carbon pollution by approximately 320,000 tons of CO2 per year, significantly reduce operating costs for West Virginia Alloys, and create and preserve valuable manufacturing jobs.4
Case study: Mittal Steel & Primary Energy/EPCOR USA
Primary Energy/EPCOR USA built heat-harnessing energy plants atop the coke ovens at Mittal Steel facilities in East Chicago, IN. Through these projects, the mill has been able to cut its energy purchases in half, saving over $100 million to date and reducing greenhouse gas emissions by 1.3 million tons each year. You can learn more about the projects through Primary Energy Recycling and "Waste Not" (The Atlantic, May 2008).
- For example, Denham Capital manages a $4.3 billion investment fund. Denham has partnered with the Recycled Energy Development (RED), a company which specializes in installing waste heat recovery energy-efficiency technology. Denham provides the financing (so far Denham has invested $500 million in RED) and RED provides the expertise to install and manage energy-saving technology. See "Gray Is The New Green", Forbes, September 15, 2008.
- McKinsey's Unlocking Energy Efficiency in the U.S. Economy. McKinsey's estimates to achieve these savings would require an upfront investment of $113 billion in energy-efficiency opportunities that have a positive net-present-value (NPV) after applying a 7% discount factor to account for the cost of capital. McKinsey's analysis shows that additional net-present-value energy-efficiency opportunities would be available with a longer payback period/or a price on carbon. For example, a $30 per ton CO2e carbon price increases the NPV positive energy efficiency potential by 8%. McKinsey's estimates don't include energy-efficiency opportunities with longer payback periods. For additional potential available energy-efficiency opportunities, see also The National Academy of Sciences (NAS), Real Prospects for Energy Efficiency in the United States.
- Third party financing is most attractive to investors when they have positive, predictable savings or revenues and a steady-stream of customers that can be bundled together on a large scale to achieve greater efficiencies and lower transaction costs. On a smaller scale as we have today, transaction costs can be too high to facilitate this financing model.
- Recycled Energy Development's Recycled Energy Project Fact Sheet [PDF]. Also see "Gray Is The New Green", Forbes, September 15, 2008.
Posted: 01-Feb-2010; Updated: 01-Feb-2010