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Part 3: ESCOs Offer Design, Contracting, Financing Services for Complex Projects
By Aaron Binkley
May 2010 -
Financing for energy efficiency projects can convert a capital expenditure into an immediate cash-flow-positive investment. Financing generally means executing an equipment lease with a vendor's financing company, and for low risk projects with credit-worthy borrowers, lease rates can be as low as 8 to 9 percent for 36-month terms. Energy efficiency projects that produce substantial savings can often be financed with monthly payments lower than the energy cost savings.
An increasing number of contractors and vendors are taking a page out of the ESCO book and offering lease financing for limited-scope energy efficiency projects. This"ESCO-lite" model generally provides limited design-build engineering, contracting and equipment lease financing. Ongoing operational oversight and improvements outside their scope of expertise are omitted. For example, a vendor that has experience with HVAC equipment is unlikely to suggest improvements to the building envelope or lighting under an ESCO-lite model.
An example of an ESCO-lite financing program is one that supports tenant energy efficiency projects. The program would provide energy savings opportunities where tenants are responsible for their own energy use under triple-net leases, and applies to lighting, HVAC and other energy efficiency upgrades. The program allows tenant businesses — regardless of size or credit rating — to undertake energy efficiency projects that pay for themselves within the term of their existing lease.
In such cases project design is provided with no upfront costs and funding is offered for the projects. Financing the project on behalf of tenants creates immediate cost savings for the tenants and is done via a simple two-page lease amendment. The amendment specifies the project scope and a guaranteed energy savings amount. Each repayment schedule is tailored to ensure that financing costs are comfortably below expected energy savings. This program allows tenants to benefit from the building owner's scale, and energy efficiency improvements are funded out of a tenants' operating budget rather than becoming a capital expenditure, which can circumvent the difficulty facility managers sometimes have getting corporate-level approval for energy efficiency capital projects.
The time is ripe for energy efficiency projects. Financial incentives are widely available and vendors have become more sophisticated about tailoring project solutions to the needs of facility managers and building owners. It is even possible to complete energy efficiency projects out of operating budgets with no upfront costs.
This begs the question: what are you waiting for?
Aaron Binkley is director of sustainability programs for AMB Corporation.
The terms rebate and incentive are often used interchangeably, but there are critical differences. Rebates are pre-determined cash amounts for itemized measures. Advantages:
— Aaron Binkley
Part 1: Financing, Utility Programs Expanding Access to Capital for Property Owners
Part 2: HVAC, Lighting Efficiency Can Help Acquire Financing for New Projects