How External Financing Can Unlock Energy Savings for Retailers: Part 1Published: Jun 17, 2016 Finance & Real Estate | Blog Post
Retail energy managers face obstacles every day when trying to lower utility bills and boost performance at their facilities. Like many impediments beyond the retail sector, they boil down to a lack of time, money, and information. Whether it’s being constrained by a limited implementation timeline and budget, struggling to find access to capital, or not having the right information to communicate the full value of an efficiency project to a finance team for approval—there’s no shortage of scenarios where energy- and water-saving solutions can be left on the shelf collecting dust.
To help address some of these issues, the Institute for Market Transformation (IMT) and the Retail Industry Leaders Association (RILA), with support from the U.S. Department of Energy, have created a set of financial management resources for energy efficiency projects. They include an energy efficiency finance calculator (click on the graphic below to download), as well as seven primers tailored to the retail sector, each focusing on a specific external energy efficiency financing mechanism.
Click on the above graphic to use the calculator to determine which external financing mechanisms might be well-suited for your retail energy management project.
In this blog post (the first of a three-part series), we’ll highlight three out of the seven primers, which are categorized as traditional energy efficiency financing—Energy Performance Contacts (EPCs), Energy Service Agreements (ESAs), and Managed Energy Service Agreements (MESAs). These mechanisms are typically financed and managed by energy service providers, and are known for their large project sizes and ability to address efficiency needs across a portfolio. In addition to improving the energy efficiency of retail stores, traditional energy efficiency financing can reduce energy consumption in warehouses, distribution centers, and corporate offices.
Generally, these are effective tools for retailers looking to stabilize utility costs and make progress on their corporate social responsibility goals without making a large capital outlay.
Energy Performance Contracts
In an Energy Performance Contract (EPC), the customer owns the energy efficiency improvements (I.E. new LED lighting, HVAC system, etc.) as soon as they’re installed and running. This equipment may be installed with little or no upfront cost—typically, an Energy Services Company (ESCO) will play multiple roles to execute this type of contract, from originator and developer to the arranger of financing.
EPCs are designed to split the value of energy savings between the customer and the ESCO throughout the contract term, so that the customer’s total savings exceed all of their payments over the contract term (typically 10-20 years). After the EPC term, payments to the ESCO cease, and the customer operates and maintains the energy efficiency improvements, retaining all energy savings. In many cases, an ESCO will guarantee a certain level of energy savings to the customer.
Simon Property Group, a leader in retail real estate ownership, management, and development, has utilized EPCs in several of its shopping malls. Their energy upgrades included lighting and energy management systems to provide increased control of equipment, such as chillers, air handlers, and common-area lighting panels. Simon was also able to address water efficiency with variable and/or low-flow technology.
To date, Simon and Ameresco have implemented more than $20 million in efficiency measures and capital improvements at 42 properties throughout the United States, including Puerto Rico.
Energy Service Agreements
In an Energy Service Agreement (ESA), a single provider develops, finances, and owns energy efficiency measures and equipment installed in a customer’s facilities during a contracted period (typically 5-15 years). An ESA customer enjoys lower utility bills throughout the contract term, but does not own the installed equipment unless they buy out the contract or purchase the equipment at fair-market value at the end of the contract.
An ESA can be thought of as an energy efficiency version of a Power Purchase Agreement (PPA)—commonly used to finance the installation of solar and other renewable energy systems. The customer does not take on project performance risk because they only pay for savings actually achieved.
For a good example of ESAs in action, look at how a Fortune 50 company in the Midwest used an ESA to make $3.1 million worth of efficiency upgrades through its partnership with Metrus Energy. Construction was completed in April of 2015 and the completed upgrades are producing $500,000 in savings annually. Energy savings due to lighting upgrades, a building automation system, controls, chiller replacement, and demand control ventilation total more than 3.8 million kWh and 31,000 therms of natural gas annually—which is equivalent to eliminating the electricity use of 500 homes or removing 760 vehicles from the road annually.
Managed Energy Service Agreements
Managed Energy Service Agreements (MESAs) are contracts under which a third-party energy efficiency contractor assumes the energy management of a client’s facility, including the installation of energy efficiency upgrades and responsibility for utility bills, in exchange for a series of payments based on the customer’s historic energy use. MESAs offer a turn-key energy retrofit and financing approach that limits upfront costs and management burden.
In effect, the MESA contract caps the customer’s utility payments, while the contractor reaps all or part of the energy savings over the contract term (typically 5-15 years). A MESA customer enjoys lower utility bills throughout the contract term, but does not own installed equipment unless they buy out the contract or purchase the equipment at fair-market value at the end of the MESA contract.
Corporate Offices Property Trust, a public real estate investment trust (REIT), utilized SCIenergy’s MESA Capital product to retrofit five of its buildings in 2006. High-efficiency lighting and HVAC systems coupled with digital controls on various systems accounted for the majority of energy savings. In total, 479,420 square feet of space was made more efficient and by 2010, and the energy savings were greater than the annual projected average of 30.8 percent.
Traditional energy efficiency financing: Is it for you?
In sum, traditional energy efficiency financing mechanisms like EPCs, ESAs, and MESAs aim to address the energy needs of multiple properties across a real estate portfolio, so they're ideal for retailers that own or lease facilities long-term, (lease and hold terms should match the contract length, which is typically 5-20 years). Due to large project sizes and the complexity of implementing multiple energy conservation measures, most retailers should consider working with energy service providers, as they can help with project management and ensure maximum efficiency.
Stay tuned for parts two and three of this series from IMT and RILA, where we'll cover green bonds and some financing options for smaller efficiency projects. For more information on retail energy efficiency financing, visit RILA’s website to download our new resources for free.