Has funds available or can raise additional funds for energy projects Is comfortable spending its own funds on energy projects rather than core operations Wishes to capture the full economic benefit of energy projects, rather than paying back a financing provider Cannot seek external financing due to debt limits or other restrictions on financing.
OVERVIEW
Energy projects often provide a very compelling return on investment, in addition to other benefits including reduced emissions, better air quality, and improved reliability of building operations. In an ideal world, every energy project with significant benefits could secure funding through an organization's standard project approval process. In the real world, however, energy projects must compete with other priorities within an organization for both capital and attention from the management team. That means even a project with excellent financial returns may be rejected in favor of other needs.
External financing is one way to overcome to these barriers. However, there are several innovative internal funding strategies currently in use that can provide a solution without requiring the use of third-party capital. The sections below briefly describe five common approaches for internal funding of energy efficiency, renewable energy, and other generation projects-including a basic description, pros and cons, and additional resources.
1. OPERATING OR CAPITAL BUDGET EXPENDITURE
The simplest and most direct way to fund energy projects is by using existing capital or operating budgets. Common strategies to streamline this process include (a) empowering individual branches or locations to identify potential upgrades and then use their own operating budgets to fund them and (b) creating an expedited approval process in which energy upgrades take less time to be reviewed and approved as part of capital budgeting. Both options require trust and clear lines of communication between the energy and finance teams, but they can be a powerful way to remove red tape. Examples
Advantages
-Simple strategy that uses existing budgeting processes
-Does not require extensive setup or management costs
Disadvantages
-Does not guarantee funding availability for energy projects in future years
-Existing budgeting processes may move slowly and need to be streamlined
OTHER FINANCIAL CONSIDERATION
-Building size: The makeup of the commercial sector ranges from large office, hospitality, and retail complexes to smaller (less than 50,000 square feet) office and retail properties. According to CBECS, properties under 50,000 square feet account for nearly 50% of total commercial floorspace, and properties under 5,000 square feet make up 50% of the total number of commercial buildings. Smaller properties may face additional hurdles to financing energy efficiency or renewable energy projects due to the lower overall dollar cost of the project, higher transaction costs and potential reluctance from financiers.
-Portfolio size: There is also diversity in the makeup of commercial building owners. Large commercial organizations may own hundreds of properties across the country, while other building owners may just have one or two properties. Certain financing solutions can be scalable for owners looking at portfolio-wide initiatives, though variance in location, policies and incentives, and building type may create challenges.
-Leased space: In leased commercial properties, the owner/tenant relationship may encounter split incentives to energy efficiency: this is the disconnect that occurs when the costs and benefits of reducing energy usage fall to different parties. This may create a scenario in which neither the building owner nor the building tenants are motivated to pursue energy efficiency efforts. A building owner may not be inclined to implement a retrofit project outside of common area space if the resulting savings accrue to tenants. Conversely, tenants may be unwilling to pay for upgrades when they do not own their property or when savings accrue to the building owner. Certain financing solutions are available to help overcome the split incentive issue, and the emergence of green leasing is enabling owners and tenants to mutually benefit from energy and sustainability upgrades in leased space.
-Competing priorities: Companies often have many potential areas where they can re-invest their capital at high rates of return, such as scaling the core business, expanding to new markets, or making outside investments. Energy efficiency may also be viewed as "back of the house" even though it can be critical to maintaining competitiveness, occupancy, and useful life. Therefore, energy projects may need to meet this higher "hurdle rate" to be competitive when compared with these other potential uses of capital. Companies can overcome this barrier by seeking external financing with little or no upfront cost or creating internal energy funds or capital expenditure programs that target high-return projects.
Incentives: Companies may be eligible for utility and/or regional tax credits, rebates, and other savings opportunities that can help to lower the overall cost for energy efficiency and renewable energy. For more information on available opportunities, visit the Database of State Incentives for Renewable Energy and DOE's Tax Credits, Rebates, & Savings Database.
