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.
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).
- 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.
- 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. Credit-worthy organizations may obtain as much as 140 percent of the value of the equipment purchased. For example, a project requiring $500,000 in equipment may also fund another $200,000 of 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.
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 are divided between the contracting organization and the ESCO as follows:
- Guaranteed savings: Cost savings go to servicing the debt first. After that, the contracting organization receives a guaranteed amount and the ESCO gets the rest.
- 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.
- Paid-from savings: Cost savings go to servicing the debt first. After that, the ESCO receives a guaranteed amount and the contracting organization gets the rest.
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 output for a predetermined period.
- Energy services agreement: This is the efficiency version of a PPA, sometimes referred to as “efficiency-as-a-service.” Contract periods are typically 5-15 years. The provider installs and maintains the efficiency equipment. Once a project is operational, the customer agrees to makes service payments that are based on actual energy savings (for example, a certain amount per kWh saved).
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.
- DSIRE: The Database of State Incentives for Renewables & Efficiency (DSIRE) is the largest and most up-to-date listing of state, federal, local, and utility incentives and policies that support renewable energy and energy efficiency projects.
- Utility incentives: Make sure to contact your utility and ask if they offer free or inexpensive energy audits or rebates for energy efficiency upgrades.
- Rebates: Search for rebates and special offers, such as sales tax exemptions, credits for ENERGY STAR certified products, or recycling incentives for old products.
- 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.
Find more detailed guidance on energy efficiency project financing in the financing chapter of the Building Upgrade Manual.