On-Bill Financing For Energy Efficiency Projects Video
We are paying for energy efficiency projects whether or not we do the projects. Why? The payback is already in your utility payments.
Energy efficiency equipment differs fiom other capital equipment, because the dollars saved by installing energy efficiency equipment can be used to pay for the project.
Postponing the installation of energy saving equipment can be an expensive decision. Cost savings from increased energy efficiency can be used to finance the new energy saving equipment;
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.
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 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.
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.
Upfront costs are a major barrier to implementing energy efficiency projects in homes and businesses. On-Bill financing is a the best alternative when financing energy efficiency projects because the source of repayment is already in the utility line item in your operating budget
Keeps costs completely off the balance sheet. Utilities will sponsor 100 percent of the upfront costs of a retrofit and allow the customer to pay back the investment through their monthly utility bills. Because customers are saving money through efficiency from day one, they are able to pay back the loan and interest, without ever having to swallow capital costs.
Considering the low default rate on paying utility bills (most people will do what it takes to keep the lights on), and given the fact that efficiency retrofits start saving money immediately, efficiency financing investments ought be considered extremely low-risk.
Where to Start
The top three projects with proven energy and/or capacity savings are eligible, provided they meet the eligibility requirements. Examples of projects include:
Interior Lighting systems
Pumps and motors
Parking Lot Lights, Streetlights
Access to capital for an energy-efficiency upgrade need not be an issue. Some upgrades require little funding. For those that do require investment, don’t worry; there are many traditional and non-traditional financial resources available. A well-designed upgrade can provide your business a positive cash flow from energy savings while paying off the capital investment for new equipment.
It’s your business decision to weigh your competing needs for capital versus continuing increases in operating costs for energy. Remember, even a longer return-on-investment on energy efficiency results in affordable comfort, and new, more reliable equipment that will pay for itself with energy savings. Strategic energy efficiency investments are your hedge against the certainty of higher utility bills that you cannot control.
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Filed under: Energy Efficiency