Financing the Future of Energy Efficiency: How to Fund Your Carbon Emissions Reductions

By Mark Orlowski, Founder & Executive Director, Sustainable Endowments Institute

(This article appears in the April, 2011 issue of The ACUPCC Implementer)

Facing rising energy costs and steep budget cuts, many colleges are grappling with how to finance urgently needed carbon emissions reductions. In response, more schools are tapping a new option for financing energy efficiency improvements, while earning a high return on investment. Their successful methods are revealed in Greening the Bottom Line: The Trend toward Green Revolving Funds on Campus.

The Cambridge-based Sustainable Endowments Institute (a special project of Rockefeller Philanthropy Advisors) published the report in collaboration with 11 partner organizations including the ACUPCC, AASHE, Second Nature, and the U.S. Environmental Protection Agency’s Green Power Partnership.

Based on the first survey ever conducted about green revolving funds (GRFs) in higher education, Greening the Bottom Line details how GRFs help cut operating expenses and greenhouse gas emissions at 52 schools. The number of green revolving funds has more than quadrupled since 2008. A major incentive is the financial benefit–a median annual return on investment of 32 percent. The breakthrough in this approach is using the substantial cost savings to replenish the fund for investment in the next round of green upgrades.

A wide variety of projects are financed through GRFs, ranging from dormitory showerhead replacements to retrofitting lighting across campus. For example, in 2009 Harvard University installed energy-efficient lighting in 10 parking garages, resulting in annual savings of $400,000. Funding was obtained through a $1.2 million loan from the Harvard Green Loan Fund and $200,000 from utility rebates. According to Greening the Bottom Line, the parking garage lighting upgrade is projected to yield a 23 percent annual return on investment over the next 10 years. Heather Henriksen, Director of the Office for Sustainability at Harvard, observed, “The Green Loan Fund has generated high returns on investment, while improving Harvard’s environmental impact and our bottom line.”

Weber State University (WSU) developed a green revolving fund in 2010 by investing endowment funds, along with other internal and external sources of capital, in cost-saving sustainability improvements on campus. After experimenting with hiring an energy services company and researching numerous potential funding sources, the school determined that harnessing its endowment through a loan program would be the most effective way to fund efficiency improvements.

WSU has committed to invest 5 percent of its endowment in energy efficiency projects on campus, amounting to $5 million of its $9 million total green revolving fund size. Additionally, through negotiations with senior administrators and modifications to the university budgeting processes, 75 percent of all energy savings generated will be directed towards replenishing the fund. As of May 2010, WSU is anticipating $1,000,000 in energy savings by 2015, while fully repaying the endowment’s $5 million investment in only nine years.

While most funds are new, others have been in existence for a decade or more and have proven, consistent long-term performance. For example, Western Michigan University’s GRF has financed 101 projects, with an average annual return on investment of 47 percent. “Since 1996, our total project costs have been approximately $5.85 million and our annual cost savings are approximately $2.75 million, with a total cost avoidance to date of approximately $16.71 million,” said Dr. Harold Glasser, Executive Director for Campus Sustainability at Western Michigan University.

The Energy and Climate Revolving Fund at the University of Colorado Boulder was initiated in 2007 by Dave Newport, Director of the school’s Environmental Center. Its initial capital of $500,000 was drawn from the student government’s budget, as it was originally intended to finance efficiency measures in student-owned buildings. It has since expanded to cover the entire campus, and is managed by staff within the student government-funded Environmental Center.

Managers of campus facilities at CU-Boulder are able to submit project proposals. Project approval is contingent on reducing energy use and having a payback period of five years or less. The university’s energy program manager is often consulted to help prioritize projects and analyze cost-saving estimates. The fund has financed 80 separate efficiency measures in three buildings, which are projected to reduce carbon emissions by 261 tons per year and achieve an average of 38 percent return on investment.

Greening the Bottom Line is the first in a series of publications that are providing the groundwork for the Billion Dollar Green Challenge. This new initiative challenges colleges and universities to invest a combined total of one billion dollars within two years in self-managed green revolving funds to finance energy efficiency improvements and provide an on-going source for future conservation upgrades.

The official launch of The Challenge will take place in fall 2011. In order to join, an institution must either have an existing green revolving fund or make a commitment to establish a fund within one year of signing. While the structure of the fund and source(s) of capital are left to each school’s discretion, a minimum fund size has been established: $1 million or the equivalent of 1 percent of an institution’s present endowment size–whichever is less.

This means, for example, a school with a $10 million endowment would need to commit to creating at least a $100,000 green revolving fund. Institutions have the option of phasing in capital allocations to the fund over a maximum of four years. Schools that enroll in The Challenge no later than August 31, 2011 will join the Founding Circle and receive public recognition for their leadership.

To help schools consider potential options as participants in The Challenge, we will publish Green Revolving Funds in Action: A Compendium of 10 Case Studies in late April, 2011. In May, we will release The Green Revolving Fund Investment Primer in cooperation with the Harvard Business School Board Fellows Program. GreenBillion.org, the web portal for The Challenge, will debut in June. This fall, we will launch the Green Revolving Investment Tracking System (GRITS), a web-based tool for efficiently managing an institution’s green revolving fund.

On Wednesday, April 20, from 1:00-2:00 pm (EDT), the U.S. Environmental Protection Agency’s Green Power Partnership in collaboration with AASHE will host a webinar on Greening the Bottom Line: How Campus Green Revolving Funds are Saving Energy and Money. For more details and free registration, see: http://www.epa.gov/greenpower/events/20apr11_webinar.htm