Introduction

This primer serves as an introduction to critical issues in energy finance for higher education. It provides case studies, market data, and other resources to help leaders in the sector take advantage of innovative financing strategies. The primer is part of the Better Buildings Financing Navigator, an online tool that helps public and private sector organizations find financing solutions for energy efficiency and renewable energy projects.

There are a few unique characteristics of the higher education sector that affect how a school may choose to approach financing for energy projects:

• Building ownership: Campus buildings rarely change ownership, allowing school officials to consider taking a long-term investment approach
• Building age: Schools often have older buildings in their portfolios, which may present some challenges (e.g. historic preservation) but can also create a large savings potential by replacing outdated or inefficient systems
• Project scale: The close proximity of campus facilities and the larger average project size generally lends itself to campus-wide financing efforts like performance contracts and green revolving funds
• Endowments: Many schools have sizeable endowments that can be used to finance energy projects, though there are often restrictions (real or perceived) on investing endowment capital in on-campus projects 
• Additional support: Academic departments and students can provide assistance with research, outreach, and implementation efforts for energy projects

Higher education institutions with limited budgets for energy projects can seek external financing options to cover the initial cost of project implementation. Energy Savings Performance Contracting (ESPC) has been a frequently used solution to implementing energy upgrades across campuses. Under an ESPC, an energy service company (ESCO) coordinates installation and maintenance of efficiency equipment in a school’s facilities and is paid from the associated energy savings. The ESCO typically provides a savings guarantee, and the improvements are usually owned by the school and may be installed with little or no upfront cost (if the ESPC is financed). ESPCs are typically better suited for larger projects ($500k+, and often $5 million+), but the scope of campus projects is often large enough to meet these thresholds.

ESPCs can be self-financed if the school has enough cash on hand, or it may seek financing from a third-party lender to cover some or all of the upfront cost. The majority of financed ESPCs are backed by an on-balance sheet financing mechanism such as a loan or capital lease. Under these structures, the school owns the equipment throughout the financing term. According to a recent Lawrence Berkeley National Laboratory (LBNL) report, ESCOs reported that from 2012 to 2014 the majority of higher education institutions paid for ESPCs with 100% external financing, while self-funding or using a combination of internal and external capital represented a small percentage of projects.

While the scalability, performance risk assurance, and longer contract terms of ESPCs may be appealing for many schools, ESPC assessments and negotiations do generally require significant staff time to coordinate, and a substantial portion of the cash flow from the project must be paid to the ESCO and the lender (if financed) during the contract. Leases, including capital leases or tax-exempt leases, and loans are other common external financing solutions that schools may use to finance projects. These financing options are generally simple, quick, and accessible with minimal contract complexity. These options also allow schools to capture a greater percentage of total cash flow from energy savings with no ESCO involved, but these savings are not guaranteed, and operation and maintenance of equipment must be arranged by the school.

Other options for financing include performance-backed arrangements such as efficiency-as-a-service and power purchase agreements that require no upfront capital and typically come with a performance guarantee. These options can be appealing to institutions with limits on the debt they can take on, as they offer third-party ownership of the energy equipment and are typically considered off-balance sheet for the customer.

In addition to external financing solutions, many colleges and universities are using internal funding options such as green revolving funds (GRFs) to pay for energy projects. Sometimes referred as a revolving loan fund, a green revolving fund is a pool of internal capital used to fund multiple rounds of energy projects. Some of the cost savings achieved are used to replenish the fund (i.e. “revolved”), thus creating a sustainable funding cycle that can be maintained indefinitely. Seed funding can come from sources such as the operating budget, capital budget, endowment, or donations/grants but do not require the school to seek external financing. So far the higher education sector has led the market in adoption of GRFs. Green revolving funds differ from a capital investment fund, which does not involve a revolving component.

Another option for schools to consider is tapping directly into the endowment to finance energy efficiency and renewable energy projects. According to Intentional Endowments Network’s Investing in Clean Energy: Campuses and Endowments, university endowments have over $528 billion in assets and are uniquely positioned to make long-term investments in energy upgrades through direct purchase of projects or providing seed capital for a GRF. While it is increasingly common for endowment managers to make investments in companies and other assets that support clean energy, direct endowment investment in on-campus energy projects is less common due to financial performance concerns, regulations, and limited peer resources or guidance. For more information on green revolving funds and endowment project financing, visit the Intentional Endowment Network and the Sustainable Endowments Institute’s Billion Dollar Green Challenge.

Colleges and universities may be eligible for utility and/or regional tax credits, rebates, and other savings opportunities that can help to lower the overall cost for energy efficiency and renewable energy. For more information on available opportunities, visit the Database of State Incentives for Renewable Energy and DOE’s Tax Credits, Rebates, & Savings Database.

If you are a higher education leader ready to take the next steps on financing for energy projects, consider doing the following:

• Engage the facilities team to assess the opportunities in your building portfolio that are feasible to implement. Understanding the size and scope of the potential projects will help determine the appropriate financing mechanisms (e.g. whether an ESPC would be appropriate or how a GRF should be sized). The facilities team is often the gatekeeper to getting projects done and should be involved in all stages of project design and implementation.
• Get a handle on what university budgets can be accessed. Funding sources can include the capital or operating budget, endowment, a student green fee, fundraising from alumni, and more.
• Assess if an ESPC is an option, particularly if you prefer to outsource the installation and operations to a third-party and/or want a performance guarantee.
• Consider the possibility of implementing a green revolving fund. For more information visit the Billion Dollar Green Challenge.
• Determine if there are available subsidies, incentives, or city/state/utility programs that could be leveraged to support financing efforts or lower the overall cost. For more information on available opportunities, visit the Database of State Incentives for Renewable Energy and DOE’s Tax Credits, Rebates, & Savings Database.
• Consider using the Better Buildings Financing Navigator to explore the range of third-party financing options available and connect directly with Financial Allies who may be able to finance your project.

Additional resources:

• Financing Energy Projects in Higher Education Webinar
• Financing Sustainable Energy Projects at Liberal Arts Colleges
• AASHE Campus Sustainability Hub
• Billion Dollar Green Challenge
• Investing in Clean Energy: Campuses and Endowments
• External Financing for Carbon Reduction Projects
• Internal Financing for Carbon Reduction Projects