Innovative Internal and External Financing for Energy Projects · Innovative Internal and External Financing for Energy Projects September 2016

Innovative Internal and External Financing for Energy Projects

September 2016

Building On Earlier Topics

The goal of this workshop is to:

1. Change the way energy projects are financed internally

2. Understand how to finance energy projects with external capital

Retailers are just as diverse when it comes to energy issues as they are in their core business.

Section 1

Internal Financing Models

adidas Group Case Study

Internal Venture Capital Energy Fund

adidas Group Case Study

$5.5 millionInvestment

49Projects

Averaged 33% IRR

Internal Finance Models

Update Internal Purchasing Systems

Best Buy: Updated Store Lighting Options

Modify Project Proposal Process

Kohl’s: Embedding the Finance Department into the Energy Team

Internal Finance Models

Green Revolving Loan Fund

Single initial investment replenishes capital from earlier projects

Internal Price on Carbon

437 companies reported an internal carbon price in 2015

Section 2

External Financing Models

Why Use External Financing?

State or utility incentives can make the difference between meeting and missing your hurdle rate

Some financing options make your project cash flow positive from the start

Do more projects

How to Narrow Down Your Options

How many buildings will your project cover?

How much will you spend?

How much will you save?

Do you own or lease your buildings?

How long do you hold a typical location?

How quickly do you need financing?

Do you want to manage installation?

Do you want to manage operations and maintenance?

Can you take debt on your balance sheet?

As a General Rule…

If there are projects to be done, and money to be saved, somebody will finance your project.

External Financing Options

Major Initiatives or Green Construction

• Green Bonds

Traditional Energy Efficiency Finance

• Energy Performance Contract (EPC)• Energy Service Agreement (ESA)• Managed Energy Service Agreement (MESA)

Specialized Financing

• Property Assessed Clean Energy (PACE)• On-Bill Repayment (OBR/OBF)• Tax-Increment Financing (TIF)



• Green Bonds





Green Bonds

Traditional debt with a twist: lower interest rates in exchange for commitments to sustainability or energy projects.

Benefits A single bond offering can cover costs for many projects over

multiple years. Autonomy over spending bond proceeds. Lower cost of capital compared to standard private-sector bond

issuances.

Challenges Very large offerings (typically $5 million or greater) 3rd party verification of ‘green’ designation

Apple’s Green Bond

$1.5 billion

Issued in February 2016

Will finance: renewable energy

energy storage

energy efficiency projects

green buildings

resource conservation efforts

Apple’s Green Bond

$1.5 billion issuance

7-year repayment at 2.85% interest

Assuming a 20 basis point (.2%) reduction in interest from green designation: $21,000,000 reduction in interest payment

over the life of the bond

Starbucks’ Sustainability Bond

$500 million issuance

May 2016

10-year, 2.45%

Funds go to supply chain infrastructure



• Green Bonds





Energy Performance Contracts (EPCs)

The ESCO model, where a 3rd party financier takes on upfront project costs in exchange for a portion of future utility savings.

Benefits

Savings guarantees common

Streamlined ESCO services

Challenges

Requires long-term (10-20 year) building ownership

Increased security on project comes at expense of lower return on investment

EPCs – A Classic Model

Energy Services Agreement (ESA)

An innovation on the Energy Performance Contract, that incentivizes a wider range of projects and off-balance sheet financing.

Benefits “A PPA for all efficiency projects” Can be structured as off-balance sheet debt Avoids major capital expenditures Easy to scale projects across a portfolio

Challenges Long negotiation period for projects Generally for large projects (>$500k)

ESA Case Study: Metrus Energy

Managed Energy Services Agreement (MESA)

A twist on the Energy Services Agreement, where a single firm manages equipment, maintenance, and utility bill payment.

Benefits Pay one bill for everything energy-related

Typically structured to immediately lower utility spend

Challenges A 3rd party must have access to buildings for ongoing

maintenance and management of equipment

Generally for large projects (>$500k)



• Green Bonds





Property Assessed Clean Energy (PACE)

A rapidly growing financing method that pays for 100% of a project’s upfront costs and is repaid for up to 20 years with an assessment added to the property’s tax bill.

Benefits

Long term financing (e.g. 20 years), even for projects with short paybacks

Bill can be passed to future occupants or building owners

Can be used for both large and small projects

Challenges

PACE legislation must be adopted by local jurisdiction

PACE: BrandsMart USA

Home appliance and electronics big box discount retailer

3 separate PACE deals: $1.8 million, $2.225 million, and $3.1 million

15-20 year repayment, tied to property

Results 34% projected reduction in annual utility costs

PACE: Big Boy Restaurant

Big Boy restaurant in Ann Arbor

Small business

Building controls, high-efficiency HVAC and lighting

PACE assessment: $88,488

10 years, 4.75% fixed

Results

19% projected reduction in annual

utility costs = $8,300 annual savings

http://www.pacenow.org/wp-content/uploads/2013/07/7.24.2013-Ann-Arbor-PACE_Big-Boy-Case-Study.pdf

PACE Is Not Available Everywhere

http://www.PACEnation.us/

On-Bill Financing (OBF)

Finance energy projects that are repaid through a line item on your utility bill, with zero or low interest rates.

Benefits

Leverages existing billing relationship

Secure, low cost financing

Financing tied to property

Challenges

Financing typically not long term

Local utility must support on-bill program

Tax Increment Financing (TIF)

A common type of gap financing used to fund additions or expansions of existing large projects.

Benefits

Can fund sustainability improvements onto an existing project at low cost (improves financial returns)

Challenges

TIF program must be offered by local or state government

Deals are often customized and difficult to scale

Find A Structure That Fits


• Green Bonds




• Property Assessed Clean Energy (PACE)• On-Bill Repayment (OBR/OBF) • Tax-Increment Financing (TIF)

Section 3

External Financing Exercise


You work for a small format electronics retailer with 100 locations across the country where you are responsible for utility costs.

You have been given approval to look into external financing options…


Annual Budget: $2,000,000

# of Stores: 100

Potential Projects:

Energy Management System

LED Retrofit

Financing Options:

Internal Funding

PACE (10 stores)

ESA (all stores)

Hurdle Rate: 10%

Payback must be <3 years

Full LED Retrofit, No Financing

95 stores LED

Cost: $1.19 million

Savings: $475,000 per year

3-Year NPV: $102,000

3-Year IRR: 22%

Simple Payback: 2.5 Years

EMS Retrofit, No Financing

50 stores EMS

Cost: $2 million


3-Year NPV: $47,000

3-Year IRR: 13%


LED + EMS Retrofit, No Financing

95 stores LED20 stores EMS

Cost: $1.99 million


3-Year NPV: $120,000

3-Year IRR: 18%


PACE + Internal Funds


10 stores used PACE

Cost: $1.98 million


3-Year NPV: $588,000

3-Year IRR: 55%


Energy Services Agreement


Cost: $0


3-Year NPV: $187,000

3-Year IRR: ‘Infinite’

Simple Payback: Immediate

ESA + Internal Funds


Cost: $1.96 million


3-Year NPV: $174,000

3-Year IRR: 22%

Simple Payback: 2.5 years

Metric of Choice

Aside from PACE deals…

Greatest 3-Year IRR: Internal LED Retrofit

Greatest 3-Year NPV: Energy Services Agreement

Greatest Cash Flow: ESA + Internal Funds

External Finance Exercise

What If…

You were to do this with a company and budget ten times the size?

You also had to do a full HVAC replacement in 10 stores this year?

To meet new greenhouse gas reporting requirements, your CEO is requiring that all stores track energy consumption?

Your CFO has limited the total energy project budget to $4 million (cash spent + financed projects)?

Section 4

Tools & Resources

RILA External Financing Calculator






Available on RILA’s website

Condenses this conversation into 15 minute tool

Contact us:

Adam Sledd: [email protected]

Andrew Feierman: [email protected]

Thank you!

Innovative Internal and External Financing for Energy Projects · Innovative Internal and External Financing for Energy Projects September 2016

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