By Ellie Winninghoff

What do the California Institute of Technology and Weber State University have in common? Both universities are using a portion of their endowment to invest in capital-intensive energy efficiency efforts on campus.

These schools are among 50 other colleges and universities that have created green revolving funds (GRFs) as a mechanism for financing investments in energy efficiency and thereby reduce carbon emissions and cut energy costs. Savings achieved in utility bills are reinvested to support additional green projects.

According to "Greening the Bottom Line," a study by the Sustainable Endowment Institute (SEI,) a nonprofit based in Cambridge, Mass., annual returns to date for GRFs have ranged from 29% at Iowa State University to more than 47% at Western Michigan University. The median annual return is 32%.

"This is a real and very significant opportunity to transform energy efficiency upgrades from perceived expenses to high return investment opportunities," says Mark Orlowski, SEI's executive director.

The nonprofit launched a "billion dollar challenge" in October encouraging educational institutions and nonprofits to invest a total of $1 billion in similar revolving funds.

SEI's study found that GRFs are growing fast, with nearly three-quarters of the funds created since 2008. GRFs range in size from $5,000 at the College of Wooster in Ohio to more than $25 million at Stanford University.

Meter It
The Caltech Energy Conservation Investment Program, or CECIP, an $8 million GRF, has earned an annual return of 33% since its inception in 2009 at the Pasadena-based institution.

The impetus for implementing a sustainability program was California's mandate that carbon emissions be reduced to 1990 levels by 2020. But when John Onderdonk was hired as the university's sustainability manager in 2008, the biggest question on Caltech president Jean-Lou Chameau's mind was cost.

He told Onderdonk that the institution's core mission is education and research, and that it couldn't afford to spend money just to be green.

So the university started with a small, discreet and easy-to-understand pilot project that made great economic sense. The project, which cost a total of $25,000, involved replacing the lighting in two four-deck parking garages with energy efficient LED lights.

The LED lights were separately metered, Onderdonk explains, because he was trying to help the non-technical financial staff to understand how the revolving fund worked.

"We walked them through the entire process," he says. "We put the light bulbs in, and we tied the kilowatt savings to the dollar savings, which go back to the endowment to pay that $25,000 loan."

After garnering an $11,000 municipal rebate for using an emerging technology, the project ended up costing $14,000 and allowed the university to save $9000 per year. And it paid for itself in 18 months.

According to Onderdonk, the key to assuring that such a revolving fund works is to use meters to verify energy use. "If you put a meter directly on this variable speed fan that you just put in, you know precisely how much energy that fan is using," he says. "And if you compare it to the metered fan that was in prior, you can see there's a difference."

Caltech started by investing in the lower cost "low-hanging fruit" projects with high potential savings and shorter payback periods--usually up to six years. The quick payback meant that the $8 million revolving fund could finance $30 million in projects between 2008 and 2020.  

Ongoing Savings
Weber State in Odgen, Utah has made a commitment to invest 8% of its endowment, or $5 million, in energy conservation and renewable energy projects that are already saving the school more than $500,000 per year.

The impetus for the university's GRF was the American College and University Presidents' Climate Commitment, which the university signed in 2007. With a commitment to be carbon neutral by 2050, sustainability manager Jake Cain wanted to build a long-term program that would allow the university to achieve its goal.

"I didn't want just a one-time savings of 15% on the energy bill," he says. "I wanted to treat this like an investment."

His idea was to use savings on utility bills to generate more savings, which acts like a savings account with interest that compounds.

But whereas Caltech's approach is to reduce the utility budget over time, Weber State's baseline budget actually increases over time.

"If utility rates hike 5% and you reduced your energy consumption 5%, it looks like you netted zero," Cain says. "The utility bill is based on a rate [per kilowatt hour] and square footage. If the rate goes up or square footage goes up, the main utility account for the university has to increase so there is money to pay for these projects."

Another difference between the programs at the two universities is that whereas Caltech has focused on low-hanging fruit, Weber State already has incorporated complex projects with longer payback periods up to 30 years.

"You treat it as an entire program," Cain says. "You do one project of $1 million with a payback of one year, and another project that the administration really likes and the campus relates to and understands but which has a payback of 20 years. You tie the two together, and you have a program with a payback of 8 years."

Behavior Change

Another reason for coupling projects is to enact behavior change, which Cain says has the potential to reduce energy use by another 20% on top of the 30% reduction based on energy efficiencies from technological innovation. But while he points out that it's impossible to actually project savings based on behavior change, he says it's already having a profound impact at Weber State.   

Cain notes that a payback of 20-25 years for solar panels isn't great, but the solar panels got the community and campus very excited about program. "People started turning off lights and shutting down their computers when they were not using them," he says. "All of a sudden, we had deans of colleges coming to us with plans to upgrade buildings, and offering us money to work with them.

"People are doing this because they are aware of the program," he continues, "and they related to [solar] panels."

With an annual utility bill averaging $4 million, Cain projected savings of $650,000 based on the construction projects the university began in 2009. But by the end of fiscal 2010 (ended June 30,) when the university had completed only ten percent of its plans, it had already saved two-thirds of its target--a whopping $430,000. And in fiscal 2011, it saved $530,000.

"We are way, way, way ahead of target," says Cain, who attributes a large part of those savings to behavior change.

"Right now, the endowment is getting almost nothing in the [stock or bond] market," he says. "And by investing in ourselves, the risk and chance of failure is almost nothing."

A former investment banker and veteran financial reporter, Ellie Winninghoff is a writer and consultant whose work about responsible and impact investing can be found at www.DoGoodCapitalist.  She can be contacted at ellie.winninghoff (at) gmail.com