Finance Energy-Efficiency Projects
Energy-efficiency projects are relatively low-risk investments and there are many opportunities for financing. In addition to traditional sources of funding, many utilities, governments, and nonprofit organizations offer financial support through grants, rebates, and loans. Well-designed efficiency projects are almost always fundable. With some dedicated research, a diligent organization may find special deals that save a significant amount of money.
When searching for project capital, begin by bargain hunting for special programs that support energy performance. Every organization planning an energy performance upgrade should investigate utility incentives, state assistance, and other funding opportunities.
- Search our rebate finders to find savings on commercial building equipment.
- Search the Database of State Incentives for Renewables & Efficiency (DSIRE), a listing of state, federal, local, and utility incentives and policies that support renewable energy and energy efficiency projects.
- Other utility incentives: Make sure to contact your utility and ask if they offer free or inexpensive energy audits or rebates for energy efficiency upgrades.
- Nonprofit programs: Many foundations and nonprofit organizations sponsor programs that leverage ENERGY STAR and may fund energy-efficiency projects. Search our directory of energy efficiency programs.
Overview of Financing Methods
The organization receives title to any purchased equipment and will add fixed assets and debt to its balance sheet (cash purchases will not add debt but will reduce cash). Equipment depreciation and any other costs capitalized into the project are tax deductible, as is interest expense (if borrowing to purchase).
- Cash: Most appropriate for relatively inexpensive, simple efficiency measures that are likely to pay for themselves quickly.
- Loans: Equipment loans normally require a down payment of 20 to 25 percent and are secured by a lien on the items purchased. A credit-worthy organization funding a solid efficiency project should be able to negotiate a loan in which the payments are less than the cash savings from the project. This allows the borrower to bear all the risk of the project as well as receive all the benefits.
- Bonds: Bonds are complex agreements that often require attorneys, accountants, and investment bankers—and therefore have high transaction costs. Issuing municipal bonds requires approval by legislative bodies and voter referenda, so these are only issued to raise large amounts of money—generally in the millions of dollars.
- CPACE: Only available in some states, commercial property-assessed clean energy (CPACE) allows borrowers to make repayments via an assessment on their property tax bill. Because their investments are so secure, lenders offer good interest rates and long repayment terms (10-20 years). Debt obligations may stay with the property should the facility be sold, keeping it off balance sheet.
- On-bill financing: Only available in some areas, on-bill financing allows borrowers to make repayments through regular payments on an existing utility bill. Interest rates are typically low to zero. They are relatively simple to set up and are a good option for projects under $350,000.
Leases are quick and easy to set up and administer. Equipment manufacturers or their affiliates will often set up the lease and arrange for equipment purchase and delivery. It is often possible to obtain a line of credit under a master lease to cover the entire project; each equipment purchase for the project would create a new schedule under the master lease, with interest starting to accrue at the time of purchase.
- Operating lease: The lender owns the equipment and rents it for a fixed monthly fee. They are simple, funded out of operating budgets, and may be ideal for shorter-term projects or projects where owning the equipment is not desirable. Changes in accounting rules now require operating leases to appear on the balance sheet; however, properly structured lease payments may be tax deductible.
- Capital lease: Capital leases typically require little or no down payment. They are essentially installment purchases of equipment, so both financial accounting and tax rules treat these transactions as purchases. Therefore, leased assets are depreciated, and this depreciation is tax-deductible along with interest. Fixed assets and debt are added to the balance sheet. Also, these leases may finance soft costs, including installation and other soft costs.
- Municipal lease: Lenders of municipal leases don’t have to pay tax on interest income, and they pass these savings to the municipality in the form of a lower interest rate. No down payments are required and they can be executed relatively quickly with minimal cost. Non-appropriation language may keep this off the balance sheet and avoid referendums.
A performance contract is an agreement with a private energy service company (ESCO) to manage one or more efficiency projects from beginning to end. These contracts are especially well suited for financing large (>$1 million) and complex projects. Energy cost savings are used to cover the entire cost of the projects, and any surplus savings may be divided between the contracting organization and the ESCO as follows:
- Guaranteed savings: The ESCO guarantees that the cost savings will cover the financing costs. Any shortfalls are reimbursed to the host organization.
- Shared savings: Cost savings go to servicing the debt first. After that, the contracting organization and the ESCO split the savings according to a percentage, such as 60/40.
Purchase and Service Agreements
- Power purchase agreement (PPA): Under a PPA, a provider installs, owns, and operates an energy system on a customer’s property. The customer then agrees to purchase the system's electric and heat output for a predetermined period.
- Energy services agreement: This is the efficiency version of a PPA, in which the ESCO provides and maintains the equipment. There are three basic variations including: Traditional ESA where the ESCO owns the equipment and customer pays the utility, Managed ESA where the energy bills are managed by an investment fund, and Energy as a Service (EaaS) where the ESCO maintains equipment performance and may include equipment upgrades and replacements, utility bill management, and recommends alternative energy sources. Contract periods are typically 5-15 years. Once a project is operational, the customer agrees to make service payments that are based on actual energy savings (for example, a certain amount per kWh saved).
Find more detailed guidance on energy efficiency project financing:
- Evaluate the Economics of Energy Efficiency Projects | ENERGY STAR
- Did Your Energy Efficiency Project Get Lost in Translation?
- Financing Energy Efficiency Projects
- Financing chapter of the Building Upgrade Manual for more detailed guidance on energy efficiency project financing.
- For public-sector organizations: