Financing Local Energy Efficiency Projects

Wondering how you can afford the energy-related projects that could save your government money? Here are some tips on getting energy efficiency projects financed for your constituency. Local governments today, no matter what their size, abundance of resources, or location, are experiencing demands for services beyond their shrinking budgets. The immediate and long-term benefits of energy-related projects can get lost in the shuffle of demands for other services. The substantial budgetary relief (cost savings) that local governments can achieve by implementing energy-saving measures is often difficult to discern because energy costs are not usually a discrete budget item. Aggregation of total energy costs helps cities and counties identify major savings opportunity. As a result, all across the nation, cities and counties have found ways, customized with a local twist, to deal with the budget crunch.

Here are several different financial techniques--without a lot of risk--that are working in various regions. Some are conventional tools, such as matching grants and revolving loan funds, modified to work for energy projects; others, such as performance contracts, are rather innovative. Your municipality or county might be able to use the techniques presented here or adapt them to local needs. 

According to Ron Mutter, Director of Public Works for Redlands, California, that's exactly the type of arrangement that has worked for the city of Redlands. Honeywell, Inc., approached a city council member about replacing and updating the city's heating, ventilating, and air-conditioning (HVAC) equipment, wastewater pumps, lighting systems, irrigation systems, and sensors. When everything's completed, improvements will have been made to 12 buildings and various park irrigation systems.

Says Mutter, "This is an old city, about 105 years old, with very old buildings. City Hall is 50 years old, the Fire Department building is 60 to 70 years old, and the police building is more than30 years old. Many of our public buildings still had the original mechanical units in them! The equipment needed replacing anyway, so we were very interested in the idea. Especially because it wouldn't cost us anything. The city council concurred."

In March of 1992, the city and Honeywell signed an agreement projected to save the city at least $462,683 in energy and $143,455in labor and maintenance costs for the first year of operation. The equipment replacement project is financed with a municipal lease and a maintenance contract; costs are covered by the energy savings and a Honeywell guarantee. "We expect to exceed our first-year program savings projection," says John Buckingham, Home and Building Controls Group, Honeywell, Inc.</P><P>The city is already saving substantial amounts of money. "The city's energy use is about half what it was 2 years ago," says Mutter. In utility rebates alone, Redlands has received more than$100,000 from Southern California Edison. "The wastewater treatment plant will be able to increase throughput without increased energy costs, while saving more than $20,000 a year," Buckingham says.</P><P>For financing, a 7-year lease was structured; once it expires, savings will revert to either a city general fund or a utility fund. "There were no risks, because Honeywell guaranteed that there would be no risk," Mutter explains. "Honeywell pays the difference if energy savings are not enough to cover the costs of the upgrades. We're very pleased."

Although Honeywell guarantees the city that its savings will at least meet the sum of its lease payments and maintenance payments, the company anticipates that savings will exceed payments. If savings do exceed payments, the city keeps the extra money.

Performance Contracting

It sounds too good to be true. A local government can increase energy efficiency without making any initial capital investment. A city or county can decrease energy costs and simultaneously reserve available capital for other projects.

This is called performance contracting, and it's a growing trend because it's a win-win situation. Everyone comes out ahead--business, government, and the taxpayer. Under such an agreement, a third party provides a city or county with a service package that typically includes the financing, installation, and maintenance of energy-saving capital improvements. The customer uses resulting energy savings to pay for the improvements. Performance contracts are often structured as a lease, but with a guarantee that payments will not exceed energy savings. This minimizes financial risk.

For More Information

National Association of Energy Service Companies (NAESCO)

1200 G Street, NW Suite 760

Washington, DC 20005

(202) 347-0419

Urban Consortium Energy Task Force

Public Technology, Inc.

1301 Pennsylvania Avenue, NW

Washington, DC 20004

202) 626-2400

Development of an Energy Services Corporation report no. 92-302

Matching Grants and Low-Interest Loans

Another option for financing energy efficiency projects is grants and loans. One local government program that combined grants and loans (in a revolving fund) was Project Rebound in Ellensburg, Washington. Rebound, a pilot project created by the Washington State Energy Office (WSEO) in 1988, studied how implementing energy conservation measures in a selected community fosters economic development.

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