Energy Efficiency Financing. for

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1 Energy Efficiency Financing for Efficiency, Emissions and Energy Choices for Ohio Manufacturers Ohio University Workshop Columbus, Ohio Michael J. Zimmer September 27,

2 Michael J. Zimmer Executive in Residence, Ohio University Russ College of Engineering and Voinovich School for Leadership and Public Affairs; Consortium for Energy, Economics and Environment (2006-current). Senior Counsel, Thompson Hine, LLP, Washington, D.C. Director, two terms at Power Generating, Inc. renewable energy company and other company advisory boards; Director and Chairman, Sphere E, Inc. ( ). Just rated in 2012 Top Rated Lawyers Guide to Energy/Environmental/Natural Resources Law, and rated in 2013 Euromoney LMG Clean Tech Top 100 in US; 2013 American Lawyer and Martindale Hubbell Top Rated Lawyer in Energy/Environment Land Use Former Co-Chair, American Bar Association ( ABA ) Renewable and Distributed Energy Resources Committee ( ). Former Co-Chair ABA Energy and Environmental Markets and Finance Committee ( ), currently in ABA SEER Section capacities on book publishing and annual Fall meeting ( ). Legal Advisor, Capital Markets Partnership for U.S. green building finance ( ), Americans for Community Development (2009-), and Washington Counsel, The Microgrid Institute. Member, USGBC Energy Atmospheric TAG Committee ( ); ASTM BEPA Legal Subcommittee ( ) on green buildings. Best rating in nation for Martindale & Hubbell ( ) - highest rated for over 20 years for legal quality and ethics. Member, Strategic Advisory Committee American Council on Renewable Energy (ACORE); former Vice-Chair, ACORE Biomass Coordinating Council. Public Utilities Fortnightly, Ground Breaking Lawyers Award (2009) for renewables and cogeneration work; 2013 Who s Who of Procurement Lawyers; Martindale Hubbell Washington, DC and Baltimore s Top Rated Lawyers Rated in Who s Who in International Project Finance Law. Moderator and Co-Editor or Contributor, Ohio Energy Report (2006), Ohio Advanced Manufacturing (2011), Ohio Climate Change ( ) and Ohio Shale Energy Supply Chain (2012), Voinovich School for Leadership and Public Affairs, Ohio University. Chapter author with Matthew Bender, Inc., Urban Land Institute, Government Institutes and ABA publication on various clean tech, energy, cogeneration and green building topics.

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4 The vast possibilities of our great future will become realities only if we make ourselves responsible for that future. Gifford Pinchot, first chief of U.S. Forest Service, 1909

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6 Energy Efficiency Financing Currently, a $20 billion/a year market that reach $150 billion a year (Cap-E) Key is to make energy efficiency financing a mainstream financial asset class, with a high degree of standardization predictability and scale. Data collection and performance experience is missing, and critical to substantiate delinquency and default rates Energy Savings Performance Contracting industrials, government and MUSH markets Energy Services Agreements, ESCO financing State/municipal loan programs Utility on-bill financing PACE financing Bond Financing for Projects, State Loan Programs Loans with Securitization, secondary market to resell loans Sustainable energy utilities VT, DE, DC Emissions, REC s and carbon funding Mortgage backed energy efficiency financing Insurance terms/performance efficacy Improvements needed regarding the lack of uniform loan term and underwriting criteria Sources of capital must expand beyond utility or government funding

7 United States: State Actions GHG Emission Targets State Climate Action Plans Source: U.S. states-regions policy-maps climate-action-plans (2011)

8 Energy Efficiency and Markets Why? Participating in energy efficiency by manufacturing is critical to implementing objectives of a competitive markets strategy and in using energy incentives and finance to boost internal rates of return (IRR s). Emissions already are the No. 3 physical commodity traded after natural gas and electricity in North America. Long term U.S. market, combining with Canada and Mexico (25% of all global emissions) and $3 trillion carbon market by 2020 Whose market is this end use customers, environment or financial intermediaries?

9 U.S. Role in Fossil Fuel Use -August 5, Because CO2 stays resident in the atmosphere for at least a century, the U.S. is responsible for more than 3x as much active greenhouse gases as China. To really succeed, is the answer not in making dirty energy more expensive but in making clean energy and smarter use of energy more accessible and cheap?

10 Even with the emergence of China as an economic powerhouse, emissions by the average American dwarf those by most others. Our standard of living and quality has been driven by energy usage. Currently, combustion of coal and natural gas will account for 70% of U.S. electricity generation, with nuclear and renewables representing the balance. Energy efficiency is critical to stablilize demand and lower costs. We spend $450 billion a year alone from our economy for transportation use of gasoline exported as petrodollars. Can less become more? The answer is Yes, and we are proving it! -August 5,

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12 Company Strategies Vary By Industry Energy intensive companies are charting their own course: Highest energy intensity is in: alkalines and chlorine, lime, industrial gases, aluminum and fertilizers, cement, brick, glass and paper/gypsum Chemicals, paper and aluminum are leading in strategic response Utilities, oil & gas, mining, food processing, shipping and aviation sectors are lagging Skills and knowledge strategies are escalating challenges for construction, engineering, utilities, shipping and retail sectors: New strategic factor for M&A sell/buy Internalizing consultants Knowledge management (KM) to promote interdisciplinary team for asset management and solutions Integrated analysis with IT and new business models, financial and energy, electricity metrics Combination of energy, environment and IT functions reporting to financial functions. Manufacturers are maximizing energy from own process uses and wastes. Renewable energy and efficiency a new clean tech industry for manufacturing, O&M, technical support and verification. Future programs built on energy management systems, intelligent efficiency with IT, supply chain focus, work force training and R&D pilots and demonstration.

13 Company Strategies Vary By Industry continued Key U.S. manufacturing sectors are not consumer goods, but: chemical products, transportation and aerospace equipment, processed food, beverages and tobacco, and computers and telecom electronics. These represent over 5.1 million workers and almost $1 trillion of annual GDP. Key attributes for energy consumption are costly to retrofit later so get them right now examples: Refining, distillation, use of petroleum coke Commercial buildings such as wall thickness, designed systems, structure, lighting Electric utilities generation pre s vintages Change in performance and valuation methods is coming. Reduction in wastes means manufacturing with less. Change the process. Change the products modify the portfolio.

14 Company Strategies Vary By Industry The new financial metrics for industry in the future become: Measurements over multi-periods: ROIC, free cash flow, risks Sustained nature of earnings overtime, not quarterly earnings Multi-period evaluations of price DCF, residual income Fuller risk assessment, financials Seeking risk adjusted returns Increased stancontinued dardization of tools and contracting Triple net evaluation techniques Least cost strategies, reshaping mergers and acquisitions IT integration within other GHG-related functions Merger of energy, economics, environment with IT Penetration into supply chain management, customers Better access to, and insurance rates continued Establish and review your own energy, resource and carbon metrics for the future?

15 Why System Energy Efficiency Matters? The term industrial systems refers to those systems that contribute to industrial production processes, including: motor systems (pumping, compressed air, and fan), steam systems, and process heating systems. % Manufacturing Energy Use by Type of System 1 Process Cooling 1% Motor Systems 12% Process Heating 38% Electrochemical 2% Other 4% Steam 35% Facilities 8% Energy Efficiency Improvement Opportunities 20% or more typical for motor systems 10% or more for steam & process heating systems Most plants do not manage these systems for energy efficiency [2] 1 Does not include offsite losses [2] 2002 MECS plants indicated energy management activities for 6.3% steam, 16,6% compressed air, 7.5% process heating systems

16 Energy Efficiency Can be Cheaper? How? Re-engineering process can improve competition, and profits in lighting, assembly lines. Responses are not always immediate, but can be effective and net positive. Must have senior management, CFO leadership to establish goals, and promote departments, plant cooperation continuously. Workers must be engaged in process, materials, systems, fuel and water, and supplier management. Remember the Suburu hierarchy of wastes: 1. Burn material rather than landfill 2. Recycle rather than burn 3. Reuse is better than recycling 4. Reduce amount needed rather than reuse 5. Eliminate material rather than reducing it Better results by involvement of your supply chain in energy and resource efficiency All your wastes are potential products or sources of value; close that loop in production cycle. Energy efficiency creates competitive, lower costs, efficiencies and cap ex benefits to your companies. Failure to act now on energy efficiency will cost you more in long, term. Sustainable, economic business practices means good risk management going forward, and better shareholder value.

17 Barriers to Energy Efficiency Primary barriers are institutional and behavioral, rather than technical. Industrial facilities without an effective energy management plan typically lack: Awareness of energy efficiency opportunities (also their senior leadership, consultants, and suppliers). A clear understanding on how to implement these improvements. A system of collecting and analyzing data on energy use and resource/emissions impacts. A consistent organizational structure to effectively manage energy use: Knowledge resides with individual who has been trained it is not institutionalized in company Trained individuals leave or transfer and take this KM with them Processes change over time and inefficiencies often re-occur Energy, materials and water utilization are full time commitments Environment management is not merely compliance any longer

18 Questions? Michael J. Zimmer Ohio University Executive-in-Residence Voinovich School for Leadership & Public Affairs & Russ School of Engineering (o) (c)

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