New Energy Efficiency Programs and Financing Mechanisms Available
By Lindsay Audin - December 2010 - Energy Efficiency
While many energy efficiency upgrades and renewable energy systems fully pay for themselves over time, securing financing for their first cost is always a hurdle. For decades, utilities offered rebates that paid part of the cost on a piece-by-piece basis. While much of that funding disappeared during the era of electric deregulation, new mandates (e.g., cut peak demand and greenhouse gas emissions, stimulate the economy) have resurrected rebates and other forms of funding. Some help shorten paybacks to where they're just too good to miss. This is a good time to check out what's available — before it's gone again.
Some readers (the ones with a bit of grey or thinning hair) recall a time when, in some states, rebates were being lavished on early adopters that installed the first electronic ballasts, variable speed drives, and other at-the-time cutting-edge efficiency technologies. Rebates reached as high as $1 per avoided watt, effectively covering most of the cost of some upgrades. New energy products were being designed around rebate structures so they could be promoted as "free, after rebate."
That golden age ran from the late '80s into the mid '90s. But between 1993 and 1998, as electric deregulation became the mantra for cutting electricity costs, such programs were (on average) cut in half. Many disappeared completely. For quite a while, rebate pickings became slim.
Happy Days are Here Again
By 2008, however, the total level of funding support (from utilities or state energy offices) nearly tripled from its low point, now approaching $2.5 billion a year. Layered on top are federal, state and, in some cases, city income and property tax deductions or credits. The recent federal stimulus is supporting a variety of "shovel ready" energy projects, putting billions more into the pot.
Factors driving this growth are sometimes synergistic. To cut greenhouse gases, for example, some states have been pushing for retirement of older/dirtier power plants. Unless grid-wide peak demand is also cut, however, new power plants would be needed to replace them. Where such programs could cut power sales, utilities are being given incentives to do so under a process called "revenue decoupling." Such efforts ease the way for utilities to support rebate programs they might otherwise oppose. A dozen states have followed that path, and a similar number are considering it.
Several states now have large energy offices, funded by fees levied on each kWh sold, providing another source of rebates and grants. Now at a decade-high peak, such financial incentives have also become more inventive and sometimes more customer-friendly, if not less bureaucratic.
The structure of many programs echoes those of the past: replace a T12 lamp and magnetic ballast with a T8 and electronic ballast, and receive either $XX for the change, or $.XX per saved watt. Others pay $.XX per avoided kWh for the first year of operation, or some other simple formula. Some pay for both demand and consumption reductions resulting from the same measure.
Unlike the past, some programs require measurement and verification (M&V) to prove savings as a condition to receive the final portion of a rebate, withheld for up to a year. In other cases, detailed computer models by independent third parties are accepted as sufficient proof that savings are likely to occur, especially for complex systems (e.g., variable speed drives). Some programs cover part of the cost of energy audits, and a few will pay for commissioning or HVAC equipment tune-ups.
New Kids on the Block
Various inventive programs have also appeared on the scene, including the following.
- Natural gas efficiency and fuel switching. Efforts to improve use of natural gas (the cost of which has dropped significantly, relative to oil) have led to incentives to raise gas-use efficiency, replace electric equipment with gas-driven systems (e.g., compressors, chillers), and even to switch from oil to natural gas, which emits about 30 percent less carbon for the same heat output. Second only to vehicular use of oil, many buildings (especially in the Northeast) continue to consume a lot of heating oil which could be displaced by natural gas. In the past, no rebates were provided for fuel switching because doing so was not seen as an energy conservation measure.
- Solar renewable energy credits/feed-in tariffs and other onsite generation support. Reversal of bygone policies promoting growth of central utilities has led to programs supporting on-site power production. Unlike one-time rebates, some provide ongoing cash flow for the life of a system. In a few states, solar renewable energy credits or feed-in tariffs pay owners of photovoltaic (PV) panels much more for the power they produce than the local $/kWh utility rate. Solar renewable energy credits may be sold by the owner through an auction process or directly to a utility, at prices ranging from $.30 to $.60 per kWh. Feed-in tariffs (popular in Europe, but relatively new in the United States and Canada) do the same, but at prices fixed in utility tariffs. Either way, a cash stream is created that can significantly shorten the payback period or attract third-party investment for such solar electric systems.
Other programs now support installation of cogeneration, i.e., combined heat and power, systems. Using natural gas, such mini-power plants generate a portion of the power needed by a facility while also supplying some of its heating requirements, at thermal efficiencies higher than those of utility fossil-fueled power plants. The net result is a reduced grid load and lower overall energy costs for the customer. Many utilities, previously seeing such units as competition to their power monopolies, now perceive them as a way to reduce the need to beef up their power distribution systems.
- Demand response. To minimize the use and construction of expensive peaking power plants and delivery infrastructure (e.g., high-voltage transmission lines), demand response programs in more than 20 states now pay end users to reduce load (or run on-site generators) when called upon to do so. A whole industry of "curtailment service providers" has grown up around that incentive process, with firms managing and automating such demand reductions on behalf of customers for a share of the dividend.
One such program involves installation of radio-controlled thermostats for small A/C systems. In exchange for a rate reduction, customers allowing installation of the devices let utilities briefly shut off A/C compressors while allowing fans to continue to run. When sequenced among thousands of A/C units, overall demand is reduced with minimal temperature impact on individual customers' facilities.
- Federal stimulus and tax incentives. From Uncle Sam come incentives in several forms. Stimulus funding was provided to states to support "cash for clunker" programs designed to buy down or rebate part of the cost of new appliances. Focused on residential customers (but also tapped by smart landlords), thousands of old refrigerators, freezers, etc. have been replaced by more efficient units. Such retirements also took out of circulation a lot of the refrigerants having the highest greenhouse gas potential.
A wide variety of community energy block grants were awarded stimulus funding to support energy upgrades in municipally-owned facilities, including courthouses, police/fire stations, low-income housing, office buildings, street lighting and water supply/treatment systems.
While neither loans nor rebates, both federal and some state governments offer tax deductions for upgrades. Under the 2007 Energy Policy Act, up to $1.80 per square foot of a building may be deducted from federal income tax for qualifying projects involving lighting, HVAC and envelope upgrades. Other deductions are available for installing PV panels, geothermal heat pumps, wind generators, cogeneration, etc. To get up-to-speed on them, check out the Tax Incentives Assistance Project (TIAP) at www.energytaxincentives.org.
Novel Financing Mechanisms
To help customers cover what rebates and grants don't, innovative financing methods may be available. Various non-governmental organizations have developed relationships that connect lenders, energy service companies (ESCOs), and customers to help the latter manage the financing of their efficiency upgrades through off-bill financing (meaning off the utility bill). Such groups exist at both the local level (e.g., Cambridge Energy Alliance in Cambridge, Mass.) and national level (Clinton Climate Initiative).
Some utilities are offering on-bill financing that allows the cost of an upgrade to be paid over time via a utility loan. Premiums appear as a recurring monthly line item on a utility bill. While available for several decades to manage customer purchases of utility distribution transformers or extra feeder cables, such arrangements have recently also involved installation of PV panels and other options. Programs are designed so monthly payments are less than the monthly energy cost savings, thus providing a positive cash flow at all times. Once fully paid off, the customer then keeps all the savings. As usual, various limits, paperwork and other steps are involved, and programs vary widely among utilities offering them. Utilities in both Manitoba (Canada) and in California now offer them at very low or 0 percent interest rates. Depending on the type of customer, loan terms range from 5 to 10 years.
Incentives are provided to encourage activities that one might not otherwise pursue. Nobody gets paid for doing what they must do. As energy codes get tighter, and inefficient equipment is no longer sold because of tougher efficiency standards, some of these programs will be phased out. Rebates for replacing incandescent lamps with compact fluorescents, and T12 fluorescents with T8s, for example, may disappear as many of those old-style lamps cease being sold in the United States, starting in 2011.
Back in the '90s, facility managers who failed to take advantage of such funding while it was available never forgave themselves. Their bosses weren't too happy, either.
Lindsay Audin, CEM, LEED AP, CEP, is president of EnergyWiz, an energy consulting firm based in Croton, N.Y. He is a contributing editor for Building Operating Management. He can be reached at email@example.com.
Reincarnation of Rebates: Energy Efficiency Incentives at a Decade High
Part 1: New Energy Efficiency Programs and Financing Mechanisms Available