Part III: Extra Information That Can Make the
Chapter 9: Energy Conservation Also Yields: Capital, Operations, Recognition and
If You Read Anything…
Do This First
The “Why”
Dear Reader,
When I began working in the energy management and financing industry, “lack of capital” was the prevailing excuse why a good proj- ect (less than a 3-year payback) was not being approved/implemented.
When I did my Ph.D. research on this topic, about 35% of projects were postponed/canceled due to “lack of upfront capital.” Despite my best ef- forts to solve this problem throughout my career, today the postponed percentage is closer to 50%! Looking at this trend, I can say that I have not succeeded at this goal. Although the global economy does have an influence on the percent of projects that are being initiated/financed, I still believe strongly that we can do MUCH more in this area to get more projects implemented that save energy, improve economic competitive- ness and enable environmental prosperity.
This book will help you understand and hopefully implement fi- nancing solutions to get more projects implemented. The book is orga- nized into sections to help you find what you need quickly, and then
“just do it.” But before I provide an outline to the whole book, I want to mention a few key concepts that you may be able to use today. These are
“quick thoughts” on “big picture” concepts that I think you should keep in mind on all projects.
Woody’s Winning Way (Key Concepts for Success):
1. Presentation Point: If your energy project has an internal rate of re- turn (IRR) that is greater than your company’s profit margin, then the energy project is the best place to invest. This is often the case as many energy projects have IRRs > 25%.
4 How to Finance Energy Management Projects 2. Presentation Point: If your energy project has a return that is greater
than the finance rate (borrowing rate), then you can finance the proj- ect (zero upfront cost) and you will improve cash flow to your orga- nization, with relatively little risk.
3. Presentation Point: “savings = waste.” Any energy savings that you could be getting via a potential project is also an existing waste stream that (by doing nothing) continues to drain your operating cash and is essentially a penalty you pay every month. Most people will take quicker action to avoid a penalty than to receive an equivalently val- ued reward. To read a whole article on this point (and other articles) click the “Resources” tab at www.ProfitableGreenSolutions.com… the articles and webinars there are free.
4. Presentation Point: “The cost of delay is usually greater than the cost of financing.”
5. FYI: Know the codes, standards and laws that are driving activity in your building sector/geographic region. Whether it’s the federal government or a local energy efficiency requirement, these “rules”
can keep your project moving forward, as well as motivate projects that you never imagined. See Chapter 11 for more.
6. FYI: Know where you can get free money for your projects. This can be tax credits/deductions, utility rebates, special energy financing rates, utility energy service contracts, etc. See www.DSIREusa.org for a list by state. Also see EERE and FEMP websites (just Google those acro- nyms)… very useful info.
7. Presentation Point: Your audience only has the attention span to solve one problem at a time… Make your presentation the most exiting solution possible… so they can’t resist approving it.
I can’t stress how important your work is… and how much I value your efforts to implement energy efficiency projects. In my opinion, there are very few endeavors in today’s capitalistic world, where “the more you do, the better.” Your progress in energy efficiency does all of the following:
• Reduces your organization’s expenses (and improves cash flow);
• Reduces your country’s dependence on energy sources;
• Reduces your country’s dependence on raw materials;
• Reduces your environmental impact (less pollution);
• Improves your organization’s “green image”;
If You Read Anything… Do This First 5
• Likely improves your building’s value (if leasing or selling);
• Likely improves your organization’s morale and productivity.
When you are presenting your project, remember the above, because your project is not just an energy project; it may positively impact the mar- keting, administrative, finance, legal, human resources, security, and pro- ductivity departments too. If I have learned anything from the hundreds of organizations I have analyzed, or the thousands of students I have taught, one common denominator of behavior is evident: “Necessity is the mother of invention.” Basically, if your project is “needed” by more of those depart- ments, more people will be in the mood to approve your ideas.
I will offer you a “trade”: My friends call me “Woody”—it has been a nickname since high school. If you implement some energy manage- ment projects in your local area, then you can call me Woody too, as you will become my friend. I also encourage you to let me know about your success; maybe I will share it with some other people around the world and they may be inspired by you! This way, you are making an even big- ger impact.
In any event, I hope you can use this book to make a big difference, and NEVER GIVE UP on what is important to you!
Sincerely,
Eric Woodroof, Ph.D., CEM, CRM Eric@ProfitableGreenSolutions.com
P.S. OK, now on to the organization of the book. The chapters are orga- nized into three parts, with some useful appendices at the end of the book.
In Part I, we cover the need for financing as well as the basic concepts.
In Part II, we present some chapters that were written by field ex- perts. They cover some practical applications of financing such as perfor- mance contracts, power purchase agreements and other items like PACE financing. All of these “vehicles” of progress are innovative financial ap- plications with proven success records. I want to mention Chapter 3 as
6 How to Finance Energy Management Projects it also covers some very useful tools that exist within the Energy Star®
program. Chapter 7 shows you a financier’s perspective and this can be quite helpful in planning the deal and avoiding mistakes.
Part III contains some very popular articles that have helped many engineers get more projects implemented. These articles also have more information that can be used to present projects and get them approved.
I think these chapters are important because “financing” is a “logical”
solution; however, people purchase most items based on emotion. There is more that can be said about this, but Part III will give you some ideas on how to leverage “non-logical” (and “logical”) benefits.
Appendix A is basically about the “time value of money” funda- mentals. Some may call this topic “engineering economy” or “Interest Rates 101.” If you are brand new to financing, you may want to review this material. Also, there is a recorded webinar (under the “Resources” tab at ProfitableGreenSolutions.com) that may help if you like to learn outside of a book.
Appendix B is very short and has links to documents that are long and updated frequently. Thus, to save some paper required to make this book, use the links to get the M&V information that you need.
Appendix C is for those who may not know what an energy audit should look like. For many financiers, this information can be helpful in understanding what is a common deliverable from an engineer who is supposed to be doing a “Level II Audit.” If you are an engineer, you will probably be bored reading this appendix, which is why it is an appen- dix… (Just trying to have some fun here!)
Appendix D is a sample of a project development agreement. These are used by ESCOs to engage the customer in the early development phases of a project. It is basically a vehicle for the ESCO to invest time, intellectual capital and resources into a potential client without fear that the intellectual capital will be wasted. Also called a “feasibility study,” it is essentially a qualification tool. I feel it is helpful to understand this type of document because the development costs may also need to be financed so the client does not have to spend money out of pocket.
Appendix E is a sample of a performance contract. It is not perfect, or all-inclusive, but an example of a typical contract.
Appendix F provides additional explanation to clarify the sample performance contract.