Standardized Data Needed To Create Credit Markets for Retrofitting

People have been replacing single-pane windows with triple-pane ones for decades. Insulating, changing light bulbs and adding extra layers of glass are not rocket science.

So, credit markets don't have that excuse for treating energy retrofits as if they were a risky investment from a technological perspective.

They do however have the excuse that there is no comprehensive, comparable, historic data indicating performance of retrofits and returns on investment. This kind of data creates a measurable, scaled and predictable risk / return profile.  Without data, investors can't be certain about returns, and so they consider retrofits a risky asset class and treat it as if it were on a par with venture-capital or private-equity.  The payback on investment is thus rarely longer than three years, and the targeted returns tend to be in the double digits. This naturally limits not just the size of the market but also the depth of retrofits; you have to confine yourself to measures which meet these relatively draconian parameters.

But, that may be about to change.

Recently, many cities, including New York, a few states, the U.S. Department of Energy and a variety of non-governmental organizations and nonprofits, have mandated (or encouraged) that buildings over a certain size report data on their energy efficiency. While this is a good start, the data collected is often disparate in nature.  There is an urgent need for a broadly accepted, robust and uniform data collection system, creating a quantitative standard for the credit markets, thereby removing one of the key components of risk.

The proliferation of jurisdiction-by-jurisdiction mandates to collect data on energy efficiency is likely to provide momentum for the establishment of just such a standard.  It's unclear what standard will be adopted. Whatever it turns out to be, it's unlikely to be established by a general mandate given the current paralysis in our legislative and regulatory bodies. Rather, it is more likely that a major building owner will obtain retrofit financing on the basis of a certain set of data, that deal will be used as a template for subsequent deals and a standard will be born. The recent Urban Land Institute conference in Chicago, focusing on data and transparency in the built space, showcased a number of approaches to these issues.  One of them will work, and the sooner it does the better.

Lack of financing is not the largest obstacle to widespread retrofitting. Lack of demand is at least as much to blame. But, creating a credit market is key to scaling up the retrofit industry.  Once the data is available, credit will flow. And once credit flows, borrowers will be able  to stretch out the payback periods, financiers will be willing to accept lower returns and we will see a market which is not only bigger but which also allows for more comprehensive retrofits.