Best Practice Guide

Local Governments

Introduction

Planning an Energy Program

Funding and Approval

Selling the Program

Incentive Programs

Funding Sources

Education

Lighting

Central HVAC System

Procurement Policy

Building Envelope

Demand Response

Distributed Generation

Water Use

Motors

Food Service

Resources and Appendices

Lessons Learned


Atascadero, City of

La Mesa, City of

London, City of

Pasadena, City of

Redondo Beach

Sacramento, City of

San Francisco, City of


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Funding and Approval

Selling the Program

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To have an energy project approved and funded, it must successfully compete with other capital investment proposals. The good news is that energy projects reduce operating expenses by as much as 30 percent. Whenever operating expenses decrease, net operating income (NOI) rises; this is one of the few ways to stimulate internal growth and is especially important since opportunities for external growth - buying and building - can be limited. NOI is used to calculate asset value, so it is important for evaluating the long-term financial health of a company. For every $1 invested in energy efficiency, asset value increases by as much as $3.

When attempting to get approval for an energy project, the first step is to understand the internal investment criteria of the municipality, often quantified in terms of the rate of return on investment (RRI). Use this information to weigh the cost-benefit of potential projects. Whenever possible, calculate the life-cycle cost, not just first-cost, since this can be misleading. Assess the life-cycle cost and relative net present value of projects so that the cost of capital and the tradeoffs between investment options can be fully identified. For income properties, look at lease structures to calculate how much of a project's estimat ed energy costs savings might be retained by the building owner as opposed to the tenants.

The next step is to explore creative funding strategies, such as government and utility incentive programs. To secure rebates and grants before a project is fully implemented, carefully align the project to meet program requirements and then establish open communications with the local utility or authorizing government agency to facilitate approval. When working with contractors, discuss how performance contracts or performance guarantees might reduce first-costs or lower the risk of investment by tying payment to end results - usually measured in terms of cost reduction or utility meter readings.

When articulating the benefits of an energy project to internal stakeholders, speak dollars rather than kilowatts. Express both cost savings as well as the resulting increase in NOI. Mention intangible financial benefits like increases in worker productivity and positive public relations stemming from environmental leadership.

ENERGY STAR Financial Tools

ENERGY STAR Financial Tools
ENERGY STAR provides three tools that help assess the economics of energy projects. The Financial Value Calculator estimates potential financial returns that could result from increased energy efficiency. QuikScope helps allocate costs and savings between owners and tenants. The cash flow calculator helps decision makers assess the financing options for energy efficiency equipment.

Common Financial Definitions

Common Financial Definitions

Simple Payback - the length of time needed to pay back the initial capital investment, usually expressed in years.

Life-Cycle Cost Analysis - the total cost of a design choice over its serviceable life.

Levelized Cost - the present value of the total cost of an investment, converted to equal annual payments.

Net Present Value - the net result of an investment, expressed in today's dollars.

Return on Investment - the income an investment provides in a year.

More definitions plus links to calculators can be found in Appendix 1.


Resources

Jewell, M.T., Energy-Efficiency Economics: What You Need to Know." HPAC Engineering: January 2003.

Hoots, M. Finance for FMs an excerpt from Capital Planning and Budgeting - IFMA's Facility Management Finance Competency Course (2005). Appeared in Buildings.com, October 2005.

Current electricity prices from the California Energy Commission.

Current natural gas prices from the California Energy Commission.

Energy Design Resources, eVALUator online calculator is an easy-to-use Windows-based program that calculates the lifecycle benefits of investments that improve building design.

BPG Appendix 1: Financial Calculators and Online Resources (PDF download, 84 KB)