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Facility managers who plan to outsource energy efficiency or other sustainability projects have several options when considering how to contract for or finance such projects. Here are the last three of five key factors facility managers should understand when deciding among third-party financing options such as lease financing, energy savings performance contracts, and efficiency service agreements. They are: financing risk appetite, technology choices, and the ability to seize an opportunity.
Closely related to the performance risk question (covered in Part 2 of this article) is how to allocate risk and responsibility for financing an energy efficiency or sustainability project. All three third-party financing options — leases, ESPCs, and ESAs — offer different ways to finance energy efficiency improvements that do not require an up front capital expenditure by a facility owner.
Lease financing is widely used and very familiar to many facility managers. As noted earlier, facility managers should keep in mind how U.S. accounting treatment of leases is changing and check any applicable existing debt covenants when considering lease financing options.
Under an ESPC, either the facility owner or the ESCO may arrange the project’s financing. Many ESPC contracts in the public sector, for example, are financed using tax-exempt lease purchase agreements, capital leases, or general obligation bonds, where available.
Under an ESA, the ESA provider bears the main responsibility for arranging project financing. In the past two years, the ESA financing model has become more widespread and better understood, and measurement and verification techniques continue to improve as technologies improve.
This is an exciting yet challenging time for facility managers interested in outsourcing energy efficiency or other sustainability projects. As more companies develop new technologies and improve on existing ones — such as more user-friendly and sophisticated building management systems, better LEDs, more efficient HVAC systems, and more "smart" devices — the ever-expanding range of technology choices can be confusing and even overwhelming. Few facility managers have the staff and resources to review all likely options and stay abreast of the latest innovations. An experienced ESCO or ESA provider can serve as a central contact for figuring out which technologies, vendors, contractors, and software systems are the best fit for a project and the facility’s needs. Here, an ESA approach may encourage the adoption of newer but proven technologies because of the mutually shared incentive of both the ESA provider and the facility owner to maximize actual energy savings.
The recent growth in energy efficiency technologies, related services, and innovative ways to finance energy efficiency projects is good news in that interested facility managers have more tools and options to choose from today than they did just two years ago. The flipside of this ongoing growth and expansion of the energy efficiency market is that evaluating, implementing, and monitoring energy efficiency measures is becoming a more complex task. While it is indeed a challenge to navigate this evolving energy efficiency landscape, it also presents an opportunity for facility managers to take a leadership role in improving an organization’s bottom line and increasing a facility’s overall quality and value.
Charlotte Kim is a partner in the New York office of Wilson Sonsini Goodrich & Rosati, where her practice focuses on global corporate finance with particular expertise in sectors that include energy, healthcare, medical devices, retail, manufacturing, and technology. She has structured, negotiated, and closed more than 150 transactions with a total value exceeding $20 billion.
Financing Risk Appetite, Technology Choices Also Key in Picking Energy-Efficiency Financing