Industrial Energy Financing Primer
The industrial sector is a significant consumer of energy, accounting for nearly a third of energy consumption in the US. Industrial facilities are often energy intensive due to their size and the energy consumption of process and cross-cutting industrial technologies such as furnaces and compressed air systems. There are important opportunities to save energy by implementing best practices and energy saving technologies. Manufacturers are using a variety of financing strategies to fund energy efficiency, some of them quite innovative.
This primer serves as an introduction to the challenges and opportunities in energy finance for the industrial sector. It provides case studies and other resources to help companies 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 companies find financing solutions for energy efficiency and renewable energy projects.
Common Barriers to Energy Financing
Many industrial companies have a range of competing priorities that all seek funding from operating and capital budgets, and executives may place a higher priority on capital investments that increase production and sales.
Industrial companies may be hesitant to add liabilities to the balance sheet, particularly if they already have a heavy debt load.
Industrial companies may require a high minimum rate of return on certain investments (including energy improvements) because they could also deploy the capital into other high-return investments.
Limited staff capacity and/or lack of financing/technical expertise in energy efficiency and renewable energy may prevent industrial companies (especially those smaller in size) from exploring potential projects.
Lengthy and complex capital planning cycles can make it difficult to leverage incentives, rebates, or tax credits that may change or expire over time.
Common Financing Solutions
Industrial companies may self-fund energy projects using capital or operating budgets. These internal funding options can pay for efficiency upgrades or renewable energy equipment without accessing external capital. This is often the most simple and direct method for funding projects, and it allows the company to capture the full financial benefits of energy projects rather than paying a portion to a financing provider. Some companies have established internal funds to help structure their own investments in sustainability projects. These include revolving funds, CapEx funds, and other types of dedicated capital pools set aside for a specific purpose. These funds can have benefits including building a clear business case for sustainability, streamlining the budgeting process, and demonstrating a company’s long-term commitment to sustainability. Read more.
Companies with insufficient internal funds to finance energy saving projects have many options to consider. The links below more fully explain the various choices, and the pros and cons to consider for each.
DEBT OR LOAN
Industrial companies can borrow money directly from banks or other lenders to purchase energy equipment, pay for the upfront costs of an energy savings performance contract, or otherwise pay for energy projects. Loans are considered a simple, quick, and accessible financing option with minimal contract complexity. However, cost savings are not guaranteed and operation and maintenance of equipment must be arranged by the owner. Loan terms and availability may be affected by the creditworthiness of the customer, limitations on debt that can be taken on the balance sheet, or current debts held by the customer. Read more.
A lease is a financing structure that allows a customer to use energy efficiency, renewable energy, or other generation equipment without purchasing it outright. Industrial companies may use lease financing to directly lease energy equipment or pay for the upfront costs of a performance contract. These financing options are generally simple and quick with minimal contract complexity. However, cost savings are not guaranteed and operation and maintenance of equipment must be arranged by the owner. Read more.
Alternative Financing Solutions
When it is not possible to overcome such challenges with conventional financing, many companies seek alternative financial solutions. Options for financing in the industrial sector include performance contracting, commercial PACE, efficiency-as-a-service, and on-bill finance/repayment. These external financing options have unique attributes that help to overcome certain barriers to financing, but are newer in the market and have had limited uptake in the industrial sector to date.
ENERGY SAVINGS PERFORMANCE CONTRACTS (ESPC)
Performance contracts (also referred to as EPCs), in which an energy service company (ESCO) coordinates installation and maintenance of efficiency improvements in a customer’s facilities and is paid from the associated energy savings, are an option for owners with large projects or multiple smaller projects that could be aggregated into one agreement. The ESCO typically provides a savings guarantee, and the improvements may be installed with little or no upfront cost (if the ESPC is financed). ESPCs can be self-financed if the plant owner has enough cash on hand, or the owner may seek financing from a third-party lender to cover some or all of the upfront cost. Read more.
Commercial PACE is a financing structure in which building owners borrow money for energy efficiency, renewable energy, or other projects and make repayments via an assessment on their property tax bill. There may be some off-balance sheet benefit to PACE, making the option appealing for owners who would prefer to not take on additional debt. The complexity of PACE deals may be less attractive for some owners, and PACE cannot be scaled for portfolio-wide upgrades. PACE enabling legislation currently exists in 36 states plus D.C. Read more.
Efficiency-as-a-service requires no upfront capital and typically comes with a performance guarantee. These options offer third-party ownership of energy equipment and are typically considered off-balance sheet for the customer, which may be appealing to owners who would prefer to not take on additional debt. The provider pays for project development, construction, and maintenance costs. Once a project is operational, the customer makes service payments that are based on actual energy savings or other equipment performance metrics, resulting in immediate reduced operating expenses. For building owners looking to retrofit multiple facilities, bundling sites under one energy services agreement may be possible. The end user pays the service provider in much the same way that they would pay their utility bills. One significant benefit is that the project risk is almost entirely shifted to the service provider. The only risk to the end user is if energy costs decrease sharply after project implementation. These agreements also offer the flexibility to pay the amounts off early. In the event that the manufacturer needs to expand production and therefore use the system to a greater degree, e.g. three shifts vs. two shifts they will end up using more energy, which will cause them to accelerate the payment towards the project costs. The agreements can be written so that there are no pre-payment penalties. Read more.
On-bill financing (OBF) and repayment (OBR) are financing options in which a utility or private lender supplies capital to a customer to fund energy efficiency, renewable energy, or other generation projects and is repaid through regular payments on an existing utility bill. The benefits of OBF/OBR include low-to-zero interest rates, simple contract structure, and balance-sheet flexibility. However, OBF and OBR are only available in regions where utilities support on-bill programs for industrial and there has been limited uptake of the financing option in the industrial sector thus far. Read more.
The characteristics of an industrial site will affect how a company chooses to approach financing its energy projects:
- Industry sub-sector: Facilities in subsectors like primary metals and forest products are built around capital assets that are viable for two or more decades while others like computer chip fabrication can be obsolete within a few years. The life expectancy of an asset affects the volume of potential energy savings from an energy measure and that can affect its return on investment and how it can be financed.
- Facility ownership: Privately held companies often have greater flexibility in return on investment requirements than publically traded companies. However, many publically held companies are often more familiar with and more willing to disclose the internal financial details required to secure alternative financing.
- Savings opportunities: Energy intensive or outdated equipment and systems are often good opportunities for alternative financing because the potential energy savings of new technologies is sufficient to provide an attractive return for financial companies.
- Bundling: Rather than fund only projects with the greatest return on investment, bundle a mix of high- and low-return projects to create portfolio with an acceptable average return. This will lead to more projects and more savings over the long term.
- Energy efficiency programs and incentives: State and utility energy efficiency programs may be available to support financing or provide other services (technical assistance, etc.) based on jurisdiction. Many electric and natural gas utilities offer financial assistance in the form of prescriptive rebates that provide fixed incentives for the purchase of specific energy-efficient equipment, and custom incentives that tie the amount of an incentive to the quantity of energy a project saves. In 2017, utilities spent more than $7.9 billion for efficiency programs nationwide and saved 27.3 million MWh of electricity. For more information on available opportunities, visit the Database of State Incentives for Renewable Energy (DSIRE),
- Tax incentives: Many states and local jurisdictions provide tax credits and deductions for the purchase of renewable energy equipment or certain types of investments in energy efficiency. For more information, see DOE’s Tax Credits, Rebates, & Savings Database and the ACEEE State & Local Policy Database.
Better Buildings Implementation Models
Nissan worked with industry peers to benchmark funding practices for energy efficiency projects to determine whether its investment criteria for these projects was restrictive relative to industry norms.
To promote energy-efficiency, 3M created a special pool of capital to fund cost-saving energy efficiency projects that provided positive returns, but otherwise failed to meet the company’s investment criteria.
GM’s creation of an Energy Performance Contracting (EPC) model helped double the amount of money directed towards energy conservation from $40 million to $80 million.
Volvo established a new guideline that allows managers to factor in the risk of increasing energy prices when making energy efficiency PPE investment decisions.
Victor Valley Wastewater Reclamation Authority: Innovative Third-Party Funding Arrangement to Finance Waste-to-Energy Project
In 2008, Victor Valley Wastewater Reclamation Authority (VVWRA) began planning plant upgrades to comply with new nitrogen permit limitations and an expected capacity increase. VVWRA also evaluated incorporating a waste-to-energy project to reduce future energy costs and eliminate natural gas purchases with the ultimate goal of becoming energy neutral.
If you are an industrial sector leader ready to take the next steps on financing for energy projects, consider doing the following:
- Engage the facilities team(s) to assess the opportunities in your building(s) 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 the size of a loan).
- Understand what internal capital (if any) can be accessed to fund potential projects.
- Assess if an ESPC or efficiency-as-a-service is an option, particularly if you prefer to outsource the installation and operations to a third-party and/or want a performance guarantee.
- 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.
- Barriers to Industrial Energy Efficiency
- SEE Action: Industrial Energy Efficiency
- ACEEE State and Local Policy Database
- DSIRE State Incentive Database
- Public water and wastewater treatment facilities have financing characteristics that fall under the scope of the Public Sector Energy Financing Primer.