Five Reasons Why Energy Efficiency Projects Fail to Launch
- Mar 2, 2022 7:02 pm GMT
Financial Fitness Through Environmental Stewardship©
Five Reasons Energy Efficiency Projects Fail to Launch
March 2, 2022 by Kerry Kilpatrick, Director of Communications, E3 Prime Environments
There are significant lost financial benefits associated with energy efficiency upgrade projects that fail to launch. A stalled upgrade of a building’s outdated HVAC system, lighting, envelope and energy infrastructure inevitably leads to reduced profitability. This includes high energy costs, increased equipment maintenance and repair costs, business downtime, and tenant dissatisfaction resulting in reduced occupancy and lease rates.
E3 Prime Environments’ President Curt Monhart details a list of the most frequent reasons hindering building and facility energy efficiency upgrade projects from going forward. He then explains how contractors, product developers, architects, and engineers can overcome them and initiate a successful project launch.
Here is Monhart’s list:
Saving energy is often not enough. If funded by traditional options, promoting an energy efficiency upgrade or design based solely on energy savings isn’t always enough. The cost of energy is often relatively low on the list of concerns for building owners or facility managers. A business owner will often put energy efficiency upgrades on the back burner and opt for investing in operational improvements where the benefits are more visible, and often with shorter payback periods.
The lack of “good fit” funding solutions. Most energy efficiency upgrades are capital intensive, and a common funding option is a commercial bank loan. Terms of five to seven years are typical, and a down payment of 15 to 25 percent is usually required. The owner must also personally guarantee the loan. For most projects the resultant project energy savings are often insufficient to repay the loan. The owner must then renegotiate the loan, if that’s even an option, at potentially a higher interest rate, or use internal funds to pay it off.
Reluctance to invest in facility upgrades if business plans are uncertain. Building owners are often reluctant to make facility improvements if they’re unsure how long they’ll own the building. With traditional funding options any remaining balance of the loan must be paid when the property is sold.
The split incentive issue is an obstacle. With common lease terms, the tenant is responsible for paying utility bills and a prorated share of the property taxes. In these cases there is little incentive for a building owner to undertake an energy efficiency or water conservation upgrade.
It’s “too good to be true“. Many building owners consider energy to be a fixed expense with little ability to influence. When presented with financial analyses demonstrating they could actually save more money than the cost of the loan, they’re skeptical.
Here’s how to overcome these obstacles:
Saving energy is often not enough
A greater financial impact of energy efficiency upgrades is increased occupancy and lease rates resulting from improved tenant environmental comfort and productivity. Lower equipment maintenance, repair and end-of-life costs resulting from these upgrades are also key contributors to profitability. These benefits, along with lower energy costs, resulting in increased net operating income (NOI) which in turn drives property values and marketability.
The lack of “good fit” funding solutions
A relatively new funding option for energy efficiency and water conservation upgrades available in most states is Property Assessed Clean Energy (PACE). PACE started in California to overcome the high initial cost of solar energy systems. The loans provide 100% financing and offer long-term loans, usually 15 to 25 years, at fixed interest rates. They’re repaid with a special assessment on the owner’s property taxes, like improvements such as streets, sidewalks, and sewers. These favorable terms make energy efficiency upgrades financially doable, and often are cash flow positive. In some states, this is a requirement to qualify for a PACE loan.
Unlike traditional funding options, PACE loans are non-recourse. The property secures the loan, not the owner. And PACE loans can often be considered “off-balance-sheet” thereby preserving the owner’s borrowing capacity for other projects.
Reluctance to invest in facility upgrades if business plans are uncertain
Another benefit of PACE includes the seamless transfer to a new owner, along with all the savings the upgrades created. This eliminates the need to pay off the loan upon sale of the property.
The split incentive issue is an obstacle
PACE also solves the split incentive obstacle. Tenants realize reduced energy costs from the upgrade. In many cases, the lower costs more than offset their increased share of the property taxes attributable to the PACE assessment. And the owner ends up with a more valuable and marketable property.
It’s “too good to be true“
To establish the credibility of the resultant benefits from energy efficiency upgrades, those serving the industry have access to a wealth of evidence. Regarding PACE, much-supporting information can be found at PACENation.org. PACENation is the national nonprofit association that advocates for PACE financing.
To further help establish one’s credibility, it’s important to use case studies and testimonials from past projects. Client references willing to discuss their project and results are especially helpful.
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