Sacramento Power Play
To finance energy-efficiency improvements for local businesses, California's capital is trying an innovative public-private approach
I've long been skeptical about using taxpayer dollars to bolster the clean-energy industry--or any other private businesses, for that matter. But a privately financed program underway in Sacramento, Calif., is showing that good environmental policy can also be good fiscal policy.
The program will allow Sacramento businesses to complete $100 million worth of energy retrofits on commercial buildings without incurring any upfront costs. The money for the retrofits, from private lenders, would be repaid through a property-tax surcharge on the participating business, but the important point is that the reduction in energy costs--typically about one-third--would more than cover the temporary property-tax increase.
And though I'm just as skeptical of public economic-development projections as I am of private businesses getting government subsidies, Sacramento Mayor Kevin Johnson's office estimates that the $100 million investment has the potential to stimulate another $530 million in regional economic activity. The mayor's office also predicts that the program will create 1,500 construction jobs.
Sacramento and Miami have been chosen as pilots for these Property Assessed Clean Energy projects by the Carbon War Room, a nonprofit founded by British entrepreneur Richard Branson, the Virgin Group CEO. Branson put together a consortium that includes Barclays Capital, Lockheed Martin and the Ygrene Energy Fund, which will mobilize up to $650 million in initial funding. The money will be used to take advantage of laws passed in half the states (including California) over the last three years that allow for the no-upfront-cost retrofits.
For five years, Ygrene will have the exclusive right to offer the upgrades to Sacramento businesses and work with the businesses to figure out what upgrades are appropriate. Typical changes include new windows and doors, insulation and more efficient lights and mechanical systems. Solar panels (Sacramento averages 300 days of sunshine per year) and other renewable power would be utilized as appropriate. Lockheed Martin is expected to do the engineering work on many larger projects.
Short-term loans from Barclays would pay for the upgrades. An insurance underwriter backs the warranty that the energy savings will materialize. The underwriter is in turn backed by a reinsurer.
After the upgrades are completed, the business pays back the loans, which typically come with a 7 percent interest rate, over five to 20 years through the property-tax surcharge.
Since they generally account for three-quarters of all electricity used, buildings are a wise place to start this energy-efficiency drive. A similar retrofit to New York City's Empire State Building reduced energy costs by nearly 40 percent. These dramatic energy-efficiency improvements carry the added benefit of increasing buildings' value.
If Sacramento succeeds, it could draw substantial private capital onto the energy-upgrade market. Clean Fund, a San Rafael, Calif., company, already has raised $250 million to invest in similar projects. That kind of success would signal the maturation of an energy-efficiency industry that is viable on its merits, with no need for government handouts.