A road map for energy efficiency financing… and free negawatts on offer

The energy efficiency financing scene is evolving quickly, especially in the USA where three main types of financing now exist:

• PACE (Property Assessed Clean Energy – click http://pacenow.org for more information)
• traditional Energy Performance Contracting (EPC) – usually financed by leasing or municipal debt
• and the emerging Efficiency Services Agreements (ESA) and Managed Energy Services Agreements (MESA).

On-bill repayment (OBR), where the repayment of capital is added to utility bills, is also growing but this is more of a collection mechanism than a type of financing, as it can be tied to various contract forms. The UK Green Deal is a form of OBR with external financing provided through the Green Deal Finance Company.

Of course organizations also have the option to self-finance energy efficiency projects but this approach is most often single measure driven, usually in response to vendors selling specific equipment, and limited due to capital constraints and competition for scarce capital with the organization’s core business activities. Bringing in the right specialists and outside finance can lead to a more optimized set of projects designed and developed in a more holistic way that leads to greater savings.

PACE has been stopped in the residential sector because of a ruling by the Federal Housing Finance Agency (FHFA) but commercial PACE, so called C-PACE, is growing rapidly (see here for a primer). C-PACE has the potential to reach $2.5 billion to $7.5 billion by 2015 according to Pike Research, even $2.5 billion would be a great step forward.

Traditional EPC contracts have been mostly in the public sector, the MUSH market as it is known in the US, and mainly financed by issues of low cost, tax-exempt debt by the client or by leasing. The traditional ESCO/EPC approach has a number of problems in the commercial sector and as the FASB and IASB move towards harmonizing the balance sheet treatment of leases, the use of leasing to get energy efficiency projects off balance sheet is likely to be stopped. (I spoke about this issue at the recent IFC ESCO Financing conference in Johannesburg – see here)

The emergence of ESAs and MESAs is very interesting as the contract form appears to have many advantages. In the MESA the service provider takes over the relationship with the utility and the client pays the service provider what it used to pay, taking the difference resulting from energy saving projects – whereas in the ESA the client keeps paying the bills and pays the service provider a price per unit of energy saved. In both forms they are service contracts with payment for energy saved, negawatt hours, rather than equipment which helps get any associated capex off the client’s balance sheet.

The various types of energy efficiency financing can be confusing, and the pioneer of ESAs, Metrus Energy, has issued a useful and neat infographic: Which Financing Vehicle Gets You on the Road to Energy Efficiency. It is worth checking out and can be found here.

As well as its useful content I like the cartoon vehicle choices, a US style school bus and what looks to be a 1970s Cadillac for the ‘traditional’ and what looks like a VW Beetle and a Mini for MESAs and ESAs. Neat.

If you want more information on the ESA structure Metrus are hosting a free webinar on 27th June at 11am PST, details can be found here . In what must be a world first Metrus is offering 100,000 free negawatts to one customer who signs up for the webinar and then implements a project in 2013.