Friday, August 7, 2009

EVO Insights Episode 3 with Thomas Dreessen

Episode 3 of EVO Insights is an interview that I've wanted to do for a long time. Earlier this week globe trotter Thomas Dreessen and I got to chat about the recently released IEEFP (the International Energy Efficiency Financing Protocol). This is a protocol that has been in the works for a long time and I got to learn a little about its history and about Thomas' hopes for it.

Click here  to listen to the show right in your browser or click here to download the episode.

Episode 3 Transcription

Nathan: Welcome to EVO Insights, episode three. Today we will get a chance to hear from Thomas 
Dreessen and learn a little bit more about IEEFP, the newly released International Energy Efficiency Financing Protocol from EVO. We’ll learn a little bit about its history, how it got started and what we are hoping the effects will be around the globe. Hope that you enjoy and remember to check in and give us any feedback that you have at or Thanks a lot.

Nathan: Hey everybody. Today we have Thomas Dreessen with us who was one of the main people behind the International Energy Efficiency Financing Protocol, the new protocol that was published by EVO this year. Tom how are you doing? Where are you at this morning?

Tom: I’m outside of the US, down in the Caribbean, trying to relax a little bit in the middle of me closing a big energy efficiency equity fund in China which I anticipate closing in the next 60 days.

Nathan: Oh great, so even in the Caribbean working in China [laughs] the world has gotten small.

Tom: Correct.

Nathan: Thomas, tell us a little bit about how you got started in energy efficiency and how you ended up at EVO.

Tom: I’m one of the founding ESCO members in the U.S. I formed an energy services company back in the early 1980’s when the U.S. industry was just getting started and I came from a financial background. As you may know, the ESCO business model is set up to where the ESCO puts up all of the capital. It goes in the large buildings and industrial sites and puts up all of the capital, has to arrange all the capital and get paid from savings so it’s a very capital intensive process to raise the capital on an on-going basis to implement the business model. I got started in that back in the early 80’s and ended up forming ten ESCO’s in ten different countries and developed projects in 24 countries. When I was doing this, I was the CEO and the financial guy structuring all of the project plans. It became clear to me that the only real cost effective way to fund energy efficiency projects was to bring in and try to get the local banks engaged in providing funding. Otherwise the cost to capital was just way too high to do it on a totally equity basis. Based on that, I started back in the early 2000’s trying to come up with a mechanism of how to bring the local banks into the funding and financing of energy efficiency projects. It became clear to me when I went into all of these different countries that there were common methodologies, common ways for efficiency projects to be evaluated and to be funded. It was also clear to me that the banks had essentially had very little knowledge or capacity on how to evaluate and how to look at finding projects which is really what was the foundation for me to really initiate the idea of an international energy efficiency financial protocol. I did this back in July 2004. The U.N. foundation’s energy future collation sponsored a state quarter workshop in D.C. which represented a broad group of experts in energy efficiency finance and the primary focus was to discuss the barriers to increase use of funds for energy efficiency projects. I threw out this idea of an energy efficiency international financing protocol and they agreed that the local banks clearly lacked guidance and expertise in order to lend money to it and this was a good program, if you will, to start setting up around the world. That was the actual genesis of the IEEFP.

Nathan: Sounds like a great match with EVO. I know one of the more complicated things, working in kind of the ESCO and measuring and verification world myself, is trying to explain how you can evaluate the value of an energy efficiency project where basically you are selling a reduction in usage of a service. It’s not exactly the most straight forward analysis. Going through IPMVP, I think that it was a great way to get people to understand the value that want to do a project, but wanting to do it and convincing a banker to do it are totally different things. How did you end up with EVO? I know that the…

Tom: Well, one of the gentlemen on the Energy Futures Coalition was Henri-Claude Bailly who was on the board of EVO at the time. Of course at the time the name was not EVO but IPMVP, Inc. prior to it changing the name and he was a board member. I suggested to him that this might be a good extension of IPMVP because it's a protocol and it's really geared toward establishing common methodologies and terminologies for bankers to use today with projects. He agreed and suggested I join the board, which I did. That goes back maybe five six years ago, I guess in that range, in that timeline. That's how I got to the board and the idea of the IEFP being an extension of IPMVP. That's the timing and how it came into fruition.

Nathan: That great, and then after that it must have been a long time in coming. This started a number of years ago. How did things move forward? What happened?

Tom: In addition to this protocol, one of the key elements of it was a conclusion I came up with because I saw it and many people agreed. That conclusion is that there are already a number of documents, materials, and other tools that are active in the marketplace but they are disseminated in a fragmented basis. One of the key objectives of this IEEFP was to create some sort of repository to collect in one place all these common methodologies, documents, and materials to eliminate replication of them being developed in multiple markets. We use that as a basis and the development of an IEEFP in a couple of markets. Actually, I put together on behalf of EVO, a proposal to APEC, the Asian Pacific Energy, I believe it's Energy, Coalition and got some initial seed funding to develop it in 2 of their APEC member countries, which were Thailand and Mexico. The outcome of that was that we developed some Best practices for ports. I formed 2 local teams who did Best practices reports on what is going on currently in those 2 countries related to banks, financing, energy efficiency projects. Also developing a business plan for developing a financing protocol, which the ultimate thing ended up being an absolute training program for local banks that could be put within one of their nonprofit, or one of their governmental agencies, and could be used as a training program in a cost effective way to train bankers and create capacity on how to evaluate and finance energy efficiency projects. So we developed those 2 business plans and then I had to go out and try to get funding for both of those countries, and I was only successful in really getting funding for Mexico. I got funding from a couple of sources. One of them was the U.K. Global Opportunity Fund. It provided substantial funding for us to complete the IEEFP bank training program in Mexico. That's what we did. We actually conducted and created that training program. We had a pilot and 2 training sessions and trained some 6 or 7 financial institutions, some seventeen to twenty people. It was extremely well received. Now we're trying to find a home for it. An agency within Mexico that will use that, promote it, and use it to train under EVO’s agents, trained new bank officers and it's geared toward the lending officers. It's not a program geared toward presidents, or high levels. It's a grass roots training program going through case studies and really detailed explanations of the various technologies in how projects are used to generate new cash flow for their end use host. That's really what the IEEFP is geared toward. It's geared toward how savings are generated and how savings can be used as new credit capacity for the host owners as a basis for repaying the loans. That's been one of the biggest gaps in the marketplace, energy efficiency projects really have no hard asset value. You replace a chiller or a boiler, the residual value is virtually nothing on the hardware or equipment that's installed, because you have lots of costs in replacing the old system. Then again, if anybody knows what is the value of a used value once it's installed in a building, you know it's very little. The real true asset value in an energy efficiency project is the cash flow stream. So, the ultimate goal of the IEEFP is to get bankers to acknowledge and recognize that cash flow stream, and have it start to become the basis for them financing the project as opposed to their traditional methodology which would have it all collateral based. That's a huge barrier for them being able to provide any financing to energy efficiency projects.

Nathan: In general, in New Mexico obviously, you've had some success. Around the world,iIs that something that bankers are able to take up and shift their traditional way of thinking and looking at capital, and look at this more cash flow based system. Have you had any resistance?

Tom: I think everybody's interested. The bankers are generally very interested because of the focus now. Green energy and energy efficiency, as most people know, is now being counted as the major solution for CO2 reductions. So, it's become a real environmentally friendly and hot item en vogue energy efficiency. So, the bankers are generally very receptive to it.

Nathan: McKinsey just released a report yesterday; I think they said America could save 1.2 trillion 
dollars before 2020. But, the capital investment needed was 500 billion dollars if I'm quoting right. I'd have to go back and check. An enormous amount of capital up font, but really a very positive deal overall for the country if we were to start investing in energy efficiency. We talked about replacing a boiler or replacing equipment. A lot of this, the harder parts to grasp is the usage habits of individuals. A lot of this affects residential factors, as well as the C&I sector. How have you seen the reaction to bankers to that where, "At least if I put in the chiller I can say this is definitely using this much less energy"? But, if it's saying, "I'm going to go in and do a training program and get people to reduce their usage", do they buy into that?

Tom: No. I think you're getting way ahead. We've got to crawl first before you can start running. You have to be running before you can take that leap of faith. That requires behavioral changes which is unpredictable as we all know in human beings. It's very unpredictable. I think that's quite difficult for them to be able to expect any behavioral changes and that those are going to be sustained over time. You have employee changes. Things change all the time. What we're trying to do is reduce it to it's most simplest methodology or program, and that is to put in reliable technologies that are known to reduce energy. We've got to get bankers to first accept that and say, "OK. We don't need behavior changes. There's no variable other than the equipment just operating as intended in it's proven technology". We can warranty it with manufacturers. So, we're really trying to get them to crawl first, and accept the non-risk related savings like putting in a light bulb. Everybody knows you take out a 100 watt fixture, you put in a 20 watt fixture, you're going to save electricity. There's no question. The only question is how much, and therein lays the relationship of the IEFP to the IPMVP using core methodologies. That's what the IPMVP, as most people may know, it gives you more options on how to measure [inaudible] savings. But, it gives you those options to be used in an IPMVP plant to be developed by the engineering community. So, it's very much a technical protocol. So, what IEMP does, it takes that information requires an MVP that complies with IVMVP that will then take those savings and equate them to dollar savings, and methodologies and calculations that are included in a loan document or a financing document. Therefore, the host agrees to pay based on that methodology. So, it takes the very beginning of the IPMVP Efficiency Valucation Organization option for technical under the plans and pulls it all the way through the market place to a financial calculation of the savings being provided that can be used as collateral for a loan.

Nathan: Now I’m not a financier but I would, you know, looking at what I know about IPMVP and there’s definitely kind of, if you take out all the compartmental pieces, all of the behavioral pieces, and you ‘re really just replacing technology, it basically removes all of the risk from your M &V plan. If you, how does, how do bankers look at this and compare the risk of a general ESCO project versus any other opportunity where they may have to invest capital? Is it more or less risky? How…

Tom: Well, I mean, that’s a great question because it’s ironic the fact is that despite replacing a more efficient chiller, or an old, inefficient chiller with a more efficient, despite that being virtually of no risk it actually is perceived as having much greater risk. And, and the problem is, in most industrial sites and private companies, energy efficiency project has two major barriers. One is competing with existing capital requirements for their core business. And, and that’s probably, the primary one, but the second one is that energy efficiency projects are pretty much deemed as infrastructure projects. And so there’s two, there’s two, that’s, those are the two main barriers and the first one is quite difficult to overcome, which is why we’re trying to get the IEEFP because, energy efficiency projects, even the most productive ones have typically a three to four year simple payback. And a lot of industrial sites, have a hurdle rate of no greater than one to two years. And the, and, what’s, what’s really kind of crazy about that is, those returns that they’re comparing energy projects have tremendous risk in them. For instance, they’re looking at comparing putting in a whole new production line of new equipment that’s going to get them this whole new market share. So the payback might be three months. But there’s all kinds of risks associated with that on a core business investment. They’ve got to go out and get all this new product, they’ve got to make all these new sales; they’ve got to get it, sell it at the price that they say they’re gonna, the profits have to be there as they think they can sell the product. It’s laid with a tremendous amount of risk to get that return as opposed to putting in a chiller with a simple three year payback where you’re going to go with a 1.2KW per ton, you’re moving it down to a .5, you know they’re going to run the facility—there’s no question about the risk. But the fact is they’re looking at it purely on a, on a, they don’t really give it equal weighting on the risk factor because they don’t understand the energy efficiency. So it’s... it’s kind of an ironic question, you know, the, energy efficiency has far less risk, but it’s being compared on a, on a return basis to other projects that have tremendous risk. But it’s in their core business. So they don’t perceive that as being a risk item.

Tom: On the infrastructure… go ahead…

Nathan: Is that just a general lack of kind of the understanding of energy efficiency or what causes that kind of…

Tom: Yes.

Nathan: …comparison. Yeah?

Tom: Yes, I do. Yes. Yes it is. It’s a combination of that and it’s also a com-, and also it… includes the, what I consider the, the infra-, which is part of the infrastructure barrier as well. And it’s really funny, there’s, there’s an agency, I don’t want to put the name out in public and, and they did a lot, they installed, it was, it’s an extension of the Mexican utility and they installed a lot of motors as part of a program that they funded from the utility. And they just simply would give these motors to the, a lot of industrial, small motors, small, medium sized enterprises, they gave them the motors and they’re far more efficient, and then they would add the cost of that motor to their utility bill and get repaid over four years, let’s say three to four years. Well what they did, then they went out and did audits, and, to determine what was the real savings being achieved from this program and they found that a substantial number of them had never been installed. The motors…

Nathan: Huh.

Tom: Yet, yet the customers were paying this additional utility bill. No problem. No problem. They just continued to pay it. And so they went and asked these customers, why are you doing this? You realize you’re paying more, you’re not getting the savings that would be, supposedly that you were gonna get from the utility, reduced utility bill that were gonna pay for what your, what we added to your utility bill. And they said, well why would we replace this motor? I mean this, the old one works perfectly fine. Why would we replace it? We’ve, we’re putting it on the shelf, it’s a replacement motor. We’ll, we’ll put that one in when the old one breaks down.

Nathan: Hm. Tom: So I think it, that says a couple things, I think. It, it, and I think it adequately reflects how energy efficiency projects in general, or the equipment that’s installed related to energy efficiency is viewed. As an infrastructure item.

Tom: …fix it if it ain’t broke? Why would we replace this good motor, it works fine. Why would we do that?

Nathan: Yeah. What about some other experiences in this training programs? Were there some successes in Mexico? How did that end up?

Tom: Well actually it ended up generating lots of interest by the bankers. We had two substantial banks, international banks, that are operating there who now want to finance projects from savings. In fact, we now have one of them who I’m working with now who got a grant through the renewable energy efficiency partnership. I developed a project that’s going to utilize some guarantees provided by one of the development banks down there because one of the gaps in the marketplace still is their willingness to accept the savings. Even though we you IPMVP, they still want to – they still will have some hesitancy to accept the savings as a method for collateral. So what I did was, I created a guaranteed, a savings guarantee insurance product by one of the development banks in Mexico and that guarantee product, we’re in the middle of that being provided. Once that’s done, there’s several other banks that are now very interested in creating a whole other energy efficiency department to fund projects and the goal will be to have the savings guarantee to really be used to guarantee for the savings to be paid to the banks. And we’ll use IPMVP and IEEFP as a methodology for evaluating those projects. So yeah, there’s tremendous interest but again there is still hesitancy on the bank’s part to just take a leap of faith and to begin accepting savings as a form of repayment. That’s the goal of IFP but it’s going to be a long haul and that which is our long term goal is to do this on a grass roots level in multiple levels, to develop this bank training program to build the capacity of the banks because that’s the only way to really overcome these barriers. I believe at the end you as consumers, you’ve got that infrastructure. The example I gave on the motors, you know this investment in energy efficiency utilities is very small, it’s a very small scale and it’s “back-of-mind”, it’s kind of the last item that an industrial customer would ever consider doing. So in order to really get wide-spread implementation, you’ve got to create a funding mechanism that does not impact their credit capacity and does not create any type of on-going operating requirements from them. It’s got to be really simple; just make it to where it’s basically invisible if you really want them to implement. And it’s got to be cost-effective, which is where the local banks come in. You can’t use equity capital at 20-22% to fund these projects because the CFOs of these industrial customers especially, which is where there’s huge opportunities in the international market, they’re looking at comparing whatever financing rates to banking rates. That’s the one thing they can do and they’re not going to allow you to put in projects or they’re not going to pay someone to put in projects that are getting 20-25%. They’d rather not do it themselves than allow that criticism of having someone come in and do that. So we need to get the local banks engaged to provide cost effective financing that is not going to be – that they will accept the savings as a form of payment so it does not impact the credit capacity of the host end user consumers.

Nathan: It seems like the insurance product, that can kind of give a little bit of reassurance –

Tom: Assurance, yeah.

Nathan: Assurance – is a really great idea. How do you see the economic climate that we see now affecting this? I know that you’ve been working on this for the past four or five years – even longer. Is that derailed or has it brought about new opportunity.

Tom: It derailed it for about 6-9 months because the development bank that was going to provide that guarantee product in Mexico actually almost a year now, had others problems they had to deal with to prop up their local banks and so they were unwilling to take on any new product like this until they got it sorted out. But we now are back on track and they are now looking to provide it. It did impact it, it delayed fairly substantially. In one year we had hoped to have that, the demonstration projects, in place by now but it’s still in its stages.

Nathan: And kind of the uptick in green and energy efficiency and a lot of things that at least here in the US, we’re using to reinvent ourselves and I can imagine that only has grown the opportunity for these types of financial products and also energy efficiency products.

Tom: Well, in theory it has but the fact is, I don’t see a lot of them out there. I see a lot of money being put in subsidies and other programs but I’m not very close to it. So I’m giving you a very uninformed opinion. I’ve not devoted the time because my focus is in China and Mexico and I’ve not spent much time at all. But my impression is that the program has not seen a lot of them that are going into absolute projects and are subsidizing that effort. As opposed to creating programs like this, which I believe are sustainable using the local banks, lenders, creating capacity. As opposed to funding one-off projects that once the funding stops, the project implementation stops.

Nathan: Right. Two last questions Tom. How do you see, I guess, a lot of what I heard about the IEEFP is local financing institutes but mostly outside of the US, China, Mexico. I know that in other things that I’ve seen these types of movements in Africa. Is there any application for the IEEFP in the western world or is it already kind of taken – there is the Johnson Control’s and the big ESCOs that you helped start or at least the business model back 10, 15 years ago. Do you see an interaction or kind of an advantage for the western world too or is it mostly in kind of more…in countries like Mexico…

Tom: Developing countries, is that what you’re…? Yeah, I mean I think it definitely applies in the US but the problem [laughs] the huge barrio to doing such a program in the US as opposed to Mexico or China is the fragmentation of the various states and all the regulatory authorities. You have 50 states, it’s not like in Mexico, they’ve got one development bank that does it for all the banks in Mexico. It doesn’t have to go across state lines and it doesn’t have to go across provincial law and everything else. It can be offered to all entities. And in China that’s especially true. In Thailand, where they have national banks, national policies, national programs that can be top-down implemented. And that’s not the case in the US at all. It would be very difficult. Plus you have competing consulting firms that would view this as a competition. It’s just in the market so huge. It would be a major effort to try to implement. But to answer your fundamental question “Could it be useful in the US?” heavens yes. No doubt about it. No doubt about it.

Nathan: Great, that’s a really interesting way of looking at it with the division of states. I know working in utilities that a lot of things are delivered by working with regulatory conditions or organizations. They’re not even on the same page.

Tom: Not even close. And the utilities would be the ideal place to aggregate. It’s all about being able to aggregate. You know what I’m saying? Aggregate projects, aggregate programs, whatever. And the US is very difficult. Utilities would be the ideal place to have a sort of savings guarantee type of program but the problem with that is – as you know – that makes it even more fragmented. Each utility has its own approved regulatory program within each regulatory agency within the US, within each state. It just multiplies the fragmentation of trying to get a uniform protocol to use to evaluate that everybody has. Everybody wants to put their stamp on it and it’s in the thousands.

Nathan: So one last thing I guess. Where do you see this going? One of the things that I always think about and never really can answer the question how to do it is if you can, in a far-fetched world, even take residency energy efficiency projects and aggregate them up, that’s where you get this numbers like in McKinsey’s report from earlier this week. You know, the trillions of dollars in savings. But you have to be able to kind of package all of these different projects under one umbrella and that helps you mitigate risk and guarantee your savings later on. Do you see creating these types of programs? I guess, where would you like to see this thing? It sounds like it has been a labor for you in the last 10 years, so where do you see it going in the next 10?

Tom: Well I’m going to spend my time in the commercial sector just because the scales are already there. I think you have to have an agent to be able to do it on the residential side.

Tom: …where there’s big opportunities because of small nature of each transaction. It’s just small, small, small. It even makes it far more difficult. I think you need to have – I think the ultimate solution is the utilities for the residential because you’re talking about the investment of maybe a thousand dollars and it’s going to save $200 dollars every year for a house – maybe double that, triple that, whatever. It’s so tiny. And the administrative costs alone to calculate the savings and just collect the savings would exceed the annual savings probably. So you have to have some mechanism, some administrative agent that is already there providing this billing and that’s obviously the utilities. So I think that’s the ultimate cost effective solution. I mean my whole focus is on providing commercially viable, sustainable solutions, not on one-off subsidized solutions because when the subsidies go, the programs stop. It’s that simple. And so I think you need to find a solution that’s commercially viable that can be done if incentives are aligned in the right place for the people who implement those programs.

Nathan: Well Tom, thank you so much. Everyone knows they can find IPM VP and also IEEFP, the International Energy Efficiency Financing Protocol at And Tom, if people want to find you on the internet, do you have a home there that we can give out?

Tom: Yes. They can send me an email if they want at is the best place to reach me. And I’ll try to get back to you in a timely manner. I travel around. I’ll be spending the next year in China, but email works quite well there.

Nathan: Yeah and people give 24 hours then you know no matter where you are in the globe at least you had a day to look at it.

Tom: That’s right. Yeah, I’m ahead of you. I’ll be 12 hours ahead of you in the US so that’s correct.

Nathan: Well Tom, thank you so much, I really appreciate your insight and your hard work in these last few years. Maybe we’ll get you in here once you move forward and do some things in China. We’ll get you back and talk about that as well.
Tom: Alright Nathan, thank you very much.
Nathan: Thank you very much, have a great day. Tom: Bye-bye.

Nathan Shetterley (
EVO New Media Director