Cashing In: Financing

Though PDE Total Energy Solutions isn’t currently in the financing business, CEO Shelley Keltner suspects the nearly 25-year-old, Sante Fe Springs, Calif.-based contractor may be soon. 


“Financing enables traditional electrical contractors to sit at the table along with ESCOs [energy service companies] and offer turnkey solutions,” Keltner said. “It can be a great opportunity for a properly positioned contractor.”


Experts say the market for financing services is sizable but largely untapped. For example, a recent McKinsey & Co. study concluded that $520 billion of investment in U.S. energy-­efficiency measures could yield $1.2 trillion of gross energy savings, reducing end-use energy demand by 23 percent and avoiding the emission of 1.1 gigatons of greenhouse gases annually. 


Assessed from another angle, “The U.S. market needs $52 billion a year in energy-efficiency financing while only $5 billion a year is currently being provided through various ESCOs, which focus largely on opportunities in the municipal, university, school and hospital segments, also known as the ‘MUSH’ market,” said Mir Mustafa, executive director of business development for the National Electrical Contractors Association (NECA). “This implies that there’s a need for about $47 billion a year in project financing that’s going unmet.”


A ‘perfect storm’


While the concept of project financing has been around for a long time, “its application to the lighting and energy-efficient project marketplace has grown over the past seven years for several reasons, including the advent of more energy- and cost-efficient lighting/EE[energy efficiency]/controls systems, such as those involving LEDs and the scarcity of new-build projects, following the U.S. economic crisis,” said Dave Ingram, director of program management, Clean Technology at De Lage Landen Financial Services Inc., a Dutch-based financial institution with U.S. headquarters in Wayne, Pa. “We’ve also seen a growing cultural awareness of and interest in sustainability and conservation as well as the increasing availability of government and utility-funded incentives and credits to help stimulate customer behavior and acceptance. For all of these reasons, we consider it a ‘perfect storm’ of opportunity” for the financing market.


“Sources of financing haven’t necessarily grown or decreased over the past five years,” said Michael Park, vice president of project finance at Noesis Energy, an Austin, Texas-based firm that specializes in commercial and industrial energy-efficiency project financing. “They’ve always been available; they just haven’t been utilized or considered for energy-efficiency projects as much. For example, equipment leasing has been around for decades to finance everything from copiers and heavy machinery to software. Only more recently has leasing been utilized to finance energy-efficiency projects, and the leading lease companies are making a concerted effort to offer financing in this sector.”


While the opportunity itself is large, Park said that it’s even larger due to the historic hesitancy of end-users to tap their financing options.


“In a recent survey we conducted, ‘lack of budget’ was cited as the most common reason why energy-efficiency projects don’t get approved,” Park said. “But the same survey reported that less than 25 percent of the players proposing energy-efficiency projects typically include financing, often citing the fact that they don’t know enough about it. So the reality is that the potential for financing is massive, but the market is still in its infancy.


“We suspect that this market will gain momentum and likely follow the same trajectory as residential solar, only the energy-efficiency opportunity in the existing C&I [commercial and industrial] building stock is much bigger,” he said.


According to a recent report by energy-analysis firm Verdantix, only roughly 10 percent of current energy-efficiency projects are financed.


“We think that the reason why the percentage of energy-efficiency projects financed is so low isn’t necessarily because CFOs choose not to finance but because they’re not being presented with appropriate or actionable financing options,” Park said, adding that “helping to connect CFOs with financing that’s optimized for energy-efficiency projects” is a role that firms, such as Noesis, and savvy contractors can play.


Opportunity knocks


According to Park, the ability to offer financing options delivers two major benefits to a contractor. 


“First, the timeline to close a deal is shortened because the customer doesn’t need to go out and search for financing,” he said. “Second, third-party financing preserves the customer’s cash and/or business line of credit, enabling the contractor to offer additional proposals for other properties that the customer may have. If a customer chooses to self-fund a deal but they have other properties that could use energy-efficiency upgrades, they likely won’t be able to self-fund additional projects and would have to wait for the simple payback period to pass before taking on the next project. Debt is also called ‘leverage’ for a reason. You can leverage borrowed money to achieve more or take on more projects.”


Ingram said that a contractor’s ability to offer this service will “help fill the project pipeline, overcome budget/cash objections and delays, increase project closes, and help protect precious gross margin on project sales.”


Mustafa also sees many benefits to a contractor’s foray into this territory. 


“Contractors who offer these services should not only be able to win more energy-efficiency work but should also be able to increase the average size of their projects, because it’s generally to the customer’s advantage to go beyond energy efficiency and implement a more comprehensive set of energy-conservation measures,” he said. “These can include, but are not limited to, lighting, controls, HVAC, building envelope, cogeneration and CHP [combined heat and power], demand response, renewables, energy storage and water.” 


These are all energy-efficient technologies that can aid an end-user in meeting current energy codes, such as Title 24 and ASHRAE 90.1., as well as higher-level targets such as LEED Silver, Gold or Platinum status.


“Among the larger ESCOs, the ability to provide financing with their proposals enables them to secure deals,” Park said. “By comparison, in the C&I market, energy-efficiency financing generally isn’t provided or made available by most contractors, but the few contractors who do bring a financing option to the table as part of their energy-efficiency proposals have higher win rates, as most building owners don’t have budget for these investments and shouldn’t be using their bank line of credit to fund them. Third-party financing is available and ideal for these projects.”


Tips for the trade


For contractors interested in investigating the world of energy-efficient project financing, our experts offer several tips to help pursue a positive path and avoid any pitfalls.


Test available tools


In addition to reaching out to financing firms, a variety of free or low-cost energy-efficient project financing apps for electronic devices are available to help contractors get a foot in the door. 


In addition, NECA’s recently launched Energy Conservation and Performance Platform (ECAP) tool, “enables contractors to offer performance contracting services, including the ability to finance up to 100 percent of the cost of the project, guarantee the performance or savings that will result, and improve the facility,” Mustafa said. “Often, the savings generated from the project can be used to pay off the cost of the work while generating a new revenue stream that flows back to the customer. In other words, the customer pays nothing up front, and the financing is often off-balance-sheet. The customer also gets the benefit of an improved facility that has lower operating costs, which in turn increases the value of the asset and justifies higher tenant rents. This tool grants contractors the ability to offer their customers multiple financing options from capital leases, operating leases, municipal leases, bond financing for public works projects, energy service agreements, managed energy service agreements, property-assessed clean energy [PACE] financing, and power purchases agreements [PPA] for renewable-energy projects.”


Seek other resources


Ingram suggested visiting De Lage Landen’s informational leasing site at www.delagelanden.com/lighting-finance, while Park said contractors should visit Noesis’ library at www.noesisenergy.com as well as resources offered by the Environmental Defense Fund and the U.S. Department of Energy. 


“It’s also helpful to talk to other contractors and developers who sell or develop complementary energy-efficiency products and/or services,” he said.


Learn the language


According to Mustafa, electrical contractors and their teams are skilled in doing all of the required electrical work. 


“But if the contractor can’t sell the project, all of that talent goes untapped,” he said. “Contractors need to spend a little time learning how to sell performance contract projects and how to speak in terms that facility owners and CFOs understand.” 


Keltner said that a new approach is required to succeed in today’s marketplace. 


“It takes a different type of skill set to go out and sell this work,” she said. “You can’t just wait for bids and specs to come up. You have to proactively present opportunities to facilities and CFOs in their language.”


Do your homework


Ingram said contractors should interview and engage with a lender who understands the market well and offers tools and services to make the end-to-end processes painless for contractors and their customers. 


“Understand and agree on key performance indicators [KPIs] related to transaction sizes, response time, documentation, eligible customer types and fees up front to avoid surprises,” he said. “Just like anything else, there are some providers who will tell you what you want to hear to make a sale and then those promises go out the window. Solicit feedback and referrals from your peers, distributors and manufacturers and learn from their experience.”


Tailor your approach


“I recommend that a contractor partner with a financing provider or broker/adviser to offer financing and seek out someone who understands how financing works, will serve as an advocate, and whose motivations or incentives are aligned with yours,” Park said. “I also suggest working with a partner who understands how to utilize multiple financing vehicles and can determine what the best financing option is for your customer. Every project and customer is unique, so it’s important to find the right financing option to meet the customer’s needs.”


Be cautious


As a point of caution, “Be wary of financing partners or advisers who don’t agree to provide you with some form of noncircumvention—a contractual pledge that they won’t take your customer or project to another contractor,” Park said. “Additionally, make sure that their incentives are aligned with helping you win the deal; e.g., they should get paid from the project upon the successful funding of the deal, just as you do.”


Embrace a new paradigm


“This market represents a huge work opportunity for electrical contractors. Contractors offering these services can secure bigger, more lucrative projects and can succeed at winning these projects more frequently than in the bid world to which they’ve become accustomed,” Mustafa said. “If they can offer a financing arm, they’re more apt to secure these higher-margin projects.”


Stay Informed Join our Newsletter

Having trouble finding time to sit down with the latest issue of
ELECTRICAL CONTRACTOR? Don't worry, we'll come to you.