 efficiency. I'll give you two background comments. One is by Brad Coppathorn who was actually in our program a couple years back did a lot of the organization of this. So I'm kind of a mouthpiece for Brad here and I propose of the comments in the plenary. I think I've learned a lot more from Brad than he's learned from me by a long shot. So I start with that. Two is I am very interested in this subject. I was on the ETAC committee which is one of the original AB 32 assembly mandated committees and we knew financing is important. I had a couple of summer students work on this and I think my store of knowledge has already been doubled or tripled just looking at the slides the guys are going to use let alone the actual talks. I'm very excited about this session. So we're going to have kind of 10-minute introductory talks by each of the panelists and then a little bit of cross-fertilization and then open it up to the audience. We're probably just going to have people come up to the mic to ask their questions. So our first speaker is John Kinney who's chief executive at Clean Fund a Clean Tech specialty finance firm with a focus on commercial energy efficiency. I actually know a lot of people in residential but almost no one in commercial so you've now increased my stock of contacts in that field. Obviously very interesting much more business oriented. I also mentioned to John I'm extremely jealous as a person in a family of four with three Stanford grads and me with a Cal degree to see he has not one not two but three Stanford degrees. So John take us take us to the lunch. Let me start by just just to calibrate myself how many people in the audience know what pace is. I'm not going to go into any details about what pace is or kind of where it's at but Clean Fund is folks I should say that we distinguish the residential pace from the commercial pace and pace stands for property assessed clean energy. It started residentially but Fannie Mae and their infinite wisdom have have made it very difficult to carry that forward. Our focus has been entirely on the commercial side. It's really a very different deployment and so we're continuing to do that. I don't think I need to spend much time on why we're doing that because that's why everyone's here. I mean it's just the whole energy efficiency and renewable space is a huge market. It not only is important for the environment but it's important for jobs. It's important for the economy and frankly the one of the big impediments to having this happen more frequently and get these projects going has been the finance side. We should point out you know our panel Bob and Brad and I were just just commenting. We only are solving a very small piece of the problem here. Making financing available has been identified as a number one reason why people are not doing energy efficiency projects but I think as much as that it's the complexity and trying to figure out what to do all the different things that go into it. So we're just trying to knock off one of the problems which is the the ability to finance these up front and what PACE does is we're using private capital to create a security that allows us to attract what are typically not great collateral. I mean lighting and insulation and windows it's frankly crappy collateral. You can't repossess it and so figuring out well how do we get building owners to be able to do this and give them 100% financing up front and spread it over 20 years has been the real dilemma here. The government has figured out how to do this. Municipal bonds have been used for a long time to finance the public good. The government gives money to a for example a school and the the funds for that are repaid on property taxes by all the people that have access to that school and this is very similar to that but instead of a school we're talking about commercial real estate and it's only one it's only one building that's increasing their property taxes in exchange for the financing and so what what we've done that's that's unique is now it's we're not relying on the government to come up with the money and we think that in order to truly be sustainable you can't rely on subsidies you can't rely on the government that the kind of public-private partnership that we're endorsing is is basically using the government as the tax collector. There are servicing agent and if you want to be partners with the government on anything it's having them collect taxes for you. They are really good at it and so so that's how we're using the government they they call we put a a good example is we just did a 1.4 million dollar project for Prologis up in San Francisco Prologis is the largest roof owner in the world and they're doing on their headquarters they're doing solar they're doing HVAC they occupy 30% of the building and they have access to great cost of capital but it didn't make sense for them to spend a million four on this building because they they were only going to get 30% of the energy savings 70% would be passed on to their tenants so it just didn't make sense for them to put up a million four and the anticipated savings if 30% of that just didn't work so we gave them a million four through the San Francisco we give San Francisco a million four to buy a bond they give it to Prologis Prologis increases their property taxes a hundred and thirty thousand dollars a year that pays us we're happy because now instead of being repaid based on the the savings we get paid on something that will survive foreclosure so we're not necessarily going to be paid paid out ahead of the mortgage holder there but even if even if that property goes into default and is taken over by the mortgage holder and goes through foreclosure we're going to continue to get paid by the new owner so we essentially our luxury is that we survive foreclosure and so we're able to attract 20-year financing to do essentially 100% financing and we wouldn't have been able to do that otherwise so the role that we play is making what is it's it's kind of a complex transaction because we're having to get all four of these groups to work together we're getting the energy efficiency and the renewable energy vendors we also can do water efficiency and they're supporting us and frankly selling for us because they're trying to make sales and they're finding out that all these building owners you're hearing about great technologies out there for reducing energy great technologies for producing energy but they're very difficult for commercial real estate owners to finance and so these vendors love being able to come in and say we've got hundred percent financing here it doesn't have covenants they like that and it's 20 years and if you sell the property you don't have to pay it off so if you have a four-year time horizon on your property and you want to do a solar project you don't have to worry about it paying off in four years then we work with local government and local government is the only one that can collect property taxes so we have to go through them and we initially thought well they're gonna love this because we're bringing money into the county to create energy improvements we found out what they really love is they really love the jobs these are all it's very difficult to export and installation these are all going to be local jobs and so the the the communities really love that and it and it's budget neutral for them and and frankly if if a property owner doesn't pay their property taxes they don't owe it to us so it doesn't even it's not a general obligation bond they don't have to touch it the property owners like this because it's it's gonna be cash flow neutral when you take many of the projects that we're talking about here today you see your 10-year or below payback and instead of saying well you put out money and you get it back over five or six years it's much easier to tell someone hey you don't put up anything and you're gonna make money the first year so the the commercial property owners it makes the decision a lot easier for them and the same thing with the other types of financing you'll you'll hear about the the ability to pass this through to the tenants is also a really important part of it but it's it's mainly just being able to to look at a project that you want to do now you don't have to put it in the budget for next year so it gets away from the capital budgeting plan you're gonna be able to finance a hundred percent of it and do it right now and the lean holder I we we have a special policy that we've talked a lot with pull on it Wells Fargo about and others we will only finance a commercial real estate owner if the existing first lean holder signs off on it and we do that because we think it's really important that this be a partnership between the mortgage holder who is unfamiliar with tax lien financing this is the first time this is being done on a private basis and a real their their customer and we want this to be something that creates billions of dollars of capital coming in and doesn't have the same thing happened that happened on the residential where you have someone that doesn't really understand it and and and panics so the lean holders are looking at this as well we've got collateral because the improvements going on it improves the loan to value the debt service coverage is actually improved because now instead of having the the building owner pay for this with with debt or something else the tenants are being re reimbursing them for it so that's why it makes sense for all those and our job is just to try and make this all come together and make it simple because for each of these people they look at it differently this is the Venn diagram between energy finance and commercial finance and project finance and muni finance so it's it's a difficult thing to do otherwise so it's a different solution it's not the only solution but capital constraints are a big deal and this solves that by giving financing and the debt capacity gets allocated to the strategic projects instead of this I I won't go through these but you know because I already mentioned them I think you know about pace and that's all I need to talk about thanks John thanks for a great start our next speaker is Brett Coppethorn who I mentioned before was a student of my class he's director of clean energy financing solutions at the environmental defense fund I know Jeff Bingham is here who visited Jim Sweeney's class and Jim said it was a test of whether or not he was saying true things about the real wrong I actually had Brad as a mid-career guy after a very successful banking industry career and I can tell you in my case the answer to that question which I asked each and every class was no so Brad no pressure yeah I'm guessing you're all wondering what I've been doing for the past three years that made me look so old given I was a student just now but the answer to that is I started old I spent the first 20 my 20 years of my career doing investment banking and then joined EDF about three years ago so first just to start real quickly environmental defense fund we are a nonprofit we're environmental advocacy organizations to sort of like Sierra Club we consider ourselves a very practical environmental organization in that most or much of our work is about how do we get the rules right so that businesses can profitably deliver environmental solutions because we feel like we can make a heck of a lot more change that way than if we're just holding our protest signs generally saying no so specifically the problem that I'm working on which is very similar to what John is doing and again we're just trying to enable businesses to be able to solve these things we don't have any financial stake in it so problem that we're trying to solve is how do we get capital available for energy efficiency and renewable projects and I think pace is an excellent solution was John talked about and bit and you know I think part of it is there's a number of buildings where it's relatively easy so for example if you want to do a financing for this property presumably it's owned by Stanford no mortgage Stanford's a very good credit it'd be very easy to either hit up an alumni for a couple million bucks or actually borrow from a bank to finance two million dollars of retrofits but I sit in at work in a 28 story office building and there's 10 different tenants and likely that property is owned by a bankruptcy remote limited liability corporation there's already a very large first mortgage and if I went to my friendly banker and said or the owner went to the friendly banker and said I'd like to borrow two million dollars to a retrofit the bank would say I don't really want to be subordinated to the first lien and similar for a homeowner unless you've got a home equity line of credit which many of us don't have in this in this era you if you want to finance a retrofit yeah we can all put it on a credit card but that's not really a very good solution so one idea that people have been kicking around is have been implementing in a lot of cases is something called pace where we take advantage of one bill that always gets paid which is the property tax bill another bill that always gets paid is the utility bill and that's what I generally work on so we feel that if we can get the financing as part of the utility obligation then all of a sudden it turns into a very very good credit now there are people all always ask what's the difference between pace and OBR which one is better and the way I like to answer that is I'm an environmental organization our goal is to get as much energy efficiency as possible what we want to do is have as many projects be implemented and we think of it like when you walk into a car dealer in that every car dealer offers loans and leases and he does that because some customers prefer one some customers prefer the other but he wants to sell as many cars we think there's some pros and cons of pace and OBR we'd like you know building owners to have choices for both so what is on bill repayment we want this to be private capital to finance both energy efficiency and renewable projects we want to become part of the tariff so part of the rate under the tariff that you need to pay when you pay utility bill the way to think about this is when you bought when you move into a home when you you know take over ownership and you call it PG you say I would like to get electric service you don't negotiate the price they they just turn you on and you get your first bill and generally there's eight different lines on it you know you owe this for that and this this is in the other thing you know local taxes etc we want the on-bill repayment obligation to be effectively the ninth line on that bill so that if you want to get electric service you need to pay it back we want to have this be a very open-source system so we would have contractors work with project developers work with lenders investors and have a have the ability to do whatever go to market strategy they think is makes makes most sense for their customers for their business model EDF is advocated that for something called bill neutrality whereby in order for a project to be eligible we believe you ought to have savings that exceed whatever you have to pay so that way when I sell my home to you you are actually excited about the fact it doesn't OBR obligation because you're paying less on your utility bill than your neighbor less is better than more we generally figure the bank lender investor does not control the utility collection process whatever protections are currently in place stay in place so utilities generally don't turn people's power off when it's a hundred degrees or 20 degrees if you've got medical cert medical equipment we don't turn your power off we offer payment plans all that would continue to stay in place we want this to be a network not a prescribed program I can't tell you how many times I get in a meeting with various government officials utility officials PUC types and they start saying okay what's the go to market strategy how do we what's exactly the retrofit that we're going to do how are we going to do that and the answer to that is no that's not it's not up to the government to figure that out it's up to each company to try and figure it out and the beauty of OBR is we're spending other people's money so if we're spending Bank of America's money Wells Fargo's money Goldman Sachs's money as a public policy person my basic objective is I want to spend as much as I can I want to do as many energy efficiency retrofits as I can and you know let's think about as flexible a program as possible if it's government money do we want to do a five million dollar retrofit for some wealthy real estate mogul probably not but if it's Goldman Sachs's money hey it's just more jobs better for the environment EDF is advocated for a third-party service to process payments so in California we've got depending on how you count either three or four investor on utilities and a bunch of municipal utilities we don't want the bank to have to deal with each different utility and worse we don't want the utility to have to deal with 15 different banks and other investors so we would require a trust company to sit in the middle and it's their job to figure out all of what's going on and to send PG&E a data run in the beginning of each month saying hey Joe owes $46 bill of $73 in the office building I was $11,000 one of the first banks I met with they told me that look don't come back with a pilot program don't come back with a program that just covers one of the California utilities make sure this is big this has got it the way that bank is going to evaluate participating in this is based on the size of the market opportunity there's too many government programs that start small and never grow but if you can do something statewide they said they would invest and take the brain damage necessary to figure this out and try and make it happen and we think that utilities should be paid for doing this that they're providing valuable service we want to pay them in two ways one is a fee right now every time a bank mails you a credit card statement or a loan statement they have a cost might be two three four dollars they pay a dollar to the utility once the utility is made their upfront investment their marginal cost is close to zero so they pay a dollar the utility gets 95 cents profit presumably and that's good and then second in California most other states we have utilities run energy efficiency programs and they get financial credit for the savings and effectiveness of those programs if we've got Wells Fargo and clean fund and whoever outdoing more projects and offering financing the utility programs will be more effective they should get paid flexibility we think is absolutely critical to making this work again I'm not I've never sold an energy efficiency or a renewable project in my life it's not up to me to figure out what the market wants how they want to buy it etc so we want to create a platform we like to think of it as visa visa doesn't tell you what you're buying or how to do it all they do is they authorize merchants and they authorize lenders and then the market figures it out same thing here so we think is particularly critical that we you have different financing vehicles so some people think loans make sense leases have a lot of benefits power purchase agreements and then Bob's gonna talk about a very innovative financing column energy services agreement all those should be credit enhanced be able to be credit enhanced by an OBR program we think this is something we've actually had some success so far selling this in both red and blue states so if I go to a red state I hide my business card I don't talk about carbon climate change or anything like that but I still have a very effective sales pitch I say you know do you want investment in your state no cost the taxpayers or ratepayers creates jobs and we let each company in each vendor figure out what the best go to market strategy is to serve their customers without influence from those nasty political bureaucrats in Austin or whatever whatever state capital we're talking about it's been very effective we've got a lot of interest and some very conservative organizations are thinking about potentially endorsing this so we're excited about that so where do we stand today the PUC in California has ordered has ordered the IOUs to create non-bill repayment program just for commercial properties we're expecting that I have Q3 here but we just got a new ruling so it's probably gonna be more like end of Q4 at this point we've got a little bit of wood to chop in terms of making sure that ruling actually is going to be effective and this program will work as well as it should but we're really hopeful we can be up and running you know late this year very early next year and what I my message to the vendors to the project developers and everybody else is look we're here in California this is you know this is great but if let's say December 1st is a start date don't start looking at this and thinking about it on December 1st because if you go to work now and you create a pipeline of projects so we've got a bunch of press releases that you know Wells Fargo has got a you know line of credit for whomever to do all kinds of projects and we're issuing those press releases it's really easy for me in January to run around to every other state capital in the country and say hey California third-party investment created jobs no cost of taxpayers no cost of ratepayers do you like jobs too and we're hoping we can scale this thing and have it go viral pretty quickly if we can demonstrate that it's really working other interesting thing is Hawaii is actually we weren't I mean obviously Hawaii's not a very large state but turns out because they are entirely used diesel generation their cost of electricity is about 37 cents so energy efficiency and solar are actually pretty attractive and we shipped them a little bit of information all of a sudden they are in the process of implementing a program they may start residential but they're actually you know we're making the case that look if you build the infrastructure you might as well do commercial too it won't cost you anything extra you get more jobs more fees you know to cover your overall program cost might as well do it we're hopeful that they do it we're working in Ohio we I just was back in New York earlier this week met with the governor staff there they're really thinking about potentially doing a commercial program they already have a residential program it's a little bit similar to what I've been talking about a bit different and we've got a number of other states that are interested so we really hope we can roll this out a little bit more broadly and look forward to working with you thanks right great to round out things nicely we next have Bob Henkel the founder and CEO of Metrus Energy he founded the company in 2009 and as Brad already indicated it is built around in a innovative energy services agreement that the company uses to finance large-scale energy efficiency retrofits oh great well thanks while I'm finding my presentation here Brad was talking about hitting up a Stanford alum for some investment if John's got three degrees he's got to be the first person you'd go to just just saying well just you know starting off giving some background on on Metrus we are a developer finance earn an owner of energy efficiency retrofit projects we offer a range of financing solutions all of which provide a hundred percent of the upfront cost of retrofit projects the projects that we finance and implement really run the gamut in terms of the types of energy efficiency measures you'd expect to see in a retrofit project so lighting and control systems as well as the replacement or upgrade of larger energy consuming equipment like boilers chillers furnaces all the projects that we fund and implement our integrated retrofit projects so multi-measure opportunities usually north of a million dollars in terms of total project cost I'd say on average our projects are in the two to five million dollar range per site our core financing product that I'll talk about today is our efficiency services agreement which is very analogous to the traditional power purchase agreement but instead of charging customers on a cost per unit of energy that's generated we charge customers on a cost per unit of energy that's saved so that can be a kilowatt hour of electricity savings a term of natural gas savings can also include water savings getting outside of energy it's really a cost avoidance contract and the projects that we do look at both electric and thermal energy savings we are headquartered in San Francisco but do work nationwide and are part of several department of energy programs including the better buildings challenge we've covered a little bit I guess of the financing landscape so far with pace but I just wanted and I am going to focus on ESAs here but just wanted to talk a little bit about the landscape for energy efficiency financing vehicles we recently put together an energy efficiency finance infographic that looks at really from a customer's perspective what type of financing vehicles are available for a given retrofit project and this is something you can you can download on our website and I have a link for but if you if you move kind of from this parking lot type scene from left to right you start with self-funding which you could dispute whether it's a financing mechanism or not but it is how a lot of customers approach energy efficiency and it's a pretty short sighted approach for most customers they're obviously using their own capital budget to fund a project and that puts energy efficiency up against a lot of stiff competition so it means projects that get done have a very short simple payback period and usually leave a lot of energy savings on the table as you keep moving from left to right you get into more traditional efficiency financing sources tax exempt bonds and leases which are very prevalent in the public sector and involve fixed principal and interest type payments that are on balance sheet for customers then as you get towards the left you start to have solutions that involve a lot more of financial and technical solutions that are integrated together and many of them on a pay-for-performance type basis paste John obviously covered it's a fixed type payment on the property tax bill going out for longer term financing than a customer might otherwise get managed energy services agreements are close in some ways to what Metrus offers an efficiency services agreement but with some key differences under a managed energy services agreement or a Mesa the Mesa provider comes in and takes over the utility bill in relationship of that with the customer agrees with the customer on a fixed price for some of their historical energy use and receives that payment on a going forward basis from the customer and then the Mesa provider implements an efficiency project which should reduce energy consumption and then they'll be responsible for paying that hopefully lower utility bill it's a it's a mechanism that's worked well and some commercial real estate opportunities and projects under an efficiency services agreement at Metrus were were coming in providing a hundred percent of that upfront funding billing customers only for realized energy savings they continue to receive their utility bill and pay for energy that they consume but start to receive a bill after the first quarter of operation of a project from Metrus for the realized energy savings on really a negawatt style type services charge looking a little bit at the continuum of our involvement in a project we do work upfront with customers to identify what type of efficiency retrofit makes sense for their facility or in many instances a portfolio of facilities we then either engage or work with the customers existing energy service company esco or contractor doing a lot of the financial engineering alongside the technical engineering work that a contractor will be doing in terms of the preliminary and detailed audits we then bring a project to closure by signing an efficiency services agreement with the customer we fund that partially with equity off of our own balance sheet but then bring in outside debt for a portion of that funding take title to the equipment and enter into efficiency services agreement terms that are usually in the five to twelve year range most of ours have been ten years although we've done an essay that's eleven years and if you compare that power purchase agreements for for solar or other forms of renewable they're a lot shorter and part of that just reflects the the stronger underlying economics of energy efficiency once a project is operational we pay an energy service company or contractor to do some ongoing maintenance that's over and above what a customer would typically be doing themselves we also really are looking for added energy efficiency measures during this time period because we might start a project in year zero that has a chiller and a lighting system but in year three if we identify an opportunity to add in controls or another energy efficiency measure that becomes attractive we can do that within the original ESA and charge the customer that same cost per kwh saved that they otherwise would have been paying so it's it really just helps make our offering more of a single point in time financing and more of an ongoing efficiency procurement program for customers today was asked to focus in on a case study so I think you know our best case study is our series of projects with BAE systems so here you see really the contractual relationships as part of this program but it applies to any of our other projects Metra centers into the ESA directly with the customer it lays out the efficiency measures to be implemented the cost per kilowatt hour saved and it discusses the measurement verification protocols for how we're gonna be billing the customer the terms and conditions of the ESA are set and then the exhibits are really something that our project specific so as we move to a different site for the same customer we have the benefit of using the same terms and conditions from the previous site and are just updating the exhibits to the contract and parallel we're entering into really an enhanced engineering procurement and construction contract with an ESCO or contractor they're performing the construction work ongoing maintenance work and the measurement and verification on a project and this all slides also calls out some of the promotional benefits for customers that are engaged with us in terms of being part of some of the DOE and other federal programs in terms of some of the specific sites within the BAE program there's three new sites that are in advanced stages of development but we have four operational projects about eight million dollars worth of efficiency measures have been installed across these four sites pretty good diversity in terms of mix of efficiency measures and different levels of savings to there's electricity savings natural gas fuel oil across all these sites so really it just just shows that we're cost avoidance type structure for customers and again the Merrimack was our first project the terms and conditions for that site are the same for their New Hampshire headquarters that we did most recently and are going to be the same for these other three upcoming sites just really to close out some of the the benefits of efficiency service agreements for customers I think I talked about a lot of these items obviously the avoided capital upfront a lot of customers think of the ESA is really a vehicle that allows them to redirect their current energy spending to more productive uses the customers are otherwise paying this money to the utility but they free up a portion of that keep some of that themselves and have lower operating expenses but then pay for facility improvements that otherwise might not have gotten done and BAE systems is obviously looking at the sustainability benefits of the work they do but a lot of the key drivers at each of the sites so far have also been facility improvements and technical matters that need to be addressed and we're still finding that as something that makes projects move more quickly we have customers that are driven by sustainability but right now what is what gets customers attention on a sustained basis is really when a project is linked in to say needing a new chiller for the cooling season then we're getting the customers full attention and projects move without it it it can be a longer development cycle and probably just the last item is our services agreement is is just that it's something that we've worked with accounting firms and have have worked with customers on to ensure is an operating expense and not a capital expense for customers the basis of our agreement is selling energy efficiency as a service on a cost per kwh save that's very equivalent to what a customer would otherwise be paying their utility it's a variable payment we're putting our own equity into in the projects and taking ownership and demonstrating control projects so for customers that it makes a balance sheet type impact customers need to look at the accounting and review this on their own but it in many ways just gets to really the premise of our business which is to make energy efficiency something that's a resource for customers have really the market view it as such and view it on par with supply side energy resources but something that's a lot more cost effective for customers to do so maybe with that I'll stop right thanks thanks very much so well Brad as advertised and now demonstrated we have three absolute rock stars in the financing energy efficiency business here on this panel we do have fortunately even with a late start about 20 minutes for questions I have four and I could easily those of you know me know I don't like to take up all the time but I would prefer to start with them we have some hands coming up the only reason I would do it is if not it well I mean speaking to the microphone here I think in some ways if you go back a decade or two a lot of the ESAs or you know in many ways shared saving style arrangements were being put forward by energy service companies that were also doing the installation and selling equipment into projects a lot of that is stopped a lot of the escos who are now our partners really want to focus on their their main line of business selling equipment doing the construction and not getting involved in the financing so that's that that's kind of one difference but I think some of the things that you bring up there's more track record in the industry now certainly with the international protocols for measurement and verification being utilized well vetted customers understand that and it's pretty industry standard but part of how we try to address it is to work up front with customers and our esco and contractor partners so that everyone is on the same page I was mentioning that you know the different exhibits to our contracts which are project specific one of them is dedicated exclusively to measurement and verification so for each energy efficiency measure that's part of a project we have a set of protocols and calculations that the customer gets to review ahead of time we do rely on a lot of baselines that are established as part of detailed or investment grade audits and you know try to be as transparent as possible about that in that case that what we agree mean that would probably get into the operating hours baseline that's established so if a customer has been operating their facility for 7200 hours a year for the last decade on average that's something we're gonna fix in there and you know say if the measure is a chiller we're gonna go put a data logger on the chiller measure its efficiency but that type of operational risk you know be it occupancy if it's more of an office building or you know business risk if it's an industrial facility that's put on the shoulders of the customer because they're really the only ones that can bear that so the customers we work with are ones that need to look at these agreements and say well you know listen if I if my business takes a downturn you know it's not that all of a sudden I'm gonna be able to to lower some of these costs so it's something that we work with customers up front on let's go yeah let's go a few back from it straight green light green shirt and then over here address something about the risks investors I saw them the benefits to the project manager and the local jobs you created what you start John hi from my what for the for the pace investors I think that the main risk is going to be liquidity because these are our 20 year bonds and there's not a demonstrated securitization market yet we believe that that's going to be easy to demonstrate that's that's the main risk people have in in working with us and in the case of our services agreement there's there's two investors there's there's metrics in the outside debt provider and maybe I'll start first with the outside debt provider through our structure we really squeeze out a lot of the risk for for lender because as part of the project we contractually fix with the customer the cost per kwh saved or whatever the right unit of energy savings is so there's no price risk if you will on what the value is of an avoided kilowatt hour in the future for our contract you know very much like a PPA and we also work with contractors or escos that can provide a performance guarantee usually in that performance guarantee goes to Metris and usually that's in the neighborhood of 80 to 90% of the expected savings on a project so from a lender's perspective they know what the cost per kwh saved is in each year and they know that if the project doesn't hit a certain level of performance there's a credit worthy energy service company that is going to pay Metris for what the output would have been and that really leaves the lender just with the credit risk and we do work with lenders John was talking a little bit about the collateral of equipment and I think this is just part of energy efficiency we own the equipment but it's it's not you know like a leasing type play where we're gonna go take a chiller and roll it down the street there's there's some collateral value to it and the lenders we work with understand that but it's not on a secondary market but really the the debt providers are just taking the customer credit risk and there we try to work with customers that obviously have solid credit and they're going to be a going concern for the duration of the ESA then the next piece of the capital stack is Metris and the equity risk and we really in many ways benefit from the performance of a project over and above what the energy service company or contractor will guarantee which we see is a pretty conservative discount energy efficiency is a lot of proven technology so we underwrite deals to their expected performance and that's where we make our return so we're the we're the we're the last ones paid so we're ultimately taking the risk that a project isn't going to perform up to the expected level and I just say on the credit risk I think on bill repayment and pace are two different strategies both of which can significantly improve the credit risk particularly if you're looking at like a shopping center or a multi-tenant office property where it becomes much easier to underwrite are the lights going to be on or is the property tax going to be paid then is the capital structure of the specific property going to continue to survive great over here I think in energy I'm sorry financing innovation is good but I don't know does it put enough pressure to reduce the sale cycle to kind of do the reduce the transaction costs to really get these projects going because I think like sometimes you're pushing the rubble a little bit and you have to figure out whether it be a policy or something else yeah how to get these projects rolling I mean I I started by saying we're only providing one element of of the solution and our go-to-market strategy is to work with the vendors to just allow them to have one more tool to make it easier for them to get a building owner to be able to do a deeper retrofit than they might otherwise do but they've got to make that they've got to make the sale we're not going to be able to to make the sale for them the financing has been an impediment and so this can get rid of that one roadblock but there's there's plenty of others that are out there that we're all having to figure out how to solve yeah I mean your question is a key one before Metrus was Metrus that used to be part of a renewable energy finance company and I had always been in the energy efficiency world and when I went over to work amongst people on the solar side it blew me away that they could go and through you know Google Earth look at a site sketch out what the project was going to be and have the project scope done you know close to what it would be in a day energy efficiency for better for worse is just more intimately involved with a customer's facility and I think that makes it more important but it makes it tough and I think there's advancements coming along in terms of software and diagnostic systems that are allowing you to reduce that sales cycle but right now we're still at a point where I at least for our deals and I think a lot of deals I don't see any way around kind of that two phase audit approach where you likely need people on site doing a one-day walk-through and then you need to go back for a more detailed energy assessment and I think diagnostic tools are gonna help shorten that cycle but that's that's where that cycle is gonna be short and I don't know if it's as much on the finance inside that we're gonna shorten it I think it yeah I think there's there's a certain kind of you know minimum amount of time that's gonna be required to develop an energy efficiency project from scratch and a lot of that is more on the technical side like for us right now if you're a customer and we go talk to you for the first time if you're super motivated we might have a deal closed in eight months but if you got other things going on in your business which you probably would it's it's it's a year yeah I mean we we've been involved in some of those fairs I mean benchmarking seems like it's an idea that has a great deal of promise there's a company in New York called Honest Buildings that is doing a lot of disclosure just getting information out there trying to create a B2B marketplace for this but yeah energy efficiency is tough it's not quite as sexy as solar panels in general and that's why we're all working on trying to make this part of it let's start on the other side now for each of your three business models does it make any difference if you are operating in an IOU territory a community choice aggregation district or perhaps I'm guessing that's probably more me so and I'm not business model we're not profits trying to create it but so what we're doing this more political answer in California is we have asked the PUC has ordered the IOUs to create an on-bill repayment program in their service territories now what we want to have happen again is that you get the central entity that's going to be effectively the master servicer is going to be the hub where everything goes in and out of and what we've said in been African very strongly for us politically it's very hard if we order Palo Alto LADWP or any of the other municipal utilities to participate that's probably not a political winner but if we create this really shiny object that is allowing jobs to be created next door to Palo Alto then we're obviously going to come into Palo Alto and say hey do you want to participate and we want this to be set up that they can plug into the hub on exactly the same terms that PG&E does etc and the other thing that LADWP is talking about is they only provide electricity so Cal gas does the gas service there so potentially we're just going to put this on the gas bill and have them execute it since since so Cal gas is already doing it it shouldn't be a problem and I guess for us you know part of it just gets down to what the underlying utility tariff might be you know if it's in an area where it's a lot lower cost energy it can make things more challenging that that being said we're developing some projects in Alabama with pretty low cost of electricity and no utility incentives but you know in terms of utility area by utility area it's more of what's the tariff structure like into the offer incentive programs that can help us do deals but but none of those are really a prerequisite so we could do deals anywhere straight back here and then making sure for John I'm wondering about your lender consent rule and how many projects can stop because the lender doesn't sign up on them are there some lenders who like it and some don't and that's one question another one is just where do you see this go do you plan to offer residential services and are there other companies out there doing this are they growing are they solid we're just still pretty much testing the water well I guess there are two questions there on the lender consent side there are going to be a lot of there are going to be a lot of times when a lender does not believe that a project is viable or that they don't want their particular building owner taking on any additional liabilities and not every building is going to be financeable under any circumstance so there's a lot of times when that won't happen we have not run into that all of our projects we've been able to get approved by the big banks Wells Fargo Bank of America city that they're they're approving these projects when they make sense and and then with regards to the where we're going we really think that the residential is a different market it's it's consumer finance so it's not something that we're going to be pursuing but we think that the residential side of PACE probably is going to come back at some point I just say in terms of the consent issue that's one of the reasons we decided to pursue OBR PACE existed first but we believe that if you for example we're not going to offer legal advice to anybody but we believe that if you do an ESA through on-bill repayment then definitionally you're just providing a service and effectively changing the service provider from just PG&E to PG&E plus Bob then that's something that clearly should not require consent so a building owner really ought to talk to all three of us Christy Oliver, representing a small city that's primarily commercial this is a good topic for me because the residential programs are not as important for us PACE hasn't worked out so I'm kind of curious about from my government perspective is there something that you really don't want governments to do should they just be getting out of the way or are there things that cities can do that would really help promote this more I'm thinking about RICO, CECO, you know our commercial energy conservation oriented that would require a time of sale, time of lease for those kinds of things and energy upgrades I would think that would help you but I don't want to make sure that we're moving in the right direction of my city and the other question was about on-bill financing or repayment what about water utilities do they also be able to join in on that and are there some pilot programs in the state for on-bill financing of water efficiency mechanisms to make sure that they wouldn't be excluded from that? So the existing program that is probably going to be created in California I think most likely will not include water on day one I mean I've been told that generally it's hard to meet bill neutrality with water and then the other issue is water is just very separate from electric and gas currently Theoretically it should work is probably just an extra layer of complexity that we ought to come back in a couple of years and try and weave in and then in terms of disclosure, building ordinances, things like that generally we're all those I think are incredibly helpful and we're generally in favor of them Our view is please stop helping us I mean that's our view to government in general is that these programs do better when simplified and let the financing solutions happen on the private sector the more regulation the more help we get the slower things go I think from my perspective there's two things that we look at it can relate to what policies are put in place or just actions in general one is does something help create demand and get customers moving quickly to the earlier questions so I think if there's some ordinances in terms of mandatory energy efficiency audits and other compliance people don't like it but from the perspective of being out there developing projects and seeing customers that are interested in energy efficiency customers that get that it's the right thing to do but also know that it's something they don't have to do I'm not advocating for big regulatory sticks but anything that can help spur demand is helpful and then a little bit to Brad's program the other area is expanding access and access is really access to the market for us as a source of financing because right now credit is a major limiting factor not only for us but for the energy efficiency market in general I mean part of the reason that PACE is so attractive for commercial real estate is that the way those buildings and properties are set up as limited liability companies they're essentially unfinancible and obviously are huge consumers of energy so all of a sudden you might if you look at the energy efficiency potential out there in the country probably 50% of it is untouchable because of credit so if something like on-bill repayment can come in and by virtue of having it attached to the meter make those customers accessible then we can do more deals and get things moving so those are the types of programs we're interested in my question is for Brad what, how are the utilities responding to this? Secretary Chiu said there's no free lunch presumably a higher bill statistically would increase delinquency rates and so how are the utilities responding to a program like on-bill repayment? So first of all we think this should actually reduce utilities' bad debt and the reason for that is let's say as a customer I currently owe $200 each month at PG&E and I finance an energy efficiency project and if we have bill neutrality my bill cannot go up it has to be the same or be lower otherwise the project wouldn't qualify so if I now owe $100 to PG&E and $100 to City and I don't pay one month and then move to Nevada they never collect but before PG&E lost $200 now they only lost $100 so hopefully at least on a default risk perspective it's better in general I was more optimistic when we put this thing together that we would get a pretty good response from utilities because again we want to pay them fees that more than compensate them for their costs and we are making the energy efficiency programs be more effective there have been some utilities around the country that have been more interested than let's say the California utilities and the California utilities have kind of been fighting us a little bit and I guess the way I would express that is I think if you got them in a reflective moment over a beer at some point I think many folks that they would say and I would actually agree with them that in California we regulate the utilities pretty aggressively and if something changes and it turns out that that was a good thing then generally as regulators we say oh utility you got lucky whatever that benefit is that I don't go to rape payers but if it goes wrong then we say hey utility you screwed up your shareholders need to pay for that that comes out of your hide well if I'm a utility in that case I don't want change and based on that I think the utilities are we haven't gotten them on board in California yet and we're kind of having to do it against their will to some degree and that is Brad being very politically correct let's do one more question A question to Bob regarding the accounting status of ESA whether or not the qualifiers of land chief financing there was some questioning from FASB what are the new guidelines on them and how are you going to affect the ESA going forward? Yeah it's a good question and something that we're following pretty actively FASB also working with the International Accounting Standards Bureau has been working now for about four to five years on revising the lease accounting standards they issued an exposure draft of some plan changes about two years ago and then got a lot of comments back and just recently reissued an exposure draft that now I think has about a six month comment period I think it's probably working towards having some final standards if things move along there'll be standards probably within a year that would then go into place about three years from now and in terms of how that impacts our arrangements at the moment it doesn't because we've been anticipating a lot of the changes that we think are coming have been telegraphed and really haven't been shifting over the last year or so so the things that are key from an accounting perspective is what's the basis of the agreement and for a services agreement the basis is to deliver avoided kilowatt hours of electricity and if you're doing that from a diversity of sources just like a utility can deliver kilowatt hours from a diversity of sources that's a positive factor if you have the ability to add in new sources and equipment that deliver that same KWH savings that's also a positive factor the other in many ways separate test is does the owner of the agreement in this case Metris have sufficient demonstration of control and the fact that we're putting in equity paying for ongoing maintenance those are all pretty positive factors and we work that through with customers but it is an issue because some customers especially with their not being certainty on the future guidance it stalls discussions and the whole leasing revisions were brought up because companies that run airlines don't have airplanes on their balance sheet sometimes it wasn't about renewable energy or energy efficiency but the reality is that some of these issues they're talking about do have the potential to impair solar PV agreements through PPAs and efficiency service agreements that deal with energy efficiency equipment so it's something that we're working on I mentioned we're part of this Better Buildings Challenge program so there's other financial providers that we're talking to and just making sure that the industry is aware of the potential implications I think we need to shut things down to let the next panel come in