This article is from the May 15, 2013 City of Jackson Questline Newsletter.

Financing Energy Efficiency Projects

Key Points

Energy-efficiency projects can provide significant, long-term savings in operating costs.
Financing options include borrowing, lease purchase agreements and energy-performance contracts.
Federal, state and local incentives can help to reduce costs associated with energy-efficiency projects.

Reducing energy use is a great way to lower your operating costs. While conservation measures can help, energy-efficiency upgrades provide the best opportunity to achieve long-term savings. Efficiency projects can range from a single-system retrofit, such as a lighting retrofit, to a whole building approach where each system is designed based on how it interacts with other facility processes.

A major barrier to implementing energy-efficiency projects is the upfront costs. Direct internal funding avoids financing costs, but the funds may not be available. Also, the project may tie up money that could be used for other purposes, such as marketing or product development. Fortunately, there are a variety of alternative methods available to help fund energy-efficiency projects.

Financing options

Careful consideration should be given to the various types of financing available, keeping the size and scope of the project in mind, and the associated risks and rewards. Commonly used financing options include borrowing, lease purchase agreements and energy performance contracts.

Borrowing. In debt financing through a commercial lender, the goal is to retrieve the financing costs through savings from the efficiency upgrade. Borrowing is a better option for larger investments involving multiple buildings, where significant energy savings are assured. When evaluating debt financing, compare the type and complexity of the financing options against the size and risk of the project.

Lease purchase agreements. These are typically offered by commercial leasing corporations, financing companies, banks, investment brokers or equipment manufacturers. They can help to defray the upfront capital costs associated with energy-efficiency projects. Similar to debt financing, the lease is ideally structured so energy savings from the project are enough to cover finance charges. The time period of lease agreements typically ranges from 5 to 10 years. Specific lease agreements vary according to the complexity of the project, state laws and specific lending policies.

Energy performance contracts. Energy performance contracts are financing packages from energy service companies (ESCOs) that include energy-saving guarantees and associated design and installation services. Under an energy performance contract, the ESCO will provide financing for a specified set of energy-efficiency retrofit measures, along with associated services. The scope of the contract can vary widely, from a single system upgrade, to an entire building retrofit. The contract should outline project costs and expected energy savings, and should establish a procedure for distributing those savings. See the U.S. Department of Energy fact sheets for more information about what to look for in an energy performance contract.

Incentives for energy efficiency

While obtaining financing is critical, a variety of federal, state and local incentives are available that can reduce your upfront costs and provide a faster return on your investment.

At the federal level, the Energy-Efficient Commercial Buildings Tax Deduction allows for deductions ranging from $0.30 to $1.80 per square foot for qualified equipment installations in buildings certified as meeting specific energy reduction targets in interior lighting, building envelope or heating, ventilating and air conditioning systems. The deductions are currently set to expire at the end of 2013. The Business Energy Investment Tax Credit provides tax credits of up to 30 percent of the cost of installing solar, wind, geothermal and other renewable energy systems.

For information about state and local incentives available in your area, see the Database of State Incentives for Renewables and Efficiency (DSIRE).