Overview of the Metered Efficiency Transaction Structure (MEETS)
The metered energy efficiency transaction structure (MEETS) first emerged in Seattle during the construction of the Bullitt Center, a net positive energy building. The developer, because of its commitment to sustainability, wanted to demonstrate that it is possible to monetize and create value from metered efficiency. Metered efficiency is the delta between a building’s performance post retrofit and its prior, historic consumption. The participants in the transaction structure are: (1) an efficiency tenant, (2) a utility, (3) the building owner, and (4) the building tenants. by Sam Klein, President, Graboyes Efficiency Tenant (www.GraboyesEfficiencyTenant.com)
The efficiency tenant develops the project, manages the building analytics to keep performance on track, and sells the metered efficiency to the utility through a power purchase agreement (PPA). The utility buys the metered efficiency from the efficiency tenant and resells it to the physical tenants of the building. (This keeps the utility’s revenue neutral and allows it to benefit from a no-cost opportunity to meet efficiency mandates.) The building owner receives from the efficiency tenant a portion of the metered efficiency revenue in the form of rent. The building tenants’ bills do not change. The decrease in energy usage is redistributed to the common area maintenance (CAM) fee, and the net effect is to see no change to the tenant’s total bill.
The Split Incentive Problem
In most facilities the building owner does not pay the utilities, but rather passes the costs on to the tenants. This makes it impossible for building owners to recoup investments in energy efficiency. Tenants are often constrained from making efficiency improvements themselves by their lease term, which makes it unlikely that they will make long-term investments in energy efficiency (EE) projects. MEETS eliminates this split-incentive problem by bringing outside investments to EE projects in the form of tenant improvements. An efficiency tenant makes the EE improvements as tenant improvements, and meters the efficiency on an all-fuels basis to the other tenants. The building tenants see no difference in their total utility spend, but now pay a mix of electricity, gas, and metered efficiency. The net cash flow effect on the tenants in neutral, but they gain the ancillary benefits of the EE upgrade in the form of such improvements as better lighting, improved thermal comfort, and reduced maintenance and repair costs.
The Balance Sheet Implications
In owner-occupied buildings like hospitals and universities, the split incentive is not an issue. However, the size, payback length, and cost of capital for EE projects is often beyond the constraints of many property owners. Even operating leases are now considered debt and affect the firm’s ability to borrow money. MEETS eliminates this issue by securitizing the investments with a long-term PPA with the utility. This structure allows long time horizons for the improvement project of 15 to 25 years, which enables large scale infrastructure replacements like boilers, chillers, cooling towers, and combined heat and power. The risk for the transaction is held by the utility and the efficiency tenant. The structure of the arrangement also provides the incentive for the efficiency tenant to continuously upgrade the building and maintain the improved EE.
Long Term Agreements
The most common perceived issue with MEETS often revolves around the idea of the 15 to 25-year agreement. However, clarity on this issue is reached when the building owner realizes they are even more strongly positioned if they wish to sell a building in the future, because the efficiency tenant is, after all, a long-term rent-paying tenant essentially taking up no space and playing an active role in the successful operation of the building. As facilities managers can attest, many ECMs have simple paybacks in the 10 to 15-year range. By stretching the time horizon, the efficiency tenant can make a deeper retrofit that incorporates a more significant whole-building approach. Because the efficiency tenant is paid through the performance of the retrofit, MEETS transactions imbue the incentive to continuously upgrade buildings as new technologies emerge. This is unlike long-term operating leases, which are tied to the amortization of the equipment cost rather than the actual performance of the upgrade.
Visit their website and view several brief explainer videos further describing how MEETS works from the viewpoint of a general audience, utilities and regulators, and building owners: https://www.graboyesefficiencytenant.com/how-meets-works/