Reducing energy use through improved efficiency measures is often a better investment when compared to investing in cleaner energy generation sources as we have noted on this blog. While the returns to the consumer are documented well in our previous posts (3.0x-4.0x ROI)- how do investors capture these excellent returns?
Let’s first identify the business. A company seeks residential and/or commercial clients who need to retrofit an existing building. The firm may implement measures such as: improved insulation, replace lighting, replace roofing materials, install energy usage monitoring equipment and replace some appliances for more efficient versions. On some occasions these firms may offer to install solar panels or micro turbines. For discussion’s sake- let’s focus on the efficiency side and ignore the generation component.
The question I pose to our readers is this: With such an excellent return profile for the clients, how can the firms delivering the value from efficiency also earn a good return?
Installing equipment is not very “value added” and does not differ much from any typical contractor who could also be installing a new pool or painting a house for example. The returns on these labor services are small and also very competitive in most markets. The value added, in my opinion, comes from the expertise of the efficiency firm in determining how to best maximize returns for the client when deciding where and how to invest the capital. The experts can best procure products and customize solutions for the individual needs of each building and house. Labor can be outsourced or done in house.
So, does a firm simply charge a fee to the client for their expertise? Again, margins on re-selling equipment and labor are not likely to be very productive. In this entire value chain, it seems like the biggest value is delivered to the end-client who will then save money once their return on investment is received. Perhaps efficiency firms could negotiate to capture a percentage of the energy savings until a target is met, using historical energy use and cost as a baseline model? It would be an ‘incentive’ payment of sorts- of course with many caveats.
What do you think? Your comments below are highly suggested.