One of the biggest hurdles electrical contractors must jump when marketing their energy services is owners’ concerns about the initial investment they must make in order to reap the savings from a project. When presented with a proposal, the owner often looks at the cost and assumes the project will have to be financed using internal company funds, borrowing from outside sources, or a combination of the two. Even though the payback on most energy projects is certain and low risk, the payback period is typically greater than the owner usually accepts for other investments in its core business. In addition, financing an energy project using the owner’s traditional sources of funds can reduce the owner’s ability to get funds for core business expansion in the future. Electrical contractors must recognize this issue of initial investment in a proposed energy project and help the customer address it.
Capture the upfront rebates and incentives
First, the actual upfront investment cost to the owner must be determined. Today, there are myriad cash rebates and incentives available for energy projects from federal, state and local governments as well as utilities and other organizations. These rebates and incentives can significantly reduce the upfront cost of an energy project to the owner as well as shrink financing needs and payback time. The Database of State Incentives for Renewable Energy (DSIRE), which is available at www.dsireusa.org, is an excellent resource for identifying these potential rebates and incentives. The DSIRE initiative is a program developed by the Interstate Renewable Energy Council, funded by the Department of Energy, and maintained by the North Carolina Solar Center located at North Carolina State University. A word of caution: rebates and incentives are usually only available to the owner of the energy project, which may not be the electrical contractor’s customer under some of the financing options this article presents.
Energy project leasing
An operating lease is one way an owner can undertake an energy project without any upfront investment. Lease terms and conditions vary and can usually be negotiated with the leasing company to account the anticipated useful life of the energy project as well as the owner’s financial and operational needs.
To help the owner take advantage of the leasing option, the electrical contractor should identify and partner with knowledgeable and interested leasing firms. Before entering into any lease, it is important that the owner’s attorney, accountant or financial adviser review and ensure the terms and conditions are consistent with the owner’s financial and tax objectives.
Performance contracting requires no initial investment from the owner. The savings the project generates over the contract period, which can range up to 20 years, pays for the project. The structure and conditions of a performance contract can vary greatly, but generally, a third party, such as a utility or an energy services company (ESCO), undertakes the energy project and provides definition, design, finance, installation, and possibly ongoing operation and maintenance. The third party typically assumes both the technical and performance risk and guarantees a minimum level of energy savings to the owner over the life of the performance contract. The owner then pays the third party back over the contract period on a predetermined schedule or through some kind of shared savings arrangement.
Most electrical contractors would not want to enter into a performance contract with an owner but could partner with a third party, such as a utility or ESCO, to offer a performance contract. The electrical contractor would procure and install the material and equipment for the energy project under contract with the third party. In addition, the electrical contractor could perform preinstallation services, such as energy audits and design, and postinstallation services, such as system commissioning, system monitoring and ongoing maintenance.
Power purchase agreement
Hosting is typically associated with energy-production projects, such as the installation of a photovoltaic (PV) system, rather than energy-conservation or efficiency projects. Hosting an energy production project simply means the electrical contractor’s customer locates the project on its property but does not own it. There are several ways the customer can host the project and benefit from it—either through lower energy costs with reduced financial risk or new revenue streams that don’t affect the owner’s energy costs. One popular alternative to outright ownership is a power purchase agreement (PPA). Using the PV system as an example, with a PPA, another entity actually owns the installation, and the owner agrees to purchase, at predetermined price over a prescribed time period, all or a portion of the energy the PV system produces.
Alternatively, hosting the project may mean leasing the building’s roof, exterior walls, parking lot or grounds for the installation of the PV system, and the owner receives a long-term revenue stream from this setup just like leasing a portion of the facility to a tenant. With a PPA, the electrical contractor’s customer could be either the facility owner or an energy-project developer, such as a utility or private business set up for just this purpose.
Property tax financing
Some U.S. municipalities are experimenting with property tax financing for residential and commercial energy projects. One way this is being accomplished is through the proceeds of property assessment clean energy (PACE) bonds that can be used to finance residential and commercial energy projects without the need for upfront investment or borrowing by the owner. A PACE bond is a municipal bond issue where the proceeds are lent to property owners specifically for energy projects. The property owner repays the loan from the municipality as an annual assessment on their property bill at a low interest rate. The loan is attached to the property and not the owner and, therefore, transfers to the new owner when the property is sold.
Even though PACE bonds are somewhat controversial and are facing legal and other challenges, almost half of the states have passed legislation that allow their municipalities to issue these bonds. The PaceNow website at www.pacenow.org is one source for more information about PACE bonds and the states currently allowing municipalities to issue them.
Partner with your electrical distributor
Like your company, your electrical distributor only makes money when your customer decides to undertake a project that requires material or equipment that the electrical distributor supplies. As a result, your electrical distributor is as interested in overcoming your customer’s upfront financing hurdle on energy projects as you are. Some electrical distributors are offering financial services in the form of a loan or lease to your customer for energy projects installed by your firm. The electrical distributor can hold the loan or lease or pass it on to a lending institution or leasing firm. For qualified customers, the electrical distributor may supply the materials and equipment directly to the electrical contractor for the installation and not charge the electrical contractor. The electrical distributor or the third party that holds the financial services agreement for the contract balance then pays the electrical contractor directly. An electrical distributor program like this will not only help the electrical contractor market its energy services, but it can also reduce the electrical contractor’s risk and age of receivables.
Overcoming the hurdle
Helping the customer overcome the upfront financing hurdle for an energy project does not mean that the electrical contractor needs to become a lender or lessor. However, it requires the electrical contractor to become knowledgeable in this area and cultivate relationships so that it can help its customer find a financial solution that works.
When considering alternative methods for financing energy projects, it is important to remember that the customer does not have to own the energy project in order to benefit from it. In some cases, it will make financial sense for the customer to own and operate the energy project based on its financial situation and ability to take advantage of tax incentives and rebates, willingness to take on any risk associated with the project, and ability to operate and maintain the system. In other instances, though, it might be better for the customer to let another company actually own the energy project. This is especially true if the customer is not able to fully take advantage of tax incentives and rebates associated with the energy project or is unable to finance the project itself.
However, simply recognizing the fact that the customer does not have to actually own the energy project outright to benefit from it opens up a number of new marketing opportunities for the electrical contracting firm.
This article is the result of a research project, “Energy Roadmap: Electrical Contractor’s Guide for Expanding Into the Emerging Energy Market,” sponsored by ELECTRI International Inc. (EI). Thanks to EI for its support.
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.