One of the barriers to the energy services market is the ability of the electrical contractor’s customer to fund the energy services project that Step No. 5 defined. Unless the customer can fund it, the EC will not have the opportunity to do the work, and the time and effort the EC invested to perform the first five steps will be wasted. At this point in the process, the EC can help its customer obtain the financial resources and incentives needed to proceed.
Many ECs have never helped potential customers obtain financing for any project. They typically feel that funding is the customer’s responsibility and that he or she does not need or want help. However, the energy services market requires a different approach to both marketing and project delivery.
Energy is usually not the customer’s primary business, and many times, energy service projects aren’t as visible or tangible as traditional facility construction, expansion or renovation projects. Additionally, customers often don’t understand that, unlike traditional construction, myriad funding options are available for energy projects, including government and utility incentives that can greatly improve a project’s economic feasibility.
Customers can still finance an energy services project using available cash from their business, traditional bank lines of credit and commercial loans, or loans or additional investment from the business owners. While this method is still an option, many customers look for alternative funding methods that will allow them to achieve their energy and sustainability goals and maximize their return from the energy services project. There may be alternative, more advantageous methods of financing the energy services project that the customer is not familiar with. Even if the customer has the cash—or can easily obtain the cash—to pay for the energy services project, the customer may still want help identifying and taking advantage of government and utility incentives (see the Lighting column, page 36, for some currently available rebates).
Leasing is an alternative to owning the energy services project. A variety of leasing types are available, and each has advantages and disadvantages given the firm’s ownership, financial structure, tax situation and financial goals. The most common method for energy services projects is the operating lease. The EC typically uses operating leases for anything from pickup trucks to test equipment, such as thermal imaging cameras, for its day-to-day business.
With an operating lease, the monthly charge for the energy services project is deducted from the customer’s income statement. The energy service project investment does not show up as an asset or as a liability on the customer’s balance sheet. However, government and utility incentives as well as depreciation expenses are typically only available to the energy services project owner, which, in the case of an operating lease, would be the lessee and not to the EC’s customer, who is the lessor. An accountant and attorney should carefully analyze whether to lease or buy with the EC’s help to ensure that leasing is the best choice for the customer.
Another option that will allow the customer to obtain the benefits of an alternative energy production project, without actually owning or leasing it, is to enter into a power purchase agreement (PPA) with a third party. The third party actually owns and maintains the energy production project, such as a photovoltaic (PV) array, over the life of the PPA. As with an operating lease, the third party receives all the benefits of ownership and recoups its investment plus profit by selling the energy by the alternative energy project to the EC’s customer. The customer benefits by having the electrical energy supplied to its facility over the life of the PPA at a guaranteed price without the risk of asset ownership or long-term lease payments. Also, since most PPAs require the customer to take all of the energy produced by the alternative-energy project at a fixed rate, the customer can recover the expense of any excess energy through the net metering provision in its utility service agreement.
Other funding options are available. It is very important that the EC understand its customer’s financial situation and needs as well as be able to assist the customer in understanding and obtaining government and utility incentives. To ensure the appropriate funding method is selected, the EC should work with the customer’s accountants, attorneys, financial institutions, and leasing firms, as necessary. If the customer does not have the necessary expertise, the EC should team up with other professionals to provide the necessary information.
Thanks to ELECTRI International Inc. for sponsoring “Energy Roadmap: Electrical Contractor’s Guide for Expanding Into the Emerging Energy Market,” on which this article is based.
GLAVINICH is director of Architectural Engineering & Construction Programs and an associate professor in the Department of Civil, Environmental and Architectural Engineering at the University of Kansas. He can be reached at 785.864.3435 and email@example.com.