Financing Budget

5 Factors to Consider When Budgeting for an Energy Efficiency Project

By Al Gaspari

Investments in energy efficiency can significantly reduce costs and provide operational benefits for California businesses. However, knowing how to budget around expenses can be difficult, especially when consideration is given to outside variables that tend to get overlooked. Rest assured that there are several resources available to help California business owners and managers with energy efficiency budgeting so they can avoid unexpected setbacks.

The five questions below offer a valuable starting point for businesses that want to know how to finance an energy conservation measure. Once a business owner or manager knows what options are available, it's easier to work with a contractor to develop a simple and objective plan that ensures energy savings.

1. Do I know my business's energy baseline?
An accurate energy baseline accounts for the amount of energy a business currently uses. This includes the energy the business uses in the day-to-day operations of the building (internal factors) and variables that are out of the business's control that impact the amount of energy it needs, such as weather or changes in energy rates (external factors).

It is essential for a business and its contractor to have a clear understanding of the building's current energy use, because having a current and accurate baseline helps California business owners and managers with their energy conservation measure budgeting and estimating savings. Business owners or managers who are uncertain of their current energy use can turn to My Energy on pge.com. This online tool has the resources and information to establish the baseline.

Once a business has its actual energy usage, it can discuss the internal and external factors with its contractor and PG&E account representative. For instance, is the business planning to add or remove equipment or is it planning on increasing or decreasing operating hours? Are any commercial electricity rate increases planned? These internal and external factors need to be taken into consideration before any savings calculations can be made.

2. Are the savings appropriate for my business's energy use?
California business owners and managers deserve to know that the savings calculations on their energy conservation measure are reasonable and accurate. One way to test the reasonability is to examine the projected energy savings percentage. Most energy savings typically range between 10% and 30% of annual energy spending, depending on the measures installed.

Another way to ensure more accurate budgeting and determine savings is to ask a contractor for pricing examples on similar energy conservation measures. Contractors can help businesses curb extra expenses based on their expertise of energy conservation measures and equipment. For example, proper heating, ventilating and air conditioning (HVAC) are key to maintaining a comfortable, healthy and productive work environment, as these systems account for 40% of the electricity used in commercial buildings.1

Contractors can help business owners and managers identify the best solutions for their facility. There are many options available, so be sure to ask the contractor for guidance and to understand their internal practices to ensure accurate savings calculations. The Business Energy Checkup inside My Energy is another helpful resource that uses a business's energy input to provide tailored energy saving recommendations.

3. Should I have a third party review the energy conservation measure?
A third-party review can ensure that the business's savings calculations are appropriate. If no third-party review is available, businesses should ask their contractor what the internal process is to calculate the savings, such as utilizing a Professional Engineer. Reviews should be scoped to the size of the project. While these reviews may not provide a guarantee of energy savings, knowing that the calculations were made to industry standards can provide a higher level of confidence regarding energy efficiency budgeting and anticipated savings for a business's energy conservation measure.

4. What is my project payback and how does it influence my budget?
Energy conservation measures will have projected savings that offset associated installation costs. The number of years that it takes for the dollar value of the projected energy savings to repay the installed cost of the installation is often referred to as the project payback. Once the project reaches its "payback," the business will realize the energy savings for the remainder of the life of the energy conservation measure straight to the bottom line.

Some projects offer higher payback than others. Lighting projects, for example, tend to offer faster paybacks than HVAC projects. For this reason, large energy users have learned it can be cost-effective to combine these measures into a single project.

The challenge for business owners is that they have to fund the installation of the energy conservation measure when they are installed, but they will realize the energy savings benefits in future periods. Energy savings result in a reduction of operating expenses, while the installation of the energy conservation measures is typically considered a capital expense. The resulting budget challenge can result in a difficulty for businesses to make smart investments in energy conservation measures.

5. What are my energy efficiency financing options?
The good news is that business owners and managers have several energy efficiency budgeting options from which to choose. Selecting the right option for any business depends upon its financial needs, goals, timing on installation, project size, acceptable loan terms and other factors. Some financing options include:

  • Loans obtained through financial institutions that can offer up to 100% financing, with varying payback periods and interest rates.
  • Property Assessed Clean Energy (PACE) loans available through financial institutions.
  • Loans through leasing companies typically offered for a project involving the replacement of a large piece of equipment.
  • Energy Savings Agreements (ESAs), which are contracts that permit energy efficiency to be packaged as a service that building owners pay for through savings.
  • Managed Energy Savings Agreements (MESAs), which involve the sale of energy savings as a service.
  • Financing through PG&E, 0% interest loans between $5,000 and $100,000, paid off monthly through the PG&E energy statement.

The most effective type of energy conservation measure project is one that aligns with a business's budget and gets done. That's why it's important to work with a contractor, who will develop an ongoing energy savings plan for the company. To learn more about energy efficiency budgeting and financing options, download "Insider's Guide to Financing Energy Efficiency Projects" from PG&E.

Referenced in article:
  1. U.S. Small Business Administration

Find the best finance option for your energy efficiency project:
  • SMB Blog Author
    Al Gaspari
    Principal Program Manager for Energy Efficiency Finance for PG&E. Oversees the On-Bill Financing (OBF) Revolving Loan Program, and the upcoming energy efficiency finance pilots, including the On-Bill Repayment option. Al works with PG&E’s Account Managers and Channel Partners to help customers overcome investment hurdles for energy efficiency. Formerly, Al was Finance Director for the Greater Cincinnati Energy Alliance, a nonprofit that helped homes and businesses invest in energy efficiency, and a Senior Manager with KPMG LLP, advising large utilities, IPPs and industrial conglomerates. Al can be reached at EEFinance@pge.com.
 

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