A PRIMER FOR PUBLIC SECTOR ENERGY, FACILITY, AND FINANCIAL MANAGERS FROM
THE U.S. ENVIRONMENTAL PROTECTION AGENCY'S ENERGY STAR* PROGRAM
INNOVATIVE FINANCING SOLUTIONS:
FINDING MONEY FOR YOUR ENERGY
EFFICIENCY PROJECTS
Are you having trouble getting energy
efficiency projects approved and
implemented? If so, this paper from EPA's
ENERGY STAR is for you. It describes how
performance contracts and tax-exempt
lease-purchase agreements may offer you a
practical solution when no money is
available in the current budget for further
improvements. This document also provides
clear financial reasoning and cost modeling,
which demonstrate that energy efficiency
projects really can pay for themselves within
existing operating and capital budgets. It
equips you to persuade the decisionmakers
within your school district, city, county,
community college, university, or state that
implementing energy efficiency upgrades is
a good business decision and should be
done as soon as possible.
EPA's ENERGY STAR is a voluntary
government-industry partnership offering a
suite of resources and tools to help
businesses, government agencies,
organizations, and consumers become more
energy efficient in the workplace and at
home. Through ENERGY STAR, an
organization can learn how to apply energy
best management practices and
technologies that result in improved energy
performance, financial well-being, and
environmental protection.
Introduction
While the reasons for delaying projects may
vary, most energy efficiency projects stall
due to one or a combination of the
following perceived barriers:
(1) Lack of money.
(2) Lack of time or personnel to design and
plan the projects because of other,
higher priorities.
(3) Lack of internal expertise to implement
the projects.
(4) Lack of "political will" within the
decisionmaking process.
This paper focuses on the perception that
no money is available in your organization's
budget for energy efficiency projects. As
you will see later, resolving this first barrier
frequently provides the solution to the
others.
CC
Anyone who doesn't have an
energy efficiency program is
acting fiscally irresponsible. J J
- Walter George
Anne Arundel County
Public Schools, Maryland
July 2001
SEPA
United States
Environmental Protection
Agency
Innovative Financing Solutions: Finding Money for Your Energy Efficient Projects, November 2004
-------
When you propose energy projects to
the decisionmakers within your city,
county, school district, community
college, university, or state, the
financial barriers they commonly raise
can be characterized as follows:
If it is not in this year's budget, it
simply has to wait.
Equipment improvements must be
paid from the capital budget.
Paying lower interest (by floating
bonds) or no interest (by delaying
the project and planning it into
future budgets) saves more money
and, therefore, is in the best interest
of our organization.
Taxes or fees will have to be
increased to pay for these
improvements.
Performance contracting with an
energy service provider (ESP) is
expensive and unreliable.
Tax-exempt lease-purchase
agreements don't lend themselves
to energy projects and are
expensive alternative funding
solutions.
Some of these comments may sound
familiar. In fact, they are common
misconceptions, which the information
presented here can help you overcome.
This paper defines some standard
financial terms, presents financing
options, and includes an effective "cost
of delay" model that quantifies the
opportunity costs inherent in energy
efficiency projects. The next time you
face your board, city council, chief
financial officer, chief operating officer,
or other decisionmaker, you will be
better equipped to persuade them that
energy efficiency upgrades can pay for
themselves and should be
implemented as soon as possible.
The brief case studies appearing in the
sidebars throughout this paper
illustrate how three different public
entities worked through their financial
hurdles to implement energy efficiency
upgrades. For example:
When officials at Brooklyn College
(part of the City College of New York)
realized they did not have enough
money to install all the energy-
efficient equipment needed to
successfully complete their project,
they chose a lease-purchase
agreement performance contract
and spent the dollars they
anticipated saving from future
operating budgets. As no capital
budget commitment was necessary,
the college purchased and installed
the new equipment right away.
In Shenendehowa Central School
District, NY, officials knew that a tax
increase was out of the question.
Using a guaranteed performance
contract, they found a way to pay for
energy improvements within their
existing approved budgets.
State of New Hampshire officials
insisted on minimizing any impact
on the state's bond (credit) ratings
while energy efficiency
improvements were being
implemented. After careful study,
state officials settled on a master
lease program that financed energy
efficiency improvements using the
dollars saved from future utility bills.
The City of Amherst, NY, realized
that by bundling a group of
apparently unrelated city properties
(ice rinks, city buildings, and the
waste water treatment facility)
together, they could get a very
competitive bid from an ESP and
low-cost financing from a lender.
What do these four examples have in
common and why were the outcomes
successful? The State of New
Hampshire, Brooklyn College,
Shenendehowa Central School District,
Brooklyn College,
New York City
By 1998, most of the
equipment that produced
chilled water for campus
air conditioning systems
was approaching the end
of its useful life. Because
this equipment was
decentralized, the college
faced much higher
replacement costs than it
would have for a shared
chilled water plant. The
total cost of the project
was $23 million, of which
The Dormitory Authority of
the State of New York
(DASNY) agreed to provide
$15 million. Brooklyn
College officials, however,
were still $8 million short
of the funds necessary to
install the most efficient
equipment they knew
should be purchased; and
using capital budget
dollars was not an
alternative. So they
negotiated an energy
efficiency performance
contract that included an
$8 million lease-purchase
agreement to cover the
shortfall. The energy
service provider projected
the savings over 12 years
and structured the lease-
purchase payments to be
85 percent of the projected
savings-guaranteeing that
the savings realized in the
project would be sufficient
to cover the lease
payments. The agreement
also included non-
appropriation language,
making the lease
payments an operating
rather than a capital
expense.
-------
and Amherst, NY, all found that using
performance contracts with reputable
energy service providers (ESPs)-combined
with tax-exempt lease-purchase agreements
as the financing vehicle-provided the best,
most cost-effective solution. Other public
agencies undertaking similar energy
efficiency projects include Pennsylvania's
Allegheny County, which turned to
performance contracting when its capital
budget was reduced by 20 percent;
Mississippi, Virginia, and Maryland, which
initiated statewide Energy Efficiency Master
Lease Programs (MLPs); and Florida's
Miami-Dade County School District, which
added energy efficiency projects to an
existing lease-purchase Certificates of
Participation (COPs) program as the lowest
cost alternative.
Background: Operating Expenses versus
Capital Expenses
To argue the advantages of a tax-exempt
lease-purchase agreement and a
performance contract, facility managers
must be conversant with the roles that the
operating expense budget and the capital
expense budget play in their organizations.
Typically, capital expenses are those that
pay for long-term debt and fixed assets
(such as buildings, furniture, and school
buses) and whose repayment typically
extends beyond one operating period (one
operating period usually being 12 months).
In contrast, operating expenses are those
general and operating expenses (such as
salaries or supply bills) incurred during one
operating period (again, typically 12
months).' For example, repayment of a
bond issue is considered a capital expense,
whereas paying monthly utility bills is
considered an operating expense.
The disadvantages associated with trying to
use capital expense budget dollars for your
energy efficiency projects include the
following: (1) capital dollars are already
committed to other projects; (2) capital
dollars are often scarce, so your projects are
competing with other priorities; and (3) the
approval process for requesting new capital
dollars is time consuming, expensive, and
typically requires voter approval.
Understanding Performance Contracts and
Tax-Exempt Lease-Purchase Agreements
Performance Contracts
Performance contracting is a common way
for public sector organizations to implement
energy efficiency improvements, and it
frequently addresses financing for the
needed equipment, should you chose not to
use internal funds (e.g., bonds, Certificates
of Deposit, etc.). Performance contacts can
be complex agreements that address project
development, energy services, and
financing issues. Common financing
options under a performance contract
include (1) ESP-based financing, (2) tax-
exempt lease-purchase agreements
provided by independent third parties, and
(3) state or utility funding. As a facility
manager, you can overcome the "lack of
time and lack of expertise" barriers
mentioned at the beginning of this paper by
outsourcing the work to qualified, reputable
energy service providers using a
performance contract.
Under a performance contract, the ESP
insures that the actual energy savings will
match the projected savings, and the
contract identifies the procedures by which
these savings will be measured and verified.
In a Guaranteed Savings Agreement (GSA)-
the most popular type of performance
contract used in the public sector-the energy
performance of the equipment is
guaranteed by the ESP, who agrees to
reimburse the sponsoring organization for
any shortfalls. A GSA bundles equipment
purchasing and performance guarantees,
and it may also include financing, energy
costs, and maintenance. However, ESPs
usually borrow at taxable interest rates,
while public agencies are able to issue
lower cost tax-exempt obligations. As a
result, GSAs usually take advantage of
According to Barron's Dictionary of Accounting Terms, capital expenditures are "outlays charged to a long-term asset account. A capital expenditure
either adds a fixed asset unit or increases the value of an existing fixed asset." Operating expenditures are costs "associated with the ... administrative
activities of the [organization]."
-------
lower cost tax-exempt lease-purchase
agreements as the underlying financing
instrument.
Tax-Exempt Lease-Purchase
Agreements
Tax-exempt lease-purchase agreements
are common public sector financing
alternatives that allow repayment from
operating expense dollars rather than
capital expense dollars. They are
effective alternatives to traditional debt
financing (bonds, loans, etc.) and allow
public organizations to pay for energy
upgrades by using money already set
aside in annual utility budgets. When
properly structured, this type of
financing mechanism allows public
sector agencies to draw on dollars
saved from future utility bills to pay for
new, energy-efficient equipment today.
A tax-exempt lease-purchase
agreement, also known as a municipal
lease, is like an installment-purchase
agreement rather than a traditional
lease or rental agreement. Under most
rental agreements (such as those used
in car leasing), the renter (lessee)
returns the asset (the car) at the end of
the lease term, without building any
equity in the asset being leased and can
postpone the decision to acquire the
asset being financed until the end of the
lease term. A lease-purchase
agreement, however, presumes that the
public sector organization will own the
equipment after the term expires.
Further, the interest rates are
appreciably lower than those on a
taxable commercial lease-purchase
agreement because the interest paid is
exempt from federal income tax for
public sector entities.
In addition, a tax-exempt lease-purchase
agreement usually does not constitute a
long-term "debt" obligation because of
non-appropriation language commonly
written into the agreement. This
language effectively limits the payment
obligation to the organization's current
operating budget period. Therefore, if
for some reason future funds are not
appropriated, the equipment is returned
to the lender, and the repayment
obligation is terminated at the end of
the current operating period without
placing any obligation on your future
budgets.
Public sector organizations-schools,
community colleges, universities, and
local and state governments-should
consider using a tax-exempt lease-
purchase agreement to pay for energy
efficiency equipment when the projected
energy savings will be greater than the
cost of the equipment plus financing,
especially when a creditworthy energy
service provider guarantees the savings.
If your financial decisionmakers are
concerned about exceeding operating
budgets, you can assure them that this
will not happen because lease payments
can come from the dollars to be saved
on utility bills once the energy efficiency
equipment is installed. Utility bill
payments are already part of any
organization's standard year-to-year
operating budget. The financing terms
for lease-purchase agreements may
extend as long as 12 to 15 years;
however, they are limited by the useful
life of the equipment, so are usually 10
years or less.
Tax-Exempt Lease-Purchase Payments
are Not Considered "Debt." Because of
the non-appropriation language typically
included in tax-exempt lease-purchase
agreements, this type of financing may
be considered an operating rather than
a capital expense. As a result, the
payments are not considered "debt"
from a legal perspective in most states
and usually do not require taxpayer
approval. You will, however, have to
assure lenders that the energy efficiency
projects being financed are considered
of essential use (i.e., essential to the
operation of your organization), which
The State of New
Hampshire
The New Hampshire
Building Energy
Conservation Initiative of
1997 prompted the
evaluation of how to
improve the energy
efficiency of state-owned
buildings. However, the
state's Treasury Department
was concerned about
increasing the state's debt,
which might adversely
affect its credit rating.
Following discussions with
energy service providers
and finance professionals,
state officials determined
that by separating the
financing activity from the
technical performance
obligations under a
performance contract, the
state could obtain lower
cost financing (i.e., by
setting up a tax-exempt
master lease program (MLP)
to underwrite the
performance contracts).
After a year of reviewing
similar programs, all parties
agreed that the non-
appropriation language of
the MLP would allow the
lease to be repaid from
operating funds and thus
have minimal impact on the
state's credit rating.
This low-cost financing
permitted New Hampshire
officials to install a broader
range of energy-efficient
equipment than they would
have if they had used the
financing bundled into the
ESP's performance
contract. As a result, more
projects met the legislated
payback requirements.
New Hampshire's credit
rating did not change as a
result of the energy
conservation MLP. And, the
state got better pricing by
consolidating all projects
under one agreement.
-------
minimizes the non-appropriation risk to the
lender.
How is Debt Defined? "Debt" can be
interpreted from three different
perspectives-legal, credit rating, and
accounting. As mentioned above, most
lease-purchase agreements are not
considered "legal debt" because the
payment obligation renews from year to
year. By not entering into a long-term
commitment, your organization may not be
required to obtain local voter approval for
this financing. However, credit rating
agencies, such as Moody's and Standard &
Poor's, do include some or all of the lease-
purchase obligations when they evaluate a
public entity's credit rating and its ability to
meet payment commitments ("debt
service"). These two perspectives (legal and
credit rating) may differ markedly from the
way lease-purchase agreements are treated
(i.e., which budget is charged) by your own
accounting department and your
organization's external auditors.
In general, lease-purchase payments on
energy efficiency equipment are small when
compared to the overall operating expense
budget of a public organization. This usually
means that the accounting treatment of such
payments may be open to accounting
interpretations. Most public sector entities
recognize that the energy savings cannot
occur if the energy efficiency projects are
not installed. As such, the source of
repayment for the projects' lease-purchase
costs (or the financing costs for upgrades)
can be tied directly back to savings in the
utility budget. Outside auditors, however,
may take exception to treating these
payments as operating expenses if they are
considered "material" from an accounting
perspective.
Determining when an expense is "material"
is a matter of the auditor's professional
judgment. While there are no strictly
defined accounting thresholds, as a practical
guide, an item could be considered material
when it is greater than 5 percent of the total
expense budget in the public sector (or 5
percent of the net income for the private
sector). For example, the energy budget for
a typical medium-to-large school district is
around 2 percent; therefore, energy
efficiency improvements would rarely be
considered "material" using this practical
guideline.
Know Your State's Rules. Many public
entities already lease equipment. Adding an
energy project to an existing lease
agreement may be surprisingly easy,
especially if a Master Lease is in place with
a lending institution. Governing statutes
vary from state to state;: and the use of tax-
exempt lease-purchase agreements may
differ across schools, municipalities, and
counties even within the same state. Public
sector organizations should always consult
legal counsel before entering into lease-
purchase agreements.
There may be cases when a lease-purchase
agreement is not advisable; for example, (1)
state statute or charter may prohibit such
financing mechanisms from being used; (2)
the approval process may be too difficult or
politically driven; or (3) other funds are
readily available, (e.g., bond funding that
will soon be accessible), or excess money
exists in the current capital or operating
budgets.
States Take Advantage of Energy Savings
To Fund
Energy Efficiency Projects
Many states have recognized that the
savings realized by installing energy
efficiency equipment can be used to finance
the needed equipment. For example:
In Pennsylvania, public sector
organizations are authorized to use funds
According to Dr. James Donegan, Ph.D. (Accounting), Western Connecticut State University, an amount is "considered material when it would affect the
judgment of a reasonably informed reader when analyzing financial statements."
California and Indiana use "abatement leases" rather than "non-appropriation" leases. Under abatement theory, the lease is not considered "debt" because the
yearly payment is limited to the ability to use the asset during the current operating period; if the asset cannot be used, then the payment can be reduced or
"abated."
-------
designated for operating expenses, utility
expenses, or capital expenditures to meet
lease-purchase or installment payments
under performance contracts.4
School districts in California are
authorized to enter into energy efficiency
financing relationships that "can be
repaid from energy cost avoidance
savings'"
In Florida, "it is the policy of this state to
encourage school districts, state
community colleges and state
universities to reinvest any energy
savings resulting from energy
conservation measures into additional
energy conservation efforts."'
In Minnesota, "a district annually may
transfer from the general fund to the
reserve for operating capital account an
amount up to the amount saved in
energy and operation costs as a result of
guaranteed energy savings contracts."''
In Texas, lease-purchase payments are to
be "made from maintenance taxes" and
"shall not be considered payment of
indebtedness.""
Many other states support the idea of
funding energy efficiency projects from
future utility bill savings. Obtaining your
accounting department's cooperation may
be easier than you think, especially if
determining the legal precedent in your
state is a matter of doing a little research.
Getting the Best Deal
If tax-exempt lease-purchase financing is so
good, why are some public organizations
reluctant to use it to fund energy efficiency
projects? One reason may be the higher
stated interest rate when compared to that
of a bond. There is, unfortunately, a
common misconception that the lowest
interest rate is always the best deal. If your
finance decisionmakers make this
assumption, you need to remind them that
two factors must be addressed to determine
the best financing alternative: (1) net
interest costs and (2) the costs of delay.
Net Interest Costs
Every borrower seeks the best deal. As
stewards of public funds, managers in the
nation's public schools, community
colleges, state universities, and local or
state government agencies seek to provide
the best quality service for the lowest net
cost. Bonds at 3.5 percent interest sound
better than a lease-purchase agreement at
4.0 percent; however, the real savings
become clear only when the net interest
cost has been calculated. Typically, lease-
purchase agreements do not include any
extra costs or fees outside the interest rate
(with the exception of fees related to setting
up an escrow account needed to manage
funds during the construction period in case
"construction progress payments" are
necessary). The legal opinion for a lease-
purchase agreement usually requires little or
no research and can be provided by internal
counsel.
On the other hand, a bond will require
obtaining an extensive (and expensive) legal
opinion, setting up a trustee, and retaining
accounting services to ensure compliance.
Bond issues may also incur costs to rate the
bond, obtain insurance, set aside a cash
reserve for the first year, and pay for
printing or marketing fees-additional costs
that can easily exceed $50,000. Adding
these bond issuance costs to the cost of
energy efficiency projects can dramatically
change the economics of a project, unless
the project is fairly large. Therefore, the
financing alternative that generates the
lowest total payment (the net interest cost)
is the best deal-and this may not be the one
with the lowest stated interest rate.
"Pennsylvania Guaranteed Energy Savings Act 29 of 1996 - ง5(b)
5California Education Code 17651 fa)
0Florida Statutes Title XVI, Chapter 235.215 (1)
'Minnesota Statutes 2000 Chapter 123B.65 Subdivision 7
"Texas Statutes Chapter 271 - Public Property Finance Act - ง271.004
-------
Political, as well as financial, issues
must be taken into account when
determining lowest net cost. A tax-
exempt lease-purchase agreement is
not considered legal debt and may be
easier to implement than floating a
bond, which is a capital expenditure
and may require voter approval.
Therefore, two additional costs must be
added to the aforementioned
calculation: (1) the out-of-pocket cost of
advertising and staffing for a
referendum, and (2) the intangible
political cost of asking the taxpayers to
approve "new debt." Frequently, the
political cost is the greater of the two.
The Costs of Delay
Quantifying the costs of delaying the
installation of an energy efficiency
project adds a new dimension to the
financial decision. School district and
local or state government officials often
feel that postponing the installation of
energy efficiency equipment until such
time as the operating or capital budget
dollars are available-rather than
financing the installation immediately-is
a better financial decision. They reason
that if internal budget dollars are used,
paying interest can be avoided
completely. However, delaying the
installation will delay the point at which
energy savings can begin and,
therefore, has an opportunity cost
attached to it.
For example, if a $500,000 project
has a 5-year simple payback, the
average monthly savings will be
about $8,333 per month ($500,000
divided by 60 months). Under this
scenario, if the project is delayed by
12 months, the public sector
organization will pay the local utility
$100,000 more (12 times $8,333)
during the delay period than it would
have if energy efficiency equipment
had been installed immediately.
If financing for the lease-purchase is
available at 4 percent for a term of 7
years (reasonable conditions for a
traditional project), the total interest
paid during the 7-year period will be
$74,090 in absolute dollars, or about
$25,910 less than the energy savings
realized during the first 12 months of
use ($100,000 minus $74,090). In
other words, the savings realized by
installing the equipment immediately
rather than waiting for 12 months
effectively reduces the interest rate
for borrowed funds to less than 0
percent!
The savings are in fact even greater,
considering that a dollar paid for
interest 7 years in the future is worth
less than a dollar saved this year.
Allowing for a real cost of money (or
discount rate) of 3 percent, the
$74,090 in financing charges
translates to $66,753 in current
dollars, or a real savings of almost
$33,247 if equipment is financed and
installed right away rather than
waiting for internal funds to become
available. Using third-party financing
initially and paying it off early with
approved future budget dollars may
be the way to maximize an energy
project's total cost savings.
Many organizations choose to wait
until funds are available in a future
year's budget rather than entering
into a financing agreement that
requires paying interest, believing
that paying no interest is always a
better financial decision than paying
any interest. Because the energy
savings on most projects are so
large, the lost savings incurred by
waiting for one year are greater than
all the present value of all the interest
payments combined. In this
example, financing the project today
versus waiting for one year has a Net
Present Value benefit of $3,365 when
financing versus a loss of $9,033 over
the term of the financing (7 years).
This cost of delay calculation is more
complicated when comparing two
different financing alternatives with
Shenendehowa
Central School
District, Clinton Park,
New York
In 1996, the school district was
facing escalating energy and
maintenance costs for seven
buildings constructed between
1952 and 1969. During that
period, lowest first-cost had
been the primary consideration,
instead of life-cycle cost, when
selecting the energy
equipment. Three of the
buildings relied exclusively on
electricity for heating and air
conditioning. Shenendehowa
officials needed to make capital
improvements at these
facilities, but budgets were
already strained. Further, they
were unwilling to approach
taxpayers for additional bond
money.
To address these problems,
school officials decided to
install new energy-efficient
equipment that could be paid
for from future energy cost
savings. With assistance from
the New York State Energy
Research and Development
Agency (NYSERDA), they
issued a Request For Proposal
(RFP) for an energy service
provider (ESP) that could
provide a performance contract
to address their needs. The
winning ESP guaranteed the
equipment performance and
energy savings, which were
verified using rigorous
measurement and verification
techniques.
Instead of bundling the
financing underthe
performance contract, the
school district chose to obtain
the funds directly from a
commercial lender using a tax-
exempt lease-purchase
agreement for a term of 10
years. The lease-purchase
agreement contained non-
appropriation language, which
limited payments to the
operating budget savings,
thereby avoiding the capital
budget. This financing option
allowed Shenendehowa school
officials to successfully install
needed energy-efficient
equipment without raising
taxes.
-------
different interest rates and terms, but the result is no less stark. For example, compare a
bond or loan issued at 3.5 percent interest against a lease-purchase agreement offered by a
local lender at 4 percent interest for the same project. Ignore, for the moment, any
additional fees that must be added to the bond and focus on the unavailability of the funds
for 12 months, while the lease-purchase funds are available immediately. A comparison of
the consequences of these examples, based on the same $500,000 equipment cost and 5-
year simple payback results in the following:
Option 1
Option 2
Instrument
Lease-purchase
Loan or Bond
Budget
Operating'
Capital
Term
7 years
7 years
Interest rate
4.0%
3.5%
Monthly payment
$6,834
$6,720
Surprisingly, the difference in the monthly payments on this $500,000 project is only $114 a
month ($6,834 minus $6,720), while the energy efficiency savings lost would be equal to
$8,333 a month (as shown in the text above).
The key question becomes: How long will it take for the lost energy savings to consume the
total savings realized from the lower interest rate financing? The answer: Just over 2
months (see Appendix B for calculation).
The following chart demonstrates these costs of delay based on waiting for the 3.5 percent
"cheaper money" (rounded to the nearest $100) when 4% financing is immediately available
for a $500,000 project with a 60-month simple payback:
Each month the project is delayed
Savings or Loss
1
$200
2
($8,100)
3
($16,500)
4
($24,800)
5
($33,100)
6
($41,500)
7
($49,800)
8
($58,100)
9
($66,500)
10
($74,800)
11
($83,100)
12
($91,500)
9Non appropriation or Abatement leases; actual treatment may vary by state.
-------
As shown, a delay of 12 months amounts to
a loss of $91,500, or over 18 percent of the
original project cost.
If you would like a copy of the Cash Flow
Opportunity Calculator Microsoft Excel
spreadsheet that calculates these costs of
delay, using your own project data, please
contact Katy Hatcher, ENERGY STAR
National Manager, Public Sector, at
hatcher.caterina@epa.gov or visit
www.eneravstar.aov.
njjr
The true cost of delay may be even greater,
as none of these calculations includes the
higher administrative costs of the loan or
bond, nor the environmental benefits of
installing the energy efficiency equipment
sooner rather than later.
Conclusion: Improving Energy Performance
and Fiscal Management
Energy efficiency equipment differs from
other capital equipment. Because the
dollars saved by installing energy efficiency
equipment can be used to pay for its
financing, this equipment can be installed
without having to increase operating costs
or use precious capital budget dollars. In
fact, as long as the finance payments are
lower than the energy dollars saved, a
positive cash flow is created that can be
used for other projects. Extending the
repayment terms will reduce the monthly
payment, improving the cash flow even
more.
In today's economy of tight budgets and
rising energy prices, a good energy
efficiency policy is a necessity. As stewards
of significant assets, public sector facilities
and finance managers must aggressively
manage all costs and maintain effective
cash management programs. Accelerating
the installation of energy efficiency
equipment will improve both your facilities
and your financial statement.
EPA through ENERGY STAR offers resources
and tools to assist your organization in
developing a roadmap to better energy
performance. To learn more about ENERGY
STAR, contact Katy Hatcher, ENERGY STAR
National Manager, Public Sector, at
hatcher.caterina@epa.gov.
-------
APPENDIX A
CASH
BONDS
TAX-EXEMPT LEASE
PERFORMANCE CONTRACTS
Interest Rates
N/A
Lowest
tax-exempt rate
Low
tax-exempt rate
Can be taxable or tax-exempt
Financing Term
N/A
May be 20 years
or more
Up to 10 years is
common and up to
12 or 15 years is
possible for large
projects
Typically up to 10 years but
may be as long as 15 years
Other Costs
N/A
Underwriting
legal opinion,
insurance, etc.
None
May have to pay engineering
costs if contract not executed
Approval
Process
Internal
May require
taxpayers'
approval or public
referendum. Bond
counsel opinion
letter required.
Internal approvals
needed; simple
attorney letter
required
RFP usually required; internal
approvals needed
Approval Time
Current
budget
period
May be lengthy;
process may take
years
Fast; generally within
a week of receiving
all requested
documentation
Fast; similar to the Tax-Exempt
Lease
Funding
Flexibility
N/A
Very difficult to
go above the
dollar ceiling
Can set up a
Master Lease,
which allows you
to draw down
funds as needed
Relatively flexible; an underlying
Municipal Lease is often used
Budget Used
Either
Capital
Operating
Operating or Capital
Largest Benefit
Direct
access if
included
in budget
Low interest rate
because it is
backed by the
full faith and
credit (taxing
powers) of the
public entity
Allows you to buy
capital equipment
using operating
dollars
Provides performance guarantees
which help approval process
Largest Hurdle
Never
seems to
be enough
money
available for
projects
Very time
consuming
Identifying the project
to be financed
Identifying the project to be
financed and selecting the ESCO
APPENDIX B
How long will it take for the lost energy savings to consume the total savings realized from
the lower interest rate financing? The calculation is straightforward and can be done using
any financial calculator or Excel/Lotus spread sheet. The variables in the formula are:
PV= present value
n= number of payments
pmt = monthly payment
FV = future value
i = interest
-------
If you use a financial calculator, by entering four of the five values, the calculator
will automatically calculate the fifth value (or unknown one). Using a financial
calculator, start by entering the monthly payment of the readily available (4%)
financing. We know the term (n) is 7 years, or 84 months, the Future Value (FV) is
zero. Use the interest rate of the lower, "better deal" as the discount rate (3.5%) in
order to calculate the present value (PV). This calculation provides the Net Present
Value of the interest rate differential, which in this case is $8,108 more than the
original project cost. Based on the monthly energy efficiency savings of $8,333, the
break-even point is less than 1 month ($8,108 divided by $8,333).
APPENDIX C
Putting Together a Proposal
In developing a proposal for an energy efficiency project to present to your
agency's financial decisionmakers, the following steps are recommended:
1. Define the decision process and decisionmakers.
- Whose approval is needed for a decision?
- What are the decisionmaker's sensitivities or "hot buttons?"
- How does the project respond to organizational priorities?
- Who are the potential "champions" of this project?
2. Quantify why this is a good project to implement.
- How much will energy costs be reduced?
- What are the other associated cost impacts, such as reduced labor costs, O&M
costs, and life-cycle costs?
- What are the likely employee impacts (e.g., on productivity or morale)?
- Does the project meet/exceed established profitability criteria (such as payback
period)?
- Does it create positive cash flow? How much? How might any extra saved
energy dollars be spent to support other pressing projects or programs?
- Does this help address indoor air quality (IAQ) problems or reduce the
deferred maintenance budget?
- What are the associated environmental impacts and public relations
opportunities?
3. Show how the project can be funded.
- What subsidies/credits are available to reduce net costs (such as from your
state energy office, utility, or public benefits program, if deregulated)?
Can a performance contract and tax-exempt lease-purchase agreement be
used if other funds are not available? What would be the terms and
conditions of such an arrangement?
4. Identify the costs of delay.
- What would be the cost of waiting for internal funds to become available?
- What would be the cost of waiting for lower interest-rate financing to become
available?
City of Amherst NY
Amherst, NY, took a holistic
approach to energy
efficiency by issuing an RFP
for energy services
companies (ESCOs) to bid on
overall energy efficiency
improvements under a town-
wide energy conservation
program. Amherst, with a
population of 117,000, has an
electric budget of $2.7 million
and a total operating budget
of $100 million. The
wastewater plant's electric
budget was $1.5 million, or
55.6 percent of the entire
town's electric bill.
New York State Energy Law -
Article 9 allows for the
bundling of projects to obtain
a weighed average simple
payback, and the town
selected the ESCO that
maximized the amount of
new equipment that could be
purchased from the energy
savings. The result was a
$5.2 million project that
included the city's ice skating
rinks, police station, three
community and recreational
centers, four libraries, and a
museum in addition to the
waste water treatment
facilities, plus other city
properties that, on their own,
would be too small to attract
the attention of any major
ESCO. This was done as a
Performance Contact
(Guaranteed Savings
Agreement). The ESCO
guaranteed $5 million of
savings on these projects,
which include end-of-life
replacement equipment as
well as energy efficiency
equipment. In the first year,
the actual savings exceeded
projected savings by 16
percent. Amherst chose to
bid the technology separately
from the financing.
------- |