Financing Energy Efficiency Projects: A Comprehensive Guide

In today’s world, energy efficiency is no longer a novel concept but a strategic necessity for large-scale commercial and industrial entities. It is a key component of facility management strategy to reduce energy use, improve building operations, and decrease carbon emissions. However, implementing energy efficiency initiatives often requires significant investment, making it challenging to secure approval and fit into budgets.

The Imperative of Energy Efficiency

Retrofitting existing building systems for enhanced energy efficiency can lead to substantial operational cost savings. This is particularly true in regions with high energy prices, where a combination of project savings, local utility incentives, and tax advantages can yield an annual return on investment exceeding       .

Beyond the evident financial savings, organizations also benefit from new, more efficient equipment, which reduces maintenance, enhances temperature control, improves lighting, and demonstrates a commitment to the environment.

Challenges and Solutions in Financing

Despite recognizing the importance of energy efficiency for cost savings, brand reputation, environmental stewardship, and social responsibility, organizations often face hurdles due to the substantial initial investment required.

For instance, even if utility incentives cover half the expense of a $1,000,000 LED lighting retrofit, the organization is still responsible for the remaining $500,000. However, financing alternatives exist to alleviate the burden of upfront costs, such as loans, service agreements, or leasing options.

Loans

Although not typically offered by installation companies, a business loan secured by a financial institution or other lender can fund efficiency enhancements. This type of financing involves receiving funds upfront, pledging assets as collateral, and committing to repay the loan with interest over a predetermined period. The borrowed capital is then utilized to compensate the equipment provider for installation and potentially ongoing maintenance .

Service Contracts and Operating Leases

Service contracts and operating leases are forms of financing directly through the provider of the energy efficiency project and equipment. In a lease, the provider retains ownership of the equipment, while a service contract also includes control over its usage. Essentially, the provider installs the equipment at the organization’s facility, permitting its use in exchange for a regular service fee, typically paid monthly.

Capital Leases

Capital leases are long-term agreements where businesses lease equipment or assets, such as energy-efficient HVAC systems or solar panels, with the intention of eventually owning them. These leases allow companies to implement costly efficiency upgrades without the immediate capital outlay, spreading the cost over time.

Unlike operational leases, which are typically shorter-term and do not transfer ownership, capital leases are treated as asset purchases for accounting purposes. This means the leased asset and corresponding liability are recorded on the balance sheet. While this can lead to potential tax advantages, such as depreciation deductions on the leased asset, the specific tax benefits depend on the jurisdiction and the business’s tax situation.

C-PACE Financing

C-PACE, or Commercial Property Assessed Clean Energy, is a type of financing program run by the local government that allows for non-profit and for-profit property owners to finance energy efficiency and renewable energy building upgrades. Financing is paid back over a period of up to 30 years through a special assessment placed on the property’s tax bill, treated like a water bill.

It can empower you to tackle sustainability-centric facility upgrades with no up-front cost while saving energy, building resiliency, and promoting economic development and private investment in commercial properties.

C-PACE-enabling legislation exists in 38 states and Washington, D.C. and over $2B in projects have been funded to date.

Building a Budget for Energy Efficiency Projects

When budgeting for energy solutions, it’s crucial to consider the following:

1. Establish a clear return on investment (ROI): Determining ROI for an efficiency project is the most important step to financing. This benchmark establishes a baseline for all parties involved.
2. Determine your payback period: Projects designed with attention to equipment cost, installation, relevant savings, and retrofit opportunities will determine a favorable payback period. You can expect lighting projects to pay back in 3-5 years and mechanical projects to pay back in 5-10.
3. Design projects to take advantage of significant utility incentives: Companies can take advantage of the dollars available to incentivize efficiency projects and implement energy savings solutions.
4. Plan to see annual operational savings: More efficient energy use translates into actual annual savings.
5. Don’t forget to calculate maintenance savings: Maintenance savings, though forming a smaller line item on the balance sheet, add up over time.
6. Re-evaluate cap-rate post-efficiency project: Financing efficiency projects will increase net operating income through energy savings, reduce operating expenses through upgrades, and increase asset value through facility improvements with new or upgraded equipment.
7. You will lose money by waiting: The longer you wait to make a change, the more money is left on the table. Every dollar spent on unnecessary energy use, un-optimized systems, and inconvenient maintenance is a dollar that could otherwise be reallocated in your budget.

In conclusion, while financing efficiency solutions can be a substantial investment, it pays off. The right projects built with right-sized solutions will deliver energy savings while making smart financial sense. Energy efficiency projects are worth considering for those seeking additional savings in their three to five-year plans.

Read the original piece in the New England Real Estate Journal.