A recent survey of North American building owners conducted by the Institute for Building Efficiency found that financial criteria and availability of capital are the most significant barriers for building owners seeking to improve the energy performance of their facilities. Thankfully, there are ways to finance energy efficiency improvements that do not require an up-front capital expenditure.  The following section will explore a number of innovative financing mechanisms to help you pay for energy improvements to your property.

Third-party Financing

Energy Savings Performance Contracts (ESPC)

If you’re like most building owners, you don’t have much cash on hand to invest in energy efficiency projects, even those with quick payback times.  Fortunately, most energy service companies (ESCOs) offer a solution – energy savings performance contracts (ESPCs).  ESPCs are an arrangement between you and an ESCO to allow the ESCO to install energy-saving technologies in your building in exchange for an agreement on your part to pay that ESCO an amount equal to or slightly less than your historic energy bill.  The ESCO repays the cost of the energy-efficient equipment through the cost savings at no additional or up-front cost to you.

The figure at right clearly shows how this process works.  The blue area represents your utility bill, the red area is the savings used by the ESCO to pay for the upgrade, the green area is the savings you accrue once the ESPC contract has expired and you inherit the energy-efficient technologies, and the purple area is projected avoided costs from the increase in the price of energy over time.  As you can see, energy use (blue area) drops significantly once the ESPC is implemented, but you keep paying a rate (yellow line) slightly lower than the expected increase in utility rates (purple area) to allow the ESCO to pay for the upgrade with the savings (in red).  After the term of the ESPC expires, the amount you pay per month decreases to just the blue area, since you will inherit a much more energy-efficient building from the ESCO.

Property-assessed clean energy (PACE) financing is an innovative use of a tax structure that dates back to Ben Franklin.  Franklin used a tax assessment to pay for a fire station in Philadelphia in 1736; he structured a tax lien that building owners paid in return for protection from house and building fires.  Similarly, PACE financing uses a tax lien to help building owners repay the costs of energy efficiency and renewable energy projects over time through an assessment to their property taxes with no up-front capital expenditure.

Energy-Efficient Commercial Building Tax Deduction (179D)

According to the U.S. Department of Energy’s Database of State Incentives for Renewables and Efficiency (DSIRE), the Energy-Efficient Commercial Building Tax Deduction, commonly referred to by its section of the U.S. Code, 179D, “A tax deduction of $1.80 per square foot is available to owners of new or existing buildings who install (1) interior lighting; (2) building envelope, or (3) heating, cooling, ventilation, or hot water systems that reduce the building’s total energy and power cost by 50% or more in comparison to a building meeting minimum requirements set by ASHRAE Standard 90.1-2001. Energy savings must be calculated using qualified computer software approved by the IRS…. Deductions of $0.60 per square foot are available to owners of buildings in which individual lighting, building envelope, or heating and cooling systems meet target levels that would reasonably contribute to an overall building savings of 50% if additional systems were installed.”

Unfortunately the 179D tax deduction expired at the end of 2013. Congress is currently considering extending this provision.