Building On Earlier Topics
The goal of this workshop is to:
1. Change the way energy projects are financed internally
2. Understand how to finance energy projects with external capital
Internal Finance Models
Update Internal Purchasing Systems
Best Buy: Updated Store Lighting Options
Modify Project Proposal Process
Kohl’s: Embedding the Finance Department into the Energy Team
Internal Finance Models
Green Revolving Loan Fund
Single initial investment replenishes capital from earlier projects
Internal Price on Carbon
437 companies reported an internal carbon price in 2015
Why Use External Financing?
State or utility incentives can make the difference between meeting and missing your hurdle rate
Some financing options make your project cash flow positive from the start
Do more projects
How to Narrow Down Your Options
How many buildings will your project cover?
How much will you spend?
How much will you save?
Do you own or lease your buildings?
How long do you hold a typical location?
How quickly do you need financing?
Do you want to manage installation?
Do you want to manage operations and maintenance?
Can you take debt on your balance sheet?
As a General Rule…
If there are projects to be done, and money to be saved, somebody will finance your project.
External Financing Options
Major Initiatives or Green Construction
• Green Bonds
Traditional Energy Efficiency Finance
• Energy Performance Contract (EPC)• Energy Service Agreement (ESA)• Managed Energy Service Agreement (MESA)
Specialized Financing
• Property Assessed Clean Energy (PACE)• On-Bill Repayment (OBR/OBF)• Tax-Increment Financing (TIF)
External Financing Options
Major Initiatives or Green Construction
• Green Bonds
Traditional Energy Efficiency Finance
• Energy Performance Contract (EPC)• Energy Service Agreement (ESA)• Managed Energy Service Agreement (MESA)
Specialized Financing
• Property Assessed Clean Energy (PACE)• On-Bill Repayment (OBR/OBF)• Tax-Increment Financing (TIF)
Green Bonds
Traditional debt with a twist: lower interest rates in exchange for commitments to sustainability or energy projects.
Benefits A single bond offering can cover costs for many projects over
multiple years. Autonomy over spending bond proceeds. Lower cost of capital compared to standard private-sector bond
issuances.
Challenges Very large offerings (typically $5 million or greater) 3rd party verification of ‘green’ designation
Apple’s Green Bond
$1.5 billion
Issued in February 2016
Will finance: renewable energy
energy storage
energy efficiency projects
green buildings
resource conservation efforts
Apple’s Green Bond
$1.5 billion issuance
7-year repayment at 2.85% interest
Assuming a 20 basis point (.2%) reduction in interest from green designation: $21,000,000 reduction in interest payment
over the life of the bond
Starbucks’ Sustainability Bond
$500 million issuance
May 2016
10-year, 2.45%
Funds go to supply chain infrastructure
External Financing Options
Major Initiatives or Green Construction
• Green Bonds
Traditional Energy Efficiency Finance
• Energy Performance Contract (EPC)• Energy Service Agreement (ESA)• Managed Energy Service Agreement (MESA)
Specialized Financing
• Property Assessed Clean Energy (PACE)• On-Bill Repayment (OBR/OBF)• Tax-Increment Financing (TIF)
Energy Performance Contracts (EPCs)
The ESCO model, where a 3rd party financier takes on upfront project costs in exchange for a portion of future utility savings.
Benefits
Savings guarantees common
Streamlined ESCO services
Challenges
Requires long-term (10-20 year) building ownership
Increased security on project comes at expense of lower return on investment
Energy Services Agreement (ESA)
An innovation on the Energy Performance Contract, that incentivizes a wider range of projects and off-balance sheet financing.
Benefits “A PPA for all efficiency projects” Can be structured as off-balance sheet debt Avoids major capital expenditures Easy to scale projects across a portfolio
Challenges Long negotiation period for projects Generally for large projects (>$500k)
Managed Energy Services Agreement (MESA)
A twist on the Energy Services Agreement, where a single firm manages equipment, maintenance, and utility bill payment.
Benefits Pay one bill for everything energy-related
Typically structured to immediately lower utility spend
Challenges A 3rd party must have access to buildings for ongoing
maintenance and management of equipment
Generally for large projects (>$500k)
External Financing Options
Major Initiatives or Green Construction
• Green Bonds
Traditional Energy Efficiency Finance
• Energy Performance Contract (EPC)• Energy Service Agreement (ESA)• Managed Energy Service Agreement (MESA)
Specialized Financing
• Property Assessed Clean Energy (PACE)• On-Bill Repayment (OBR/OBF)• Tax-Increment Financing (TIF)
Property Assessed Clean Energy (PACE)
A rapidly growing financing method that pays for 100% of a project’s upfront costs and is repaid for up to 20 years with an assessment added to the property’s tax bill.
Benefits
Long term financing (e.g. 20 years), even for projects with short paybacks
Bill can be passed to future occupants or building owners
Can be used for both large and small projects
Challenges
PACE legislation must be adopted by local jurisdiction
PACE: BrandsMart USA
Home appliance and electronics big box discount retailer
3 separate PACE deals: $1.8 million, $2.225 million, and $3.1 million
15-20 year repayment, tied to property
Results 34% projected reduction in annual utility costs
PACE: Big Boy Restaurant
Big Boy restaurant in Ann Arbor
Small business
Building controls, high-efficiency HVAC and lighting
PACE assessment: $88,488
10 years, 4.75% fixed
Results
19% projected reduction in annual
utility costs = $8,300 annual savings
http://www.pacenow.org/wp-content/uploads/2013/07/7.24.2013-Ann-Arbor-PACE_Big-Boy-Case-Study.pdf
On-Bill Financing (OBF)
Finance energy projects that are repaid through a line item on your utility bill, with zero or low interest rates.
Benefits
Leverages existing billing relationship
Secure, low cost financing
Financing tied to property
Challenges
Financing typically not long term
Local utility must support on-bill program
Tax Increment Financing (TIF)
A common type of gap financing used to fund additions or expansions of existing large projects.
Benefits
Can fund sustainability improvements onto an existing project at low cost (improves financial returns)
Challenges
TIF program must be offered by local or state government
Deals are often customized and difficult to scale
Find A Structure That Fits
Major Initiatives or Green Construction
• Green Bonds
Traditional Energy Efficiency Finance
• Energy Performance Contract (EPC)• Energy Service Agreement (ESA)• Managed Energy Service Agreement (MESA)
Specialized Financing
• Property Assessed Clean Energy (PACE)• On-Bill Repayment (OBR/OBF) • Tax-Increment Financing (TIF)
External Financing Exercise
You work for a small format electronics retailer with 100 locations across the country where you are responsible for utility costs.
You have been given approval to look into external financing options…
External Financing Exercise
Annual Budget: $2,000,000
# of Stores: 100
Potential Projects:
Energy Management System
LED Retrofit
Financing Options:
Internal Funding
PACE (10 stores)
ESA (all stores)
Hurdle Rate: 10%
Payback must be <3 years
Full LED Retrofit, No Financing
95 stores LED
Cost: $1.19 million
Savings: $475,000 per year
3-Year NPV: $102,000
3-Year IRR: 22%
Simple Payback: 2.5 Years
EMS Retrofit, No Financing
50 stores EMS
Cost: $2 million
Savings: $750,000 per year
3-Year NPV: $47,000
3-Year IRR: 13%
Simple Payback: 2.7 Years
LED + EMS Retrofit, No Financing
95 stores LED20 stores EMS
Cost: $1.99 million
Savings: $775,000 per year
3-Year NPV: $120,000
3-Year IRR: 18%
Simple Payback: 2.3 Years
PACE + Internal Funds
95 stores LED33 stores EMS
10 stores used PACE
Cost: $1.98 million
Savings: $970,000 per year
3-Year NPV: $588,000
3-Year IRR: 55%
Simple Payback: 2.0 Years
Energy Services Agreement
95 stores LED100 stores EMS
Cost: $0
Savings: $75,000 per year
3-Year NPV: $187,000
3-Year IRR: ‘Infinite’
Simple Payback: Immediate
ESA + Internal Funds
95 stores LED85 stores EMS
Cost: $1.96 million
Savings: $787,500 per year
3-Year NPV: $174,000
3-Year IRR: 22%
Simple Payback: 2.5 years
Metric of Choice
Aside from PACE deals…
Greatest 3-Year IRR: Internal LED Retrofit
Greatest 3-Year NPV: Energy Services Agreement
Greatest Cash Flow: ESA + Internal Funds
What If…
You were to do this with a company and budget ten times the size?
You also had to do a full HVAC replacement in 10 stores this year?
To meet new greenhouse gas reporting requirements, your CEO is requiring that all stores track energy consumption?
Your CFO has limited the total energy project budget to $4 million (cash spent + financed projects)?
RILA External Financing Calculator
Available on RILA’s website
Condenses this conversation into 15 minute tool
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