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Financing Energy Efficiency for Large Customers

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?

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Financing Energy Efficiency for Large Customers

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  1. Financing Energy Efficiency for Large Customers

  2. 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

  3. 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

  4. 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

  5. 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

  6. Off Balance Sheet Financing Structure Shared Savings Agreement USER ECM ESCO “Shared Savings” Operating Payments Assignment of Payments Project Funds and PPS payments Performance Guarantor Financier

  7. Financing Barriers and Solutions?             

  8. 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

  9. 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

  10. The Mechanics of Federal Financing Performance Gov’t. Contract Payments Project Financing Gov’t. Contract Payments Government Agency Utility/ESCO Financier

  11. 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

  12. 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

  13. Recommendations Use a funnel to identify your finance market: Find customers with strong incentives to install EE Of those customers with strong incentives find ones where financing removes barriers to implementing EE Determine which financing barriers are present 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

  14. Questions?

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