Energy-efficiency or renewable energy projects offer environmental, operating and maintenance savings benefits, but can often be an expensive endeavor. Clean energy projects have capital costs requiring large upfront investments, followed by a long period of payback. Despite a significant return on investment, many projects do not come to fruition due to a lack of capital.
The International Facility Management Association (IFMA), in partnership with Johnson Controls, recently surveyed decision-makers from a wide variety of industries. When asked what they see as the top barrier to energy efficiency, the most common response was a lack of access to capital.
These findings suggest that alternate financing structures can make a huge impact on enabling clean energy investments. Several innovative financing models have been developed to overcome financial hurdles to support energy efficiency and renewable energy projects in buildings.
- Traditional debt: The most straightforward and historically documented approach to financing energy efficiency is a conventional loan from an institutional lender or raising bonds for public entities.
- Shared savings agreements: The shared savings model results in immediate energy savings for the owner without making a capital investment or assuming debt. The energy service company sells a portfolio of building improvements to a third party ownership company, while the owner receives the energy and operating savings, and pays a percentage back to the third party company.
- Tax-exempt lease-purchase agreement: To avoid the negative impact of energy project debt on the financer’s balance sheet, public facilities and non-profit entities can employ tax-exempt lease-purchase agreements. Payment obligations are considered an operating expense rather than a capital expense. Thus, the municipal lease is not considered a long-term debt obligation.
- Capital lease: Under a capital lease, energy-efficient equipment appears on the balance sheet as a capital asset and requires the building owner to account for depreciation. This provides tax advantages leading to rates lower than market averages.
- Lease or bond pools: Some jurisdictions or agencies have developed funding pools to enable energy efficiency projects. By grouping together many projects over multiple sites, these pools offer lower interest rates than would be available for a single project.
- On-bill financing: On-bill financing is offered by electricity or natural gas utilities. The utility fronts the cost of the improvements and recoups it over time by incorporating loan repayment into future energy bills.
- Tax-lien financing (PACE): Under the tax-lien financing model, also known as property assessed clean energy (PACE) bonds, property owners borrow money from a municipal agency to finance the upfront cost of energy efficiency and renewable energy projects.
- Power purchase agreements: Power purchase agreements allow the business to get a known benefit from the installation of third party photovoltaic panels or a high-efficiency central heating and cooling plant in exchange for purchasing the resulting energy or chilled and heated water, respectively.
- Energy efficient mortgages: In some cases, energy efficiency investments are bundled with the financing of the property itself. Known as an energy-efficient mortgage, this solution wraps the cost of energy efficiency improvements into the cost of the property, and the borrower can generally secure financing at lower rates.