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Subsidies and the Institutional Energy Efficiency Business

By Scott Sidell '81, PhD, CEO of First Sustainable, LLC

[Editor's note: First Sustainable focuses primarily on developing the first ever, truly scalable, market–based financial solution to build and aggregate large scale, commercial, energy/water efficiency retrofit projects in the U.S., and ultimately, overseas. See http://firstsustainablellc.com/]

Having learned a very painful lesson in March 2011, in the wake of the shocking news from the Italian government that all forthcoming subsidies on solar power plants not yet operating would be substantially lowered, I made a fundamental strategic business decision that all First Sustainable efforts going forward would focus exclusively on the financing and development of renewable and/or sustainable infrastructure projects, which do not depend on subsidies or public policy in any meaningful way. While this strategic move was in no way a criticism of such subsidies, it was simply a response to the unfortunate reality in which externalities have yet to be efficiently priced into conventional energy sources.

Consequently, First Sustainable redirected the bulk of its resources to solving the barrier that has historically prevented large, private commercial property owners from accessing the necessary capital or balance sheet resources to support material energy/water saving retrofits. Despite the fact that the private sector accounts for 72 percent of all nonresidential building energy-related consumption, to date virtually all such retrofits have been targeted at investment grade (S&P or Moody's BBB—or Baa3, or higher, respectively) institutional property owners, like major hospitals, universities, municipalities, and the federal government. Few retrofits have been directed to the private commercial sector, as there has been no manner in which most such parties could access third-party financing.

First Sustainable has in fact developed an entirely market–based solution, to finance large energy/water efficiency retrofits in private commercial properties, which is agnostic to the credit profile of the underlying beneficially interested property owners. Our approach depends only on the cost savings generated by the retrofit projects, not on any subsidies, incentives, or credits of any kind. Thus, our solution is 100 percent independent of public policy or any transitory utility–related incentives.

As a result, First Sustainable's business model is insulated from the current policy debates at the national and local levels. The ongoing discussion regarding the Production Tax Credit has no bearing whatsoever on First Sustainable's business prospects. Any subsidies, incentives or credits available at the time that any of our projects are built or completed are perceived simply as an added rather than a necessary benefit to our equity holders. In the aftermath of our unfortunate experience in Italy, we are proud to report that we have in fact been successful at removing public policy as a major variable influencing our ultimate success.

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