Comparison of Financing Options for Energy Efficiency Projects

The following information is abstracted from the financing chapter of the Energy Star™ Building Upgrade Manual.

Note: This information was developed with U.S. audiences in mind, and may reflect tax laws and accounting practices specific to the U.S.

Equipment Purchase

In México 19% of the generated energy for the public service is generated with renewable energies. Comisión Reguladora de Energía – CRE

Equipment such as improved lighting fixtures, chillers, thermostats, etc. (and related services) can be purchased outright if you have enough cash reserves available and the investment will not harm your balance sheet. The advantage is that the savings resulting from the improved energy efficiency will be immediately available to you and will go right to the bottom line. Depreciation on most equipment purchases can also be tax-deductible. The down side is that the cash used will not be available for other, competing investments.

Loans

Conventional banks and lenders are often willing to finance energy projects, but may require substantial down payments. You may also be required to put up business or personal assets to secure the loan. Your borrowing limits and terms will depend on the debt you are currently carrying and your credit history. Some lenders may structure loans so that the payments coincide with the energy savings realized.

Leasing

In México the CRE (Comisión Reguladora de Energía) has authorized 87 permits for the installation of 2,263 MW of capacity based in renewable energies. Comisión Reguladora de Energía – CRE

Leasing can be an attractive alternative to borrowing since the lease payments may be lower than the loan payments. The laws and rules that apply to leasing are complex and change frequently, so be sure to get expert advice before signing any leasing agreements.

Capital Leases

A capital lease is similar to an installment purchase, with little or no initial outlay involved. You can take a deduction for depreciation and the interest part of the payment. The criteria for what constitutes a capital lease are found in Financial Accounting Standards Board Statement No. 13, and include:

• The lease transfers ownership of the property to you at the end of the lease.
• The lease contains a bargain purchase option.
• The lease term covers 75 percent or more of the estimated economic life of the equipment.
• The value of the lease equals or exceeds 90 percent of the fair market value of the equipment at the beginning of the lease period.

Tax-Exempt Leases

Government organizations may be eligible for tax-exempt capital lease. Rates for these leases are generally lower than market rates because taxes do not apply on the interest. One feature of this kind of lease is that your obligation to make payment will end if you fail to appropriate funds to make the lease payments. As a result, neither the lease nor the lease payment are considered debt, and you can use the energy savings from the project to make the lease payments. Unlike bond issues, tax-exempt leases generally do not require voter approval because they are considered an operating, rather than a capital, expense. If your organization is already leasing equipment, it may be straightforward to add your energy project to the existing lease agreement, especially if you have a master lease agreement in place with a lending institution.

Operating Leases

Under an operating lease the lessor owns the equipment and essentially rents it to you for a fixed monthly fee. The lessor claims any tax benefits associated with the depreciation of the equipment. At the end of the lease period, you can usually purchase the equipment at its fair market value.

Performance Contracting

In México the CFE (Comisión Federal de Electricidad) has 960 MW of geothermal capacity in four geothermal facilities, which are responsible of generating the 3.3% of the electric energy of SEN (Sistema Eléctrico Nacional). Sistema Eléctrico Nacional

Performance contracting is a financing mechanism that arose to address a common problem with energy upgrades. Organizations are often both short on cash to pay for upgrades up front and are unsure of the benefits of the investment. Under performance contracting, an energy services company, or ESCO, installs the equipment in your facility and receives payment out of the resulting savings. (For this reason, performance contracts are also referred to as shared savings contracts). This arrangement gives the service provider an incentive to make sure the project is successful.

Here are the typical steps involved in working with an ESCO to establish an energy performance contract:

1. The ESCO conducts a preliminary audit of the facility. The audit may involve an actual site visit or it may be conducted through telephone interview or online data collection. Given enough information about the facility, experienced ESCOs can give reasonable estimates of the energy savings potential of various measures, sometimes without actually visiting the site.
2. Based on the results of the preliminary audit, the ESCO will propose a specific type of energy performance contract. The contract will spell out the method that will be used to document the energy and cost savings.
3. The ESCO then undertakes an investment-grade energy efficiency audit. This involves a very detailed examination of equipment and systems at the site, measurement of electrical loads, and assessment of facility energy needs. Based on the findings, the audit analysis will identify an upgrade strategy that will clearly identify the costs and benefits of the project including metrics such as first cost, payback period, net present value, and internal rate of return.
4. For leased buildings, the ESCO will have to consider tenant/landlord issues. Under a gross lease arrangement, the landlord pays the energy bills and captures all the savings, while under a net lease the tenant pays the bills and receives the benefits.
5. Through negotiation, you and the ESCO establish the project financing terms. The two most common alternatives are guaranteed savings and shared savings. (For more information, see the Energy Star™ Building Upgrade Manual.)
6. The project agreement is signed.
7. The ESCO secures financing for the project.
8. The ESCO manages the project implementation. The ESCO may undertake installation of equipment and related systems itself, or may subcontract out this work. If the work is subcontracted, the ESCO will monitor the project closely since careful installation is required to ensure maximum energy savings.
9. The ESCO will provide any necessary training on the new systems to facilities operation and maintenance staff.
10. Generally, the project agreement will include a requirement that the building be recommissioned following the upgrade. Recommissioning ensures that the building’s mechanical systems are operating as intended and are adjusted as needed to reflect the energy upgrades that have been undertaken.
11. After the upgrades are installed and the building is recommissioned, the ESCO will monitor the energy performance of the building to begin documenting savings. The savings will be compared with the expected results from the audit. The building systems may receive further tuning to optimize energy performance. Based on the documented savings in energy consumption, the building owner pays the ESCO its negotiated share.
12. The length of the ESCO’s financing agreement and responsibility for the project will vary, but could range from 7 to as long as 20 years. After the agreement expires, ownership of the equipment and responsibility for maintaining it revert to the building owner.