How Milwaukee is brewing energy efficiency, financial innovation

How Milwaukee is brewing energy efficiency, financial innovation

Cities such as Milwaukee are embracing innovative finance models to overcome barriers to energy efficiency.

While not as flashy as solar or wind technology, energy efficiency is one of the most cost-effective and powerful tools for helping cities mitigate and adapt to climate change. The cheapest and cleanest power? The kind you don’t need to produce in the first place.

Cities account for over 70 percent of global energy use and 40 to 50 percent of greenhouse gas emissions worldwide, according to the U.N.'s Human Settlements Program (UN-HABITAT). That's why ramping up energy efficiency programs is crucial.

"Cities are really in a great position to lead,” said Erick Shambarger, director of environmental sustainability at the city of Milwaukee, during a recent GreenBiz webinar. "We have the leadership on the ground and the partnerships as well to bring the opportunity for energy efficiency to building owners."

The world has taken notice of the potential for energy efficiency in climate change action, and there has been an unprecedented increase both in interest and investment plans for energy efficiency, according to the 2016 Energy Efficiency Indicator Survey by Johnson Controls, which sponsored the webinar.

And some 72 percent of organizations worldwide plan to increase their investments in energy efficiency and renewables in 2017 — especially in the emerging economies of India, China and Brazil.

"As far as the cost-effectiveness of strategies to combat global warming in general, building efficiency is the most cost-effective emissions reduction strategy," said Debbie Weyl, manager of Building Efficiency Initiative at World Resources Institute. "Not only does it have the most cost-effective emissions reductions overall, but it also has the most low-cost emissions reductions possibilities."

But with the high upfront costs of installing energy upgrades, finance remains the biggest hurdle to investment in energy efficiency for cities, companies and homeowners.

"These financial barriers include uncertainty regarding savings, insufficient payback or return on investment, and lack of funding needed to pay for the improvements," said Clay Nesler, vice president of global energy and sustainability at Johnson Controls.

The myriad benefits of energy efficiency

Financial savings from energy reductions traditionally have motivated energy efficiency pursuits, but organizations and cities alike are discovering a slew of other benefits, noted Weyl. These include catalyzing economic development through job creation, spurring social development through increased energy access for the poor and improving environmental stewardship through resource efficiency.

"Although cost reduction remains the primary driver for investment, energy security, customer and employee attractions, greenhouse gas reductions, brand reputation, government policy and investor relations are also significant factors in decision-making," added Nesler.

Buildings are long-term investments and a major opportunity for locking in benefits well into the next century. Overcoming the upfront costs of energy efficiency in cities — which are, in a way, a collection of buildings — is critical.

Private and public financing schemes

In the private sector, innovative financing mechanisms such as Property Assessed Clean Energy — known as PACE — are allowing organizations of all sizes to pay for energy efficiency upgrades with no upfront cost. PACE covers 100 percent of a project’s costs and is repaid for up to 20 years with an assessment added to the property’s tax bill. The financing stays with the building upon sale, and is easy to share with tenants.

"PACE has really proven to be an ideal vehicle for financing projects in the private sector — for commercial buildings, multi-family housing and condominiums, among others," said Nesler.

But for municipalities and other public entities, a different kind of financial solution has emerged to help pay for much-needed energy efficiency projects: performance contracting.

Around 80 percent of performance contracting occurs in public markets for the MUSH market, or municipalities, universities, schools and hospitals, said Nesler. This is an attractive option for cash-strapped cities, as it allows them to finance energy efficiency projects without tapping into taxpayer or ratepayer funds.

"Performance contracting is a proven model in the public sector," Nesler said. "Infrastructural improvements are paid over time with savings and a general prime contractor is responsible for the whole process — from doing an energy assessment investment grade audit, developing a business case, engineering a solution, installing the solution, commissioning the solutions, and then measuring and verifying the energy savings over time and guaranteeing the performance."

In other words: Energy waste is turned into efficiency, which translates into financial savings that pay for the project.

Milwaukee’s best practices for efficiency programs

"We’re kind of where the action is," said Milwaukee’s Shambarger. "We’re a collection of buildings, and each building has its own story and each one has tremendous energy efficiency opportunities. And so the challenge and opportunity together is to come up with programs and strategies that we can hit a lot of individual decision makers in all of those building to have a strong collective impact."

But local governments such as Milwaukee often face an efficiency gap thanks to those pesky financial barriers.

"There are a number of policies that can overcome these barriers — market, financial, technical, institutional — when they align the interests of all the stakeholders," said WRI’s Weyl. "Partnerships and commitments enable implementation of ambitious projects and policy packages to address barriers, bridge efficiency gap and avoid lock-in of inefficient buildings."

These policy packages can then target those key barriers, help bridge the efficiency gap and create opportunities for scaling up efficiency solutions and investments.

Milwaukee embraces a "new triple bottom line" approach to urban sustainability, which emphasizes ecology, economy and so-called "ecommunity," said Shambarger. To create a sense of urgency and accountability, the city publicly pledged to cut energy use by 20 percent in next decade.

"Just like in our life if we make resolutions, set goals, and if we happen to share them with the world on Twitter or Facebook, we’re much more likely to follow through on them," said Nesler of Johnson Controls. "The same happens with organizations that make commitments around environmental goals."

Milwaukee’s executive leadership joined the Department of Energy’s Better Buildings Challenge for municipal and commercial buildings, and the city is tracking energy consumption using the EPA’s free Portfolio Manager. The city created an internal team to drive energy projects.

"Fundamentally, it’s about economic development, and energy efficient buildings make cities more competitive," said Shambarger. "We have put in place energy efficiency programs for older buildings because we believe those buildings are important, and we believe cities need economic development tools to help retrofit those buildings in addition to thinking about new construction."

Milwaukee, like most cities, faces tight budgets and has helped compensate for this by turning to financing programs such as PACE and energy performance contracting. The city also helps educate businesses and homeowners on how they can make use of the many rebate and incentive programs flowing through utilities from the state government.

"Energy efficiency is an economic development tool ... and our PACE program really demonstrates that," said Shambarger. "The biggest user of PACE financing in our city is developers who are taking an older building and renovating it for new uses."

Milwaukee has partnered with diverse stakeholder groups representing building owners, including Building Owners and Managers Association, the U.S. Green Building Council and local business improvement districts.

"We make the pitch that energy efficiency is good for you ... but we put it in terms of their language: profitability, occupancy; managing costs; getting new equipment and leading the market," said Shambarger.