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Large investors want to put their money in energy efficiency. The problem is that the market hasn't scaled nearly enough to encourage the financial innovation needed to bundle projects and bring large amounts of capital into the sector.
For Noesis Energy, a Texas-based startup with a free online marketplace that connects building owners and energy service professionals, beefing up the industry's project pipeline to bring in new investors is one of the main reasons for setting up its service.
"Every time we talk to investors, we hear the same thing. The money is there. But it's the scale, the volume and ability to find the right deals quickly enough that's lacking. The key is connecting the opportunities to the money," said Noesis CEO Scott Harmon.
Harmon's experience echoes a recent report from Ceres outlining why lack of scale is leaving tens of billions of dollars in institutional investments on the sidelines.
After a year of building an online marketplace with 10,000 efficiency professionals analyzing 22,000 buildings totaling 1.3 billion square feet, Noesis rolled out a new financing partnership yesterday to attack the capital availability problem.
Noesis started its marketplace by focusing on two groups: efficiency service companies and owners of large commercial or industrial buildings. A building owner registers a facility and uses Noesis' analytics tool (its version of virtual auditing) to survey and normalize energy consumption data. Energy professionals then analyze that data to provide recommendations and quotes for projects. The platform allows for all quotes to be compared side by side, ensuring buyers and sellers can interact in a transparent way.
With a critical mass of users on the site, Noesis decided it was time to bring financing professionals to the table. Four firms -- BluePath Finance, Metrus Energy, TIP Capital and Vireo Energy -- will now offer financing opportunities for projects in the database.
Harmon said the company looked to innovations in solar financing and marketplace-building when creating its latest service.
"We've studied the solar industry very carefully. I think there are a lot of similarities between solar and efficiency," said Harmon.
Harmon pointed to two models that grabbed him.
One is SolarCity, a third-party financing firm that has brought scale to residential solar through a vertically integrated model, raising $1.6 billion in the process.
The other is Clean Power Finance, which built a marketplace to connect installers, distributors and manufacturers to one another, and, in turn, bring in financiers willing to invest in residential projects through solar leases or power purchase agreements. Clean Power Finance has raised more than $62 million to build its marketplace.
Noesis' service is similar to what Clean Power Finance offers, said Harmon.
"That model is a better template for us," said Harmon. "There are thousands of small firms out there doing great work and making recommendations. It makes more sense to build a big network, so that's the model we focused on."
With $14.5 million raised by Noesis over the last two years, the company's marketplace has also caught the attention of venture investors.
The firms financing projects through Noesis will offer four models: capital and operating leases, efficiency services agreements, managed energy services agreements, and property-assessed clean energy. All the financial partners have deep experience in the efficiency space.
"Some of these innovative structures are like the efficiency version of the PPA. We were able to find partners that understand how to do those deals. If we provided access, they said they could do them," said Harmon.
In the near future, Clean Power Finance could be more than an inspiration for Noesis -- it could eventually be a competitor. Harmon said that users are asking for the tools to model on-site generation projects like solar. Although Noesis has not partnered with any specific companies, Harmon said that the company does have an "eventual plan to add people who specialize in distributed generation."
Third-party financing is now dominating solar. According to a report from GTM Research, the residential solar financing market is expected to grow from $1.3 billion in 2012 to $5.7 billion in 2016. That is still a small number compared to the potential of distributed solar, but innovations in finance have certainly provided a boost to the sector.
The same thing could happen with more innovation in energy efficiency finance. According to a report from Deutsche Bank Climate Advisors, the U.S. efficiency market represents a $279 billion yearly market. However, the bank warns the actual market will only be fraction of that potential without greater financial innovation.
It will take more than one company like Noesis to move the needle on that investment. But if the solar industry is any guide, individual companies can certainly have a massive impact with the right business model.