smart gridThe Smart Grid engenders an evolution from centralized generation to distributed energy resources (DER) that has profound impacts on business models and operations.  Technology is one of the drivers of this evolution.  Legislative and regulatory policies that focus on improving grid reliability AND resiliency are other important drivers.  But intelligently designed regulations and elegant technology solutions will fall short if we do not have financing products and services that make it easy to fund Smart Grid investments along the entire value chain of generation to consumption.

There are glimmers of hope that financial tools are innovating, and in the process, creating new sources of capital that bring down the costs of funding.  It’s a complicated problem because financing mechanisms for residential purposes are sometimes quite different than commercial or utility-scale funding options.  On top of that, financing tools and considerations may differ for generation of kilowatts (such as solar production) versus generation of negawatts (like energy efficiency projects).   However, new financial products and services offer opportunities for Joe and Jane Ratepayer to directly benefit as investors in the transformation to a Smart Grid.

One of the most intriguing innovations in finance uses crowd-sourced funds to encourage large groups of retail investors like Joe and Jane to participate in renewable energy generation projects – not just large institutional investors.  As the Smart Grid enables consumers of electricity to become producers of electricity (prosumers), the Internet democratizes the investment marketplace – an unexpected convergence with multiple benefits.

Mosaic finds and qualifies solar projects and connects investors to them.  Investment minimums are $25, opening the market to a large pool of motivated investors eager to join renewable energy markets.  Residents of New York and California can participate by virtue of their location.  People in other states must be accredited investors.  This is a very intriguing service that seems to be a hit since every solar project is fully subscribed.  Their last subscription of three projects was fully funded in 24 hours to the tune of $313,325.  It appears there is a significant unmet need for investors who wish to participate in renewable energy deployments but lack opportunities through traditional investment models.

It would be very interesting to see a similar service created for energy efficiency projects, but there are a few unique challenges to negawatt projects that don’t exist with kilowatt projects.  For instance, energy efficiency projects are based on hypothetical savings.  It’s hard to prove a negative – meaning it’s not easy to determine how much energy is saved as a result of energy efficiency investments.  Moreover, energy efficiency investments – particularly those that involve retrofitting buildings – can take years to show a positive return.

Residential and commercial PACE (Property Assessed Clean Energy) programs are one promising strategy to finance energy efficiency projects.  To date, 28 states and Washington DC have approved PACE programs for residential use.  Two states, California and Colorado, have approved commercial PACE programs.  Like residential PACE mechanisms, these rely on bonds whose proceeds are used by building owner borrowers to fund renewable or energy efficiency projects.  PACE loans remove the substantial upfront costs of energy efficiency projects and enable owners to upgrade and enhance the value of existing structures, save on energy costs, and create local jobs during the deployment phases of those projects.  By some industry estimates, the market for commercial PACE projects could exceed $180B.

Another financial product possibility is to securitize portfolios of energy efficiency loans.  By aggregating a number of energy efficiency projects and then defining various categories of risk, retail investors, not just institutional investors, could participate in the market and vastly increase the capital funding then available for energy efficiency projects.

And then, there are direct voter initiatives like California’s Proposition 39, which closed a corporate tax loophole and mandated that 50% of the newly recovered tax revenues for the next five years ($500M/year) be spent on renewable and energy efficiency projects.  State legislation under consideration now targets this money for energy efficiency projects in California public schools.  The California Energy Commission calculates that the state’s schools (excluding colleges and universities) spend $132 in energy costs per student each year. That’s an annual bill of $700 million, and at a projected average of 30% savings for energy efficiency initiatives, that would result in $240M per year that could go to textbooks and teacher salaries.  Of course, building retrofits also create jobs, another win for local and state economies.

These innovative financing mechanisms drive grid transformation investments along the entire value chain from generation to consumption.  In the process, we increase grid resiliency through distributed renewables generation, reduce our carbon footprints, and allocate profits and cost savings into local economies.  Financial innovations also open up energy markets for prosumers and small investors.  As a Smart Grid driver, finance can definitely accelerate investments in DER and deliver a broader range of benefits to a wider pool of participants.