Developing Financing Strategies for Energy Efficiency

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  • Energy-efficiency upgrades can result in energy cost savings of 35 percent or more.
  • Financing options include energy performance contracts, lease-purchase agreements and more.
  • Energy performance contracts are a popular option, helping municipalities across the country reduce energy costs.

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Energy can account for up to 10 percent of a local government’s operating budget, according to the U.S. Department of Energy (DOE). Municipalities continue to look for ways to reduce these energy costs and financing them can be an issue.

Energy cost savings of 35 percent or more are possible for many existing buildings; new buildings can save at least 50 percent. Investing in energy efficiency can also stimulate the local economy by creating jobs and encouraging development. Other benefits include reducing carbon footprint, improving indoor air quality and productivity, and attracting new companies.

Financing options

There are a number of financing options to consider; choosing the right one will depend on a variety of factors. Municipalities often include energy projects in capital or operating budgets and fund them with energy cost savings. The U.S. Environmental Protection Agency (EPA) recommends using life-cycle cost accounting to quantify lower net capital and future operating costs in this case.

Other options include loans, bonds, energy performance contracts, lease-purchase agreements, grants offered by private foundations, utility rebates and federal tax incentives. Orlando, Fla.
partnered with Orlando Utilities Commission and used grant funds to perform energy-saving retrofits on about 1,200 homes.

An energy performance contract is an agreement between a local government and energy service company (ESCO) to finance energy-efficiency improvements with money saved through reduced energy costs. The contract is usually for a 7- to 15-year term (average is 9.5 years). Most ESCOs guarantee energy savings; for one city the actual savings exceeded the guaranteed amount by 16 percent. Sometimes the ESCO maintains ownership of the facility and sells back its output to the state entity.

According to the DOE’s Lawrence Berkeley National Laboratory, the average cost of ESCO-executed energy-efficiency upgrades for state and local governments is approximately $3 per square foot. See the following successful examples:

  • The performance contract signed by Lowell, Mass., which includes 47 of Lowell’s municipal buildings and more than 23 energy conservation measures, is expected to produce annual energy savings of 25 percent or more than $1.5 million over a 20-year contract.
  • The City Council of Greensburg, Okla. approved an agreement with a Pittsburgh-area ESCO to make $1.5 million in improvements. The company’s fee is based on a percentage and comes from the overall $1.5 million cost. The city is financing the improvements; the finance costs are paid with the monthly energy savings.
  • Dover, New Hampshire’s 10-year energy performance contract could save more than $3.6 million over the next decade. The city expects to save $319,463 annually; including $271,943 in energy costs, $13,680 in operations and maintenance costs and $33,840 in capital cost avoidance.

A tax-exempt or municipal lease purchase agreement allows public entities to finance purchases and installation over long-term periods using operating budget dollars rather than capital budget dollars. Interest rates are typically lower than rates under a common lease agreement and may be lower than an ESCO. This option also does not require voter referendum to approve debt, only internal approval and an attorney’s letter, making it a much faster process.

Buffalo, New York used a $3.5 million lease-purchase agreement to help finance upgrades to 55 public buildings, saving more than $600,000 in annual energy costs after four years; total savings over 15 years is estimated at $6.1 million.

Low-interest loans are available through commercial property assessed clean energy (PACE) programs. This financing mechanism relies on a voluntary benefit assessment which is levied on the property, collected by the local tax collector and remitted to the PACE program administrator. Once energy-efficiency upgrades are approved by the PACE administrator, low-cost financing is arranged for the property owner, who must accept a property tax assessment for up to 20 years.

The Clean Energy Sacramento $100-million PACE program lets building owners pay for upgrades over the course of 20 years through a line item added to their property taxes and no initial costs. A third party secures private financing for each project and certifies the contractors who install the equipment. San Francisco’s PACE program for commercial buildings requires property owners to negotiate the financing themselves, choosing from one of several lenders working with the city. See the PACENow website for a list of PACE programs.

Public bonds allow amortization of capital costs over a multi-year repayment term; costs are recovered through energy savings over the life of the project. Utility rebates and other incentives may also be available; check the Database of State Incentives for Renewables and Efficiency.

Local governments can use the ENERGY STAR Cash Flow Opportunity Calculator to help determine the most effective timing of energy-efficient product purchases.

Reference

Energy Efficiency in Local Government Operations: A Guide to Developing and Implementing Greenhouse Gas Reduction Programs. U.S. Environmental Protection Agency. 2011.