Renewable Energy: Evaluating A Third-Party Financing Option
By Anne Cosgrove
Published in the May 2011 issue of Today’s Facility Manager
Facility managers (fms) may find themselves in a situation where they know implementing a renewable energy system on site will benefit them from both an environmental and long-term financial standpoint. Still, especially in the current atmosphere of stagnant or reduced budgets, financing the project internally may not be feasible. Before abandoning the possibility of going with greener energy, fms in this scenario might want to seek out information about an energy performance contract (EPC).
As a financing technique that uses cost savings from reduced energy consumption to repay the cost of installing the related energy conservation measures, EPCs are typically available through utilities or energy service companies (ESCOs). The costs of the energy improvements are initially taken on by the service provider; the facility customer receiving the improvements (and resulting energy efficiencies) pays the provider back with the money saved through energy savings.
An EPC involves the performance contractor guaranteeing a specific level of energy savings and typically consists of the following elements:
Turnkey Service: The contractor provides all of the services required to design and implement a comprehensive project at the customer facility, from the initial energy audit through monitoring and verification of project savings.
Comprehensive Measures: The contractor tailors a set of measures to fit the needs of a particular facility.
Financing: The contractor either finances the contract itself or works with a financing company. Financing is offered in a variety of forms.
Project Savings Guarantee: The contractor provides a guarantee that the savings gleaned by the project will be sufficient to cover the cost of project financing for the life of the project.
Traditionally, utilities and ESCOs have been focused on energy efficiency improvements with EPCs, but in recent years, many have begun expanding service offerings to include the installation, financing, and ongoing operations and maintenance of renewable energy systems. As a result, financing renewable energy with an EPC—whether alone or as part of a broader contract—is becoming more common.
Solar photovoltaic (PV) systems are often the most common technology included in these contracts, but small wind and small biogas power projects have been included as well. In an EPC that involves a renewable energy system, the contractor typically makes an assumption about the system’s ability to reduce a facility’s demand for grid supplied electricity. In that sense, the renewable energy system is treated like other energy efficiency measures in that it reduces traditional utility payments. If the cost of a solar PV system, for example, is comparable or relatively small when compared to the other retrofit measures proposed for an EPC, then the PV system might not affect the financial attractiveness of the overall EPC project.
But if the fm wishes to include a more costly PV system, that system may increase the total project’s payback period, possibly to the point that it becomes unrealistic to finance the project. If possible, that obstacle could be overcome by removing another long payback period measure from the project scope.
It is advised that fms who want to include renewable energy systems in an EPC should be prepared to accept a longer payback period and debt service schedule; be aware that the ESCO may have to remove some energy efficiency measures; or invest equity in the project to accommodate the renewable system financing. An alternative could be to structure the performance guarantee to isolate the renewable energy system and limit that guarantee to a few years (versus the 15 to 20 year period typically used for EPCs). Or, the contractor may be willing to create a separate EPC for the renewable energy. This approach recognizes that renewable systems often need a year or two of operation to determine if actual energy production meets estimates.
Tax benefits (e.g., investment tax credit and depreciation) may assist in the economics of renewable projects. It should be noted that these benefits accrue to the owner of the equipment and may be lost to tax exempt organizations unless financing is properly structured.
Involving a third party in the financing of a renewable energy project may seem daunting to some fms. However, if the need is there and the factors align to make it suitable for the organization seeking the energy improvements, it can be an effective route to increased sustainability.
Research for this article included information from “Introduction to Energy Performance Contracting,” a report prepared for EPA ENERGY STAR by ICF International and the National Association of Energy Service Companies and “Energy Performance Contracting Financing Options,” available through the Clinton Climate Initiative.