New Business Model Cuts Up-Front Costs to Spur Energy Efficiency

Technological developments often are seen as the surest way to reduce society's dependence on fossil fuels, but one young startup hopes to spur change with an innovative business model.

If successful, Metrus Energy's model could usher in a wave of investment in energy efficiency projects.

The idea is to enter into long-term contracts with commercial, industrial, and institutional facilities in which Metrus pays the upfront costs of installing energy efficiency measures, such as high-efficiency lighting or building energy management systems, and then shares the resulting savings from lower energy bills.

"We set the fee below what the customer is currently paying the electric utility," said Bob Hinkle, chief executive of the San Francisco startup. "So the customer gets savings from the start."

Energy efficiency projects are widely recognized as the lowest-cost measures to achieve greenhouse-gas reductions. The McKinsey Global Institute, the research arm of the consulting firm McKinsey & Company, says energy efficiency projects can use existing technologies that typically pay for themselves and therefore free up resources for investment elsewhere.

Those are the sort of benefits that should drive businesses to act. But the reality is that many don't and for a variety of reasons.

Some of those reasons include a lack of information about energy use and cost and the disconnect between tenants and landlords in terms of who pays the electric bills and who owns the building, according to a white paper on energy efficiency published by CalCEF Innovations, a research arm of the San Francisco-based California Clean Energy Fund, a nonprofit venture capital fund that invests in early-stage clean energy technologies.

Another reason for companies not investing in energy efficiency projects, even if the projects pay for themselves, is that firms are resistant to diverting resources toward projects that aren't central to their businesses. That, said Hinkle, one of the white paper's authors, is where efficiency service agreements come in.

Metrus invests in and owns the projects—its customers just pay for them over time while saving money along the way.

The idea of efficiency service agreements is a twist on business arrangements known as power purchase agreements that have been a major force in driving growth in the solar industry.

Under power purchase deals, a developer installs and owns a solar array for a customer, such as on a university campus or a store roof, and then sells the power generated to the customer. The rates are set so such that solar power is cheaper than buying power from the grid.

Hinkle hopes his business innovation can do for projects that reduce energy demand what power purchase agreements have done for solar.

Metrus wouldn't be the first to use this type of agreement to attract customers. So-called energy service companies, or large energy firms like Johnson Controls, have been designing and implementing energy efficiency projects for decades and making guarantees on the savings to their customers.

The difference, Hinkle said, is that they have largely ignored the private sector and projects that cost less than $5 million.

Hinkle believes his startup is the first company in the United States to target private sector projects in the $1 million to $5 million range using efficiency service agreements.

Metrus would partner with banks and other financial institutions to finance the deals and hire engineering and construction firms to design and install the projects. Hinkle said Metrus already is in negotiations with about $50 million worth of projects, the first to be installed later this year at an industrial facility in the Northeast.

As promising as the idea sounds, Metrus' success isn't certain.

With the economy sluggish, potential customers will be hesitant to engage in new ventures, said Zarko Sumic, a Gartner analyst who covers energy-related markets. And much like the sudden surge in power purchase agreements in the last few years, success by Metrus quickly will drive competitors into the market, who won't be held up by intellectual property claims or major technological barriers since this is a new business model and not an engineering breakthrough.

But while new entrants might make it more difficult for Metrus to grow as a company, the more energy-saving projects installed also would mean the country would be less reliant on fossil fuels.

 

See also:

San Jose Gets Creative to Help Homeowners Pay for Solar

Start-Ups Rise to Push Solar on College Campuses

LEED No Longer Stops at Construction: Version 3 Checks Up on Efficiency

Waking Up to Energy Efficiency: What Washington Can Learn from the States

Energy Efficiency Saves California $56 Billion, Creates 1.5 Million Jobs

Energy Efficiency Funds Saving Our Bacon

California Tops List of Most Energy-Efficient States; Idaho Most Improved

 

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