A few years ago, there were few options to invest in energy efficiency or renewables – to buy and own the equipment, or finance it with a loan. Nowadays there are many innovative and flexible financing mechanisms available. You can decide on how to structure the cash flow, what party will own the asset and the associated risks, and how the asset will be treated on the balance sheet.
On one end of the spectrum, you can self-fund all the actions, and own and operate the new assets. An example of this would be replacing all your lights with energy efficient fittings, or installing solar panels on your roof from your capital budget.
On the other end of the spectrum, you can have no upfront investment, outsource the ownership, operation, and maintenance, along with the risk the project might not perform as expected, and only pay monthly instalments from the operational budget. An example of this would be entering into a power purchase agreement (PPA) with a solar company.
Free Download: Financing Options for Sustainability Projects
The criteria for what financing options you would choose depends on the specific project, your risk appetite, your tax situation, organisational preferences, the net present value (NPV) of the various business cases and the trade-offs you are willing to accept. An example for a trade-off might be not paying any upfront costs, but having to accept a lesser financial return for your project.
The following table is meant to give an overview of the various options for energy efficiency and renewable energy investments. You can find out more details about these financing options in chapter 10 of Barbara’s book ‘Energy Unlimited’.
|Financing option||Up front cost||Repayments to 3rd party||Organisation owns asset||Balance sheet||Technical risk|
|Self-funded from capital budget or internal carbon price||100%||N/A||Yes||On||Yes|
|Revolving energy fund||100%||N/A||Yes||On||Yes|
|Loan funded||0%||Fixed or variable||Yes||On||Yes|
|Operating lease||0%||Fixed – $/month||No||Off||Yes|
|Capital lease||0%||Fixed – $/month||Yes, at end of lease||On||Yes|
|On-bill financing||0%||Fixed||Yes||On||No, if there is a guarantee|
|Onsite solar PPA||0% or setup fee||$/kWh purchased||No, can purchase at end||Off||No|
|Community ownership||0% or setup fee||$/kWh purchased||No||Off||No|
|ESA and EPCs||0% or small||Variable||No, though can purchase at the end of ESA/EPC||Off||No|
We have developed a Financing Guide for Local Governments that goes into more details about these financing options.