Joule Assets Sees Outsized Returns Investing in Negawatts

Joule Assets' founders Mike Gordon and Dennis Quinn have been helping small- and medium-sized enterprises (SMEs) save energy and boost energy efficiency for years. At the same time, they've been contributing to a wave of disruptive, fundamental change impacting U.S. power markets and industry – helping establish demand response as a viable means of better managing the flow of electricity across the grid, and the production and distribution of electrical power from variable renewable energy resources, such as wind farms and solar power plants.

Now, Gordon and Quinn are taking their expertise public, for the first time offering accredited investors the opportunity to earn above-market returns by helping SMEs realize energy savings – otherwise known as “negawatts” – and take advantage of changing supply-and-demand conditions in electricity markets by shedding load during times of high and peak demand – so-called demand response.

The first investment fund of its kind, Joule Assets' planned $300 million-$400 million Energy Reduction Assets (ERA) Fund will monetize and distribute the energy savings and demand response cash flows Gordon, Quinn and team originate and finance between fund investors, technology providers and SME consumers.

Investing in negawatts and demand response

Estimated at some $900 billion, the energy conservation, energy efficiency and demand response industry has by and large been limited to industry insiders and private and public sector organizations looking to monetize energy savings and cash flows from demand response. For the most part, they are able to do so in-house. However, that's not typically the case with SMEs, who rely on entrepreneurial intermediaries, such as Gordon and Quinn, with the financial and operational expertise to design and carry out energy conservation and energy efficiency projects.

Such energy reduction projects can encompass one specific aspect of an SME's energy use, or the entire range of their operations. They can be realized at a widely varying lengths of time: from six minutes to 6 hours. The energy savings and demand response potential depends on the consumer, Joule Assets' co-founder Mike Gordon said in a 3p interview.

“For instance, there might be 1,000 retail stores that within six minutes could raise the temp by 2 degrees and checkerboard their lighting, and there goes 40 megawatts (MW) off the grid. There were many companies in Texas where we could take an assembly line offline in 6 minutes.

“Then there are opportunities like the had roughly 150 square feet of commercial facilities that could turn off lighting, shut down an elevator, lower the temperature a couple or few degrees, that would take a couple of hours.”

SMEs, smart energy technology and investors: A beautiful marriage

For the U.S. renewable energy markets – solar energy in particular – 2014 was a year that saw financial innovation really begin catching up with advances in technology and manufacturing that have driven well above-average growth. Having enabled individual investors to help finance and earn attractive returns from residential, commercial and municipal photovoltaic (PV) installations, Oakland's Mosaic is now looking to expand overseas.

While third-party residential solar energy leases continued growing by leaps and bounds, SolarCity also brought to market the first securities backed by residential, commercial and municipal solar photovoltaic (PV) leases. These asset-backed securities (ABS) monetize the income streams from the leases by creating securities via which most of their cash flows are passed along to investors.

Gordon and Quinn see a similar opportunity by giving investors the opportunity to earn above-average returns by doing what they have been doing for years: creating a stream of cash flows from negawatts that result from their designing energy reduction agreements and matching energy consumers in the SME space with innovative technology providers.

The latter, Gordon explained in a 3p interview, include companies offering the latest in energy efficient heating, ventilation, cooling and air conditioning (HVAC) systems and technology, smart thermostats – such as Nest, which Google just acquired for over $3 billion – and those providing intelligent lighting and LED systems.

Having raised $100 million of an intended $300 million-$400 million, Joule Assets' ERA Fund managers are initially working on projects such as air conditioning (A/C) optimization scans, heating and cooling systems and heating unit optimization scans. They're also working with steam-powered systems to make use of energy from wasted heat. As Gordon explained,

“It's a tremendous wasted resource, in some units, facilities are overheated in some units, in others they're underheated. It could be an industrial facility, it could be an office building. We're doing work with smart thermostat providers and with whole systems integrators, not the actual manufacturers.”

When it comes to energy use, many U.S. businesses and other organizations have come to take cheap, plentiful energy supply for granted. Attitudes have changed significantly, for environmental and social, as well as economic reasons, over the past decade, however.

Triple Bottom Line investing in the U.S. power markets

There's a dynamism in, and disruption to today's power markets and industry that has been lacking for decades, fueled by the rising financial, environmental and social costs of fossil fuel use and the rapid development and adoption of digital networking and renewable energy technologies. On top of this, investors are having trouble finding attractive returns in the prevailing low interest rate macroeconomic environment.

Gordon and Quinn see this confluence of factors as a win-win-win situation for energy consumers, technology providers and investors alike.

“It's an exciting time [to be in this space]. You have end users, communities and technology providers in need of financing and investors. It's a beautiful marriage,” Gordon elaborated. “With renewable energy generation, you have less predictable power generation, but with new control systems you have more control over power flows. From that perspective, a less predictable power supply has value.

“Then you've got municipalization, where individual communities are setting up their own utilities. Now, they can provide enhanced value to consumers. [Electricity generation] is moving much closer to the local level, and that's an exciting opportunity for scaling up all kinds of demand response and enhanced power management and control."

Less well known and less accessible, investing in Joule Assets' Triple Bottom Line energy conservation/demand response concept should be more lucrative in terms of returns than more traditional investment markets.

“Negawatts can be deployed in markets where you can get paid for temporary or permanent demand reductions, for reductions in kilowatt-hours or even BTUs (British Thermal Units). And you're getting getting paid for the environmental benefits, which include greenhouse gas emissions reductions and reductions in all the environmental risks and degradation associated with large-scale fossil fuel exploration, development, refining, distribution and combustion.

This market is broad, deep and growing fast, and “it's less well known and takes some operational expertise to access these more complex markets. A traditional investment vehicle hasn't been able to invest in these projects,” Gordon told 3p.

In previous ventures, Gordon and Quinn were paying energy consumers $100 million per year for roughly 100 megawatts (MW) of controllable energy consumption, “meaning on the flip of a button we could turn on energy savings in anywhere from 6 minutes to 2 hours notice. We've done this, we have the operational expertise in this area. We have the technology to monetize these cash flows,” Gordon stated. This includes software that automates the energy reduction process.

Energy conservation and energy efficiency technology developers need greater access to capital, while energy consumers have never had adequate financing for energy savings or to install smart energy technologies before, according to Gordon. Looking for secure, attractive investments, investors are increasingly looking to put their capital to work in projects that yield environmental and social, as well as financial, returns.

Gordon and Quinn's ERA Fund may pave the way and open up opportunities for other energy efficiency, conservation, demand response and negawatt investment funds. That would be a win-win-win situation.