How to use an Energy Services Agreement to finance energy efficiency projects
Looking for ways your business or nonprofit can afford your energy efficiency upgrades or retrofits? You’ve come to the right place! Here at Pathway Lending we’re able to offer 2% rates on our energy efficiency loans, but you and your clients should be aware of all the ways a project can be paid for.
The article below is a quick overview of how Energy Service Agreements, or “ESAs,” work, but you can find links to all 7 financing solutions in this blog post.
What is an ESA?
Energy Services Agreements (ESAs), “Energy as a Service Contracts,” or “Efficiency Services Agreements” are a relatively simple form of energy efficiency financing. An ESA is a pay-for-performance contract where the client can implement their energy project with zero upfront capital expenditure.
How does an ESA work?
Your third party ESA provider develops, finances, and owns the energy efficiency measures and equipment for the duration of the contract (typically 5-15 years). In exchange for implementing the project, that ESA provider will charge the customer a monthly fee for a portion of the realized savings.
While the customer will enjoy immediate energy savings, they won’t actually own the new equipment unless they buy out the contract or purchase the equipment at the end of the ESA contract. The ESA provider pays for all project development and construction costs, and works directly with the equipment vendor.
This is an off-balance sheet solution where the energy savings pay for the projects, but with an ESA, you’ll typically be looking at longer close times, size limitations (typically better for larger projects – more than $1 million), and building ownership constraints.
Let’s look at lighting as an example. The ESA provider will work with the lighting vendor to install efficient lighting in a facility over a determined period of time. The end-user of the lighting never owns the lighting, therefore, the lights are not an asset of the end-user, but they’re also not a liability. The expenses of the contract are operating expenses rather than capital expense. This makes the decision to implement an energy efficiency project easier in some organizations. All maintenance is handled by the lighting vendor so the company is incentivized to install the best quality product.
There are downfalls to consider before entering into an ESA.
No tax incentives or depreciation can be claimed by the end user since that organization never owns the equipment. It will also be more expensive to the end user than purchasing the equipment with a loan or capital lease. This is because the end user is paying a premium to receive a hassle-free process and maintenance services throughout the contract.
ESAs can be structured a flat monthly fee or as a percentage of the monthly savings. Keep in mind that shared savings agreement projects must include an ongoing monitoring system to measure the savings related to the energy efficient on a monthly basis. The monitoring equipment and project risk of shared savings agreements will add to the additional overall cost of the project for the end user, as they will receive less of the monthly energy savings benefit than an end user who owns the equipment outright, or an end user with a flat monthly fee arrangement.
Most reputable energy vendors can help you decide is an ESA, commercial loan, or other financing mechanism is the best fit for your project. You can also find more information on ESAs at energy.gov.
If you’re interested in an energy efficiency loan with our 2% rate or want to discuss which funding mechanism is the best fit for your project, please let me know!
Stay tuned for more ways clients can finance energy efficiency upgrades.
Sign up for our monthly Energy Efficiency Email to read success stories from our EE clients and to get program updates: