By Tyler Harbottle – Skanderbeg Capital Group

Recently Skanderbeg Capital CEO Bryan Slusarchuk spoke at TEDx Vancouver – a locally organized sub-conference of the famed TEDtalks.  Bryan was chosen to speak amongst several well-known environmentalists not because he has a long history of hugging trees, staging sit-ins, protesting for animal rights, or going head-to-head with Japanese whaling boats.

No, Bryan was chosen to speak at TEDx Vancouver because of a realization he has come to.

We’re all thinking about it.  We’ve been thinking about it ever since Al Gore stood atop a Skyjack Hydraulic Scissor Lift and so dramatically expressed our impending doom.  We’re suffocating ourselves in CO2, he says.  Well Gore or no Gore, our environment is in trouble.

A few savvy investors here and there, however, have come to the same realization that Mr. Slusarchuk has come to:

It’s becoming very obvious that amidst the dismal environmental situation we currently find ourselves in, there are some exceptional investment opportunities to be had.  And those investments — those innovations — may just be the source of a total transformation in how we operate on this planet.

And as it turns out, the same mindset — the same type of innovative thinking — that holds the solution to some of our environmental problems, might also haul our economy out of recession.

TSX.V: GRN

So I want to outline the key reason why we at Skanderbeg Capital are viewing the environmental crisis and the corresponding quest for solutions with optimism….

Via Greenscape Capital Group and its subsidiary Green.Switch Capital, Skanderbeg’s primary point of interest is in an emerging and lucrative market for energy efficiency upgrades.

The energy efficiency market

Recently, McKinsey & Company posited the following question in a Quarterly Report titled Unlocking Energy Efficiency in the U.S. Economy:

“How is it that so many energy-saving opportunities worth more than $130 billion annually to the U.S. economy can go unrealized, despite decades of public awareness campaigns, federal and state programs, and targeted action by individual companies, non-governmental organizations, and private individuals?”

After an extensive 2008 U.S. energy efficiency analysis, McKinsey came to the following conclusions,

“If addressed in a holistic and comprehensive manner, energy efficiency offers a “vast, low-cost energy resource for the U.S. economy.”

McKinsey estimates that with such an approach, an initial investment of $520 billion through the year 2020, would yield energy savings of more than $1.2 trillion.  This would result in an estimated reduction in end use energy consumption by 9.1 quadrillion BTUs, or 23% of projected demand.

A 23% reduction in energy consumption would mean “potentially abating up to 1.1 gigatons of greenhouse gases annually.”

This would have a truly global consequence.

In another study, this one done by the Environment America Research & Policy Center in 2008, it was concluded that a staggering 10% of GLOBAL energy consumption is from American buildings alone.  They state, “energy efficiency is the cheapest and cleanest way to increase our energy productivity,” noting that it would cost about “$42.1 billion to gain one quad [quadrillion BTUs] of energy through residential and commercial building efficiency” whereas to deliver an equivalent amount of energy production from the building of coal power plants, it would cost $122 billion and $222 billion for Nuclear power.

So as it turns out, the greatest source of clean energy is not from solar, wind, or even nuclear.  It’s from using LESS energy. To quote Thomas L. Friedman, “The cheapest, cleanest, non-emitting power plant in the world is the one you don’t build.”

This type of analysis is even more applicable to the Canadian economy.  We northerners try our very best to huddle along the 49th parallel, but the fact is we spend about 90% of our time indoors.  It’s cold outside.  It has been suggested that 1/3 of all Canadian energy production goes to the heating, cooling (yes cooling, sometimes), and lighting of buildings.  Not to mention 50% of our natural resources.

The savings potential is enormous.  A study done in October 2003 titled The Costs and Financial Benefits of Green Buildings, by Greg Kats, revealed the potential total life cycle benefits of “greening” an existing building is upwards of six dollars per square foot.  Kats presents a 20 year average present value savings of $5.79 per square foot.  By this estimate, an average sized industrial building of 100 000 square feet, over a 20 year period, would provide savings of nearly $580 000.

The general population has been completely oblivious to this realization.  However, in all fairness, there is at least one significant barrier to all of these upgrades and the subsequent savings: initial capital costs.  For the most part, people want to do their part in reducing our impact on the planet.  Business owners want to be able to advertise their energy efficiency, their ‘green’ business, and the cost savings to be passed down to their customers.  But for most business owners and, indeed, for most homeowners, the upfront cost of upgrading HVAC systems, interior and exterior lighting, hot water systems, windows, and insulation, is just too much.  Even considering the future cost savings to be had, money is tight these days.  And, as the adage goes, it costs money to make money.  Well in this case, sometimes it even costs money to save money…

There are some instances, however, when the capital cost is negligible, if not nothing at all.  Often an energy efficient upgrade can be implemented when regular maintenance or renovations would occur anyway.  A recent Rocky Mountain Institute report suggests that an energy efficiency upgrade which yields savings of more than 50% can often be LESS expensive than saving nothing.  This is because “costly capital equipment (such as air conditioning) can often be made smaller or even eliminated.”  In other words, it costs more to save less!

For example,

The renovation of a 20-year-old 200,000-ft2 curtain-wall office tower near Chicago, offered a
design energy saving of 75% at a slightly cheaper cost than the routinely required renovation that
saved nothing.

The fact is, most buildings built today will still exist in 10, 20, and 30 years and hardly any of them are energy (and therefore cost) efficient.

Next week the worlds leaders will meet in Copenhagen for the United Nations Climate Change Conference.  Whether you believe in anthropogenic climate change or not, governments around the world will should be searching far and wide for the most efficient ways of reducing energy consumption.

Earlier this year Lawrence Berkeley National Laboratory, sponsored by U.S. Department of Energy, published a report titled Building Commissioning: A Golden Opportunity for Reducing Energy Costs and Greenhouse Gas Emissions. They posited that as a result of the drastic energy savings resulting from the “commissioning” of existing buildings “the median cost of conserved carbon is negative— -$110 per tonne.”  In other words, by this method, for every tonne of carbon we don’t emit, we SAVE $110.

This is something that even the most incredulous of climate change skeptics can embrace because it’s not just about climate change. Though the current political atmosphere is go go go CO2 reductions, the energy efficiency market is attractive for more than just it’s GHG promises. It’s about energy conservation.  It’s about peak oil and fossil fuel depletion.  It’s about innovation in the face of a wobbling economy.  And it’s about capitalizing on a growing trend of “green” investors.

Now, besides the fact that energy efficiency retrofitting (or “commissioning”) offers a vast source of emissions-free energy, massive potential savings, and the most cost effective strategy for reducing GHG emissions – it also represents an enormous investment opportunity…

There are two major reasons we are excited about the investment potential:

1. Someone has to fund the retrofits, and
2. Someone has to implement the retrofits

And Green.Switch does both.

I’ll explain using a hypothetical example that represents a classic Green.Switch retrofit project.

The Green.Switch Model

Scenario:

“123 Parking” is an aggressively expanding parking garage, but is in a heated competition for customers with “ABC Parking”.  They’re looking for ways to decrease their capital costs so they can reduce parking prices and therefore grab a bigger share of the market.

123 Parking realizes three things:

1. their biggest capital cost is in lighting,
2. their lighting system is grossly outdated and extremely inefficient, but
3. they don’t have the extra capital to spend on an upgrade.

123 Parking is a perfect fit for the Green.Switch model.  For no upfront capital cost, Green.Switch will initiate a full service retrofit – right from the assessment all the way through to installation and ongoing monitoring.  123 Parking even gets consultation on how to re-brand themselves as a ‘greener’ alternative to ABC Parking.

Green.Switch, under this particular retrofit package, will take an agreed upon percentage of the energy savings value until the financing costs are paid.  Thereafter, the percentage Green.Switch takes decreases on a sliding scale until eventually 123 Parking keeps 100% of the energy savings from the retrofit.

123 Parking is now the greenest parking lot in the city, has increased it’s bottom line significantly, and now has the ability to grab that extra portion of the market by passing the savings on to customers.

This is a win, win, win situation.  The environment wins because 123 Parking is using less energy.  123 Parking wins beacuse they’ve increased their bottom line.  Green.Switch wins because they’ve garnered a percentage of some significant energy savings.

Huge Potential

photo: o palsson

Now remember, there is thought to be over a trillion dollars in energy savings out there in the U.S. alone. The political atmosphere is such that this will only gain further momentum.  As economies are increasingly moving away from fossil fuel reliance the price of electricity is set to go up.

Companies can realize energy savings now and better insulate themselves from price fluctuations in the future.  But the point is, they don’t have to fund this change themselves.  The burden of capital costs can be completely unloaded on a company like Green.Switch.

The revenue model is brilliant, the upside is obvious, there’s no risk to the consumer, and the market is ENORMOUS.

Greenscape Capital Group owns 100% of Green.Switch.  It trades on the Toronto Venture Exchange under the symbol GRN.

Greenscape Capital Group, GRN