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.
Finance Model Superchargers
In addition to the financing models discussed above, there are additional models for energy efficiency projects that do not warrant a specific financing structure. Because these projects are compatible with many of the methods above, they can utilize finance model superchargers to further boost the value in a financial agreement.
The performance contracting model enables building owners to make capital improvements, save energy, reduce emissions and address tight budgets, while using the expected utility and operational savings to finance some or all of the cost. Offered by select energy services companies (ESCO), performance contracting is a way of receiving guaranteed energy cost savings that help offset the costs of facility and infrastructure projects over a period of time. Some ESCOs will even pay the difference between the savings guaranteed and any savings not realized.
Green Lease Structures
Green lease structures ensure that tenants comply with the building’s green practices. There are three key elements to a green lease:
- Triple-net lease: The lessee is responsible for paying all taxes, insurance, maintenance, and utility expenses, causing them to prioritize energy-efficiency because they directly recover any investments in efficiency over their lease term.
- Sub-metering: Sub-metering energy and water services enable building owners to bill tenants for actual usage and peak demand. This practice motivates tenants to minimize their energy and water consumption, and allows the building owner to employ a feebate (fee/rebate) incentive system to ‘right-size’ electrical and mechanical systems.
- Allow capital cost pass through: Under a green lease, building owners are given the option to pass the capital improvement costs through to tenants. As a result, the tenants, who pay the utility bills, reap the energy savings benefits as a return on investment.
A collaborative green leasing process can result in the largest gains by reducing vacancy risk for building owners and lowering operating costs for tenants. Green leases create incentives for both parties to save money through efficient design, construction and operations.
Putting energy efficiency within reach
As an ever-increasing number of businesses emphasize sustainability, these financing models uncover opportunities for more building owners to capitalize on energy efficiency and renewable energy updates that deliver strong returns with lower risk. Businesses are now able to more easily complete retrofits in ways that align with their financial models and business strategies.
Bill Guiney is the director of the Solar Thermal business at Johnson Controls. He is currently developing the Solar Water Heating program and building the internal capabilities of Johnson Controls, and has more than 30 years of experience in the solar industry as a retailer, contractor, distributor, manufacturer and educator. Guiney has provided many renewable energy and energy efficiency training programs, and has been an instructor for solar thermal energy systems.
Photos courtesy of flickr users Jennuine Captures and sidewalk_story.