A novel way to improve energy efficiency: Take over the utility bill

Energy efficiency is often called the ​“lowest-hanging fruit” of decarbonization — it’s a lot cheaper to use less energy than to make more clean energy. But making buildings more energy-efficient does cost money — and most building owners don’t have tens of thousands of dollars to spend on improvements that can take years to pay off.

There are ways around that problem: Efficiency providers have developed energy-savings contracts, energy-as-a-service agreements and other financing structures that allow them to take on upfront costs and have customers pay them back over time as a share of energy savings. But those deals can get bogged down in contractual complexities about who’s in charge of making sure the improvements actually deliver the savings they’re intended to and how to split up the proceeds of those savings.

Connecticut-based Budderfly has devised a novel way to cut through the morass — the company simply takes on the responsibility of paying its customers’ utility bills. If the upgrades it pays for, installs and manages for its customers don’t actually reduce energy use, ​“we don’t get any money,” said CEO Al Subbloie.

On Tuesday, Budderfly announced a $400 million debt facility originated by Vantage Infrastructure and co-led by the Energy Infrastructure Credit team at Nuveen aimed at scaling up this approach. The funding adds to a $500 million commitment from Partners Group, the Swiss private equity firm that bought a majority stake in Budderfly in November 2022.

So far, Budderfly has been able to reduce the utility costs for the restaurants, retail stores, fitness centers and other customers it serves by an average of 30 to 35 percent, Subbloie said. The company bills its customers for energy at a 5 percent discount to their utility bills to provide them immediate savings, covers its own payback costs with the next 15 percent or so of savings, and earns its revenue from additional savings up to about 30 percent, he said. And it splits any savings beyond that with the customer.

That model has allowed Budderfly to roughly double its annual revenue over the past two years, to about $110 million in 2023, and to more than double its customer base from about 2,500 customers at the end of 2022 to close to 6,000 at the end of last year, Subbloie said. Clients include franchisees of quick-serve restaurant chains such as Burger King, Denny’s, IHOP, McDonald’s and Subway, auto repair chains Meineke and Midas, fitness chains, retail outlets and properties managed by real estate investment trusts such as Essential Properties.

That’s fast growth in a midsize commercial building market that’s been hard for efficiency contractors to crack. But in a U.S. market that spends about $50 billion a year on energy, it’s just a start, Subbloie said. The new round of funding will help the company expand its work to ​“deploy energy-saving technologies, including high-performance HVACs, solar panels, smart thermostats and more,” he said, adding that most of the money will go to buying the equipment that Budderfly installs at its customer sites.

Budderfly upgrades HVAC, lighting, refrigeration and other energy-hungry equipment, installs its own energy-management technology at each site, and monitors and manages each building with proprietary energy software that connects to a network operations center via the cloud.

All of this comes with no out-of-pocket cost for the customers. Other efficiency providers have structured similar low- or no-cost retrofits and energy management services via financing structures that rely on contracts that define how customers will pay back those upfront costs over time. Often those payments are tied to measures of how much energy savings the customers are realizing.

But it’s hard to measure energy saved against a hypothetical forecast of what buildings would have spent otherwise. Differences in weather from year to year that cause heating and cooling bills to spike, business expansions that alter energy demand, changes in utility bills and tariff structures, and a host of other factors can complicate the contracts that govern who gets paid for what and who’s owed how much.

Budderfly’s approach eliminates these complexities and gives the company ​“control over the economics for 10 to 20 years,” Subbloie said — a 10-year contract is standard, but customers can extend the relationship beyond that. ​“With that, we can give the customer savings very quickly. Then we invest our money with the best things you can do energy-wise to enhance operations.”

The wide world of no-money-down building-efficiency business models

There’s certainly plenty of need for business models that can make money by squeezing the energy waste out of buildings. The U.S. Environmental Protection Agency estimates that commercial and industrial buildings waste about 30 percent of their total energy use, amounting to a cost of about $65 billion per year.

But for a number of reasons, building owners are unlikely to spend much money to reduce that waste. Energy tends to be a relatively small part of most businesses’ budgets, and they have many other more pressing and profitable ways to spend the money they have. Many businesses rent their buildings, and even those that own them may want to sell them and move elsewhere well before the five to 10 years it can take to earn back the cost of efficiency upgrades.

Financing to overcome these upfront cost barriers is far from a new idea. Giant energy services companies, or ESCOs — units of big building-equipment vendors such as Honeywell, Johnson Controls, Schneider Electric and Siemens, utilities including Duke, Engie, NextEra and NRG, and engineering firms such as Ameresco, Burns & McDonnell and Willdan — have well-developed shared-savings and performance contracting efficiency business models to serve large government, institutional and corporate buildings.

Other companies including Denver-based Redaptive and San Francisco–based Metrus Energy offer similar services to corporate customers that are demanding faster payback than the 10 years or longer required for traditional ESCO contracts.

But those contracts can be incredibly complicated, Subbloie said. A typical sales cycle for a major ESCO contract can stretch longer than a year and yield 100 pages of contract language, he noted. ​“Our agreement is two pages, and we’ve had some sales cycles be literally one day.” That makes it possible for a chain-store owner to engage in the contracting process — and for a business like Budderfly to go after that market.

Other energy-services companies such as GridPoint and vadiMAP specialize in providing energy-management technology and services for small and midsize commercial buildings and chains. Subbloie started Budderfly in 2008 with a similar goal in mind, investing in the company’s software to parse factors such as utility tariffs and weather patterns to fine-tune how buildings can reduce their energy bills. But he changed course after deciding that ​“the market needs a completely outsourced solution and someone to manage the outcome.”

To be clear, Budderfly’s model isn’t without its own complexity, mostly tied to the fact that it’s the customer of record for each building it contracts with. If customers no longer want Budderfly to serve as their utility customer of record, they can buy themselves out of the existing contract — and cover the unrealized costs of the equipment that Budderfly installed, he said.

Budderfly’s model does expose the company to significant risks over the 10-year contract it typically signs with customers. Subbloie said the company’s energy analytics software, which provides granular forecasts of energy use and variables that could alter those forecasts, is an important tool for determining which customers offer it a reasonable expectation of return on its investment.

Having more customers also helps to spread the risks out — ​“We have a portfolio strategy,” he said. A whole slew of energy-efficiency improvements are necessary to combat climate change, he added, and accelerating the pace of those inevitably entails risk.

Budderfly takes on that risk deliberately, Subbloie said. ​“I want the customer to know we’ve got it all on the line.”