Power and Pitfalls for Energy Efficiency Financing

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On the face of it, green infrastructure projects seem to have it all. Positive environmental outcomes AND potential financial savings!?! Where do we sign up? But the truth is if these projects and their associated financing mechanisms are not structured correctly, the promise of these projects can fade quickly, resulting in additional strain on agency budgets and disillusioned staff and elected representatives. To prevent loss and undesired results from creeping in, agencies can take a couple of steps to ensure their green infrastructures deliver on potential savings. According to James Wawrzyniak from Jones Hall, Bud Levine and Rob Pankratz from Wulff, Hansen, and Co., there are ten steps you can take to make sure your project pays off:

  1. Select the right Energy Service Company (ESCO)
    ESCOs provide a broad range of energy solutions: design, construction, implementation, maintenance, retrofitting, energy conservation, risk management. While California Law allows for agencies to sole source ESCOs, agencies should consider conducting an RFP to ensure they select the best ESCO for their agency’s needs.
  2. Keep your project cost assumptions real
    Understand your project’s original scope, assumed costs, and potential savings. To avoid project scope creep or “sub-projects,” which may seem like they will provide savings but ultimately will not. As Rob Pankratz says, “not all project savings are created equal.”
  3. Consider proper sources of repayment
    How will your agency pay for the project? Through lease payments payable from the General Fund and internally allocated to the benefiting Enterprise Fund? Could pledging net revenue or a portion of rates in enterprise funds to minimize impacts on the General Fund?
  4. Understand how energy costs savings are calculated
    Recognizing the time value of money is essential when calculating energy cost savings. Discount savings to their Net Present Value using the cost of capital as a discount rate and set a range of realistic assumptions on annual escalators to calculate any anticipated savings accurately.
  5. Understand the all-in TIC and other costs
    Be mindful of the all-in “true interest costs” and other costs like upfront financing fees, legal expenses, and lender review.
  6. Explore low-cost and subsidized financing options
    The State and Federal government offer low-cost financing for “green projects” through a variety of programs. In addition, there may be cost-free grants available for your projects. These programs can take additional time; however, you should work with your municipal finance advisor to identify your options for your project.
  7. Consider Operation and Maintenance (O&M) Costs and Service Provider
    All equipment, including new energy efficiency equipment, requires some level of on-going O&M costs. While your agency may complete O&M work, ESCO or another outside vendor, improper and insufficient O&M may offset any benefits from set guarantees from your ESCO.
  8. Consider the Limits of a System’s Useful Life
    The equipment depreciates over time and will eventually need to be replaced. Sometimes with these projects, savings are overstated over a more extended period that fails to account for the useful life of the equipment. Excess savings can provide for needed replacement costs to extend useful life.
  9. For solar projects, consider leasing vs. owning vs. Power Purchase Agreements
    Solar projects have additional financing alternatives available, which will impact any potential savings. For leases, O&M costs will remain with the lessor. Under Power Purchase Agreements (PPAs), a 3rd party builds and owns the facility and sells back the power to the agency at a contractually agreed-upon rate. However, PPA providers provide significantly lower savings than what could be obtained by system ownership, and termination costs alone can be cost-prohibitive and legally complex.
  10. Choose the right financing vehicle/lender/invertor for your agency.
    ESCOs promote one-stop-shop convenience, packaging financing with the equipment and installation. However, by having potential lenders compete for your project, agencies may receive more favorable terms than what can be found in the one-stop-shop offers of ESCOs. Check with your municipal finance advisors or bond counsel to help identify the best financing vehicle for your agency.

If you are interested in learning more about financing energy efficiency projects, feel free to email Bud Levine (blevine@wulffhansen.com), Rob Pankratz (rpankratz@wulffhansen.com) or James Wawrzyniak (Jwawrzyniak@joneshall.com) for more information.

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