Target-Setting Practice for Loans for Commercial Energy-Retrofit Projects

Abstract

Overcoming the financial barriers to energy-efficiency (EE) investments requires efforts to explicitly evaluate energy-related risks during the commercial loan underwriting. To support such efforts, the objective of this paper is to suggest a novel target-setting practice that borrowers and lenders collaboratively can use during the early stages of an energy-retrofit project. The practice uses a simulation called energy retrofit loan analysis model (ERLAM) to determine the target-building performance and the allowable cost for design and construction. Using a case study of an energy-retrofit project, this paper demonstrates use of ERLAM by evaluating the effect of two identified energy-related uncertainties (project-cost risk and operational-practice risk) on the financial performance of the investment. This target-setting practice can help project parties gain greater understanding and early confidence in the feasible size and terms of a loan before moving to design development. As a result, the practice can support commercial underwriting by helping to overcome financial barriers to energy-retrofit projects.