Energy Financing Report How to Make Your Energy Retrofit Happen, Including Financing and Selling the Project to the C-Suite
How to Make Your Energy Retrofit Happen, Including Financing and Selling the Project to the C-Suite
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acilities managers and commercial property owners increasingly accept that they can save their company significant amounts of money through reduced energy use and lower plant operating costs. But engaging in energy efficiency projects and upgrades can be costly and companies don’t always have the funds to get started. Fortunately, funding options are available for companies that know how to find them. Companies also struggle with a lack of know-how. Energy management projects have a variety of moving parts and can seem overwhelming. Facility managers must consider questions such as : Where are our biggest energy savings opportunities? How do we identify the most effective energy management techniques? What measures can we take that will quickly pay for themselves? Where do we go for help with funding? How do we start implementing the projects? And how do I sell the project to my higher-ups? In this report, we will look at two of these funding options, performance contracting
and PACE financing, and will answer some of these questions in order to help you get started.
Why Act Now? Energy costs have become a rising concern for a growing number of companies and investments in energy efficiency projects have seen heightened activity, says Dan Dowell, vice president of Bundled Energy Solutions for facility solutions provider ABM. In addition to rising energy costs, companies are being spurred to act now for a number of reasons. Most often, companies put energy efficiency projects into place because they have aging assets. Companies that have not made a facility upgrade since before the downturn of the economy have assets that have gone seven or eight years since the last improvements. Aging equipment leads to rising energy costs as the equipment becomes less efficient. At the same time, operating expenses also rise because of the increased need for maintenance.
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When companies don’t have the capital to change the situation by purchasing new equipment or engaging in an upgrade, energy costs and operating costs continue to rise. “Many are learning that they must move forward with energy efficiency projects now, because deferred maintenance on infrastructure can be so great that, in some cases, it has crippled organizations,” says Dowell. In fact, deferred maintenance can add as much as a 40 percent increase in utility bills from not engaging in proper maintenance on chillers and boilers or on other equipment, says Len Hoey, PEM, an energy engineering manager at DEACS Utility Savings Initiative. “So if you have a bill that should be $100K, all the maintenance you’re not doing can add about $40K,” Hoey says. “And that $40K would buy a lot of maintenance.” In other words, companies are not saving money by not maintaining their equipment -- rather, they are spending the same amount of money, but they’re giving it to the utilities rather than using it themselves for upgrades. And as the US Department of Energy points out, preventative maintenance programs can save as much as 12 percent to 18 percent in equipment replacement and repair costs. Another reason companies are moving forward with energy efficiency projects now is because capital costs are so low at this time. “Energy costs have stabilized, interest rates are lower than we’ve seen since the early sixties, and the forecast is that they’re not likely going to get cheaper. It’s a powerful time to invest in fixing or upgrading facilities if the company is not able to finance the
upgrades on their own,” Dowell says. Investments in energy efficiency are only expected to grow. The International Energy Agency estimates that $8 trillion will be spent worldwide on efficiency between now and 2035, according to an article in The Guardian.
How Do I Find Funding? In the past, impediments to efficiency efforts has been a lack of capital. In many areas, utility rebate programs will offset some of the cost of the efficiency measures, but even with rebates there will generally still be the need for some capital outlay, pointed out Martin Flusberg, of Powerhouse Dynamics, in a recent Energy Manager Today article. But as payment models have become increasingly available, more companies are moving forward with improvement projects. Property assessed clean energy (PACE) financing and energy performance contracting (EPC) from energy service companies (ESCOs) are two popular ways to finance projects. The goal, as it has always been, is to pay for upgrades through the energy savings that are realized, rather than with an initial outlay of funds. The difference now is that smart technologies are available that allow companies to track and measure, with certainty, the energy and financial savings, making it more attractive than ever, The Guardian article points out.
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PACE Property Assessed Clean Energy (PACE) is one of several innovative financial solutions that can remove these funding barriers. PACE is a financing mechanism passed on a state by state basis that allows you to fund 100% of your facility upgrades through property tax assessments, over a term of up to 20 years. This enables companies to implement energy efficiency and renewable energy upgrades to their facilities with no upfront costs. Unlike traditional financing, the loan is attached to the property and not the company or individual, so the assessment transfers to the new property owner if the property is sold. “Traditionally, the private sector would basically have to get a ‘second mortgage’ on their facility,” says Bill Maurer,
senior vice president of facilities services with ABM. “That scares them, because they don’t know how long they’re going to own that building or if they’re going to want to turn around and sell it.” The other problem with a traditional loan, says Maurer, is that if a company borrows money, say $5 million for a boiler and lighting upgrade, that loan then limits the company’s borrowing capability for other projects. PACE is not for everyone. The program is limited to areas that have both enacted PACE legislation and implemented a PACE program, so it may only be available to a handful of customers who happen to be located in a PACE district. Additionally, an interested building owner must be current on taxes owed on the property and must not have
Is PACE available in your state?
Current as of 12/15/14 Source: ABM
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Case Study
Energy Financing for Schools
Creative Energy & Financing Solutions Impact Students’ Learning Environment Twenty-first century schools across the country face unprecedented challenges as they strive to prepare students to compete in a dynamic global market place. While innovation and technology are at the forefront of education principles, many schools are faced with choosing between funding needs. According to the U.S. Green Building Council (USGBC), $542 billion is required over the next 10 years just to modernize our K-12 educational infrastructure, which does not include the need to fund technology upgrades in the classroom or new construction to cover average daily attendance growth. Soaring utility costs only add to the funding problems. Energy has become an enormous expense for U.S. K-12 schools – approximately $8 billion each year per the U.S. Environmental Protection Agency (EPA) and U.S. Department of Energy (DOE), which is 30 percent more than necessary according to ENERGY STAR reports. This huge cost eats into the operating budget and negatively affects spending for technology and other educational needs and limits the programs schools can offer. The EPA and DOE estimate that by improving energy efficiency, K-12 schools can save $2 billion annually. As a result, many school districts across the country are taking dramatic steps to increase the energy efficiency of their buildings, with the most innovative turning their wasted energy into funding for critical facility improvements. Through creative energy retrofit packages, schools are beginning to find ways to fund major technical infrastructure upgrades, reduce energy use and operating costs, and meet sustainability goals and requirements – without any negative impact on the education budget or increasing the burden on taxpayers.
Case Study: Altar Valley School District The Altar Valley School District, located in a rural community outside of Tucson, Arizona, encompasses nearly 600 square miles of high Sonoran desert and mountains. Summers in this area can be extremely hot and students often face outdoor temperatures in excess of 100 degrees at the beginning of the school year. While already dealing with aging HVAC units and high utility bills requiring budget allocations to continue to be maintained properly, the Altar Valley School District received notice in 2013 on new multi-year budget cuts that would begin the following year. In the 2014-2015 school year alone, the estimated budget decrease was set at $147,000, meaning administrators were not only confronted with the possibility of having to cut spending on educational and sports programs, but also had to determine a way to continue to maintain their aging infrastructure and increasing energy costs. After careful analysis alongside ABM, Altar Valley tailored a solution that allowed its schools to make significant technical renovations through an innovative retrofit package without burdening an already tight budget – since the energy savings were guaranteed by their provider, the solution would be budget neutral. Altar Valley was able to make over $430,000 in facility upgrades, and the customized program is guaranteed to save more than $732,000 in energy and operating costs over the next 15 years.
“This guaranteed energy performance contract, $433,000 worth of capital work, could not happen any other way. In our District, it is unfeasible and unrealistic to bond or have a capital override. But this is work that has to be done now, particularly on the HVAC side, we’ve identified 9 units district wide that were aging to the point that we were going to have to do something” Dr. Nathan McCann, former Altar Valley School District Superintendent.
been delinquent in the past three years, or since owning the property; the same goes with mortgage payments. The owner also cannot be in bankruptcy, writes Michael Park, of Noesis Energy, in a recent Energy Manager Today article.
PACE Project Set to Save Millions One PACE project is being implemented by BrandsMart USA’s South Dade County, Florida, location, and is expected to save 35% on its annual utility costs. The improvements will include major enhancements to the facility’s heating and cooling equipment, replacing lighting fixtures with LED lighting, and modifying its existing energy control system. The project will save the company $135,000 in annual costs, and more than $1.6 million over the life of the contract. The project is being implemented by ABM and Ygrene Energy Fund, a developer and administrator of clean energy financing programs.
Another limitation is that project size for PACE is limited to no more than 20 percent (10 percent in some jurisdictions) of the assessed property value. To date, 31 states and the District of Columbia have PACE-enabling legislation, and more than 800 municipalities have a PACE program, according to PACENow.org.
Energy Savings Performance Contracting
The project has been a “win-win” for everyone involved and the company is hoping to implement similar solutions at other BrandsMart USA locations throughout the Southeast, says Lary Sinewitz, executive vice president of BrandsMart USA.
Another way of funding energy savings initiatives are Energy Saving Performance Contract (ESPC), which guarantee that improvements to a building will deliver a certain amount of energy savings over a fixed period of time. The costs of facility and infrastructure retrofits or renewal projects are offset by the energy and operational savings that are achieved as a result, helping organizations maintain cash flow. Here’s how it works: together with the ESCO, a company determines the projects that will be implemented and the dollar amount of the assets to be put into the building. The ESCO determines the amount of savings the company will see and guarantees those numbers. The company then takes out a loan (continued on pg. 7)
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Another university is implementing an energy efficiency project via an energy savings performance contract, and is guaranteed to save $300,000 annually, for a total of $3.8 million. North Carolina A&T State University needed steam system, lighting, and weatherization improvements, installation of new HVAC controls, retrocommissioning at selected buildings, and a preventive maintenance program. Energy efficiency and energy infrastructure solution provider Noresco partnered with the university on the guaranteed energy savings agreement. The project is funded by reductions in energy usage over a 17.25 year contract term, with no upfront cost.
Performance Contracting at Two Colleges Enables Infrastructure Upgrades, New HVAC Controls, Weatherization Improvements and More Private liberal arts school Columbia College needed to replace a degrading, inefficient heating and cooling infrastructure that was draining cash, while facing borrowing restrictions on funding the critical upgrades. Additionally, the deteriorating infrastructure was impacting quality of life for students and faculty. Working with an ESCO, the school was able to replace the aging infrastructure with high-efficiency boilers, water heaters, air handlers, circulating pumps and stateof-the art building controls. ABM, the energy services company working with Columbia, guaranteed the school that it would reduce energy use more than 30 percent, including 66 percent savings on natural gas. Combined with operational savings, the project will generate $6 million in capital funding over the 15-year term of the financing agreement. In addition to the energy savings and financial benefits, the project “helped raise student retention rates from 91 percent to 97 percent by improving quality of life issues,” says Dr. Caroline Whitson, president of Columbia College.
(continued from pg. 6)
based on the value of the work. The ESCO gets paid as though it’s a normal construction project, and the company pays off the bank loan using the financial savings from the project. If the ESCO doesn’t achieve the guaranteed savings, they pay the customer the difference between what was guaranteed and what was actually achieved. The company working with the ESCO often comes out ahead in the end, with the financial savings over the term of the loan being more valuable than the loan itself. ABM, for example, has saved its clients, on average, “somewhere in neighborhood of 15% more than we guarantee,” says Maurer.
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First Steps When hoping to move forward, consider these five elements: i.
ii.
Do I have the pain, the readiness, and the financial ability? These three qualifiers are the most important to identify when deciding whether to initiate an energy improvement project. Is there a critical need? “If you have a new facility - if you don’t have a 30-yearold boiler, for example - it is hard to move the project forward,” says Maurer. “The second question is, ‘Are we willing to do it right now?’ If you are building a new building or engaging in another major project, now might not be the right time.” Finally, are there financing options that are currently available and appropriate? Identify goals. When planning improvement projects, consider some that have a shorter payback period as well as some that will take longer to earn back the investment. That way, you will begin to see some return in the shortterm. Upgrades to lighting can have a payback period of three to five years and are attractive even in markets where utility costs are low. But some of the projects that have longer-term paybacks - HVAC, fenestration upgrades - can often be the most lucrative and may be worth waiting for. When projects with longer-term paybacks - 25 to 30 years - are combined with those in the threeto five-year range, “together you might have a 10 to 15 year payback, and that’s very attractive,” says Hoey.
iii. Be willing to borrow. “Over the next 20 years, the timing of the opportunity to invest is not going to get any better than right now,” says Dowell. “If you want to become more energy conscious, you should do it now, because you’re going to get more for your investment.” iv.
Thoroughly vet your potential partner. Understand what the organization is all about and be sure they are qualified in all areas of the project. Check their track record. Every potential partner will want to give you their three or four best clients. Google the entity for other projects and the full spectrum of clients. What truly defines an organization is not the deal that went flawlessly, but the one that had roadbumps. What did the organization do to fix them?
v.
Thoroughly vet the account team and subject matter expert. Who, personally, will you be working with? How accomplished and skilled are they? Will you get along? This is more important than you may think.
Perhaps the biggest obstacle in the way of getting an energy efficiency project in the works is reaching the right people and convincing them that the project is necessary. Remember these suggested tactics when trying to get approval: i.
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Get in front of the financial people first, not the operational folks. “Starting with operations is the kiss of death. They get wrapped up in the
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technical side of it and never bring it up to their officers,” Maurer says. “The financial guys need to be sold at the very front of the project. Help them understand that these projects are a financial solution to their critical facility needs,” Maurer says. ii.
Sell it in terms they’ll understand. For example, “Industrial companies are always looking to increase the number of quality objects that they produce. Say you make 100 units, and 90 are top quality. You’re wasting 10 of those: think of the energy waste, the materials waste,” says Hoey. “But if you make 95 that are top quality, you save utility dollars and labor dollars and materials costs. If you tell [higher-ups] that new lights will save energy, that might not interest them. But if you say new lighting will help the workers make more topline products - show them the collateral improvements the improvements will have on the manufacturing process - that’s huge.” Be specific in terms of savings rather than vague promises. For example, a 10 percent decrease in energy could lead to a 1.5 percent increase in net operating income, according to Energy Star.
look at the utility bills, the engineering stuff, and say, ‘I get it,’ but the other groups are just as important to bring onboard because they can help move the project forward.” iv.
Present the solution, not just the problem. An energy manager should not get in front of the C-suite and say, “I have $2 million worth of improvements that need to be done, I’ve been asking for the money, and I haven’t been given it.” A better approach is, “If I can make these improvements, we will begin reaping these particular benefits in X years…”
“I’ve heard a million times, ‘Why isn’t everyone doing this?’” says Hoey. “The answer is, it’s hard to get in front of the C-level suite.” Once the right case is made to the right people, companies can begin to fully take advantage of significant energy savings, he says.
iii. Bring in other key stakeholders as soon as possible. “The energy manager should involve asset management folks, legal department to assess the risks, the CFO’s office - all of them should be brought in earlier in the process,” says Ted O’Shea, vice president of energy with ABM. “The energy manager can
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Case Study
Energy Financing for Municipalities
Case Study: Town of Shirley, MA Creates Savings and Energy Reduction with No Financial Outlay In 2011, Town of Shirley was awarded a Green Communities Grant to advance local and state clean energy goals. The Town needed an expert in this field to carry out the Grant’s mandate of reducing energy consumption by 20% over the next 5 years. The Town of Shirley selected ABM based on their exceptional work history and recognized expertise in energy conservation. Immediately upon being selected, ABM began an extensive evaluation of town-owned properties as a means of establishing their energy benchmarks. ABM then developed a plan that implemented energy conservation strategies and facility improvements that achieved significant results: 1.
Identified a 26% reduction in energy consumption in the majority of the Town’s 9 buildings, getting them halfway to their 20% town wide grant goal
2.
Created a 39% savings in actual dollars
3.
Incurred no additional taxpayer burden
Thanks to ABM’s hard work and collaborative efforts, residents overwhelmingly approved funding for the project. ABM’S SOLUTION: •
Established energy benchmarks for the Town
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Created a performance contracting plan that exceeded the Town’s energy efficiency goal
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Replaced more than 200 street lights with high-efficiency LED lights
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Switched heating fuel from oil to natural gas in three buildings
BENEFITS: •
Despite the third coldest winter on record, the Town saw an overall decline in energy use
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Project funded more than $680,000 in repairs through guaranteed operating cost reductions produced by ABM, requiring no increase in taxpayer burden
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Seven community buildings received energy efficiency improvements including building envelope upgrades and indoor climate stabilization
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Improved Town’s safety with brighter, more consistent street lighting
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Lowered carbon footprint
“We firmly believe that the ‘do whatever it takes’ attitude continuously displayed by ABM is a driving force and a reason why on the 5th of August 2013 we received a 91% approval to borrow at our Special Town Meeting to fund this project.” - Bryan Dumont, Shirley Energy Committee Chairman
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