November 1, 2022 Meeting Challenges in Financing Clean-Energy Projects

This article looks at several strategic paths and tactics to consider in financing a sustainability effort during turbulent times.

By Tom Waters

If you’re like many other companies today, you’ve made the call to green your business. Perhaps you’ve decided to switch to LED lighting, install a more energy-efficient HVAC system, develop a microgrid to increase your energy independence or make another energy-efficiency move.

Now it’s time for financing. How will you pay for the projects? More specifically, how will you pay for the projects in an inflationary environment with rising interest rates? This article looks at several strategic paths and tactics to consider in financing a sustainability effort during turbulent times. From the most conservative to the most advanced, one – or a combination of these – should offer a path to meeting your sustainability goals.

Reevaluate timelines and priorities

Interest rates will eventually drop. In the meantime, you could simply take a wait-and-see approach, and revise priorities. A year ago, a company may have been feeling pressure to demonstrate how it was meeting sustainable development goals. Today, the priority list may be very different, with some of those goals moved down so that the capital targeted for clean-energy projects can be invested elsewhere.

This is the time to conduct a thorough analysis to determine the point rates need to reach before a project is greenlighted again. Know, too, that what made sense to implement a year or two ago may not today. Plus, clean-energy technology and government incentives are continually changing, complicating matters. This can be an excellent time to reevaluate priorities, set goals and determine what types of projects to undertake, in what order, and when.

As you work through these steps, you can look carefully at realistic timeframes for implementation. Clean-energy projects are particularly sensitive to delays in electronic components, since so many elements of these projects contain semiconductor-driven controls to measure energy consumption, and control heating and cooling. In response, some companies are developing products internally or finding domestic sources to address these supply chain challenges.

Research government funding

In the United States, significant funding for clean-energy projects within the Inflation Reduction Act will become available soon. Specialists in the area are just now learning how to access the money, which is mostly funneled to the state level.

State-sanctioned energy-efficiency retrofit loan programs also are available in a handful of states. These programs allow utilities operating in the state to charge a tariff on each customer’s utility bill, the proceeds of which are used to provide funding for energy efficiency improvements. Loans under these programs are interest-free and can be repaid over time through additional charges on the customer’s utility bill.

As an example, an owner of a Class A office building in a major west coast market recently installed LED lighting, air system upgrades and new energy-efficient variable flow pumps. The company funded the project with an interest-free loan via a utility on-bill financing program. They anticipate that these measures will generate more than $68,000 in annual utility savings with a payback of less than 10 years.

Utilize alternative financing options

For companies that can, the most obvious choice may be to pay cash, and then go back into the lending community to back-leverage with debt at the appropriate time.

In the meantime, though, new and different sources of money may exist to help businesses meet their sustainability objectives. Make sure to think outside the box, and look in and under all the nooks and crannies. Here are a few ways to do just that.

1. Negotiate contracts with customers that incorporate inflationary levers and allow cost pass-through to customers. While not a completely new technique in business, employed on a temporary basis, this may work for clean-energy projects. It’s similar to how a construction company may build a provision into a homebuilding contract to increase its price if lumber costs exceed a certain level (utilizing a lumber commodities index as a benchmark). In the same way, other businesses can build in an inflationary lever to mitigate effects of inflation.
2. Consider Energy-as-a-Service. The decision of asset ownership is an important one. Companies can own an energy asset or employ pay-as-you-go models. If a company does not want or need to own its energy asset(s)—generally infrastructure—outright, Energy-as-a-Service (EaaS) can be an excellent option.
   And, if a company has one of these contracts in place, it may make sense to do a thorough analysis and see if it is possible to adjust its floating-rate debt for a balance that will more favorably allow the clean-energy savings projects to continue.
3. Look into a Power Purchase Agreement. In contrast to EaaS, a Power Purchase Agreement (PPA) is a financing option a company can employ when it wants to implement a clean-energy project, but doesn’t want to pay for the project up front, and doesn’t want (or need) the asset on its balance sheet. In a PPA, a third party (an energy developer) owns the asset and provides service to the company under terms of the agreement.
   PPAs can be particularly helpful for projects providing energy resiliency. For example, a beverage distributor in the southwest United States wanted a microgrid to provide power and energy resiliency at two distribution facilities. It installed two natural gas-powered microgrids, signing a PPA with the developer to guarantee the delivery of 100% of the distribution facilities’ power needs. The distributor projects annual utility savings will average more than $60,000 over the term of the agreement.

Each day, more shareholders and stakeholders are asking – often requiring – companies to be more accountable for their carbon footprints. We’re seeing business owners and leaders wanting to do the right thing and taking steps to learn about smart energy-efficiency moves. Whether it’s upgrading an HVAC system, installing electric-vehicle charging infrastructure or developing microgrids, more financing options than ever are available to make it happen.

About the author
Tom Waters is Director of Clean Technology Finance, a division of Mitsubishi HC Capital America, a provider of customized financing solutions dedicated to improving the communities where it operates with a commitment to the United Nations Sustainable Development Goals, with an emphasis on clean energy and mobility. https://www.mhccna.com/en-us

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