Published: Sunday, 15 Nov 2009 | 6:22 PM ET

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While investment capital seeks to exploit stimulus package programs for renewable energy projects, investors may want to consider the greenest form of energy out there—the megawatt no one uses, what's known as a white credit.

“It’s much cheaper to save a unit of energy than to produce a unit of energy cheaply,” says Jeremy Panacheril, US director of global accounting and advisory firm KPMG's cleantech group.

Energy efficiency hasn’t attracted as much attention as other green initiatives like carbon emissions reduction or the development of renewable energy, but various state governments and Congress are working on creating a new credit to measure this saved energy—the energy efficiency certificate (EEC) or white credit.

Twelve states have well-established energy efficiency portfolio standards, EEPS, or mandates, requiring investor-owned utilities to meet a certain percentage of their projected power needs through energy efficiency. Another six states are considering EEPS legislation, and current climate change bills before Congress also call for a national EEPS.

“We see room for a new type of asset,” says Jon Naimon, managing director of Seattle-based Light Green Advisors, an asset management firm working at finding a way for investors to take advantage of energy efficiency opportunities.

He adds the benefits for utilities—or for companies in sectors like real estate, where existing buildings could benefit from energy efficiency retrofits—are more tangible than efforts to generate carbon credits.

“It has tons more upside, since (efficiency) also goes to your cash flow,” he says, pointing out that energy costs can be significantly higher in older buildings.

With a white-credit incentive, a firm could save money from reduced energy use, and make additional revenue from selling EECs to a utility or other regulated entity.

An EEC market would look less like proposed carbon credit markets, and more like the trading of credits created by states’ renewable portfolio standards, RPS, regulations that began springing up in 1999, and that have now been adopted by 29 states and the District of Columbia.

These RPS regulations mandate that a certain percentage of electricity used in the state must come from renewable energy sources. To prove compliance with the regulation, eligible green power generates a credit for the utility, called a renewable energy certificate, REC.

Each REC equals one megawatt-hour of generated green energy. EEPS would set similar targets for efficiency, with an EEC equaling one megawatt-hour of saved energy.

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Despite looking like carbon’s cap-and-trade system, it will be tough for individual or institutional investors to access these credits as a commodity, either directly or via futures.

“It’s probably a fairy tale right now,” says Alden Hathaway, senior vice president for business development at Sterling Planet, about the potential of widespread trading of EECs. His firm measures and certifies that generated EECs comply with regulations.

But the real benefit for investors may be in firms that improve their bottom line through the energy savings that generate EECs, and in the companies making, marketing and installing the technologies to generate those energy savings.

"What doesn't exist is a way to invest (directly) in energy efficiency," says Light Green's Naimon, who adds that the $1 billion potential EEC market pales in comparison to the estimated $2 trillion of the carbon market, and to the billions already invested in renewable energy technologies, like solar.

He says one approach might to be create discrete efficiency projects. These would work like carbon offset projects and would create EECs in unregulated industries that firms in regulated sectors could buy. The project owner or developer would generate cash flow savings by conserving energy.

"White credits are a rounding error," says Naimon.

He also sees EECs as a tool to provide transparency into a company's energy liabilities, eventually providing the basis for a buyer of that company's assets or products to pay a premium for an energy efficient asset, or a discount for an inefficient one.

For example, what if a buyer of a commercial building was given a 12-month energy audit for the building, in addition to a typical physical building inspection report that would go with a transaction like this?

EECs generated by the building’s current owners would provide a paper trail to the building’s efficiency; a lack of them would show a potential liability that could drag on return on equity.

Investors already confronting a bewildering array of green credits that seem to measure common environmental attributes—carbon, RECs and EECs—could be forgiven for being baffled. But they need to recognize these credits markets as proof that corporations generating such credits are serious about potential changes in their bottom line.

Lars Kvale, manager of renewable energy infrastructure at Santa Clara-based energy services firm APX Inc., says an energy efficiency market may level the playing field across state lines more than a national carbon market would.

For example, he says it would allow a state with potentially high-cost renewable energy to find a better way to reward an otherwise polluting utility’s efforts to clean up.

“It’s one of the way to get states that don’t have (green) resources to reduce some of their dirty power,” he says, a big issue in the southeast, where the bulk of states without RPS are found and where wind, solar, geothermal and hydropower renewable energy sources make less economic sense.

“The reason for a tradable market [in credits] is to get the cheapest reductions,” says Kvale, adding that, depending on the corporation involved, the cheapest approach could mean taking action to generate the credit in the first place or buying it on the secondary market.

Unlike the potential greenwashing nature of a press release about a dubious environmentally friendly initiative, owning or selling the credits should show that management has deployed shareholder equity most effectively.

“You have that certificate that shows they took the action themselves," says Kvale.”

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