Financing Energy Efficiency Projects
The approaches to financing energy-efficiency projects are as varied as the need. Energy services performance contracts guarantee savings will meet or exceed annual payments to cover the project costs. Lease-purchase agreements are also popular. Some states offer tax credits and other incentives to companies that implement more efficient energy systems.
Using an Energy Performance Contract
Energy services companies (ESCOs) will design, install, finance, and manage energy-efficient systems in a customer's facility using energy savings they produce from new efficiencies to pay for the cost of the project. They enter into a performance contract with a company that states that the ESCO will guarantee the amount of savings the facility will achieve. These contracts typically run from four to ten years. The length of time is dependent on the project's complexity, the project type, and the savings payback period.
A baseline consumption profile is determined using past energy bills, and then savings are calculated using the actual energy bills received throughout the contract period. Usually both parties agree to monitor the savings on a regular basis-that way midcourse adjustments can be made and performance improved.
Performance contract projects must be of sufficient size, so that the savings generated by the project cover its costs over the length of time specified in the contract. Aggregating smaller projects into a single contract is a way to create the critical mass necessary to make performance contracting a viable option.
Lease-Purchase
Commercial leasing corporations, banks, investment brokers, financing companies or even the equipment manufacturers themselves will offer lease-purchase agreements as a means of reducing the costs of energy-efficient equipment. These leases are designed so that the energy savings actually pay the financing charges. Leases in which the lessee assumes ownership typically range from 5 to 10 years.
Capital leases have many of the same characteristics as asset ownership. Capital leases are long-term, no-cancel agreements in which the lessee assumes responsibility for maintenance, insurance, and taxes.
An operating lease, on the other hand, allows the lessee to use the asset, but does not include the rights and responsibilities of ownership. Operating leases are attractive to companies that regularly replace or upgrade equipment.
State Tax Incentives
Not all states have incentives, but some do. One way to learn if your state has special tax or other incentives for commercial energy-efficiency projects is to visit the Database of State Incentives for Renewable Energy (DSIRE).
Federal Incentives
The Energy Policy Act of 2005 Commercial Building Tax Deduction (ยง179D IRS Code) has been extended to 2013. You can receive a tax credit up to $1.80 per square foot in three different end use applications:
- Building envelope ($0.60/ft2)
- Heating, cooling, ventilation ($0.60/ft2)
- Interior lighting ($0.60/ft2)
The tax credit is available to owners or tenants (or designers, in the case of government-owned buildings) of new or existing commercial buildings. In order to qualify, you must save at least 50% of the energy cost of a building that meets ASHRAE Standard 90.1-2001. There are verification requirements involving software and certification requirements from a third-party.
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Article used with permission of Questline, Inc. Photo by Photos8.com