Financing energy efficiency projects.

• Author: Zobler, Neil
• Position: Using cost savings from increased energy efficiency to finance equipment

Postponing the installation of energy saving equipment can be an expensive decision. This article shows how the cost savings resulting from increased energy efficiency can be used to finance the needed equipment.

Shenendehowa School District in upstate New York recently faced escalating energy and maintenance costs for seven buildings constructed between 1952 and 1969. Back then, lowest first-cost rather than life-cycle cost determined the type of equipment purchased. Three of the buildings, which relied exclusively on expensive electricity for heating and air conditioning, required capital improvements. But budgets already were strained, and Shenendehowa officials were unwilling to approach taxpayers to issue additional bonds.

To solve their problem, school officials installed new energy-efficient equipment that would be paid for from future energy cost savings. With assistance from the state energy office, the district identified an energy services provider that offered an energy services performance contract to fit its needs. The provider guaranteed the equipment performance and energy savings, which were verified using rigorous measurement and verification techniques.

Instead of bundling the financing under the performance contract, the district chose to obtain financing directly from a commercial lender using a 10-year tax-exempt lease-purchase agreement. The agreement contained non-appropriation language, which limited payments to the operating budget savings, thereby avoiding the capital budget process. This financing option allowed Shenendehowa school officials to successfully install energy-efficient equipment without raising taxes.

This article introduces energy performance contracts and the corresponding benefits of using tax-exempt lease-purchase agreements as the underlying financing vehicle. It explains how to use the energy inefficiencies buried in your current operating budget to pay for energy-saving equipment. Clear financial reasoning and cost modeling demonstrate that energy efficiency projects really can pay for themselves out of existing operating budgets without having to compete with capital budget projects. The article also presents a "cost of delay" model that quantifies the opportunity losses caused by delaying the installation of energy efficiency projects.

Show Us the Money!

Most energy efficiency projects stall due to one or more of the following perceived barriers: lack of money to fund them, lack of time or personnel to design and plan them, or lack of internal expertise to implement them. A number of common misconceptions also can undermine energy projects. Consider, for example, the following statements:

* If its not in this years budget, it simply has to wait.

* Equipment improvements must be paid from the capital budget.

* Paying lower interest (by floating bonds) or no interest (by delaying the project and planning it into future budgets) saves money and, therefore, is in the best interest of our organization.

* Taxes or fees will have to be increased to pay for equipment improvements.

* Performance contracting with an energy services provider is expensive and unreliable.

* Tax-exempt lease-purchase agreements don't lend themselves to energy projects and are expensive alternative funding solutions.

In fact, capturing wasted energy dollars may be easier than you think. Using a performance contract and corresponding lease-purchase agreement to finance the purchase of assets may allow the repayment to be treated as an operating expense. This is especially important when financing energy efficiency projects because the source of repayment is already in the utility line item in your operating budget.

In contrast, there are several significant challenges associated with using capital budget dollars for energy efficiency projects. Capital dollars are usually already committed to other projects. Even when they are not, capital dollars often are scarce, so energy efficiency projects must compete with other priorities. And last but not least, the approval process for requesting new capital dollars is time consuming, expensive, and typically requires voter approval. Waiting for capital dollars to finance energy projects can cost governments millions of dollars.

Energy Services Performance Contracts

Energy services performance contracting is a common way to implement energy efficiency improvements and frequently covers financing for the needed equipment. An energy services performance contract is an agreement between a government and a private energy services provider, or ESP. The ESP identifies and evaluates energy-saving opportunities and recommends improvements that can be paid for through savings. The ESP usually guarantees that savings will meet or exceed annual payments to cover all project costs. If the savings do not materialize, the ESP pays the difference. The contract clearly identifies the procedures by which these savings are to be measured and verified.

A common concern is the ESP's ability to meet future obligations should the energy...