How to utilize energy efficiency as a service after COVID-19
Alternative financial solutions such as energy as a service (EaaS) can help impacted entities grapple with their situation after the COVID-19 pandemic cools down.
The impact of COVID-19 will be both challenging and transformational as society reexamines its approach to long-accepted processes, policies, and behaviors in order to minimize the current spread and prepare for future pandemics. How facilities are utilized, how we interact with others, and how everyday activities may need to change are being discussed across all aspects of society.
The most-impacted entities will be those that provide essential services that have been integrated into citizens’ everyday life. Schools, municipalities, water districts, utilities and government agencies all provide critical services to their constituents. Due to the impact COVID-19 has had on the economy, these entities will likely adapt their processes while recognizing lower revenues to fulfill these services. And, while the costs of providing these services has been on the rise, pre-COVID-19 infrastructure renewal needs will become even more challenging to address.
Traditionally, energy savings performance contracting (ESPC) has been a solution for public entities during downturns in the economy. Regardless of the economy, leveraging utility and operating savings to finance necessary infrastructure upgrades is an attractive solution, but is especially attractive when capital and cash flow is at a premium. During the 2008 recession, there was reluctance to take on additional debt in such uncertain times. Similarly, the uncertainty from COVID-19 will cause some local governmental entities to pause before taking on additional long-term debt. Although ESPC requires taking on additional debt, it is offset by the revenue stream the savings provide. Still, under uncertain economic conditions, some clients might prefer to maximize their debt capacity for unforeseen needs.
Another approach to offset infrastructure costs is using energy as a service (EaaS) or an energy service agreement (ESA) as an option for clients to leverage generated savings, paying for infrastructure renewal projects without requiring upfront capital. Although relatively new as compared to Performance Contracting, this is a proven structure for implementing multimillion dollar retrofit projects in major facilities across the U.S.
EaaS also allows for off-balance sheet accounting, which enables the client to reserve capital for other critical projects and receive performance guarantees on the projected savings. This financial approach is similar to a service agreement paid over time through the client’s operating budget. By utilizing a service agreement structure, an organization will be able to shift energy efficiency projects and the infrastructure renewal they can deliver from an asset that must be bought, owned, maintained, and depreciated to an operating expense that resembles any standard service agreement or utility bill. These are familiar vehicles that these entities utilize to address numerous needs across their business.
Under EaaS, a contractor or energy services provider works with the client to develop a baseline of the client’s energy consumption and calculate an upfront savings estimate. A financer (ESA provider) is then engaged to acquire the necessary capital to pay to install and maintain the high-efficiency equipment through the contract period. ESA projects are funded through a combination of equity from the ESA provider and a third-party lender. The ESA provider typically forms a special purpose entity (SPE) that owns all installed equipment. The SPE is repaid over time through the client’s payments under the ESA. After project installation completion, the energy service company (ESCO) provides a thorough measurement and verification (M&V) analysis to determine that projected energy savings are being realized.
Once the upgrades are complete, the client realizes lower utility bills throughout the contract term which should equal or be greater than the cost of the ESA payments. The client pays the ESA provider a charge per unit of energy saved that is set below its baseline utility price, resulting in immediate reduced operating expenses. The maintenance of the equipment is the responsibility of the SPE, which also reduces the demands of client staff to be fully trained on all newly installed equipment.
For example, EaaS could be viewed as an energy efficiency version of the typical power purchase agreement (PPA). Much like in a PPA where clients only pay for the energy they use, the client doesn’t bear the project performance risk, only paying for the savings achieved under EaaS. The service provider bears the risks and gets paid less if the project savings are lower than expected.
As local governments are expected to continue to provide essential services as effectively and accessibly as in the past, it’s inevitable that new regulations and policies related to COVID-19 will make it more expensive to provide these services. In uncertain times where safety takes precedence, alternative financial solutions such as EaaS can help local government entities with infrastructure needs and address these needs through the use of a safe, financially-sound solution that minimizes risks for local governments and schools.