Manufacturers Best Practice Guide

Planning an Energy Program: 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.

Incentive Programs

Never before have so many incentive programs offered rebates, grants, tax credits and expertise to assist with energy efficiency projects. As energy efficiency becomes more commonplace, companies that wait may not enjoy this same level of support, yet will still need to compete with more efficient businesses and will be held accountable under California's stringent building codes, GHG restrictions and energy efficiency standards. It is in every company's self interest to take full advantage of incentives while government and ratepayer funding is still widely available.

Saving a kilowatt is cheaper than generating one, and incentive programs are a win-win-win situation - good for business, good for the state and good for California ratepayers. Speak with your local utility before implementing energy upgrades to determine which incentive programs might be right for your project. You can also research incentive programs through Flex Your Power's up-to-date Rebate Locator.


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 allowing the business to retain all 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 FinancingDebt financing 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.

Leading by Example: California Portland Cement


As its energy management program evolves, California Portland Cement is finding many ways to uncover savings and then implement energy projects. For example, in 2006, the Mojave, California, cement plant applied for and received a process heating Energy Savings Assessment offered by DOE as part of the Save Energy Now campaign. In 2004, the Rillito, Arizona plant received a cost-shared award from DOE and is currently completing a plant-wide assessment. From these two opportunities alone, California Portland Cement has identified hundreds of thousands of dollars in savings opportunities.

To help make projects more feasible, California Portland Cement also takes advantage of utility rebates. In the past two years, the company has qualified for more than $1.3 million dollars in rebates and has used these funds to implement energy efficiency retrofits and process improvements such as installing a state-of-the-art vertical grinding mill and a new, high-efficiency separator on an existing ball grinding mill at the Mojave plant.