News Article
April 29, 2010

New Financing Models Overcome Capital Barriers to Energy Efficiency

The most commonly cited barrier to implementing energy efficiency and distributed renewable energy improvements in buildings is a lack of capital available to fund clean energy capital, meaning property owners don't have the capital budgets and can't find the financing to proceed with investments. New financing structures are emerging, however, that could break down capital barriers to energy efficiency, water efficiency, and distributed renewable energy in residential, commercial, and industrial buildings.



 

clean energy capital barrier chart

 

When asked what barriers stand in the way of energy efficiency, the most frequent response amongst real estate leaders and building managers, consistent across variety of sectors, was capital availability. Source: Johnson Controls and the International Facility Management Association (2009) “Energy Efficiency Indicator.” Milwaukee, WI. May 2009.

 

The Challenge

Clean energy is inherently capital intensive. Whether upgrading a chiller, installing a solar photovoltaic system, or undertaking a deep whole-building retrofit, projects require large upfront investments, followed by long payback periods, with returns on investments realized through savings in energy bills.



In contrast, typical facility budgets include a constant operations component with small and sporadic infusions for capital improvements. The process for obtaining approval for large-scale capital expenditures might require significant time and effort on the part of staff, especially if it involves arduous or unpopular steps such as obtaining legislative appropriations, raising property taxes, or trimming shareholder dividends.



 

barriers to energy efficiency funnel

With limited capital budgets, owners might seek outside financing to obtain clean energy capital. However, several barriers—both internal and external—stand in the way of this route. Internally, some organizations have stringent rules against taking additional debt for facilities onto their balance sheets. Externally, those willing to do so still face challenges in finding lenders comfortable and experienced with financing energy efficiency projects.



 

The next hurdle is passing the credit check. In the commercial real estate sector, buildings are often owned by special purpose entities that lack the credit rating to receive financing at acceptable rates and terms, regardless of whether the project in question promises an attractive return on investment. Even if the building owner's credit is sufficient, there may be insufficient collateral available to secure the loan. Unlike supply-side energy projects where the equipment can serve as collateral (e.g. a new energy generation station or high voltage transmission line), the assets to be upgraded or replaced in energy efficiency projects are often burdened by an already existing mortgage lien.

 

New Models Help Owners Over the Hurdles

Several new financing models are emerging to help overcome these capital barriers to energy efficiency. These new funding structures could provide building owners with radically better access to the financing they need to align cash outflows with the inflow of cost savings.

 

Comparison of financing options for building owners

These new financing models can make a dramatic impact in igniting clean energy investments in buildings across the globe. The availability of some of these models, however, may depend on new state and local legislation, as well as significant capacity building.

April 2010

 

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