financing energy efficiency for large customers

|ICC Staff Workshop on Energy Efficiency – November 6, 2008

Financing Energy Efficiency for Large

Customers


General Observations• Don’t confuse the two key financing questions:

– Would financing remove a barrier to implementing EE?• EE is not a silver bullet – be sure it would remove the barrier

– What are the barriers to financing an EE project?

• One size does not fit all – Different approaches for different market segments– Different finance barriers require different solutions– Understand the existing EE finance market

• Target customers that have strong incentives to install EE

• Program design – if you build it they may not come, or worse…– What happens to rebates?

• Program delivery is as important as program design


Financing Barriers for Large Customers

• Lack of knowledge about financing EE

• High transaction costs relative to benefits

• High interest rates

• Two to three year payback requirement

• Short-term business horizon

• Poor credit


Solutions to Financing Barriers?

• Interest rate buy-down

• Liberal terms and conditions

• Qualified sales people

• Streamline the process – e.g. Cambridge

• Public support/pressure

• Off balance sheet financing


Off Balance Sheet Financing

• History

• Operating lease vs. capital lease – Why does it matter?

• Essential elements– Energy service company and performance contract

– Share the savings (70/30)

– ESCO owns the installed EE equipment

– Stipulated fair market value buy out

– Finance term is less than economic life of measure


Off Balance Sheet Financing Structure

USERESCO

Financier

Assignmentof Payments

ECM

“Shared Savings” Operating PaymentsProject Funds and

PPS payments

Shared Savings Agreement

Performance Guarantor


Financing Barriers and Solutions?

Interest Rate Buy-Down

Liberal Terms and

Conditions

Qualified Sales People

Off Balance Sheet

Financing

Streamline Process

e.g. Cambridge

Public Support/Pressur

e

Lack of knowledge about the finance

program

High transaction costs

High interest rate

Two to three year payback requirement

Short term business horizon

Poor credit


Markets Where EE Financing is Working

• State, county and municipal– Working especially well with k-12 schools and public

colleges

• No Illinois - $40m, E Illinois - $35m

– LBL draft study – suggestions for improvement

• Federal public housing – Baltimore - $100m, Boston $50m

• Federal government customers


Federal Alternative Financing • Feds told to implement all projects with less than a ten year payback

• Executive Order 13423 and Energy Act of 2007 require

– 3% energy savings per year from 2007-2015

• Standardized contracting procedures and documents– RFPs are not required for every project– Model documents streamline process

• Utilities are permitted to sole source with Feds– Com Ed installed $100m in EE at Great Lakes and Fermi 1995 -2000– According to Fed database, Com Ed serves over 100 federal facilities

• Selected ESCOs may work with Feds– ESG is currently installing $6 million of EE at VA hospitals in Chicago– Ameresco is looking at $2m + at Fermi– Constellation is talking with Great Lakes about projects


The Mechanics of Federal Financing

Utility/ESCO Government Agency

Financier

Performance

Project Financing

Gov’t. Contract Payments

Gov’t. Contract Payment

s


Federal Financing Elements of Success

• Motivated customer– 2007 Energy Act and Executive Orders

– National Security

– No capital dollars/declining O&M budgets

• Program is paid for out of operating dollars

• Streamlined process– No RFP process - contractors are pre-selected

– Pre-approved model agreements and pricing

• Feds are a good credit – numerous financiers


Recommendations• Attempt to incorporate elements of successful

financing programs into the C&I program design– Find a way to turn capital costs into operating expenses

– Reduce transaction costs

• Standardized agreements

• Standardized pricing

• Limit number of RFP/bidding processes

– Create strong credits through bundling and credit enhancement

– Create strong financial and non-financial incentives for customers that will offset their payback restrictions and transaction costs


Recommendations• Use a funnel to identify your finance market:

1. Find customers with strong incentives to install EE

2. Of those customers with strong incentives find ones where financing removes barriers to implementing EE

3. Determine which financing barriers are present

4. Design a program that overcomes the barriers with appropriate solutions, using highly qualified sales people

• Utilize existing state and federal finance programs to the maximum extent

– Improve the state program


Questions?

financing energy efficiency for large customers

Documents