Best Practice Guide

Commercial Office Buildings

Introduction

Planning an Energy Program

Funding and Approval

Funding Sources

Incentive Programs

Selling the Program

Lighting

Building Envelope

Central HVAC System

Distributed Generation

Demand Response

Commissioning

Procurement Policy

Water Use

Education

Energy Efficiency in Telecommuting

Resources and Appendices

Lessons Learned


Adobe Systems Incorporated and Cushman & Wakefield

Arden Realty and next>edge

Cypress Semiconductor

Equity Office Properties

Glenborough Realty Trust

Natural Resources Defense Council

Qualcomm

Swinerton, Inc.

Transwestern Commercial Services


View the Glossary

Funding and Approval

Funding Sources

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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. A business can use either general operating funds or revolving investment funds - both allow the business to retain any cost savings. However, 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 - allows a business 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. 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 business 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 business repays the project costs, including ESCO fees and finance charges, it usually retains any additional energy savings.

Business Examples

Cypress Semiconductor negotiated a unique payment arrangement with its HVAC engineering contractor Ferreira Service, Inc. (FSI). FSI guaranteed that energy savings resulting from an investment grade energy audit at its corporate headquarters would recoup Cypress' investment in two years or less - or else the service would be free of charge. Cypress secured a grant from PG&E under its Standard Performance Contract program that covered 43 percent of the project costs. Cypress advanced FSI the amount of the grant and arranged to pay the remainder of the fee in three quarterly payments using money saved on energy costs. As such, Cypress used no capital investment funds for this project; savings on operational expenses paid for the audit in less than a year. Through this innovative financing structure, Cypress was able to reduce its electricity use by 55 percent and reduce its natural gas use by 85 percent.


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.