20X Your Energy Project Size: Factors to Consider
I’m publishing a series of blog posts that will help energy engineers and business development executives look beyond the typical energy conservation scope. The first two posts in this series were:
Today’s post will help Energy Service Company (ESCo) business development executives and energy engineers expand their focus when building a project for a prospective client.
When assigned a Technical Energy Audit (TEA) or Feasibility Study, a rookie engineer will look at lights, pumps, fans, a utility bill and quickly decide what energy conservation measures (ECMs) will work in the building. A rookie business development representative will only sell energy cost savings. That’s NOT the way to build a comprehensive energy project.
In this blog post, I will show you each aspect of a project that you must consider if you want to 20X your energy project.
Each of your clients will have a Core Mission. This mission rarely has anything to do with energy cost savings. However, the core mission is the most important thing to your client. A core mission for a school district is to educate their students. A core mission for a paper mill is to produce high quantities of high-quality paper at a reasonable price.
The core concern of a data center is up-time of critical servers.
If a school district is using little energy but sacrificing the educational environment, that is a problem that is relevant to your project.
If a data center will experience less reliability because they have unreliable power backup, that is an opportunity for your energy project.
If paper production in a paper mill can be increased by using a more expensive fuel source, this benefit will override the increased cost of energy.
Regardless of your customer type, it’s important that you know what their core mission is and how your project impacts that mission.
This is probably the most important category when creating a viable scope for an energy project. The source of money to fund energy projects is endless. Here are a few key funding sources to consider:
Energy savings: This funding source is a direct cost savings from the utility bill that is paid by your customer. Energy cost savings is any cost reduction that will result of using less energy, water, or other measured utility. It can include cost savings from peak electricity reduction, changing rates, or any other tactic that I describe in the Check List that I published in the previous blog post.
Adjusted baseline: It’s important that you create an adjusted baseline from which to calculate energy savings. If the client is currently spending $100,000 per year on utilities with a dysfunctional building; and would have spent $120,000 with a properly functioning building, the basis for energy cost savings must be the $120,000. Where does this additional $20,000 come from? It is the cost of running the building the “right way”.
Energy rate changes: As with most things, energy prices increase with inflation. Different utilities experience inflation in a different way. Since you are making an investment today to reduce future expenses, it’s important to properly inflate future energy rates to match expectations. This will ensure a fair evaluation of the value of making energy retrofits now.
Guaranteed savings: In my humble opinion no one should complete an energy project without a guarantee. There are many scams in the energy efficiency industry; and it’s important that an ESCo guarantee and then measure and verify that energy savings is occurring.
Operational Savings: Operational savings is the savings from material purchases, service contracts, labor, or other non-metered costs that will be avoided because of your energy project. For instance, if your customer is paying a service contractor to replace several pneumatic control components that you plan to replace with electronic controls that have a lower maintenance cost, these cost savings can be added to energy cost savings. Each project item will impact operational cost in some way. It will either increase operational costs; or decrease those costs. Ensure that you accurately communicate such cost savings or increases to your client.
Capital budget: Capital comes from a variety of sources. A school district has an annual capital budget; or it issues bonds to raise funds for capital projects. A company budgets a fixed amount for capital investment each year. If your energy project eliminates the need for these future projects, it can be a mutual benefit for you and your customer. This capital is a source of funding for your energy project when it eliminates the need for your client to spend that capital at some future time.
Government Grants: The source of government grants for public-sector clients is endless. States, local and federal government grants are available for energy and facility renovation projects for public-sector clients. Your client may be aware of these grant programs… so ask them. If they aren’t aware, then do your research. Understand the time required to apply for grants, deadlines for application, and the approval process and how this timeline intersects with your project timeline. Many grants will be denied for work that has already been completed.
Tax Credits: Tax credits are available to public and private sector clients. While public sector clients do not pay income taxes, tax credits can be taken by the ESCo doing the work for the client. In the case of private sector clients, tax credits are available for accelerated depreciation on installed equipment and environmental impact credits. Many states and counties administer Property Assessed Clean Energy (PACE) programs that allow you to transfer any payments for energy efficiency upgrades to the property tax bill so that a building owner can extend the term of paying off energy efficiency upgrades.
Utility Rebates: Utilities often incentivize electricity demand reduction and improved efficiency so that they can better manage demand on their system. Always check the amount of rebates that are available and what limitations exist on the nature of your energy projects. Also understand the timing of rebate payments, and expirations to match rebate payments to project costs. Many rebates also require measurement and verification of installed energy efficiency measures. Ensure you include the cost to complete shut measurement and verification tasks.
Long-Term Financing: If you estimate the cost of your energy project to be $5,000,000 and the annual capital budget of your customer is $200,000, it will be necessary to provide long term financing. Each public and private entity has specific statutes around longer-term financing. If you work with public-sector clients, learn the laws, and understand how to help your clients secure bonds, lease-purchase agreements, or whatever other financing they need.
Private sector clients are often reluctant to finance energy projects because they view them as capital projects that must wait their turn in their ongoing capital budget cycle. Public sector clients have strict budget limitations imposed by tax limitations and laws that govern long-term financing. Understand your customer’s limitations on financing.
Be prepared to educate your client on creative funding tactics for energy projects. If you’ve identified $600,000 in annual cost saving to pay for your $5,000,000 project, it is perfectly reasonable to use annual saving to make payments on the $5,000,000 project with no negative impact on the customer’s finances.
Operating Leases: It will help you to understand the tax implications of leases and capital equipment for a private sector client. If a client purchases a $500,000 piece of equipment with a equipment life of 15-years, they can only deduct 1/15th of their purchase of that piece of equipment as a deductible expense each year. If on the other hand, they make lease payments for this equipment on an annual basis, the full amount of that lease payment is deductible on their taxes as an expense. The difference between these two scenarios is so dramatic that it will help private sector clients understand the benefit of longer-term financing.
Longevity of Building
We think of buildings as permanent fixtures. They’re not. Most institutional buildings will last the longest. Courthouses, schools, hospitals, prisons, and other government buildings have a lifespan of 100-years. While private-sector clients keep buildings for five to 20-years. In any case, you should not propose 20-year payback items to a building that will be demolished in 5-years. Each of your clients can tell you how long they expect to keep their buildings. All you must do is ask.
One of the biggest challenges in the energy retrofits industry is retrofitting a building where the building owner doesn’t pay the utility bill. If your project reduces utility costs that are not paid by the building owner, the building owner will not see the benefit of paying for such building improvements. If you charge building tenants for improvements to the building which they do not own, they will not see the benefits of your energy project. Before you spend time on a leased building, you must establish the transfer of payments to and from tenants and building owners. Otherwise, you’re wasting your time.
You may wonder what politics is doing in a blog post about building an energy project’s size. The fact is that each client will have a political agenda when it comes to energy projects. Some want to prevent climate change. Others want to demonstrate they are fiscally responsible. Others may have some other political motive. When you can align your project scope with the political aspirations and ideals of your client, you will be able to dramatically increase the size and impact of your project.
For instance, if your client wants to prevent climate change, reducing carbon emissions ought to be a key goal of the scope that you develop. This client will likely accept higher payback terms if you satisfy this political desire. Likewise, if your client wants to demonstrate fiscal responsibility, focus on the financial wisdom of energy retrofit measures you propose.
There are political topics and words that create emotional reactions from your clients. When you audit a building or meet with your client, be sensitive to their political leanings. You will have your own political opinions that may or may not agree with your client’s perspective. Do not advocate for any political position. It’s often the case that your client has multiple decision makers with varying political leanings. It is a lose/lose proposition to pick a political side when completing energy audits.
Environmental Impact (ESG)
ESG stands for Environmental Social and Governance. This term is used for many private sector companies who have goals aligned with improving the environment, creating an equitable social culture, and ensuring that their leadership teams are diverse. If your client has ESG goals, be aware of such goals. Especially, environmental goals. Many large companies are promising to be carbon-neutral by 2030; but have no idea how they will achieve this goal. In fact, many are not fully sure about what they’ve signed up to do. As an ESCo, you can help them quantify what it will take to achieve such environmental goals. The scope you develop in your project ought to be aligned with ESG goals of clients who have adopted these policies.
Energy projects can have a substantial impact on local communities. Especially, if your client is in a rural community. Here’s an example. Our client was a school district in a rural community. It turns out that the main source of revenue for this local community was reselling electricity to its residents. When we converted the school from gas heat to electric ground source heat pumps, the town gained revenue, and the school district reduced its energy bill.
Be aware of your client’s community and how your energy project will help or harm the local economy and ecology.
This blog post covered several topics, and I didn’t get too deep into any one area. I hope that this list gets you thinking about many of the peripheral considerations that can help you dramatically increase the size and impact of your energy projects.
About me. I have been actively engaged in the energy efficiency, renewable energy, and energy conservation industry all my professional career from 1987 until now. I was a licensed Professional Engineering in six states and a Certified Energy Manager (CEM). I worked as a sales executive, energy engineer, sales manager, and entrepreneur. I started, grew and sold my own Energy Service Company (ESCo) called Ennovate Corporation (1997 to 2013). I now coach business owners, engineers and business development executives in the energy efficiency industry.