Funding Sources
The Department of Energy describes three general financing mechanisms for energy efficiency projects: internal financing, debt financing, and lease or lease-purchase agreements. Another, less commonly used mechanism known as energy performance contracting, is also described. Energy managers can decide to pursue any combination of these mechanisms to suit their individual financial and building requirements. Internal Financing Internal financing is the simplest, most straightforward funding option for energy efficiency projects. Projects will be constrained by budget limitations and may have to compete with other capital investment proposals that have a higher rate of return on investment. As such, this funding source is best for projects that have a short payback period. Debt Financing Debt financing - loans - allow a city to have control over the repayment structure so that accounting records show a break-even or positive cash flow during the project's life. Energy cost savings resulting from the capital project can even be used to repay financing costs (this is sometimes called "Pay as You Saveā¢" ). Debt financing tends to be more complex than internal financing and requires some level of in-house financial expertise. Smaller projects may not make sense because of the high transaction costs and slower payback rate. Lease and Lease-Purchase Agreements Lease and lease-purchase agreements use neither scarce internal funds, nor incur debt, and are suitable funding mechanisms for either small or large projects. Energy savings are retained by the business and can help repay the financing charges. However, these arrangements are complex, requiring in-house financial and project management expertise. Energy Savings Performance Contract If a facility is more than 40,000 sq. ft. and energy efficiency upgrades are expected to cost at least $200,000, a city might consider entering into an energy savings performance contract (ESPC). An ESPC contracts an energy services company (ESCO) to bundle all of the engineering, equipment purchasing, construction, installation, and commissioning needs into a single package. The ESCO guarantees that energy cost savings will repay the cost of the project and financing. Thus, a business uses operating funds rather than capital investment funds to finance a project. This allows for capital improvements that may not otherwise be undertaken due to budget constraints or credit worthiness. After a city repays the project costs, including ESCO fees and finance charges, it usually retains any additional energy savings.
Resources
Department of Energy, Rebuild America. Financing Energy Efficiency in Buildings. May 1, 1998. Alliance to Save Energy. Web page of energy efficiency funds and programs in North America.
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