The Equipment Leasing & Finance Foundation has released a new research study, “The Future of Financing Advanced Energy Efficient Building Equipment.” The paper, somewhat of a “Financing 101” for building upgrades, defines the growing building energy efficiency market, specifically focusing on project finance for retrofits in commercial buildings; outlines the major drivers and barriers of the industry; examines the latest financing mechanisms; and reviews the newest technologies that are moving the building sector towards a more efficient future. I highly recommend reading the study if you are planning to finance upgrades to your property—many of you I suspect.
The study outlines three financing models of current importance: Energy Service Agreements (ESA) and Managed Energy Service Agreements (MESA); On-Bill Financing (OBF); and Property Assessed Clean Energy (PACE).
Energy Service Agreements (ESA) and Managed Energy Service Agreements (MESA) involve energy efficiency projects that are financed and installed by a third party provider and repaid by the customer based on realized energy savings. On-Bill Financing involves efficiency improvements that are serviced by or in partnership with a utility company, which provides the initial capital required to implement the project and is repaid through the customer’s monthly utility bill. With Property Assessed Clean Energy (PACE), energy efficiency upgrades are provided to property owners at no upfront cost through municipal bonds that are repaid in long-term annual property tax assessments and secured by a property lien.
The financing models described above cover solutions that address the building envelope, equipment upgrades, and operational efficiency (commissioning, recommissioning, etc.). According to the study, commercial buildings, of which lodging is a part, have the greatest opportunity for efficiency upgrades (as opposed to industrial, residential, hospitals, municipalities, etc.).
Advancing Technologies Addressed
The study addresses the potential impact of recent advances in sensors, lighting technologies, HVAC systems, cool roofs, green roofs, windows, walls, and building controls, and provides some case study examples.
The paper details why financiers historically have been reluctant to lend money for efficiency upgrades. A good portion of the hesitation has been due to poor data collection on the building owner’s part. Energy efficiency upgrades within the commercial sector are also characterized by longer payback and term lengths than other investments. Everybody loves a short ROI. That said, the paper digs into the three financing models described above and why they are becoming more common.
In an example of On-Bill Financing, the study details a PG&E program whereby PG&E offers zero interest loans to commercial customers. The projected energy savings determine a customer’s loan terms and must be sufficient to repay the loan during the maximum allowable term, which is five years for businesses. PG&E underwrites projects between $5,000 and $100,000.
As common as new financing models are becoming, more private capital is needed in place of public funding. “Investors are reticent to participate in the market largely due to the unfamiliarity with these new financial structures,” the paper states. “Investing in a project with returns based on energy savings is a relatively new concept for most investors.”
The study concludes, “The opportunity to put capital to work improving commercial building energy efficiency is large, standing at almost $300 billion. And, given the increasingly efficient technologies in development—from lighting and HVAC hardware, to smart networks for improved analytics and controls—this opportunity is only growing. Yet, the current size of the commercial building energy efficiency market remains small due to a range of barriers. On the consumer side, buyers face a range of constraints surrounding financing efficiency improvements in their buildings and find the traditional financing models difficult to engage with. On the capital market side, lenders face high educational hurdles in understanding these structures and the underlying technologies and associated risks, which must be overcome before they will be comfortable putting significant money to work.”
Click here to learn how to get the new study.
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