It makes a lot of financial sense to upgrade your buildings with energy-efficient technologies and systems. They reduce your utility costs over the short and long term, improve your environmental footprint, and help with attracting and retaining tenants. However, as with any capital expenditure or equipment upgrade, there can be significant upfront costs. Even when you plan for these types of projects, you might not have access to the necessary funds to cover all the expenses.
That’s where external sources of financing can help with bridging the gap between planning and reality. There are different options to consider when financing energy-efficiency projects, each with their own benefits and drawbacks. It’s best to understand your options before investing in the next big building upgrade. Government incentives Government incentives are available in some jurisdictions, and can also be blended with private financing. You can apply for government incentives to fund a portion of your energy efficiency capital expenditures. Many utilities offer incentives to cover different aspects of your project, such as performing the energy audit, purchasing equipment and materials (e.g., LED bulbs, low-flow toilets), and doing the actual work. Contact your local distribution company to determine what incentives are available. “There are government grants and incentives available for most energy-efficient projects and technologies,” said John Robinson, Partner, R.H. Shergold and Associates. “Make sure to apply for funding before starting any project to determine if you qualify. I would recommend that you get independent 30 | jan uary 2017
advice from third-party companies or peers to find the best options when developing an overall energy plan.” The only real downside to some government incentives for your energy-efficient projects stems from the guidelines and limitations associated with qualifying for those incentives. The government programs focus on energy savings achieved (such as kilowatt-hours saved) rather than your return on investment. As a result, there can be times when you are a good fit for the new technology, but a poor candidate for the incentive. For example, there are great government incentives for cogeneration projects, but other energy-efficient technologies might provide shorter ROI. Debt financing Banks and other financial lending institutions have traditionally served as the first option for building owners who want to fund their capital projects, including energy-efficient upgrades and technologies. Basically, you would take out a loan to finance your purchases, and pay off the principal and interest over an agreed upon period.
Given today’s continued low interest rates, taking out a loan is an inexpensive financing option. However, the loan sits on your balance sheet and reduces your ability to borrow when the situation arises (as you’ve already borrowed money).
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“A traditional loan is the cheapest financing option but transaction costs can be high and there is no performance guarantee,” said Allison Annesley, Vice President, Energy Solutions, Efficiency Capital Corp. “The focus is your ability to pay, rather than whether your project is successful.”
protects your reserves and borrowing power, thereby enabling you to access capital and financing when necessary. Much like leasing, you get the tax advantage of equipment depreciation. “The primary focus with performance contracting is achieving maximum energy savings,” said Annesley. “Our contracts include third party insurance for the expected savings, which acts as a performance guarantee. When targets are met or exceeded, it’s a successful project for everyone. Your
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Equipment leasing Equipment leasing is an alternative to buying the equipment outright. It allows you to make your building more energy efficient without having to tie up capital and invest in purchasing the equipment. In essence, you can try before you buy, and it provides tax advantages from equipment expense depreciation. When hiring a company to do capital upgrades, or when purchasing any type of equipment, your focus should include finding reputable equipment manufacturers and installers, as well as ensuring that the equipment will meet your needs.
“However, if your project fails to achieve energy savings performance targets, you’ll still be on the hook for those regular payments with a lease,” said Annesley. “You also have to ensure that the payments over the financing term are less than your expected energy savings.” Performance contracting Performance contracting is a non-debt, off-balance sheet financing option. This method enables you to pay for energyefficient building upgrades through future utility volume savings. There are no upfront capital requirements, which rental hous ingbusine ss.c a | 31
payments never exceed your verified utility volume savings and the engineers we work with are financially liable for meeting the savings targets they set.” Performance contracting typically requires minimum spending thresholds, as well as minimum energy savings. Therefore, your project or building might not qualify. Also, because you don’t technically own the equipment, you share the energy savings with the company. There are fewer problems with not owning the equipment, but there are also fewer overall financial benefits over the long term. Conclusion As you can see, there are several options available to finance the purchase of your energy efficient projects and equipment. There is no “one-size-fits-all” solution for every building or project. Financing comes in different forms, and different situations require different solutions. Government incentives and rebates should almost always be part of your overall energy plan. Before taking any steps, make sure to do your research to identify the benefits and drawbacks of any particular financing plan for your specific needs.
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“Before starting any large undertaking, reach out to get advice from industry contacts who have done the same work,” said Robinson. “Get independent advice so that you can maximize the money you spend on your energy efficiency projects to get the best return on investment.”
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By David Gargaro, in collaboration with Allison Annesley of Efficiency Capital Corp. and John Robinson of R.H. Shergold & Associates