EASY ACCESS TO ENERGY IMPROVEMENT
FUNDS IN THE PUBLIC SECTOR
Are you postponing the installation of energy
efficiency projects because the money is not in
your current budget? Do you find yourself
weighing the benefits of installing energy
efficiency equipment today against the hassles
and expense of requesting new or additional
debt? Are energy efficiency projects being
delayed because you are understaffed?
If you answered "YES" to any of these
questions, you will be happy to know there are
several simple, fast, legal, and well-tested
financing alternatives that may address your
concerns.
In the public sector, two of the most popular
mechanisms for financing energy efficiency
projects are performance contracts and tax-
exempt lease-purchase agreements. A
performance contract, while not a financing
mechanism on its own, bundles performance
guarantees together with one or more of the
following components—financing, equipment
purchases, maintenance, etc.
Both mechanisms provide effective
alternatives to traditional debt financing, and
both may allow you to pay for energy
efficiency upgrades by using money that is
already set aside in your utility operating
budget. By spending only operating budget
dollars, you may avoid the cumbersome
capital budget process altogether. Both
mechanisms will allow you to draw on dollars
saved from future energy bills to pay for new,
energy-efficient equipment and projects today.
Tax-exempt Lease-purchase Agreements
A tax-exempt lease-purchase agreement, also
known as a municipal lease, is closer to an
installment-purchase agreement than a rental
agreement. You will own the equipment after
the finance term is over. One big benefit of a
lease-purchase agreement is that the lessee's
(borrower's) payment obligation usually
terminates if the lessee fails to appropriate in
future budgets the funds needed to make the
lease payments. Because of this non-
appropriation provision, neither the lease nor
the lease payments are considered debt, and
payments can be made from the energy
savings in your operating budget.
Unlike bond issues, tax-exempt lease-purchase
financing usually does not require a voter
referendum because it is considered an
operating rather than a capital expenditure due
to the non-appropriation language. However,
lenders will want to know that the assets being
financed are of essential use, which will
minimize the risk of non-appropriation. In fact,
your organization may already be leasing
equipment, and it may be surprisingly easy to
add your energy project(s) to the existing
leasing agreement, especially if your
organization has a Master Lease (similar
to a line of credit) in place with a lending
institution.
Performance Contracting
Performance contracting also can provide an
effective way to fund efficiency improvements,
if savings can be easily measured and
documented. Energy service companies
(ESCOs) frequently assume the performance
risk of the technologies they install and will
often guarantee a certain level of energy cost
savings that can be used to pay for new
equipment and deferred maintenance. An
ESCO may bundle in the financing needed to
SEPA
United States
Environmental Frctecticn
Agency
a s y Access to Energy Improvement Funds in the Public Sector, November 2 0 0 4

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replace, repair, and maintain HVAC, control,
and lighting systems as part of an energy
performance contract. However, when
evaluating performance contracts, your
organization may benefit by separating the
financing activity from the performance
guarantees. By unbundling the financing from
equipment performance, you may be able to
take advantage of lower, tax-exempt interest
rates or combine this financing with the
financing of other projects.
The following table summarizes the benefits of
these two popular financing mechanisms and
compares them against issuing bonds or
paying cash. Remember that statutes vary
from state to state, so be sure to ask your tax
advisor to ensure that the lease agreement
complies with state provisions.

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 theTax-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
For more information about EPA's technical support for financing energy upgrades or to schedule a
presentation on this subject, visit www.energystar.gov or contact Katy Hatcher, ENERGY STAR
National Manager, Public Sector, at hatcher.caterina@epa.gov.

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