Most energy efficiency projects leave a lot of energy savings on the table because the technical scope of a retrofit project is developed within the restrictive confines of a company’s capital budgeting process. However, the energy efficiency market is rapidly evolving to include no-first-cost financing options that finally enable companies to implement projects that not only have deeper energy savings with longer paybacks, but also improve the bottom line and the sustainability of their operations.
Capital constraints are often cited as a roadblock to implementing large-scale energy efficiency projects. Most companies use their own capital to fund projects, which forces retrofits to compete against investment opportunities in a company’s core business. When pitted against “growing the business,” investments in energy efficiency are typically shelved or limited to small, single measure upgrades with very short payback (less than two or three years.) Further, when a company self-funds a retrofit they retain all of the project performance risk. Conversely, third-party financing options that fund 100 percent of project cost enable companies to implement integrated retrofit projects that increase energy savings and achieve much needed facility improvements without the performance risk. By eliminating upfront project costs, restrictions imposed by internal capital budgeting processes are removed, freeing facility and energy managers to optimize their retrofits to include efficiency measures with longer payback periods.
Some of the more innovative third-party financing options enable facility and energy managers to use “negawatts” for a retrofit. A negawatt is a measurable benefit of energy efficiency; it represents avoided kilowatt-hours (kWh) of electricity and avoided therms of natural gas. Since kWh and therms have a defined cost in terms of payments a customer would otherwise make to their utility, the value of a negawatt is clear. The preeminent negawatts financing solution in the marketplace today is the Efficiency Services Agreement (ESA). Under an ESA, customers make no capital outlay on a project and are billed only for negawatts earned. The ESA structure is analogous to a power purchase agreement (PPA) for solar PV. ESA payments are an operating expense and not a capital expense and are therefore off-balance sheet for customers.
ESA providers measure a project’s negawatts each period and bill customers on a price per unit of energy reduction (e.g., $/avoided kWh and $/avoided therms). The ESA rate is generally set below that of current utility rates, thereby enabling customers to earn savings from day one. Companies like Metrus, a leading ESA provider, also offer negawatts incentive programs for projects of a certain size.
The adage still holds — the cheapest kilowatt-hour is the one not consumed. Now these negawatts have real value: they can be put to work to fund your facility improvements.
An infographic entitled Which Financing Vehicle Gets You on the Road to Energy Efficiency is available for download on the Metrus Energy website. It outlines a series of innovative financing options that maximize the benefits of large-scale efficiency retrofits.
