By Michael Spotts, Senior Policy Analyst
@E_HousingPolicy on Twitter
There are many reasons for adopting green building measures,
including improving resident health, minimizing environmental impact and
reducing ongoing utility costs.
However, given current economic struggles and
government budget deficits, the decision of whether or not to “go green” can
sometimes become one of strict dollars and cents: do the financial savings that
result from reduced energy and water consumption make up for the up-front
development costs greening a building?
On average, Enterprise research suggests that well-designed
and maintained energy and water saving measures can yield
long-term savings. We hope that this evidence will help both lenders and
developers decide to finance and institute green building measures. Yet on an
individual project level, there still remains some risk that energy and water
costs savings will not meet expectations and subsequently harm financial
performance.
What if something could be done to mitigate this risk?
Insurance is available to hedge against financial loss resulting from
everything from automobile accidents to a hurricane disrupting your wedding. In
fact, some insurance products are
available to Energy Services Companies (ESCOs) that provide coverage in case a
project’s utility savings do not materialize.
ESCOs provide services to
property owners and/or developers to reduce energy and water consumption. They
often guarantee to the owner/developer a certain degree of savings, taking on a
portion of the project’s performance-related risk. Large ESCOs can manage this
risk on their own balance sheet – in short, if the project under performs, the
ESCO has the assets to cover those losses. However, others who do not have the
assets to self-insure (or prefer to operate under a different model) can
purchase energy savings insurance (ESI) to add another layer of risk
mitigation.
If brought to scale and made widely available, energy and
water savings insurance could yield several benefits. Insurance companies will
likely require their own engineers and/or analysts to review planned improvements.
Ideally, this additional layer of review would lead to a more accurate estimate
of savings. In addition, the ability to mitigate risk may encourage more
aggressive energy/water savings goals, potentially bringing added environmental
and financial benefits if analyzed and undertaken properly. Finally, research
suggests, "If properly applied, ESI can potentially reduce the net cost of
energy-savings projects by reducing the interest rates charged by lenders, and
by increasing
the level of savings through quality control."
ESCOs provide energy services to a broad range of property
types, including manufacturing and commercial facilities, and some public
housing authority properties. However,
not all affordable housing projects looking to “go green” utilize the ESCO
development model. Since the ESCO is the
recipient of the insurance coverage, it is unclear the extent to which ESI is
available at the property level to affordable housing owners/developers, and it
appears as if it is not widely used in the field.
ESI is certainly not a panacea that would lead to immediate
adoption of green building techniques. Challenges still remain, including the
fact that ESI guarantees only pertain to performance risk (for example, the
percentage reduction in consumption) and not to pricing risk resulting from
changes in per-unit energy and water costs. If energy or water prices go up,
property owners will still take the hit.
Furthermore, the ability of a
multifamily property owner to control energy consumption is limited because
they do not control the individual choices of tenants. Therefore,
project-by-project pricing may be more difficult than for
manufacturing/industrial projects with more control over end uses. However, the
possible benefits at least warrant further exploration of the subject.
Could the affordable housing industry benefit from broader
availability of ESI? There are several unanswered questions that would first
need to be answered:
- Is there enough
competition and standardization in the market to make pricing affordable?
- Would project-by-project
discrepancies prevent this product from being brought to scale?
- Would the additional cost
of ESI affect the financial feasibility of the project?
- Could the ESI issuer’s due
diligence reviews happen concurrently with other necessary reviews, so
that duplication and additional red tape could be avoided? Could the
insurer’s analysts be more seamlessly integrated into the existing design,
construction and inspection process?
- Finally, is insurance
necessary, or could risk be mitigated in easier and/or less expensive
ways?
Have you used ESI or have ideas on this topic? Continue
the conversation in the comments, or on Twitter @E_HousingPolicy – our
new feed for affordable housing and community development policy updates.
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