Energy-as-a-Service: A Flexible Funding Model for Efficiency Upgrades
Exploring Innovative Financing Models to Fuel Energy Infrastructure Modernization
Across the United States., there is a push to modernize infrastructure for efficiency and resiliency. In New York City, the need to refurbish and rebuild aging energy systems and transportation networks is evident. New York City is America’s most densely populated city and a nexus of technology, finance, healthcare, media, education, and more. As a result, everything in New York City is highly scrutinized in the U.S. and around the world. As the city has grappled with the consequences of climate change and extreme weather events, it has shown leadership creating a path for a more energy-efficient and carbon-neutral future. The Climate Leadership and Community Protection Act (Climate Act) of 2019 was a landmark measure for setting a path to slow the impact of climate change.
Many companies, facilities, and organizations want to modernize and update energy installations for efficiency and sustainability. However, many lack the financial resources for the large capital outlays required to fund these projects. But there are alternatives to traditional financial approaches, such as debt and leasing. Energy-as-a-service or energy service agreements are innovative new models, allowing organizations more freedom to pursue these projects now. Keep reading below as we explore these flexible funding models for energy modernization projects.
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Capital projects for energy efficiency can be financed through debt. While the CARES Act provided accelerated depreciation for capital improvements to property, higher short- and long-term interest rates have significantly ratcheted up the cost of borrowing. Moreover, many companies and organizations that already have debt-heavy balance sheets may not be able to add more easily.
In the automobile business, leasing became a popular financing alternative to purchasing as cars are also large purchases. Indeed, many companies use leasing for vehicle needs, which reduces capital outlays but is still a debt. Capital and operating leases are also a financing vehicle for modernization projects, much as they are for commercial property. While leasing can ease the initial cash outlays and puts ownership and other responsibilities on the financing company, they are still debt that is accounted for on balance sheets. With interest rates rising, leasing may also be less attractive for energy projects. Importantly, if the energy project is for a leased property, the lease terms need to match up, which may be difficult to achieve, depending on the nature and scope of the upgrades.
Some innovations migrate their way to other industries. In information technology, the internet and the cloud created entirely new models for computing. Companies today no longer have to buy servers, application licenses, and support staff to run major parts of their IT infrastructure. Instead, they can purchase it as they do in the cloud, paying on a monthly basis and eliminating the need for large capital investments in technology. Microsoft, Google, Oracle, Zoom, and a host of providers provide small businesses to Fortune 500 enterprises a complete array of scalable software solutions to run operations without funding a data center. This innovative model – while not quite as easy to implement in energy – is now an option for energy projects. Called energy-as-a-service or, more commonly, energy service agreements (ESA), it can revolutionize the ability of companies to achieve the energy modernization needed for efficiency, environmental goals, and regulatory compliance.
How Do ESAs Work?
With an ESA, your company works with a partner that funds and builds the capital improvements. You pay the provider a set monthly payment for the energy services. The ESA provider takes on all the risks of the capital expenditures and provides services according to a set of service-level metrics. ESAs with specific performance metrics are also referred to as performance contracts. The ESA provider maintains the system and provides more efficient energy-as-a-service to your facility or company. In practice, the ESA monthly costs encompass your actual energy costs, the costs for maintaining the improvements and upgrades, and part of the project’s savings.
With an ESA, your company enjoys important benefits: lowered risk from the project, a set, predictable, budgetable expense, no large capital outlays to initiate the project, and no debt on the balance sheet. It turns the project from a capital expense plus operating expenses to a purely operating expense model. While that model may not fit every organization’s capital and tax structure, it offers an easier and more flexible funding alternative. Moreover, many of these agreements can be created with clauses that allow contract buyouts and purchase of capital equipment and the end of the term should the company’s needs and strategy change.
Are you looking for a partner that can get you on the path to a more sustainable energy future? Vanguard Building Solutions is a full-service, design-build energy services company. We have the expertise and staff to supply turnkey energy solutions, including complete project financing options, with full incentives and rebate management. Call (856) 406-4880 or fill out our contact form to get in touch with us. We look forward to the opportunity to work with you.
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