Better Buildings Initiative Drives Investment, Creates Jobs
White House Leads on Retrofit Program
SOURCE: AP/ Carolyn Kaster
The business of creating jobs and leading our country to a cleaner and more prosperous future must continue even in the face of perpetual stalemate in Congress. President Barack Obama has found a way to continue leading on energy efficiency by using his executive power over federal agencies and he is getting help from a diverse coalition including commercial real estate developers, bankers, universities, and local governments, as well as partners as diverse as organized labor and the U.S. Chamber of Commerce.
Earlier this month the president announced a series of commitments under the Better Buildings Initiative, a historic public-private partnership that will leverage $4 billion in new investment for job-creating energy-efficiency upgrades to more than 4 billion square feet of public and private buildings over the next two years. These commitments will cut our nation’s energy use by 20 percent by 2020.
They will create jobs, too. Doing this work will create new demand for approximately 114,000 jobs in the building trades and domestically sourced construction materials at a time when the industry continues to suffer from near-depression levels of unemployment.
It will also be completed at zero cost to taxpayers by using energy savings to pay back upfront public investments in government buildings and leveraging private investment to jumpstart retrofits—energy-saving technologies that span everything from insulation and sealant to water heaters and solar panels—in commercial office buildings.
Altogether, this voluntary partnership—which brings together a wide range of organizations including federal agencies, labor unions, retailers, colleges, and hospitals, among others—will generate $1.4 billion in savings on energy costs for American businesses.
This critical venture will also help jumpstart the market for energy-efficiency financing and make it easier for private companies, pension funds, and other financial entities to invest in these projects.
The Obama administration used executive action as part of the initiative by directing federal agencies’ procurement strategies, a decision that requires no additional fiscal requests and fits within their existing budgets.
The bold leadership and public-private partnerships just described are precisely what the country needs to cut through partisan gridlock in Congress and get back to work. The partnerships will open up new investment streams to build a market around low-cost, low-risk capital improvement projects that will immediately create jobs, save consumers money, and reduce pollution and harmful emissions.
Here we tell the story of how the Better Buildings Initiative came together. It’s a great example of how government can get job-creating energy-efficiency programs up and running during tough fiscal times.
How the program built partnerships
Solving big problems requires innovative and streamlined governance as well as robust participation from a diverse set of actors. In today’s reality of constrained budgets and limited cooperation from Congress, mutually beneficial partnerships between government and nongovernment entities that transcend partisan interest are needed more than ever.
This is exactly what happened when President Obama announced the Better Building Initiative on February 3 of this year—a national challenge to spur private investment for energy efficiency in commercial buildings.
The initiative, spearheaded by former President Bill Clinton and President Obama’s Council on Job’s and Competitiveness, included an initial boost of support from two unlikely allies: the U.S. Chamber of Congress and organized labor groups such as the AFL-CIO and the American Federation of Teachers.
The chamber recognized that this program would be critical for creating jobs and spurring economic activity for the nation’s struggling businesses. The labor groups affirmed their support for this program by committing $150 million in capital from pension funds over the next few months, a first step toward investing billions more over the next decade. While Congress remains stuck in counterproductive bickering, American workers stepped up to the plate and invested their retirement security to pay forward a new generation of good jobs with decent wages, rebuilding the smart infrastructure and more efficient buildings that will make the whole economy more competitive.
This early leadership by businesses and working families was absolutely critical to growing the coalition that ultimately culminated in the $4 billion investment in the program. Moving forward this sort of public-private partnership to build a sound market for productive capital investments in energy efficiency may be our best hope of breaking the political impasse and restoring the health of the struggling U.S. economy.
How the program builds markets
Experts agree that energy efficiency is the “low-hanging fruit” in tackling our nation’s energy security and economic challenges. These are smart investments that pay for themselves over time. And at a time when few analysts predict resurgence in new construction any time soon, making buildings more efficient through retrofits can be an important catalyst to economic recovery by creating much-needed jobs. But despite the promise of these investments, real barriers have blocked their growth. We outline below how these barriers were overcome for the Better Buildings Initiative.
Overcoming hurdles to financing projects
One of the primary challenges in deploying large amounts of capital into energy-efficiency projects is the lack of clear pathways for investors to finance this infrastructure.
Energy-efficient building improvements result in immediate savings and lower operation costs, improving the overall profitability of real estate investments. They accelerate capital improvements in existing assets and strengthen real estate markets overall. But unlocking these savings requires large amounts of upfront capital.
Another issue is that traditional lending is secured by clearly defined assets: When you take out a mortgage it is secured by the property itself. But when you want to finance a new boiler, some duct work, and replacement windows, the collateral to back that loan is less clear.
Plus, while everyone agrees these investments are a good deal and save real money, it takes time for banks to assemble the deep data they need to assess the risks and returns that investors can expect to face.
As a result, this very secure and productive investment opportunity lacks “mainstream” credentials, clearly understood investment vehicles, and a mechanism to move capital into a market hungry to get to work.
Private capital responds to movement and trends in the marketplace, and investments flow to ventures that are considered stable and economically sound. For the Better Buildings Initiative partnership, private-sector actors such as Citi and emerging financial service providers such as Green Campus Partners and Transcend Equity committed to make direct investments in commercial retrofits and structure innovative financial products that met the risk thresholds of private real estate owners.
Additionally, the White House will use its own procurement power by directing federal agencies to finance $2 billion up front in these energy-saving retrofits, saving much more money over time. These savings are passed along to the taxpayers because the federal buildings will consume less energy than they would have otherwise.
This arrangement will be accomplished through Energy Service Performance Contracts, or ESPCS, in which future energy savings are used to purchase upfront capital investments. Payback on these ESPCs is structured so that a portion of the savings is kept by the contractor, providing a guaranteed return on investment, while the other portion is used to capitalize these projects.
ESPCs are a well-understood tool for driving productive investments, and the White House showed real leadership in building on the success of this program. To date, more than $2.46 billion has been invested in federal energy efficiency and renewable energy through these contracts, resulting in 309.5 trillion BTU (British thermal unit) saved and $6.66 billion in energy-cost savings.
Energy Service Performance Contracts are particularly advantageous in a gridlocked legislative atmosphere since they do not require additional appropriations from Congress or upfront capital from tight agency budgets.
In this context, President Obama’s leadership in launching the Better Buildings Initiative is all the more important. The $4 billion pipeline of public and private financing cut through the red tape to catalyze a growing industry and an emerging sector of the capital market. The private sector is now on notice that energy-efficiency markets are open for business.
Generating demand for projects
With financing secured and repayment through energy savings set in place with ESPCs, the federal government will generate demand for energy-efficiency projects by opening billions of square feet of its own property for retrofits—hiring thousands of contractors and hundreds of thousands of construction workers around the country to upgrade federal buildings.
Additionally, the partnership secured commitments from large property owners across the country to upgrade 4 billion square feet of commercial and industrial property. These include corporations such as Nissan and General Electric; national retailers such as Best Buy and Walgreens; hospitals; cities and states; and colleges and universities.
The initiative now has a built-in customer base with solid financing and stable repayment structures through energy savings. The demand represents a pipeline of work that businesses can start to serve. The nongovernmental entities and businesses that get put on the job will hire contractors and workers and the virtuous cycle of savings, investment, and job creation will continue.
Furthermore, from an investment perspective, the opportunity in the commercial sector is vast, totaling 87 billion square feet of floor space. This represents 25 percent of the total efficiency potential in the United States, amounting to $290 billion in savings. The Better Buildings Initiative sends a signal that this massive market is open and ready for business.
Together, these financial and real estate commitments are already helping to jumpstart the market and drive additional investments from the private entities mentioned above, propelling energy-efficiency finance further into the mainstream.
The program is a success
The indispensable element in achieving the results of this program was the significant leadership vision of Presidents Obama and Clinton, and the deep bipartisan support of their partners in business and labor, state and local government, and across the construction and financial services industry.
At a time of bitter tensions in the federal government, Congress would do well to stop debating whether clean energy jobs are real and instead get to work creating some. If they need any help getting started, they need look no further than the White House Better Buildings Initiative.
Bracken Hendricks is a Senior Fellow, Jorge Madrid is a Research Associate, and Adam James is a Special Assistant for the Energy team at the Center for American Progress.
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