Unlocking the Potential of Energy Efficiency through Exploration and Production Blocks Bruce Schlein and Paul Bienstock

July 10th, 2018

Market Leadership

Over the last year, Citi has been working closely with Metrus Energy to help build and scale the energy efficiency market through Metrus’ Efficiency Services Agreement (ESA). A broad range of efficiency assets can be financed through an ESA including lighting, HVAC, and building envelope; improvements that Metrus and Citi model and evaluate for their potential to reduce costs and carbon emissions. The ESA structure holds significant promise to help unlock the potential of this vast market.

Together with Metrus and its ESCO partner SmartWatt, we recently completed a fourth tranche of an ESA transaction for a Fortune 100 client, bringing the total program for this single customer to approximately $50mm in efficiency measures at 37 sites across the United States.

This transaction is noteworthy for reasons beyond size and reach. The programmatic approach allows this customer to blend site economics, combining sites where utility rates and weather are more favorable with sites that have less favorable conditions. In addition, the sites are all leased, for which landlord consents have been secured and the benefits of the ESA are shared among all stakeholders.

This approach is akin to exploration and production blocks for oil and gas; in this case the “block” being a portfolio of similar properties scattered across multiple jurisdictions. Instead of a government auctioning off geographic blocks, here we have a corporate entity opening up its facilities to efficiency developers for the exploration and production of energy (and other resource) efficiency.

This is exactly what is needed to achieve scale. If we think creatively about how to develop new formulations of blocks and how to harvest efficiency from ever larger pools of properties, outstanding results are achieved. Supply chains, franchises and managed properties are good places to start. How might these work?

Under an ESA, the primary risk evaluated and the fundamental question being asked is “what is the likelihood that the host will be an ongoing viable concern such that it is capable of paying the equivalent or less of its historical utility bill for the life of the ESA contract?”

In the case of supply chains, the entity best able to make this determination is the customer that utilizes the suppliers. Take a global beverage company and its bottling plants around the world as an example. The customer will have intimate knowledge of local markets, and the likelihood of a bottling plant continuing to operate on their behalf for the next five to seven years (typical length of an ESA contract).

On that basis, the customer might be willing to backstop ESA payments for its suppliers, its bottlers. It could mitigate its risk through a portfolio approach, and by limiting the portfolio to say the top 25% of its bottling network. Furthermore, it could charge for the backstop by keeping a portion of the savings.

Local bottling plants reduce costs, and improve resiliency and working conditions, while the customer, in addition to shared savings, strengthens its supply chain and demonstrates environmental responsibility for a greater portion of its footprint. Based on performance, over time the 25% of network could be ratcheted upwards.

The market has only begun to scratch the surface of efficiency exploration and production. We are ready to pursue these new formulations of blocks and other opportunities with Metrus and its partners and clients.

As part of its Sustainable Progress Strategy launched in 2015, Citi announced a landmark commitment to finance and facilitate a total of $100 billion over 10 years to finance activities that reduce the impacts of climate change and create environmental solutions that benefit people and communities.

About the Author

Bruce Schlein is Director, CRA Business Strategy and Paul Bienstock is Vice President, Asset Finance Group at Citi