Three Strategies for Financing Efficiency

Boosting operational efficiency for industrial and commercial players is becoming a key objective for companies as the significance of energy costs becomes more apparent at board level. But, despite the potential for economic and environmental gains, financing such investments can be a challenge. Nonetheless, there are solutions, as David Appleyard discovers.

While at face value investment in energy efficiency improvements yields obvious commercial and environmental benefits, companies hoping to finance such projects can, nonetheless, face challenges raising the required balance sheet cash.

1. The ESCO Opportunity

Such schemes are often supported by financial incentives such as tax breaks, environmental credits, and capacity payments, and are therefore potentially attractive to lenders. However, given that securing heat and power supplies is typically beyond the scope of many business interests one option open to commercial and industrial players is to work with a third party energy services company.

Heather Foster, Head of Operations at UK-based ENER-G, explains that as a first step a key role of such a third party organisation is to correctly size any new plant by conducting an energy audit. Exploring electrical and heat demand is critical ahead of any planned investment in new electrical generation and heat capacity. “We start at the beginning and try to look for all the demand-side measures that provide the quick wins. We can make suggestions to the site, such as installing LED lighting or updating/changing the boiler controls to maximise efficiency. After this, we look at the feasibility of CHP, as we don’t want to put something in that’s too big or won’t meet future site demand.”

Heat management“The plant capacity is usually sized on heat even though there is typically a greater electrical load, as this allows for optimum operation and efficiency. We can put a CHP unit in that’s a little bit bigger, which may reject some of the heat during the summer, if a site wants more electrical output. However, where possible we try not to encourage our customers to reject too much heat, so that their units operate for as many hours as possible and all the heat goes to their site. Some customers benefit more from the financial savings from the electricity, so they’re willing to reject a little bit of heat because electricity is more expensive and that’s where you get most of your savings from.”

Foster continues: “Once we size the unit based on demand, we look into what financing options the sites are interested in.”

Naturally, the most basic is a capital purchase of the equipment which allows owners the most flexibility. In addition, in the UK for example, this enables them to claim a tax break in the form of ‘enhanced capital allowances’ on the technology – provided the project is registered with CHPQA. “If you’re operating a Department of Energy and Climate Change (DECC) accredited “good quality” scheme, the scheme becomes eligible for reduction or exemption in Climate Change Levy, which is an additional charge on the site gas usage. Managing a good quality CHP scheme maximises savings available to sites with CHP units, this is in addition to the utility savings from buying electricity or generating electricity at a lower rate.”

However, where capital purchase is not an option, alternatives can be arranged through an energy services company, for example. Foster outlines one of their services: “There isn’t a capital outlay – we provide the equipment, we install it, and we then maintain it on, typically, a 10-year contract, and they pay us a pence per kWh rate.”

Under this type of scheme the cost of electricity is fixed, bar inflation, though operators electing to develop a project on this basis are still required to purchase the gas to supply the on-site engine.

Foster concludes: “With all of the funded options, our customers are not buying the equipment, they’re buying discounted energy. At the end of the finance agreement, the customer is given the option to extend the contract or to replace the equipment with a new, more efficient CHP unit, fitted with the latest cloud based control system. On some of our sites, we’re on the third generation of equipment and our customers are continuing to make energy savings.”

Major players making savings

General MotorsAt the larger scale, major industrial and commercial players may justify efficiency investment on the basis of an internal rate of return and such schemes may also form part of the wider corporate social responsibility (CSR) programme.

Al Hildreth, global energy manager at General Motors (GM) explains the company’s strategy for energy efficiency investment: “Every plant globally has a requirement to reduce energy. We have a goal of 20% reduction from 2010 to 2020 on an ‘energy per vehicle’ basis. As well for water and carbon emissions reductions. Our water goal is 15% from the same time period, carbon’s 20%.”

“So, as we’ve integrated it into our business plan, it pops up every year, every month, every day, on people’s business plans, and they track their energy per vehicle. It’s a standardized business process for us. It’s very similar to safety or quality or cost. Because energy and the environment are integrated into our business plan, that provides us with access to resources, both people and money. We have dedicated resources at each major manufacturing facility and usually non-manufacturing facilities also. This is called our ‘global manufacturing system’, the continuous improvement of energy and environment is built into that.”

“That’s a real advantage, 2014 is our latest year with available verified data and we’re about 11% [down] on MWh per vehicle built from 2010 – 2014.”

2. Utility finance for energy conservation

Hildreth highlights some of the key sources of efficiency funding: “We have established a fund for energy savings projects, pretty close to US$20 million a year. We also leverage utility incentives, mostly in United States and Canada, so I also usually get an extra US$3-4 million from utility companies to do energy efficiency projects. We really find in the US and Canada that utility companies focus on the fact that it’s cheaper for them to pay us to reduce our demand than it is for them to pay to build a new power plant and so they give a lot of demand reduction programmes, lots of incentives.”

High-voltage Towers

“Our strategy in Europe is more carbon tax avoidance. The price of electricity is significantly more in Europe, and so the returns are actually higher for us there than they are in the US for the same project, because the energy rates including the carbon tax are much greater than they are in the US.”

While this type of project financing is supported by internal financial management, there is also a role for energy service companies in serving major industrial needs, as Hildreth explains: “Anything less than a two-year payback, GM funds those energy savings projects directly. If it’s greater than a two-year payback then they do allow us to use a shared savings approach with energy performance contacting.”

“We competitively bid to energy service companies. Typically these are longer return, about two to five-years, and still we get positive cash flow from day one. So to us it looks like a really great return. We’ve been able to do those probably to about the same amount of money, $10 – $15 – $20 million a year is what we’re targeting to do projects like that.”

Hildreth adds: “We’ve done them in Europe quite a bit and the United States, and we’re migrating to other countries as well.”

Rob Threlkeld, GM’s renewable energy manager, notes that the company has also invested in renewable energy projects, both on and off-site: “We’ve actually exceeded our current 125 MW target and most of this doesn’t involve direct General Motors investment in renewable energy projects. We secure new power purchase agreements available in the renewable market.”

Threkeld adds: “There are some on-site projects that we’ve recently completed. By leveraging our own internal capital structure we’ve invested about US$35 million in the last two to three years in renewable energy projects, US$10 million of that in about 4 MW of solar at our facilities here in the US, particularly in markets where there’s renewable energy credits that help support the business case.”

Hildreth concludes: “We prioritise [projects] based on a return on investment basis. So the best returns we start first.”

3. Hybrid project multiplying income streams

A novel hybrid model represents yet another route to financing efficiency improvements, as Sal Scuderi, Manager of Operations at Scuderi Clean Energy, explains: “Unlike a typical combined heat and power system designed around the heat demand, our system is really designed to be very highly efficient in its electricity production. Our efficiency is typically much better than other power producers feeding power into the grid, we can sell very effectively and profitably into the grid and at the same time provide savings to the end user we’re sitting next to for both electricity and heat, that’s our business model.”

Based on gas-fired reciprocating engines, heat recovery and advanced controls, Scuderi says: “We make it highly efficient across all running conditions and utilize a lot of the heat to generate [additional] electricity, but we also utilise the heat wherever possible for your typical combined power system application, either using it as process or using heat for buildings or something along those lines.”

Currently in the process of patenting a proprietary ‘bottoming’ heat recovery cycle, according to Scuderi the electricity generating technology is an improvement on the Organic Rankine Cycle (ORC) engine – the most widely used bottoming cycle for gas-fuelled piston engines. “It’s more cost effective,” he says.

Patents are expected to be granted for the technology in the next few weeks.

Energy financing“What we do for an end user is we provide them with a guaranteed reduction in their cost of utilities, whether it’s heating, cooling or electricity, up about 20%, we are able to do that because we actually oversize our system. We’re not only selling to the end user, but we’re also selling to the utility as a member of the wholesale electric market, so we actually end up with two or sometimes more customers at a single site.”

“The advantage we have is that we have multiple revenue sources, and because we’re qualified as a combined heat and power system, we are then eligible for additional revenue streams like energy credits, we also receive capacity payments from the grid.”

He adds: “Because we are structuring these systems the way we are we qualify for benefits on the funding side as well. For example, being qualified as combined heat and power there’s certain accelerated depreciation that we can take advantage of, there are tax credits we can take advantage of.”

Scuderi continues: “Even though our system is oversized and therefore more expensive than what the end user might install by himself, we have more revenue streams and consequently the cash flow off of our unit has a very attractive cash flow to debt ratio, and therefore is very attractive to the lenders.”

“We’re like a hybrid where we have features of both combined heat and power and independent power production, so we’re focused on very high efficiency production of electricity, but were also focused on the maximum utilization of the waste heat from the engine itself.”

Scuderi estimates a typical payback period of three to five years. Its first project is due for commissioning in the third quarter of 2016.

Industrials in Control

While building and public services energy efficiency projects have to wrestle with multiple stakeholders and policies, it is clear that industrial players have the advantage of having a lot more control over what they can implement and how they can benefit. Raising balance sheet cash to fund energy efficiency projects may be a challenge for some companies, but evidently that is no impediment to investment in energy efficiency and, with it, an immediate balance sheet impact.

David Appleyard is a contributing editor for E2