Financing Energy Efficiency in Commercial Buildings: Creative Options
Energy efficiency has become a proven way of reducing costs and improving profits in commercial facilities. From lighting retrofits –including the rapid adoption of LED lighting – to HVAC upgrades to window replacements, energy efficiency improvements often pay for themselves fairly quickly.
The issue is that you need to pay for these projects before they pay for themselves. As a result, energy efficiency upgrades often compete with other projects for access to limited capital resources. Of course, financing is often available – and there are even finance companies focused on energy efficiency – but the basic competition for funding remains. In many areas, utility rebate programs will offset some of the cost of the efficiency measures, but even with rebates there will generally still be the need for some capital outlay.
In some areas of the country, however, there are creative, alternative programs that may be worth considering as a means of accelerating the adoption of energy saving measures.
PACE – or Property Assessed Clean Energy – emerged in California in 2008 as a means to enable homeowners to adopt energy efficiency and renewable energy options. In municipalities that adopt PACE, homeowners can finance energy efficiency and renewable energy projects and pay them back over an extended time period on their property tax bill. The extra tax payments are intended to be covered by monthly energy cost savings, resulting in a net gain to the homeowner.
Unfortunately, PACE was effectively shot down in a very controversial decision by FHFA (Federal Housing Finance Agency) in 2010, before it became widespread. (Programs underway or getting started in 23 states were effectively halted). FHFA basically decided that payback obligations when combined with residential mortgages were problematic. However, PACE now appears to be making somewhat of a comeback (see, for example, PACE on the Rebound….), with many of the programs now focused on commercial rather than residential properties.
For example, Connecticut has a major program called C-PACE that is available in municipalities that have opted to join the C-PACE program. According to the C-PACE website, more than 80 have already done so, including Hartford, Norwalk, and Stamford. C-PACE allows building owners to finance qualifying energy efficiency and clean energy improvements over time (up to 20 years) through a voluntary assessment on their property tax bill. The repayment obligation transfers automatically to the next owner if the property is sold. Similar to a sewer tax assessment, capital provided under the C-PACE program is secured by a lien on the property, so low-interest capital can be raised from the private sector with no government financing required.
One of the best sources of information on PACE programs is provided by PACE Now, one of the organizations that has emerged to help states and municipalities set up and finance PACE programs. An interactive map on the PACE Now website shows where PACE programs exist. (Please note that the map shows both residential and commercial PACE programs; click through to the map for details).
On Bill Financing
PACE is, by definition, available only to property owners. An alternative that may be open to both owners and renters, depending upon the specifics of the individual program, is On Bill Financing.
With On Bill Financing, the installation of energy efficiency measures is paid for by the utility, one of its financing partners, or in some cases a 3rd party financing organization, and then paid off over time through the utility bill. Because of the threat of turning off service, utility bills have a very high payment rate – and utilities check the payment history of the customer before allowing them to participate in On Bill Financing.
There are two primary types of programs, although there are other variations. With Loan-Based Financing, the financing is treated as a loan, and generally the loan will need to get paid off before the facility can be sold. This type of program really only makes sense for property owners. With Tariff-Based Financing, however, the payments continue to be made by whomever occupies the facility. This type of program supports both owners and renters. In this scenario, it is assumed that the benefits of the energy efficiency improvements flow through to building occupants.
As with the PACE program, property owners (or, in this case, renters) are expected to generally save more on their energy bills then they spend per month on higher utility fees.
Over 20 states have adopted On Bill Financing with a varying set of rules. For example, Pacific Gas & Electric (PG&E) describes its program as follows:
PG&E’s On-Bill Financing (OBF) Program is funded by California utility customers and administered by Pacific Gas and Electric Company (PG&E) under the direction of the California Public Utilities Commission (CPUC). OBF provides qualified, non-residential PG&E customers with a means to finance energy-efficient (EE) rebate and incentive programs implemented under select PG&E EE programs. The loans issued under OBF are interest-free. The loan proceeds will fund costs qualified PG&E customers incur in connection with a qualified retrofit project.
Some competitive energy suppliers offer their own programs outside of the regulatory framework. For example, Constellation New Energy has a program they call Efficiency Made Easy which works in a very similar manner.
A good source of information about On Bill Financing is provided by the American Council for an Energy Efficient Economy (ACEEE).
PACE and On Bill Financing are not available everywhere, but where they are, they may represent attractive mechanisms for financing energy efficiency improvements in commercial facilities.
Martin Flusberg is CEO of Powerhouse Dynamics.
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