INTRODUCTION

Financing can be a key success factor for projects. This chapter’s purpose is to help facility managers understand and apply the financial arrangements available to them. Hopefully, this approach will increase the implementation rate of good energy management projects, which would have otherwise been cancelled or postponed due to lack of funds. Most facility managers agree that energy management projects (EMPs) are good investments. Generally, EMPs reduce operational costs, have a low risk/reward ratio, usually improve productivity and even have been shown to improve a firm’s stock price. Despite these benefits, many cost-effective EMPs are not implemented due to financial constraints. A study of manufacturing facilities revealed that first-cost and capital constraints represented over 35% of the reasons cost-effective EMPs were not implemented. Often, the facility manager does not have enough cash to allocate funding, or can not get budget approval to cover initial costs. Financial arrangements can mitigate a facility’s funding constraints, allowing additional energy savings to be reaped.

Alternative finance arrangements can overcome the “initial cost” obstacle, allowing firms to implement more EMPs. However, many facility managers are either unaware or have difficulty understanding the variety of financial arrangements available to them. Most facility managers use simple payback analyses to evaluate projects, which do not reveal the added value of after-tax benefits. Sometimes facility managers do not implement an EMP because financial terminology and contractual details intimidate them.

To meet the growing demand, there has been a dramatic increase in the number of finance companies specializing in EMPs. At a recent Energy Management Conference, finance companies represented the most common exhibitor type. These financiers are introducing new payment arrangements to implement EMPs. Often, the financier’s innovation will satisfy the unique customer needs of a large facility. This is a great service; however, most financiers are not attracted to small facilities with EMPs requiring less than $100,000. Thus, many facility managers remain unaware or confused about the common financial arrangements that could help them implement EMPs.

Numerous papers and government programs have been developed to show facility managers how to use quantitative (economic) analysis to evaluate financial arrangements. Quantitative analysis includes computing the simple payback, net present value (NPV), internal rate of return (IRR), or life-cycle cost of a project with or without financing. Although these books and programs show how to evaluate the economic aspects of projects, they do not incorporate qualitative factors like strategic company objectives, (which can impact the financial arrangement selection). Without incorporating a facility manager’s qualitative objectives, it is hard to select an arrangement that meets all of the facility’s needs. A recent paper showed that qualitative objectives can be at least as important as quantitative objectives.

This chapter hopes to provide some valuable information which can be used to overcome the previously mentioned issues. The chapter is divided into several sections to accomplish three objectives. These sections will introduce the basic financial arrangements via a simple example, and define financial terminology. Each arrangement is explained in greater detail while applied to a case study. The remaining sections show how to match financial arrangements to different projects and facilities. For those who need a more detailed description of rate of return analysis and basic financial evaluations

WHY READ THIS BLOG?

We all know Energy Projects are very important to our economy and our environment. I am proud to say that with energy conservation projects—the more we do, the better it is for the environment (this is a rare profession). So, what can we do to increase the number of projects that are implemented? Well, the number one project “killer” is… You guessed it: Lack of Funding. So, this blog is all about solutions to that problem.

Many projects must be financed to get approval because most organizations (like most families) do not have cash just lying around so that they can accomplish all tasks at one time. Your energy project may be one of many potential projects from which a CFO must choose only a few to implement. If you can make your deal so that it has positive cash flow, you can “stand-out” from the other projects and become the CFO’s “new best friend.” With energy saving projects, another selling point is to determine the dollars that will be wasted with the “do nothing option.” Doing nothing is the equivalent of the CFO burning thousands of dollars each month—which is exactly what is happening. These dollars are “easy profit” dollars—if you save them; they go directly to the bottom line profit (as opposed to other investments like marketing, sales and advertising—which can have a higher risk of not producing a return).

This blog’s purpose is to help you understand the key success factors for structuring a financed energy project, and getting it approved. With your increased confidence in financing energy projects, the authors hope you will get more projects approved, thereby saving more energy and helping our environment.

There are many “correct” ways to assemble and finance an energy management project. The number of possibilities is only limited by one’s creativity. So be flexible and keep searching until you find the “Win-Win” deal for everybody. Don’t close your mind to new ideasafter you have only found the “1st” solution.