The “lack of upfront capital” problem is the largest barrier to getting energy projects implemented. Professionals acquiring this new knowledge will be able to get more projects approved, thereby helping our economy and the planet. This topic is timely because several surveys show that lack of capital remains the primary barrier to approving energy management projects. Even if a project has a 50% Return on Investment (or approximately a 2 year simple payback period), there is no “return” if a company cannot make the initial investment. Financing the upfront investment allows a company to become more cost-competitive immediately. In addition, most energy savings benefits will last for years to come. Even after paying financing costs, the net returns from an energy project are often greater than a company’s normal profit margin. Therefore, lack of upfront capital is a solvable problem for many project, however many professionals are not aware, or do not have the skills, to effectively navigate their financing options. Compounding this problem is that many banks are investing in energy efficiency, but the industry lacks competent professionals who can package deals in a way that is attractive to investors. For career-focused individuals that want to earn accreditation, there is the new Performance Contracting & Project Funding Certification, which will be awarded upon completing a course and passing a comprehensive exam on the curriculum. I think this type of training will help many facility managers, utility experts and ESCO professionals navigate their options and accelerate project approvals. In addition, professionals who have earned the certification will have demonstrated a level of competency with a very valuable skill set. Facility managers who have this knowledge will be able to avoid delays and possible legal risks.
To tackle this problem, professionals must understand their options to fund an energy project. The following paragraphs describe some of the basic methods. These and more advanced techniques are discussed in the new course, which debuts this summer from the Association of Energy Engineers.
There are many traditional financing options available to facility managers. If structured properly, an energy savings project can be financed similar to a car payment or home mortgage. If you decide to finance a project with a loan, bond, true lease, capital lease or other leasing variation, there are many new vocabulary words to learn. You may have to get accountants involved and consider things like depreciation (and how to label equipment to enable a faster depreciation schedule). Note that the tax laws regarding depreciation have changed for 2014, so it is good to be aware of the changes.
Performance contracting has been around for decades and allows projects to be developed by an Energy Service Company (ESCO) that will offer a “performance guarantee” on the savings, such that the savings are greater than the finance payment (usually handled by another third-party). PC is more common with government, institutional and educational facilities because financiers are more comfortable lending money to organizations that are likely to survive a recession or other business cycles. Thus, performance contracting has its limitations. In addition, contracts can become complex (for both the ESCO and the facility) and it takes time understand them as well as get legal endorsement.
Additional project funding options have become available in recent years such as Utility Energy Service Contracts (UESC), Power Purchase Agreements (PPA), On-Bill Financing and Property Assessed Clean Energy (PACE) financing. There is a lot to say about all of these options, but below is a quick summary:
- Utility Energy Service Contracts are basically performance contracts that are developed and implemented by the utility servicing an energy consumer. This offers some streamlining as the utility can provide the funding for project development and make the deal cash flow neutral to the consumer, with less hassle.
- Power Purchase Agreements are commonly used for solar PV (and wind generation too). The PPA allows a building to put solar on the roof at no upfront cost, when they agree to purchase the kWh produced for a long-term contract. Hopefully, the PPA is structured so that the consumer is paying about the same price for the solar kWhs as they do from the grid. This works well when the grid price is high, the utility is cooperative and there are local incentives.
- On-bill financing is offered by some progressive utilities (it is usually part of a Demand Side Management Strategy that benefits the utility). As the name implies, the consumer repays the installation costs with an extra charge on their future utility bills. The deal is structured so that the monthly savings is larger than the extra charge. The improvement can be “linked” to the meter, so that if the consumer moves out of the building, the savings and the repayment are owned by a new consumer.
- PACE is very similar to the on-bill financing concept, except the savings and repayment are “linked” to the property tax, so that if an owner sells a property, the new owner would assume the property tax “amendment” (extra payment), but the new owner also gets the savings cash flow. In the past few years, PACE has become very popular, enabled by legislation in 31 states.
- Grants and utility rebates can also assist with funding. For example, my utility will give a $10 rebate on LED lamps that cost $20… that is basically subsidizing 50% of the material cost. A list of free rebates and other incentives (tax credits, etc.) is available here.
Ultimately, financing is a tool to get more projects implemented, but we need to focus on it because it is a solution to the largest barrier to energy management projects. It is clear that the number of energy financing options has exploded, leaving more choices for the facility manager. This is a great situation, if you know where to look and how to leverage the information. As mentioned previously, it is a good idea to get trained on the newer material (PACE, UESC, PPAs and On-Bill Financing options).
I firmly believe that the PCF certification will make a big impact, with huge rewards. It will help people implement more energy savings projects, which is good for everybody. It will also create an expected level of competency in this blossoming field.