Decarbon helps businesses cash in on 'fifth fuel'

Energy efficiency is a strange “fuel.” You don’t get a monthly efficiency bill like you would for, say, heating oil or natural gas. But efficiency — or the lack of it — can have as big an impact on your bottom line as what you shell out for every kilowatt-hour or BTU you consume.

The trouble is, most people who use energy don’t think of efficiency that way. (Efficiency is often called the “fifth fuel” — the other fuels being oil, coal, nuclear and renewables.) Decarbon is on a mission to change that.

The London-based company’s goal is to help businesses boost their profits and cash flows by funding energy efficiency.

In other words, it wants to help big energy consumers view an investment in energy efficiency as a plus, rather than as a liability, on their balance sheets. How? By making it possible for energy-hungry companies to access an external budget without any upfront costs, in return for a share in the savings achieved.

“We’re trying to make it simple for businesses to benefit,” said Dan Saunders, founder and managing director of Decarbon. “Traditionally, financing, for a customer, is a liability.”

No-risk, external funding for an efficiency project, on the other hand, is a no-brainer for the energy consumer … and that’s what Decarbon’s model offers.

Here’s how it works:

1. A company that thinks it could save a significant amount of money by becoming more energy-efficient settles on a project or solution that could help. (Companies that have already invested in efficiency improvements can also use Decarbon to refinance those projects and free up cash for other expenses.)
2. That company turns to Decarbon, which performs due diligence to ensure the proposed project will deliver worthwhile energy savings.
3. If the energy savings potential looks good, Decarbon then matches capital from its investor pool to the project, supplying funding using Decarbon’s Energy Performance Investments (EPIs).
4. After the project is installed, measurements are taken regularly — through metering or independent auditing, for example — to assess the project’s impact on energy consumption, energy costs and carbon emissions.
5. The savings that are generated are shared beween the investor and the company for the lifetime of the contract at an agreed rate.
6. At the end of the contract, whether or not the investors have been repaid, full ownership of the new energy efficiency solution is transferred to the company, which can continue to reap all the savings benefits from those improvements.

Saunders says the model is similar to the power purchase agreements offered by some solar panel companies. Under such agreements, the solar company installs panels on a customer’s roof for little or no upfront cost. The company’s investment is repaid through the customer’s monthly savings on electricity bills over time.

“It’s the same principle,” he said. “The difference is we don’t need government subsidies to make it work, and we’re not restricted to any particular technology.”

In the case of Decarbon’s customers, however, the appeal goes beyond simple cost savings. As energy costs keep going up, big power users — especially manufacturing firms and other industrial companies — need to find every way they can to control expenses and stay competitive in a global market.

In the UK, such businesses are now taxed on their carbon emissions under the government’s CRC Energy Efficiency Scheme. That program mandates the purchase of allowances based on a user’s carbon emissions. The lower the emissions, the fewer allowances a company will need to buy.

While most of Decarbon’s customers want to keep their involvement confidential, Saunders said his company — incorporated in 2010 — now has about £10 million (around $15.5 million) in approved projects, with a further £20 million (around $31 million) under discussion. He’d like to see that number grow, not only because it’s good for Decarbon’s credibility but because it benefits both the economy and the environment.

In fact, Decarbon has also taken on some projects helping companies switch from carbon-intensive energy like heavy fuel to lower-impact sources like natural gas. It’s also looking at moving into water conservation as well. That’s because increasing demand for this limited natural resource will inevitably drive up prices, Saunders said.

And what about Decarbon’s funders? What’s in it for them?

Typically, there’s a good return on investment. Efficiency projects vary, but they can deliver savings of anywhere from 20 percent and up, depending on the specifics of the project. This attracts funders who are looking to diversify their existing investments, as well as gain some green bona fides.

Up until now, Decarbon’s funders have generally been institutional, but the company is looking to broaden its offering.

“We would like for retail and high net-worth investors to know we’re here and that we can put their money to work where they can see it actually doing good,” Saunders said.