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Financing Energy Efficiency Projects [+ ROI Calculator]

Image of Laura Miller
Laura Miller

Energy has always been a significant expense in commercial buildings and improving energy efficiency with Energy Management efforts has long been an important way to keep costs in check.

Often, an energy efficiency project pays for itself over the course of several years. However, the upfront capital investment and ongoing operating costs for maintaining the project may not be budgeted for or high on a finance or even facility management team’s priorities. Justifying the financial investment for an energy program can be difficult for several reasons:

  • Lack of understanding from those holding the purse strings
  • Competing projects
  • Large, up-front capital expenses

Fortunately, there are several strategies that can help free up funds or even create funds, to finance energy efficiency projects. Funding is divided into two categories: internal and external. Among these two categories, there are various options depending on your unique situation.

Download now: Energy Efficiency Project ROI Calculator

Internal funding

Internal funding refers to the process of financing energy efficiency projects using an organization’s own financial resources. This option is often the most straightforward and most valuable as it ensures that an organization reaps the full benefits of energy optimization efforts. Within the internal funding source, there are numerous options depending on your situation.

They include:

  • Operating and capital budget expenditure
  • Self-funded Energy Savings Performance Contracts (ESPCs)
  • Capital investment fund
  • Revolving loan fund (RLF)
  • Internal carbon price

Operating and capital budget expenditures

For most organizations, funding for energy projects comes from using existing capital or operating budgets. One advantage of using operating or capital expense budgets is that the process is fairly simple. However, it might require some adjustments to existing budgeting processes to ensure budget allocation for energy projects. This strategy also minimizes the need for extensive setup or management costs since most organizations already have operating and capital expense management processes in place.

Capital investment fund

A capital investment fund acts as an internal venture capital fund that provides financing, expertise, and project management resources to ensure the successful implementation of energy management projects. A capital investment fund is unique to capital budget expenditures in that they are specific and special budgets dedicated to financing projects across portfolios. They are an attractive option because of their ability to deliver a net profit from the cost savings generated by these projects.

Revolving Loan Fund (RLF)

A revolving fund establishes a dedicated budget for energy management projects using the savings created from previous energy management projects as continual reinvestment into the fund. This helps prevent unnecessary competition for general funds between high-priority facility management projects such as deferred and emergency maintenance and energy management projects.

Internal carbon price

Internal carbon price is a relatively newer practice for funding energy efficiency projects. It involves assigning costs to organizational operations that generate greenhouse gas emissions. Internal carbon prices are typically structured in one of two ways, either a real price in which departments pay into a fund proportional to the amount of carbon they’ve emitted or as a price signal where the cost shows up as a line item in financials to inform leadership of areas for capital investment, risk management, or strategic planning opportunities.

External funding

Energy efficiency projects can often be capital-intensive and require significant funds to execute. Despite nearly all investments having a positive return on investment over time, they may just simply not be feasible to execute due to capital constraints.

Despite this, society, governments, and utility providers recognize the benefits that corporate energy programs provide us and there are many resources for corporations to leverage to help fund necessary projects that attribute to minimizing their carbon footprint. Along with traditional commercial loans, incentives and rebates, and bonds, specialized energy-specific financing options are also available for energy projects.

These include:

  • On-bill financing (OBF) and repayment (OBR)
  • Commercial property assessed clean energy (CPACE)
  • Green bonds
  • Incentives

On-bill financing (OBF) and repayment (OBR)

With on-bill financing (OBF) and repayment (OBR) a utility or private lender supplies capital to fund energy efficiency projects. The OBF or OBR is then repaid through regular payments on existing utility bills. Often, OBRs and OBRs are accompanied by low-to-zero interest rates and simple contract structures that result in easy, streamlined repayment plans. However, OBFs and OBRs are only available within jurisdictions where the service is provided.

Commercial property assessed clean energy (CPACE)

A commercial property-assessed clean energy (CPACE) financing structure is a funding option where building owners borrow capital and make repayments via an assessment of their property tax bill. Like OBR and OBF options, CPACEs are only available in specific jurisdictions, making it difficult for these solutions to scale across entire portfolios.

Green Bonds

Another unique financing option for energy efficiency projects is the green bond. Green bonds work similarly to traditional bonds, except the funds are specific to green initiative projects. Green bonds are excellent for organizations looking to implement robust, capital-intensive projects that achieve a measurable impact on sustainability.

Incentives

Each year, approximately $3.6 billion in rebates, incentives, and demand response programs are available to the commercial building sector. Despite the availability of these funds, a survey in 2012 found that 45% of them went unspent.

In addition to general rebates and incentives, other programs focus on demand response and load management programs which provide incentives to reduce demand during peak energy use periods.
The Database of State Incentives for Renewables & Efficiency (DSIRE) is an excellent starting place to find incentives in your area.

Overcoming objections

Convincing financing departments that investing in sustainable energy-saving efforts can prevent a significant barrier to getting and sustaining corporate funding for energy efficiency projects.
One strategy is to show proof of concept with low-hanging fruit energy efficiency projects that result in monetary savings. Starting with low-hanging fruit should demonstrate the links between energy efficiency, corporate responsibility, and cost savings to attract the interest of finance.

Leveraging a smart building application like onPoint that enables data analysis can help you quickly validate low-hanging fruit projects and provide backup for easier buy-in on future projects. A smart building application that leverages intelligent fault detection and diagnostics (FDD) can also serve as a low-hanging fruit itself by providing insights into quick-hit energy efficiency opportunities.

Additionally, creating a business case for your energy management project can help demonstrate expected costs and payback periods. At Buildings IOT, we’ve created an Energy Management ROI Calculator and Business Case Template to help you estimate the return on investment of energy efficiency programs to help make the business case for undertaking a selected energy optimization project.

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