Show Me The Money. Financing Your Energy Efficiency Upgrade
Since energy consumption has such a major impact on operating costs, effective energy management is critical to success for both public and private organizations. Yet, despite the favorable return on investment that improved energy efficiency provides, municipalities, businesses, and schools frequently struggle to find the capital required for much-needed energy efficiency upgrades.
That was then. This is now.
Increasing global commitments to sustainability have spurred a variety of flexible – and effective – financing options for energy efficiency. As a result, funding opportunities exist for nearly every type of enterprise. You just have to find the one that’s best for you.
Here’s an examination of some of the most popular financing options. You just need to find the solution that best meets your needs.
Efficiency as a Service (EaaS)
What is it?
Efficiency as a Service is a pay-for-performance, off-balance sheet financing option that allows companies to implement energy and water efficiency projects with no upfront capital expenditure.
Energy developers like SmartWatt cover all project development, construction, and maintenance costs. Upon project completion, a portion of the realized savings is simply charged back to the customer. This charge can be treated as a monthly operating expense.
How does it work?
- The process begins with a preliminary, baseline energy assessment
- Upon approval, the EaaS provider conducts an investment grade energy audit of your facility/facilities
- The provider will then present project-level contracts detailing estimated energy savings, final project scope, and payment terms
- Once the contract is approved, the provider funds and implements the project
- A measurement verification analysis (M&V) is performed once the installation is complete to determine actual, realized saving compared to baseline energy use
- The EaaS payment is normally structured either as a fixed dollar amount per kilowatt-hour saved, or a percentage of your utility rate
- This is a risk-free solution since you only pay for the energy you’ve saved. The EaaS provider assumes all risk — if achieved energy savings are less than originally projected, the provider is paid less
- The EaaS provider retains ownership of the equipment for the duration of the EaaS term and conducts all required for maintenance to ensure reliability and performance
Efficiency as a Service is your best financing option if:
- You want to upgrade your energy systems but, either lack the capital required, or would prefer to invest your capital elsewhere in the business
- You want to maximize long term energy savings quickly, by upgrading a portfolio of projects
- You’re looking to get projects completed outside of the traditional Cap Approval process
|Your energy savings pay for the upgrade||Your EaaS payments are based on realized energy savings which are lower than your current energy costs||Size limitations||Most EaaS providers are looking for projects valued at $1M+|
|Not a capital expense||EaaS is an off-balance sheet financing option. Payments are treated as an operating expense – just like your utility bill||Building ownership restrictions||EaaS is still an option if you lease your building – but it is only viable if the contract term is shorter than your lease term|
|Reduced maintenance costs||Your EaaS provider will provide ongoing maintenance to ensure equipment is operating at peak performance. This translates to less down-time|
|Ability to bundle sites||Most providers will allow you to bundle multiple sites together into one, enterprise-wide contract|
Energy Savings Performance Contracting
What is it?
Energy Savings Performance Contracting (ESPC) is a budget-neutral financing option that allows government organizations to make building improvements that reduce energy and water use and increase operational efficiency.
By partnering with an energy program developer like SmartWatt, a facility owner can use an ESPC to pay for today’s facility upgrades with tomorrow’s energy savings—without tapping into capital budgets.
How Does it Work?
- The first step is to partner with a qualified, energy program developer.
- The developer will audit your facility/facilities to evaluate existing energy consumption patterns and inefficiencies
- The developer will present recommended energy upgrades, along with any available local energy efficiency incentives and rebates. ESPC legislation varies by state but is usually open-ended on the types of efficiency upgrades that qualify
- Upon approval of the scope of work, you’ll enter into an Energy Performance Contract in which your energy program developer agrees to design, implement, manage and measure the savings achieved through the upgrades. The contract should also detail your guaranteed energy savings.
- Your realized savings should be greater than the sum of your financing payments over the term. In other words, the project is paid for by its own energy savings
- Once the term of the contract expires, you’ll stop making service payments — keeping all future energy savings.
An Energy Performance Contract is your best financing option if:
- You have infrastructure upgrade needs without available capital
- You don’t have the internal resources available to develop and implement infrastructure upgrades
- You prefer turnkey design-build over spec, bid and build
- You want to maximize energy savings with the infrastructure projects you implement
|Guaranteed energy savings||Most ESPCs include a performance guarantee — essentially eliminating your risk||Size limitations||Most energy developers won’t participate in ESPCs under $1M. Many prefer those more than $5M|
|One-source project management||Your energy program develop handles most aspects of project implementation, and management, reducing the burden on you and your employees|
|Reduced operating and maintenance costs||Your energy developer will provide rigorous monitoring and verification of your upgraded systems to ensure long-term reliability and performance of the equipment|
|ESPC’s are scalable to suit your needs||ESPCs can be used for portfolio-wide energy efficiency initiatives|
PACE (Property Assessed Clean Energy)
What is it?
PACE is an innovative financing option that allows property owners to finance the up-front cost of energy improvement and then pay the costs back over time (typically 10 to 20 years) through a voluntary assessment. The unique characteristic of PACE assessments is that the assessment is attached to the property rather than an individual.
PACE may be funded by private investors or government programs, but it is only available in states with enabling legislation and active programs. Energy incentives, rebates, and tax credits can be used to offset project costs or pay down a PACE loan. To date, 32 states plus the District of DC, have adopted legislation for commercial PACE programs.
How does it work?
- The energy upgrade must be approved by a PACE administrator before financing becomes available
- Once the project is approved and financing is secured, an energy developer like SmartWatt will install the equipment
- You’ll begin realizing your energy savings as soon as your upgraded equipment is installed
- A PACE lien will be placed on the property. If the building is sold during the PACE repayment period, the lien remains with the property and becomes an obligation of the new building owner
- Nonpayment of a PACE assessment results in the same set of repercussions as the failure to pay any other portion of your property tax bill
PACE is your best financing option if:
- You own facilities located in jurisdictions with PACE programs
- You’re looking for long-term financing (10+ years) with lower monthly payments
- You’d prefer to do pilot energy efficiency upgrades at a few locations before committing to enterprise-wide upgrades
- You don’t plan to own facilities long-term and would like to transfer financing obligations at the time of sale
- You’d like to invest in long-term improvements to efficiency and sustainability
|Positive cash flow||PACE financing can cover 100% of project costs The result? Lower monthly payments that are less than your monthly energy savings||Limited availability||PACE is limited to the 32 jurisdictions with PACE-enabling legislation|
|Better interest rates||Since PACE provides strong security for investors, they’re able to offer better interest rates and longer repayment terms to their customers||Mortgage lender approval required||Properties with a mortgage require mortgage lender consent|
|Flexible balance sheet options||PACE loans may be structured to either off-or on-balance sheet — depending on your needs|
Pretty sure you already grasp the concept … but just in case … A lease is a simple financing option that allows companies to use (“lease”) energy efficiency, renewable energy, or other energy generation equipment without purchasing it. At the end of the lease, you have the option to purchase the equipment, return the equipment, or extend the contract. Lease financing is offered by many equipment manufacturers and vendors as well as third-party lessors.
There are four major lease types:
- A capital lease functions much like a bank loan – with a few key advantages, such as no upfront cost, less paperwork, and quicker approvals
- Under the terms of a capital lease, you own the energy efficiency equipment for most legal and accounting purposes during the term of the lease
- As such, you must declare the equipment as an asset and the lease payments as a liability
- At the end of the lease term you can purchase the equipment for a nominal, (typically a $1 “buck-out” payment).
- Operating leases must pass several tests set by the Financial Accounting Standards Board
- In an operating lease, the lessor maintains ownership of the equipment. You simply pay a monthly fee to use it
- At the end of the lease, the customer can extend the lease, purchase the equipment
- A tax-exempt lease is a common financing option that allows public organizations (like municipalities) to pay for equipment using their annual revenues
- This option is an effective alternative to traditional debt financing but is only available to municipalities and other qualified political entities
- Tax-exempt leases have two unique attributes:
- Since the lessor may claim a federal income tax exemption on the interest they receive, they can offer their customer a lower rate
- The lease contract usually stipulates that if the customer fails to appropriate funds to make payments on the lease in any given year, its obligations to the lessor ends and the customer must return the equipment to the lessor. In most states, this means that:
- A tax-exempt lease is not considered debt and therefore voter approval is not required
- Lease payments may be made from operating rather than capital expense budgets.
- Under the terms of a solar lease, the leasing company installs the solar system and maintains ownership of the equipment
- The customer simply pays a monthly fee
- Customers may have the option of paying nothing upfront, making a custom down-payment, or prepaying the entirety of the lease amount
- At the end of the lease term, customers can either buy the system outright, have the leasing company remove it, or leave the system in place and renew the agreement
- Any tax incentives and/or rebates for solar are retained by the lessor
Leasing is your best financing option if:
- You’re looking for a simple, quick, accessible financing option with minimal contract complexity
- You’re relatively credit-worthy and willing to take on equipment performance risk
- You’d prefer an off-balance sheet financing option
|Widely available and quick to close||Manufacturers, vendors, and installers usually offer lease financing options||Credit Issues||Creditworthiness can have a large impact on the availability of financing and the rates offered.|
|Simple||Leases are straightforward contracts, requiring minimal effort to execute and administer|
|Fewer benefits||The simplicity of leases means that they can’t provide more specialized financing options like performance/savings guarantees or automatic transferability|
|Flexibility||Customers have the choice to buy, renew or return the equipment at the end of the lease|
|Balance sheet flexibility||Leases can be structured as on- or off-balance sheet depending on your needs|
|Enterprise-wide financing||Most lessors can finance projects across many facilities simultaneously. Some offer enterprise-scale structures where a single master lease can accommodate addendums for any additional projects|