You may have heard the phrase “look inward before looking outward”, although most likely at a yoga or meditation class and not in the context of financing energy projects. Nevertheless, this is an apt phrase to describe how businesses should approach finding their optimal financing solution for an energy efficiency project. Before researching the many external financing options available in the market, retailers should first determine if projects can be funded internally.
To help retailers make their portfolios more energy-efficient through specialized internal funds and processes, IMT and the Retail Industry Leaders Association (RILA), with support from the U.S. Department of Energy, recently published our Guide to Internal Financing for Energy Efficiency in Retail. The guide details five strategies, which I’ll summarize in this post.
Why Energy Efficiency Projects?
Energy efficiency projects have tremendous appeal, as they reduce operating expenses, improve budget forecasting by lessening the financial impact of energy price fluctuations, and bolster brand value with accompanying environmental and social benefits. However, corporate finance teams have many competing budget priorities and in spite of all their benefits, energy efficiency projects are often placed towards the bottom of the list.
So what internal structures and processes can be put in place to increase the likelihood that companies pursue energy-saving projects?
Internal Carbon Pricing
Internal carbon pricing is a policy that’s been adopted by at least 435 major corporations worldwide, and is an ambitious option that will likely generate significant outside attention and improve brand value. Companies can set a real price on carbon, which means stores and company departments pay into a fund based on the amount of carbon they’ve emitted. This fund is then used to invest in energy efficiency and renewable energy. Alternatively, companies can establish a price signal whereby carbon emissions are assigned a cost that is factored into investment decisions. Implementing a carbon price is no small feat, but it can yield significant long-term benefits for a company.
Capital Investment and Revolving Loan Funds
Two other types of internal strategies are the Capital Investment Fund (CIF) and the Revolving Loan Fund (RLF). While both types distribute money for energy efficiency projects, there are two key differences—first, a company must replenish a CIF annually, but only has to fund a RLF once. Therefore, a RLF makes more sense for a company that lacks the budget or will to allocate funding for energy efficiency on an annual basis. Second, a CIF is designed so that company stores retain the energy cost savings their projects generate, thereby increasing stores’ operating budgets. On the other hand, since a RLF does not receive a budget after its first year of operation, it depends on cost savings from the initial round of energy projects cycling back into the fund so that future projects can be funded.
Creating a fund is one way to increase investment in energy efficiency. Companies can also incentivize energy efficiency with specific processes. For example, expedited approval of energy projects can help companies complete more projects by shortening the time needed for project review. As a company’s finance team is often in charge of project approval, this strategy requires a strong working relationship between energy and finance teams. An expedited approval process can yield numerous benefits, including greater company awareness around energy efficiency and accelerated progress towards corporate sustainability goals.
Lastly, cross-departmental collaboration can also broaden a company’s awareness of energy efficiency. This strategy can take multiple forms. For example, an energy team can identify projects that other company departments are pursuing with the potential to save energy, and then work with those departments to ensure energy savings are realized for their projects. Ideally, companies create a culture in which business units consider if energy efficiency can be achieved via their respective projects.
Internal Financing and Beyond
We hope this blog has provided readers with an informative glimpse into the strategies companies can adopt to save energy in their operations. For detailed descriptions and examples of these strategies, please read IMT and RILA’s newly published Guide to Internal Financing for Energy Efficiency in Retail. If you’re looking beyond internal strategies, my colleague Jonathan Bauer also has a blog series about external financing options for retail energy efficiency projects up in The Current. Please see Part 1, Part 2, and Part 3 for more on that topic, and download IMT and RILA’s free Guide to External Financing for Energy Efficiency in Retail.
For more free resources on retail energy efficiency financing, visit RILA’s website.