Accelerating Financing for Retrofits

Matt Golden:

... The ideas and business models and financing and technology that we need to scale this industry will come from the private sector innovation, and some of it's already out there, some of it is yet to be invented. But we need to follow the footsteps of every other industry and put the same fundamentals in place, which is when you bring a project to Aaron, how does he know that that's a project he should actually invest in? How does he trust you? And once that project gets installed, how do we make sure it actually worked? And those are really fundamental things that also unlocks real flows of capital long-term because this is a multi-trillion dollar problem with a T that we're talking about.

Michael Torrance:

Welcome to Sustainability Leaders. I'm Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices and our world.

Speaker 4:

The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries.

James Burrow:

I'm James Burrow, I'm Director of Sustainable Finance for BMO Capital Markets. I've spent the last 18 months thinking about how we can accelerate financing for retrofits and I'm thrilled to be joined by Aaron Berg who is head of the Building Retrofits Initiative at Canada Infrastructure Bank, Martha Campbell, who is Principal, Carbon Free buildings at the Rocky Mountain Institutes, and Matt Golden, who is an entrepreneur and policy advocate who is currently CEO of Recurve, an energy efficiency services company located in California. So, before we dive into the topic at hand, which is deep energy retrofits to the building stock in North America, I thought we could just go round the room and start with a few intros. Aaron, it'd be great to hear about who you are, what your role is at Canada Infrastructure Bank and how CIB are helping to accelerate deep energy retrofits to buildings in Canada.

Aaron Berg:

Thanks, James. My name is Aaron Berg and I lead the Building Retrofits Initiative at the Canada Infrastructure Bank. A Federal Crown Corporation tasked with investing in revenue generating infrastructure projects for the benefit of all Canadians. We launched the Building Retrofits initiative in March of 2021. We have made close to $1.2 billion in investment commitments in the space, and that ranges from doing direct investments with building owners. We've also entered into an investment partnership with the Bank of Montreal. I think one of our north stars that kind of guides our investment activities is really catalyzing a retrofit market that doesn't necessarily exist. And what doesn't exist historically is the emphasis and focus on decarbonization. So, our hope is that as we make more of those investments, the broader market will come to better understand the features and benefits of a decarbonization retrofit for their buildings.

James Burrow:

Perfect. Thank you very much, Aaron. Martha, maybe we can move over to you to just understand what your role is and what the Rocky Mountain Institute does to help accelerate retrofits in this space.

Martha Campbell:

I'm Martha Campbell. I'm a principal on our carbon-free buildings team. For those that aren't familiar with RMI, we're an energy think and do tank, and we're focused on decarbonizing the economy, typically using market-based approaches. We focus on the four main end uses of energy, so buildings, transportation and industrials and the power sector. I'm on the buildings team and I lead our work that's looking at how are we going to scale up retrofitting existing multifamily buildings to be zero carbon emissions, both on the residential side and on the commercial side. So, RMI looks at what are the technical solutions to electrifying different types of buildings, all the way to how do we make this more of a policy requirement.

James Burrow:

Thank you very much, Martha. And Matt, coming round to you, it's the same question, but I would love to hear what you do as CEO of Recurve and what you've done throughout your career.

Matt Golden:

Certainly. I started out actually retrofitting buildings, doing work for a living, blowing in insulation, installing HVACs. I am CEO of a company called Recurve, which is providing the ability to measure the impact of retrofits, whether it's electrification, or traditional efficiency, or storage or how you manage your EV charging. If you don't know what you're actually delivering and don't have agreement on how to quantify that impact, you can have all sorts of rather gnarly outcomes.

It's in a lot of places increasingly all over the country, but California, where we come from, we ran into these problems first because we started installing solar before anybody else, so, the game's really changed. So, we're focused on being able to use primarily smart meter data to measure energy efficiency and demand response and how that affects customer bills, but frankly more importantly, how does that actually affect the grid?

I also work with Aaron and CIB on something called the Investor Confidence Project, which is about standardizing and asset class for commercial retrofits, which is also a part of those same kind of building market fundamentals that we see in every market that we need to have in place for energy efficiency to scale. I think that the ideas and business models and financing and technology that we need to scale this industry will come from the private sector innovation, but we need to follow the footsteps of every other industry and put those same fundamentals in place.

James Burrow:

Perfect. Thanks, Matt. And I think that was a great overview of some of the problems that you're trying to solve there. So, I'm conscious that we've maybe even jumped ahead a little bit. Probably heard a lot of technical terminology about retrofits and decarbonization, but maybe Martha, I can turn it over to you just to strip this back right back down to the basics a little bit. What are retrofits? What's the difference between a retrofit and a deep energy efficiency retrofit? And why are retrofits important for the race to net zero and decarbonizing North America's economy?

Martha Campbell:

Sure. I'm just going to use an example of someone's home. A retrofit is kind of like a renovation, but it's focused on the systems and the structures in a building that affect how it performs, predominantly from an energy standpoint, which is what we're focused on here, but it also can relate to moisture management and things like that. So, we think a lot of it as being around building science and building performance. And when we think of the systems in your home, there's the domestic hot water, there's the HVAC system, there are your windows, there's the insulation in your walls, the insulation in your attic. All of those things affect the amount of energy that you need to heat and cool your building, or how well that hot water system affects the efficiency of the fuel that you're using to heat your hot water. So, those are the areas where you can make improvements to different systems in order to improve the overall performance of your home and hopefully maybe even improve your utility costs.

And at the same time, you hopefully are going to have a better thermal comfort experience. It's going to be more temperate climate inside your home and even things like noise management and things like that can improve. And then in terms of the difference between just a retrofit and a deep energy retrofit, hopefully listeners are familiar with utility rebate programs where you get an incentive to change your light bulbs, or somebody comes and wraps some insulation around your hot water heater. Those are programs that historically were making improvements in your home that reduced the amount of energy that you consume.

And a deep energy retrofit though is really looking to dramatically reduce the amount of energy use. So, those types of improvements you might get, I don't know, 10% to 15% energy savings. But with a deep energy retrofit, we're looking to try and get energy savings above 50%. That means you have to do pretty substantial things to the building, maybe get double or triple paned windows if you're in a cold climate, really beef up the amount of insulation in your walls, air seal your walls, things like that. Those are some of the mechanics of what can be involved in a retrofit.

James Burrow:

Martha, I have a confession to make and thank you for that. I am still heating my home with gas, so presumably that needs to go at some point if my home's going to hit net zero.

Martha Campbell:

Yes, it's time for that heat pump.

James Burrow:

Okay, perfect. Thank you very much. So, Martha, maybe I can just ask you to kind of help me set the scene for some of the questions that are going to come here. Rocky Mountains Institute's role as a think and do tank. I wonder if you can just give an exam grade of how North America is doing on the path to net zero with regards to building energy efficiency retrofits in both the commercial industrial space and in single family homes. Are we on track with an A or are we failing with an F?

Martha Campbell:

Definitely not on track with an A. I would say we're falling pretty far behind some of our peers in Europe, for example, where they've been pretty significantly affected by the war in Ukraine and the skyrocketing price of gas in Europe. They've really taken efficiency pretty seriously as those prices have obviously gone up. And so I don't think we've necessarily had the same gusto as it relates to how we've been managing our energy consumption at the moment. But we're doing great in terms of things like the Inflation Reduction Act. I mean, this is a monumental piece of legislation that's fundamentally changing the incentives around building performance in a way that really hasn't existed.

And so I would say from that standpoint, I'd say the US should definitely be getting closer to a B by passing that legislation and how that's ideally going to help unlock the market and really stimulate demand for this type of improvements in buildings. With regards to our efficiency rate, according to IEA, we need to double the rate of efficiency that we're capturing globally by 2030. Efficiency is going to be a huge part of reducing our emissions globally, so we need to really be doubling the rate at which we're capturing efficiency.

James Burrow:

Can I ask you to unpack that a little bit, Martha? When you say double the rate, do you mean do twice as many buildings twice as fast?

Martha Campbell:

Well, I guess there's a few ways that you could get there. If we're looking at those average rate of savings from a utility program, let's say somewhere between 15 and 25%, we need to double that. Every single project needs to be capturing twice as much efficiency. So, it's a combination of when you do a project capturing twice as much efficiency. And then I'd say the rate of the number of buildings that are actually doing these projects needs to increase by a minimum of a factor of two.

James Burrow:

Great. No, that's really helpful. Matt, maybe coming to you now. Martha just painted a bit of a mixed picture of the retrofits landscape in North America. I think with what Aaron's doing, it's the CIB with the money and the funding that's coming through the Inflation Reduction Act. There's certainly a lot of incentives, regulation and financing in the pipeline to help accelerate this market, but it seems like we're not really doing retrofits at the speed and the scale and the pace that we would need to do. You mentioned earlier your job is getting customers to do stuff that works. Maybe you could unpack that a little bit. What works in this space? What doesn't?

Matt Golden:

So, I'm going to answer that in a slightly different way. We create a platform for lots of cool companies to go figure out how to get customers to do stuff that works. And I actually think that's one of the fundamental changes in our thinking. We need to move away from deciding what the technologies or the solutions are and focus on the outcomes and send the right signal. Because let me say something a little controversial, I don't think we have any barriers whatsoever to energy retrofitting except the standpoint that the economics don't make a lot of sense, and we are in purgatory between an old approach to energy efficiency that really was born out of low-income weatherization and scaled up. But that's a social justice program. It doesn't have market-based economics. So, we need to really change the way we think about energy efficiency and demand response, which are two sides of the exact same coin, long-term load shaping and how you change demand based on events.

James Burrow:

What's demand response? Because I'm conscious that that is certainly a bit more a technical term that perhaps some people won't be familiar with.

Matt Golden:

It's actually both energy efficiency and disband response need new definitions. So, there's no such thing as just reducing energy use in a building. Everything we do creates a load shape impact. If you insulate attics, you will save during summer peaks when it's hot and winter cold periods, and you'll get very consistent load shape impacts. It's actually very similar to solar. You can predict it. And so the difference between energy efficiency, which again we try to call this long-term demand flexibility and leave that term behind, is that it's a long-term signal. You install an HVAC system and insulate the attic. If you had an air conditioner in the first place, you'll reduce summer peak and you will add load in the winter morning very consistently over a long period of time. And if you insulate your attic, you'll reduce demand in both those periods.

Demand response is event driven, which means it's 104 degrees out today, we can't keep the lights on, we'll pay you a bunch of money to be a little less comfortable and turn your air conditioner up a few degrees. The way I think about it is long-term load flexibility, also known as energy efficiency is like a base load or a load following power plant on the grid. It behaves like wind or solar or natural gas to a large degree. And demand response is like those peak plants that we fire up during emergencies. It's really expensive and it's really critical when we need it, but it's pretty inefficient from a grid standpoint and a cost standpoint.

And so we think all of this stuff is part of a virtual power plant or a distributed power plant, which is the words we're trying to move to because there's nothing virtual about it. These are real resources behind meters. And that's the fundamental change that we see, which is the entire grid has always been about put more poles in the ground, string a bunch of wires, put pipe in the ground, build a bunch of power plants. And the grid is the most complicated machine on the planet, but it's also super simple, which is must have enough electrons to keep the lights on every second of the day in all parts of the grid. And it's always been very supply side focus.

The new world we're in is that doesn't really work. It's not sufficient. Interconnection queues take years, it's slow and it's very costly. Our whole belief is that the demand side, the combination of long-term load shaping and the ability to dispatch and respond to real-time prices on the grid and value, those are the components of the virtual power plant. We need every building to be a participant in the decarbonization of the grid. And we think flexibility is identical to supply side production, except that it's better because it's cheaper, doesn't have internet connection queues and also reduces the cost to customers and makes their buildings better.

And so that's the way I actually think about energy efficiency and demand response. And then your original question is like what's standing in our way is access to that price signal, and the fact that we have regulations built for these programs where we paid everyone rebates in advance for very specific technologies and nobody measured the outcomes. It's a very inefficient system. There's a whole stack of regulations we've built to manage that inefficiency and that conflict of interest that we've created. We know from experience, if you expose these companies to that price signal and say, "You take the performance risk, we'll pay you for what you deliver," these companies will compete with each other for customers, develop technologies that actually work and deliver vastly better outcomes than we see in current programs.

James Burrow:

So, Matt, effectively what you're saying is it's not enough simply just to electrify everything. But to make sure that the electricity that we use is clean and efficient electricity, we need to use the grid more smartly and we need to make sure that the price signal for electrification is there. It is cheaper to electrify than it is to stay on your gas heating.

Matt Golden:

Yes, and frankly, I would say in general, my belief is we just need to introduce market economics into demand flexibility. But I wouldn't say anything's a defacto. Obviously, we do need to get off natural gas to get to zero GHGs. There's no doubt about it. But I think our goal should be zero GHGs, not necessarily electrification as an end all be all. Electrification is what one of the outcomes of that is. But a good example is when you install a heat pump, you are moving gas onto the electric grid and you're creating a winter morning peak that in many places will be two or three X larger than our current summer peak at 6:00 or 7:00 in the winter morning, which is not particularly clean energy.

So, that's challenging. It's not a solution unto itself. It has to be mixed with where do we get those clean electrons at 6:00 in the morning? And all of a sudden things like insulation, like Martha was talking about, incredibly critical because if you insulate an attic and reduce the amount of energy it takes to heat the house at 6:00 in the morning, you might be offsetting the cost of wintertime solar plus storage, which is crazy expensive. And so we just need more of a systems thinking.

But in places like California and New York and Massachusetts and the places, the challenges, the economics are really hard. And especially when we're adding air conditioning, a lot of folks are buying heat pumps because they want their air conditioner. And when you do that, you're increasing their energy costs and creating new summer peak energy use, which is the dirtiest time of the entire year. And so I would just say I'm not pessimistic about any of it, but we need to back up and focus on the outcomes we want, put a price on it, pay for what it's worth, and you'll get the mix of solutions you need to actually get to a clean grid. We can't just take clean energy for granted. It isn't just going to happen without us.

James Burrow:

That's really helpful. Thanks, Matt. Aaron, maybe I can pivot to you now. And I want to talk in short about how your job is to make yourself redundant in the long run. So, you as Canada Infrastructure Bank represent public capital, the taxpayer's dollar hard at work, investing in retrofits and clean energy. But ultimately the taxpayer can't afford to do all the heavy lifting here. How do we get more private capital into the space? How do we reduce the role that the taxpayer has to play?

Aaron Berg:

Thanks, James. So, it's somewhat of an imperative that we unlock and mobilize private capital into the decarbonization of our buildings. I think we're just the tip of the spear in that broader effort. And we're only in Canada. We're not in the United States. But I think a couple things about unlocking private capital. I think Matt mentioned earlier their investor confidence project and creating a standardized asset class for retrofits that is recognizable, reliable and transactable. And Matt also mentioned outcomes to be outcome focused, unlock private sector innovation. These are all core market-based solutions thinking from an initiative and a program design perspective that if you transact for the outcome rather than the technique. So, historically, a conventional utility rebate programs in the 80s and 90s and 2000s and even to this day are often largely measure focused.

So, if you put X units of insulation in your walls or your attic, we will give you Y dollars per unit of insulation. That's a measure driven incentive. That does not incentivize the outcome, which could be greater energy efficiency. It could be less carbon pollution from the building, and that's how we transact. So, we're looking to make investments in measurable reductions in greenhouse gas emissions. Buildings are highly regulated entities by codes and standards. And so a lot of what we need to do is upgrade or modernize our buildings, particularly ones that were built with technology from 40, 50, 60 years ago, and modern technologies outperform those technologies. That often also will cause kind of an entire redesign of a building systems. It's not always as simple and easy as doing one for one replacements, especially if you're electrifying buildings.

And another big systems level change that Matt was touching on that also needs to occur is really trying to position buildings as assets to the grid operators and the utility companies. And what I mean by that is assets in a distributed energy system that can actually buy and sell power on and off the grid at different times of the day, largely augmented by emerging modern battery technology. And that's a unique feature of what we're doing at CIB, investing in decarbonization of buildings is that we've made eligible for our investments onsite renewables and battery storage when attractive and available. But what's missing is that the regulated utility sector in both Canada and the United States is highly fragmented. It's fragmented state by state. It's even fragmented within state.

So, standardization is key I think to unlocking private capital. I think we also just need more proof and more evidence. The idea of decarbonization retrofits and concept is largely unfamiliar to most people, and most bankers, and most investors and probably most building owners. People I think have gotten very used to the reliability of our North American energy systems. When I turn on the light switch, the lights come on. When I go over to my thermostat and I calibrate the temperature in my building, the gas furnace fires up and I get more heat if I ask the thermostat to give me more heat, which I think that's kind of where people's knowledge of this topic begins and ends. And so definitely some market awareness and education that's needed.

We're hopeful that if we can at least catalyze the early kind of market investments and decarbonization retrofits, do that with the investor confidence project and the certification requirements we have, that begins to establish that asset class, establishes a track record of performance that can inform broader participation in the market. And I think there's an opportunity for new companies to form around the retrofit opportunity that don't exist. And I've noticed that with some predominant construction companies that are largely optimized to build new buildings. They've never really set up retrofit divisions because there was nobody asking for retrofits.

So, there's a chicken and an egg problem. Is it a demand problem or is it a supply problem? And at some point it's both. And we're really in the business of investing in demand generation and making projects happen, but eventually we're going to run into supply side challenges. So, I think both the opportunities and challenges are largely insurmountable at this point. And we kind of put one foot in front of the other and walk and hopefully run. A lot of it comes down to creating a standard, I think, an investible standard that defines a decarbonization retrofit. And then as we've touched on, a lot of this really is a matter of policy. Policy governs building codes and standards, regulates the utility sector and the grid. And so policy is kind of the path forward here, including putting a price on carbon.

So, one of the benefits we do have operating in the Canadian market is we have a price on carbon and that price is going up $15 a year until it stabilizes at $170 a ton in 2030. New York City I know has introduced some form of carbon pricing legislation, but that's largely a missing kind of policy piece too because as Matt mentioned, you electrify using heat pumps, and all of a sudden you're paying kilowatt hours that are four times the price of the equivalent unit of natural gas. So, that doesn't work. The economics don't work. Well, how do you create a market when the economics don't work? I guess you regulate the market by pricing what you don't want to have happen, which is really a tax on carbon or a price on polluting.

So, lots of changes on lots of levels. We're hopeful that if we can at least turn on contractors. We've kind of turned on the BMO engine with our blended finance product. And James and I in our day-to-Day here are living the experience of commercial real estate lenders learning about retrofits. They didn't previously know much about them and now we're organizing around that opportunity and that takes education and awareness, and so lots of system level change. And then on all levels, government policy, state policy, local municipal zoning codes are effective and federal policy as well.

James Burrow:

Thanks, Aaron. So, just one quick follow-up question there. A couple of themes that I was hearing about were standardization is a way to track private capital and treating retrofits as an asset class. So, are you saying that one day we could see a retrofit bond trading on a bond index somewhere that you could buy into? Is that a possibility? And where do the returns come from for those bond investors and how are those returns guaranteed?

Aaron Berg:

Well eventually, if we're going to get to trillions, we need a secondary market. So, we have a primary market financial product, James, CIB and BMO. It interfaces directly with customer. It gets underwritten by the BMO team. We direct our capital through that once we've complied with all of our self-imposed procedures. But let's say we blew through our money. Could we sell portfolios of retrofit projects into the pension funds and the life coast on a secondary market arrangement? Because those players don't want to buy $10 million pieces of anything. To wake them up out of bed in the morning, you got to get to $100 million, $500 million. And in order to do that, you have to have consistency and cohesiveness in the portfolio of what you're offering them.

I mean, this is also kind of how the equipment leasing space often works. You have all kinds of boutique originators of leasing paper. And they know that at the end of the month, if they use their own working capital, they can take that paper and sell it up to banks because the banks actually want to buy the asset. So, that works. We don't have anything like that in the retrofit space. It's too early, we're not there, but that's kind of what I mean by creating a standardized asset class. And you need something to underpin that and that's where the investor confidence project and the investor ready energy efficiency certification comes in.

James Burrow:

Perfect. Thanks, Aaron. Matt, maybe I can come back to you.

Matt Golden:

This is a good one. I think there's two facets to this. One is having some of these fundamentals like the investor confidence project certifies projects as investor ready, energy efficiency. It was super not innovative. Every market has to have something like this. It's really just taking a page at every other market that exists. The way this relates to financing, I think there's just twofold here. One is that most all the financing in energy efficiency, it's really consumer finance where typically basing the investment on the credit worthiness or the asset value of the borrower or the building. And that's not how you build power plants or invest in infrastructure. Infrastructure finance is actually very specifically financing cash flows from infrastructure that is not based on the credit worthiness or asset value of the borrower.

And that's where you get the money to build large scale power plants. It's way lower cost capital and it's much more plentiful and it's also can be much more equitable because not everybody has a good credit rating or a valuable asset. So, one of the things that we're seeing happening that I'm really excited about in markets where we are paying for the grid benefits that are occurring, that virtual power plant outcome, not just the savings to the customer, is we have investors who are now coming in and financing the future of cash flow stemming from the grid impacts from virtual power plants using infrastructure finance.

And what that means is that customers aren't financing the T and D and GHG benefits that accrue to somebody else. Customers paying for their lower bills and better comfort. And those grid outcomes that as a building owner are not my savings. We segment those off and finance that like an actual power plant, and we think that's ultimately where you get trillions of dollars. We're not going to squeeze trillions of dollars out of everybody's building value or credit to get there. So, it's absolutely critical that we create securitizeable assets that can scale. And we don't only just securitize the credit, but we securitize the actual value that's being created from these virtual power plants.

James Burrow:

So, just to be clear, with a virtual power plant, we're not talking about a power plant that may or may not exist depending in which quantum world you're living in. We're talking about a network of distributed assets which both consume and produce power at different times connected to a flexible grid. Is that what we're talking about when we say virtual power plants?

Matt Golden:

Right.

Aaron Berg:

Yeah. And what Matt's talking about is consume less. So, this is where the term or idea of a megawatt is equally as valuable to a grid operator as a kilowatt produced and maybe more so.

Matt Golden:

I think the interesting change is that we're not always trying to consume less. When it comes to electrifying transportation and electrifying buildings. And there are periods of time where it's a net benefit for everybody to consume more. It actually is better for rate payers in California if I leave my toaster oven running during the peak period than paying other states to take solar from us. It's a crazy new world we're in.

Martha Campbell:

I'm curious also, Matt, if you would agree with the way I've been thinking about a virtual power plant, which is that there's some sort of a third party that is going out and doing a bunch of projects, whether it's making a building grid interactive where you can ramp up or ramp down the load of the building while also trying to decarbonize it ideally. And that is why there's it's called a distributed power plant because it's not just the traditional utility that's doing this. It's an aggregator where you can have new businesses emerging in the marketplace that do these kinds of projects because it does become technical. You do have to understand how you're going to combine efficiency with a battery with solar, and how you're going to basically trade that into these larger markets that the utilities are buying and selling power on. So, I think that third party piece is what's important to understand about a virtual power plant and how you as a homeowner or building owner can basically be like an energy tenant. They'll pay you rent to just come and harvest efficiency or harvest demand flexibility from your building.

Matt Golden:

Yeah, that's very much the orientation we take. My personal experience with customers in their buildings is that they're not walking out to their meter very often. So, having somebody in the middle that takes all that complexity and turns it into something people can easily buy that supports customer benefits that simultaneously optimizes for the grid. And it's finding that balance point of what customers will put up with and what's best for the grid and somewhere in the middle is your optimal solution.

James Burrow:

Okay. I want to go from a kind of macro perspective, like a fairly technical macro perspective, virtual power plants, bond issuances, all this sort of stuff. I want to go right down to the micro and make it super tangible. So, let's say I'm an investor in New York, a small time investor. I've got three multifamily buildings in the low to middle income space. I'm all for combating climate change. I believe climate change is happening, consider myself to be an advocate for efforts towards net zero. But I have other competing financial priorities. I don't want to raise rent on the people that are living in these apartments. I don't want to disturb these people because retrofits can be busy. They can create a lot of noise. They can create a lot of disruption. And let's say my gas furnaces still have a lot of life in them. Why should I consider doing a retrofit now? What's the business case to me as the investor?

Matt Golden:

I don't think it's always crystal clear. I think we need to also do what we call targeting, which is you start new markets by focusing on early adopters. And in the US we got 139 million buildings. Just in California, we have 12.4 million residential buildings. And while the economics catch up, we should be focusing on the places where it makes the most sense. And the good news is there's lots of those customers out there. So, some of it I think is you got to be selective about which technologies you apply and which places to maximize benefits. While on the flip side, as we move towards decarbonization, the value of reducing natural gas and GHGs and these things will go up. So, you want to use carrots with our early adopters and sticks with our laggards. And be really careful if you're using sticks on your early adopter, you're in trouble. So, I feel like it's just like table stakes is like find the opportunities where the stuff we do works great and start there, and that will keep us busy for the next couple decades, actually.

Aaron Berg:

I think that's right. I mean the concept of early adopters and market transformation curves certainly resonates with me. And I think one example of aligning decarbonization retrofits with other major renewals or reconfigurations of buildings is also a really good market segment and target market. In Canada we've seen a fair amount of organic activity in repositioning commercial office space and converting office to residential units. And when that happens, that is massively disruptive. You may be actually even re-cladding the whole building and stripping the building down to essentially steel and slab, and so you can kind of do anything. And so we're looking for those types of projects. Could we get in the middle of that so that the new reconfigured building comes out the other side as low carbon as possible?

And then I think in general speaking, there needs to be a compelling value proposition for somebody to buy anything. And so unlocking people selling retrofit solutions and developing a value proposition for certain building types is also something that we've been trying to make investments in. But again, it's not easy because most building owners aren't thinking about this stuff. They just simply are not. Our energy systems have been too reliable and too cheap for so long that they're just an afterthought. And that's kind of a culture or a behavioral economics shift that's required here too is that we need people paying more close attention. Well, why would they do that if they could make money? So, Matt, to your point on flex markets, if there's an opportunity where I can receive a notification from a utility and a price signal that tells me if I can reduce my consumption right now, I'll get paid some money, that hopefully would wake some people up.

So, again, finding all the different kind of drivers and incentives. We don't want to be too heavy handed with the stick versus the carrot, early days. And at least some of the work I've been doing I think of as if we can create the financial solutions and the in-market retrofit solutions providers, well then now if you wanted to turn up the heat and create some problems for people from regulation and zoning and penalties or pricing of carbon, at least we've invested in the solutions. So, when you create that problem, there's somewhere for them to go and not vice versa. I think that would be one of the biggest mistakes we could do is to turn up the penalty side of the equation too fast.

We need as many people as we can to be on side with taking action. There's a social license component to this too that thankfully in the year 2023, most people acknowledge and accept that taking action on climate change by reducing carbon emissions is the right thing to do or a good thing to do than 10 years ago. 10 years ago, I think we weren't in the same position. So, that's an important piece of the current landscape.

Matt Golden:

Why I'm so confident, frankly at this point that if we get out of our own way and we make the economics work, it'll scale. In 2021, California Governor Newsom created a summer grid reliability emergency proclamation which said every agency in the state's got to figure out ways to solve this problem. And part of that was they created something called the Market Access Program, which is an energy efficiency program paying people to invest in building long-term efficiency measures like heat pumps or insulation or smart thermostats or lighting. So, really in just the last basically 12 months we got going on that and Recurve was implementing that in about half the state. And it was really simple. We said to about 160 companies that are signed up through a flex purchase agreement to go out and deliver solutions to customers and get paid for the measured results at the end based on the grid value.

And the grid value is primarily concentrated right now in the summer peak because that's where the grid problems are in the GHGs in California. So, that program ran and we went from zero to increasing the California commercial portfolio statewide by 38% in 12 months. Each megawatt hour of savings that is being delivered is coming in at 2.2 times greater than traditional efficiency programs simply because we pay for peak reductions, so, that's what we get. There's nothing else going on there. And we're realizing over a hundred percent of the forecast because the incentive is to deliver not forecast high, because they only get paid for what they deliver.

Aaron Berg:

Matt, maybe for the benefit of the audience too, you can just touch on the concept of deemed savings.

Matt Golden:

That's a good point, Aaron. It's not intuitive how this system actually works. Every once in a while, consultants, what are called work papers that say if you install a light bulb in a commercial building, you're going to save X megawatt hours and have some load shape impact that is deemed and it's averaged across everybody and it's predetermined. I was a retrofit contractor and I had engineers and blower doors and infrared cameras, and all that cost me a lot of money, but no matter what I did, I got paid exactly the same. So, when you pay for averages in advance, you incentivize the lowest common denominator and the companies investing in high quality get burned. And that's one of the core ideas is pay for what you actually want and you'll get it, and it will reward high performing folks who can actually deliver the results. It's almost counterintuitive how this market works. There really aren't very many or any real analogies that I can think of that work like that anywhere else.

Aaron Berg:

To be fair, I take the view that a lot of those mechanisms are kind of legacy technology based, that we didn't have the ability to do two-way communications between a utility grid operator and a building owner in the nineties.

Matt Golden:

We don't have to beat ourselves up, but we do have to move forward in transition.

James Burrow:

Okay. So, now to close out a low carbon fairy godmother, I want to grant you three wishes, one for each of the participants here. So, Martha, maybe I can start with you. What policy intervention from the US federal government would you wish for and why, beyond what is already in place?

Martha Campbell:

Gosh. I think there's a few different ways to solve this problem. And part of what I've been observing over the 10 years that I've been in this sector is how quickly can regulatory reform happen at the state level? It can be orchestrated through central actors like utilities to help decarbonize the grid, but that does require a degree of reform by PUCs. And how quickly can we get that to scale across different states? And that has always presented a challenge to me in terms of like should we be looking at a central organizer to help solve this problem or are we going to have to do this one house at a time, one building at a time? And so the other option then is how do we get financial markets to signal, look, these buildings are a risk, they are a liability. And I would like to see financial markets start properly assessing how high performing buildings do mitigate certain types of risk and properly incentivizing buildings to be made or improved in a way that mitigates that risk.

So, one option, let's say we're looking at residential, is for the government sponsored enterprises to basically say, "Look, you have to disclose the energy performance of a building when we're underwriting your loan. Just like we have to know what the insurance payment is that you're going to make and what's your annual income." They want to know all that that affects your propensity to default or not and to make your payments. And energy burden is one of those types of risks that they're just blind to right now. And if you had to disclose that risk and you were getting different pricing on your mortgage, I can guarantee you the market would start taking the energy performance of the building much more seriously. So, that could be a federal policy that has nothing to do with utility regulations state by state that could start to send a signal to the entire residential market today. So, that would be one of the things I would advocate for. There are some equity implications you're going to have to think through. But sending those types of signals to the market is one thing we could do.

James Burrow:

Great. Thank you very much, Martha. So, Aaron, turning to you now, if we could bring just one type of capital provider to the table to finance retrofits in a big way, what type of provider would that be and why?

Aaron Berg:

Magic wanding, I think it would be like a sizable coordinated consortium of philanthropy that was willing to splash the pot with some money to address the affordability concerns. One of the greatest concerns we have, especially for decarbonizing the residential sector, apartment buildings and whatnot in light of current conditions is affordability. And that would hopefully provide some time for technological innovation, better understanding of the dynamics of affordability and project economics. Now, I don't know how realistic that is. And something we discussed earlier though was making investments in a certain way as a standardized asset class, relying on the investor confidence project to unlock secondary market investment. So, that's going to be your large institutional that need high volume or significant transaction size to get involved, and that's down the road. That's why I positioned early, philanthropy, to kind of smooth over some bumps and then over time as things are better well understood, then you could start to tap into the secondary capital providers.

James Burrow:

So, in other words, if Bill Gates is listening, we've got a good business case.

Aaron Berg:

Yeah, Bill Gates. I was saying Mackenzie Scott, too, clearly she cares about housing. So, if she's listening, Mackenzie, give us a call at CIB or BMO and we'd be happy to direct some of your money into the market where it can really move the needle. Bill Gates, Warren Buffet and whoever.

James Burrow:

Okay, thank you, Aaron. And Matt again, reminder, we're in fairy godmother magic wand territory here. If you could just put one energy efficiency technology inside every building in the country or in the US and Canada, that would make a difference, what would that be?

Matt Golden:

The first thing is smart meter data that we can actually access. I'm really resistant to picking one tech over another. There's a lot of good stuff out there and I don't think there's one piece of technology that makes sense in every building when it comes right down to it. With Smart Meter gives you access to everything behind the meter, so that's the ubiquitous thing in. And of itself doesn't do any efficiency, but it gives us the ability to send the right signal and manage the building properly. There are a bunch of no-brainers though, like in general, insulation shell reduction. Smart thermostats are generally a good idea, but not ubiquitously In some markets they make energy go up.

I think in general it's more this transition from thinking about technology and products first to thinking about creating a market structure that actually scales What we're doing here in California, and I think we just ultimately have to do is equity and policy goals, we're going to have to bite the bullet and pay for it. And the most equitable way to do that is the tax system, not the energy system, which is usage based. But if we really care about GHGs and equity, we're going to have to pay for it. And the more mutual that we can make that the smarter we're going to be.

James Burrow:

Okay. So, I think that brings the episode to a close. We've delved into policy financing technologies, virtual power plants, so I think it's been a fairly whistle stop tour of all the areas that impact energy efficiency and carbon in North America. So, hopefully it was enlightening. Just like to thank Aaron at CIB, Matt at Recurve, and Martha at the Rocky Mountain Institute for joining us. It's certainly been a pleasure to chat from you and learn from you. Thank you very much.

Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider and we'll greatly appreciate a rating and review and any feedback that you might have. Our show and resources are produced with support from BMO's Marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.

Speaker 8:

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