This primer serves as an introduction to critical issues in energy finance for public sector organizations. 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.

For more specific information on energy financing in public universities or K-12 schools, visit the Higher Education Energy Financing Primer or Lawrence Berkeley National Lab’s Financing Energy Upgrades for K-12 School Districts.

There are a few unique characteristics of the public sector that affect how an organization may choose to approach financing for energy projects:

• Lead by example: Because state and local governments have the opportunity to spur innovative energy efficiency and renewable energy solutions through actions focused on their own public buildings, many governments have implemented or are considering goals specifically for reducing the energy consumption of their building portfolio. Internal budgets may be able to pay for a portion of proposed projects, but many governments are leveraging external financing solutions to cover additional projects and realize savings more quickly than waiting for capital budget funds to become available.
• Financing programs: Financing programs can help governments structure and fund investments in energy efficiency and renewable energy. These programs can vary in size and scope, and there are often multiple target markets. Governments may leverage certain program resources to support the implementation of energy upgrades in their own facilities. Many programs also aim to support private-sector adoption through various mechanisms such as state revolving loan funds, Property Assessed Clean Energy (PACE) programs, and utility incentives and rebates. For more information on financing programs, visit DOE’s State & Local Energy Efficiency Action Network, the State and Local Solution Center, and EPA’s Clean Energy Financing Programs Decision Guide.
• Portfolio size: The size and demographics of a governmental jurisdiction can affect its ability to finance energy projects. Larger jurisdictions typically have more facilities and thus a greater savings potential. External financing solutions can help governments tackle a larger project pipeline.
• Project bundling: It is possible to group multiple sites with varying payback periods into a larger more comprehensive project under a single financing solution. Bundled projects  enable greater overall savings across a wide range of facilities that might not be feasible as standalone projects.
• Building ownership: Government buildings rarely change ownership, allowing officials to consider taking a long-term investment approach with longer allowable paybacks.  State policies typically allow ESPC contracts of up to 20 years.
• Utility incentives and rebates: Utility incentives and rebates exist for many energy projects that can help reduce total project costs. For more information on what is available in your jurisdiction, consider contacting your local utility.

Discussion of Common Financing Solutions:

Internal Funding
Many governments are using internal funding options, i.e. capital budgets, to pay for energy upgrades without accessing external capital. This is often the most simple and direct method for funding projects, and it avoids some of the bureaucratic complexity that may come with seeking financing for projects. Internal funding allows the government to capture the full financial benefits of energy projects rather than paying a portion to a financing provider. While some governments simply implement projects on an as-needed basis, many have established dedicated financing programs or centrally managed internal funds to help structure their own investments in energy projects. Examples include revolving loan funds, and other types of dedicated capital pools set aside for a specific purpose. These programs or funds can have benefits including building a clear business case for sustainability, streamlining the budgeting process, and demonstrating a long-term commitment to sustainability. While many governments may prefer to pay for projects using internal funds, competing budget priorities, limited budgets, lack of  information about available options, and other barriers may create impediments that external financing options can help solve.

Bonds
Bonds are long-term debt instruments that can be issued by state and local governments to fund a variety of projects including energy efficiency and renewable energy projects. While energy projects are typically not the driver of most bond issuances, a share of bond proceeds can be put towards funding projects or entering into an ESPC. Bond financing is not limited to large projects as smaller projects can be pooled into a larger bond issuance. Bonds are typically considered low-risk and capital can be raised at low interest rates. Voter approval is typically required for governments to issue bonds, and the process for issuing bonds can be complex and time consuming.

Energy Savings Performance Contracting
State and local governments can use Energy Savings Performance Contracting to implement energy upgrades across government facilities. Under an ESPC, an ESCO coordinates installation and maintenance of efficiency improvements in a facility (or bundle of facilities for portfolio-wide initiatives) and guarantees the energy savings. Governments may elect to pay for the project costs using existing internal budgets or seek financing from a third-party lender. ESPCs are typically better suited for larger projects  $1 million+, but smaller projects can and have worked. The scalability, measurement & verification of savings, energy performance guarantee, and longer contract terms of ESPCs are appealing for many governments. Conversely, 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. For additional information on ESPCs, visit DOE’s Energy Savings Performance Contracting Toolkit.

Leases
Leases are generally simple, quick, and accessible with minimal contract complexity. Leases also allow governments 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 government.

A tax-exempt lease-purchase agreement (also known as a municipal lease) is a common type of lease financing structure for public organizations to pay for equipment using their annual revenues. This option is an effective alternative to traditional debt financing but is only available to municipalities and other political subdivisions that qualify. Tax exempt leases have two unique attributes: (1) the lessor may claim a federal income tax exemption on the interest  received from the customer under the lease, allowing them to offer a lower rate, and (2) the lease contract usually stipulates that if the customer fails to appropriate funds to make payments on the lease in any given year, its obligations to the lessor ends and the customer must return the equipment to the lessor. In most states, this non-appropriation clause means that (a) a tax-exempt lease is not considered debt and therefore voter approval is not required, and (b) lease payments may be made from operating rather than capital expense budgets.

Power Purchase Agreements (PPAs)
A PPA allows the customer to receive stable and often low-cost electricity with no upfront cost while also enabling the owner of the system to take advantage of tax credits. Once the third-party energy generation system is in place, governments then purchase the system's electric output for a predetermined period. Offsite or virtual PPAs, where the customer does not take physical delivery of the renewable power generated, are an alternative to onsite PPAs and are common among governments looking to procure renewable energy.

If your government office is ready to take the next steps on financing for energy projects, consider doing the following:

• Engage the appropriate staff to assess the opportunities in your building portfolio that are feasible to implement. This may include a facility specific energy or sustainability manager or a facilities team for the building portfolio. 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 an internal fund should be sized). The facilities team often plays a lead role in getting projects done, including project design and implementation.
• Understand what internal capital (if any) can be accessed to fund potential projects and consider whether it could be structured into an internal fund or capital expenditure program.
• Assess if an ESPC is an option, particularly if you prefer to have a third party support the installation and operations of a project or want a performance guarantee.
• 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 projects.

Additional Resources:

• Current Practices in Efficiency Financing: An Overview for State and Local Governments
• Energy Savings Performance Contracting (ESPC) Toolkit
• Department of Energy State and Local Solution Center
• EPA’s Clean Energy Financing Programs Decision Guide
• Easy Access to Energy Improvement Funds in the Public Sector
• Financing Energy Upgrades For K-12 School Districts
• Performance-Based Contracting: A Primer for K-12 Schools
• Energy Efficiency in Water and Wastewater Facilities
• Energy Savings Performance Contracting for Water Resource Recovery Facilities
• Guide to Promoting an Energy Efficient Public Sector (PePS)