Many cities want to save money and cut overhead by implementing energy efficiency projects such as building automation systems, installing solar power sources, and retrofitting facilities. While every city would like to reduce energy costs, increase revenues, improve employee comfort and productivity, and decrease carbon emissions, not every city possesses the capital to get such projects running. The best way to overcome lack of capital as a project barrier is to evaluate your city’s financing options.
An energy service company (ESCO) can guarantee the energy savings that will be generated by an energy project. By performing an energy audit, ESCOs can recommend solutions and estimate the level of savings expected. When a city signs a service agreement with an ESCO, the scope of the project is outlined, equipment upgrades are pre-determined, and energy savings are specified. For an annual fee, a Measurement & Verification (M&V) provides security, as it guarantees the project’s performance. In the case that the project does not produce the projected savings during the M&V period, the ESCO is required to provide compensation. This can be done in one of two ways: either the ESCO performs additional work at no extra cost or the ESCO makes a cash payment to the city at the end of the year.
There are a variety of ways a city can finance energy efficiency projects.
The most commonly used financing tools are capital leases, such as the non-appropriation tax-exempt lease. There are also grants available through the federal government, states, and local utilities.
With a capital lease, a city can finance up to 100% of the project cost and make payments throughout the life of the lease. By going this route, cities get the funding needed up front to complete the project. This results in an energy cost savings going forward and frees up funds to make lease payments. Over time, less energy is used, generally resulting in a positive cash flow or a budget neutral situation for the city.
Typically when using a capital lease, cities opt for non-appropriation tax-exempt lease purchase agreements, which offer lower payments than taxable financing leases. Tax-exempt lease purchase agreements decrease overall program costs and diminish interest expense. In most states, the non-appropriation clause allows the city to account for lease payments as a current expense instead of debt. Therefore, the non-appropriation clause eliminates the need for taxpayer approval and expedites the process.
Lack of funds should not be seen as a barrier to executing energy efficiency projects. The real barrier is the lack of awareness or understanding of what financing options are available. By working with an ESCO, cities can evaluate their needs and explore financing options available.