Capital: The first ingredient to a successful EE/RE financial instrument starts way up the chain, far away from the borrower or contractor, who represent our ultimate end-users. Continuing the lemonade analogy- let’s call Capital our water. Without the water- there is no beverage. Likewise, without a source of capital, there can be no financial instrument to fund a project. Depending on the type of financial instrument being funded the capital can be sourced from a single entity or a combination of capital sources outlined below:
|Lenders (debt)||High yield, regulatory conformance|
|Investors (equity)||High return|
|Subsidizers (governments, utilities)||Stimulate EE investment, meet regulatory compliance, rate of return|
In addition, capital must be managed within a financial instrument from beginning to end. This means that a capital source requires an entity to underwrite the borrower and to originate and service the instrument, which can be the same entity as the capital provider, or an entity that specializes in providing these functions for outside capital. Finally- capital can be aggregated and sold on the secondary market. This requires a level of volume and confidence in the financial instrument that we are beginning to see more and more in the EE/RE world. Bundling loans and selling to investors allows for the original capital provider to then deploy additional capital. This cycle is critical to the creation and maintenance of a robust EE/RE capital market.
Capital sources could be as easy to locate as the utility that is looking to develop an energy loan program, or could be a more complicated conglomeration of various financial institutions seeking to deploy capital through a new or existing loan product. In any case, we are seeing increasing attention from the capital markets into EE lending- (see our blog post “Residential Energy Efficiency Lending: Is it Dead?”), which is a good sign of more to come. I’ll drink to that!