I= Kr + Te + De: Innovations in Project Finance

Milton Bevington, a lecturer at U Mass, and closely associated with the Clinton climate initiative has an intriguing post at the Sustainable Business Forum site.  He takes note of the fact that the greenest, most efficient energy is the energy we don't use, yet despite much progress by engineers in developing energy efficient building technologies, adoption of some of these technologies has lagged rational expectations. 

The article discusses a path to sustainable financing of these technologies. 

Question: What is the significance of innovation in energy efficiency project finance? Answer:

 I=K_r +T_e +D_e

Innovation in building energy efficiency results from the interplay of Knowledge from research, Technology from engineering, and Delivery to market from enlightened entrepreneurship. A common problem arises when a promising idea reaches a stage known as the “Valley of Death” — that is, when the idea is not yet perceived as workable in practice or at scale and is therefore considered too risky by traditional investors (read building owners and real estate lenders in the case of energy efficiency). Crossing the valley requires some kind of convincing demonstration of economic feasibility which in turn requires financial resources, hence the dilemma.

Suzanne Harness has an article, here on the Triclium (June 15), looking at the risk transfers inherent in performance contracting.  The Bevington article covers performance contracing from the other side:

Energy performance lending

For mortgaged properties with limited refinancing options, a new form of collateral and underwriting process for energy efficiency projects. Common real estate lending practice complicates energy efficiency projects because it can be difficult to add debt without refinancing a property completely. As proponents of PACE finance (both residential and commercial) have learned, the rights of first mortgage holders cannot be easily ignored.

Energy performance lending uses underwriting criteria which lean on energy efficiency project cash flows to secure loans. An analogy is the way that a drilling project is secured using the expected cash flows from oil. When used in conjunction with an enhanced contracting model, projects underwritten in this way can coexist with senior debt without affecting prior security interests

The ideas discussed have broader application to new project delivery methods like IPD as well.  Innovation in project delivery requires (Kr) knowledge from research (gathering of metrics, is IPD really more efficient, cheaper, and less litigious), (Te) techonology from engineering (BIM, enhanced pull scheduling, etc), and finally (De) enlightended entrepeneureship.