Building EfficiencyInnovative Financing

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Financing Energy Efficiency

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In a recent survey, 42 percent of executives said the biggest barrier to achieving energy efficiency is access to capital. Fortunately, new financing models are emerging that create incentives to move forward with energy-efficient, private-sector building retrofits. 

One highly-effective approach is performance contracting, where the capital investment to make the improvements is paid for through the savings created over a set period. The energy service company that installs the improvements contractually guarantees savings on energy consumption, improved system performance, or both. 

For all its success in public and not-for-profit entities, performance contracting has had limited appeal in the Commercial, yet it is gaining momentum and, in fact, is just one of many emerging financing models that create incentives for both landlords and tenants, eliminate the need for owners to provide capital, and expose financiers to less risk. 

  • Anchor Tenant Financing: With anchor tenant financing, a building owner works with an energy service company to complete the retrofit and passes the cost to the tenant by way of the lease. The tenant then uses the guaranteed energy savings to offset the higher lease cost and pockets the excess savings.
  • Shared Savings Agreements (SSA): In this arrangement, an energy service company sells a portfolio of building improvements with guaranteed savings to a third-party ownership company (OwCo). The building owner receives the energy and operating cost savings, remits a set percentage back to the OwCo through monthly payments, and retains the balance of the savings.
  • Capital Lease: Under a capital lease, the energy-efficient equipment is treated as capital equipment, owned by the project financier and leased to the building owner. At the end of the contract, the equipment ownership transfers to the building owner.
  • Power Purchase Agreements (PPA): In the most common form of PPA, a company allows a third party to install, for example, photovoltaic panels on its building and agrees to purchase the resulting energy at a specified price for an agreed-upon term, typically 15 to 20 years.
  • Property-Assessed Clean Energy (PACE) Bonds: With PACE bonds, owners borrow from a newly-established municipal financing district created exclusively for energy-efficiency retrofits and small renewable energy projects. They repay the money over a 20-year term through a special assessment on the property tax bill.
  • Green Leases: These leases motivate tenants to conserve energy and water, produce less waste, and choose environmentally friendly products, furnishings and office equipment. They often include provisions to ensure that tenants comply with the building’s green practices.
  • On-Bill Financing: These programs are offered by the electricity and or natural gas utilities. The utility fronts the cost of the improvements and recoups it over time by incorporating loan repayment into future energy bills.
  • Performance-Based Infrastructure: Performance-Based Infrastructure shifts full responsibility for building operations and all financial and operating risk to an energy service company for a term of up to 30 years.

To learn more about these emerging financing options, view our whitepaper titled "Financing Commercial Retrofits: An Awakening in Energy Efficiency." Or, visit the Johnson Controls web site for more information on commercial building retrofits.

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