City Project Financing

Most city leaders agree that energy and water efficiency is a good idea – the benefits of reducing energy bills, increasing employee comfort, conserving resources, and creating positive engagement with residents are universally positive. However, financing efficiency projects can present a challenge for many municipal organizations. Understanding the landscape of traditional and emerging financing options may be the key to progressing city efficiency goals.

The US Department of Energy (DOE)’s Better Buildings Financing Navigator is a free online resource that uses basic project information to identify financing options that best align with a city efficiency project needs. The Navigator can save significant time and reduce the research barrier for cities taking the initial step of exploring the world of available financing options.

Source: US Department of Energy.

Local governments also have the option to “Connect with Financial Allies” straight from the Navigator, identifying experienced and knowledgeable partners about financing energy efficiency upgrades and PACE projects.

Explore the financing navigator, find financing that fits your city’s needs, and connect with partners here.

In Texas, the LoanSTAR Revolving Loan Program offers cities and other public sector entities low-interest financing for energy and water efficiency upgrades and performance contracting their facilities.

The LoanSTAR program is administered by the State Energy Conservation Office (SECO). Since its inception, the program has funded over 290 loans and achieved cumulative energy cost savings of $571 million for participating facilities. The measures installed through LoanSTAR funding have prevented the release of over 15,801 tons of nitrogen oxide, 5.5 million tons of carbon dioxide, and 11,795 tons of sulfur dioxide into the atmosphere.

Resources

• LoanSTAR program website
• Sign up to receive LoanSTAR updates
• LoanSTAR technical guidelines

Although other leasing arrangements exist for public sector energy efficiency financing, tax-exempt lease purchase agreements are the most commonly used lease arrangement by state and local governments. The intent of a tax-exempt lease purchase is to enable public organizations to pay for energy upgrades by using money already allocated for utility budget. Under this arrangement, the public entity owns the assets after the lease-term expires. The cost of capital is appreciably lower than taxable commercial lease-purchase agreements because the interest paid is exempt from federal income tax.

Resources:

• • Department of Energy, Leasing Arrangements

Energy Service Performance Contracting (ESPC) enables local governments to procure energy and water efficiency with zero upfront capital and repay the loan through utility cost savings. Though often thought of as a financing mechanism, ESPC’s can be financed through a number of routes including LoanSTAR, tax-exempt lease purchase agreements, and self-financing.

Under the ESPC model, cities partner with an energy services company (ESCO). The ESCO performs an investment-grade energy audit of city facilities, identifies energy and water saving measures, and creates a proposal from those audit findings. If the project moves forward to the implementation stage, the ESCO guarantees the performance savings from installed measures. Measurement and verification of the measures is performed on an ongoing basis to ensure the savings are being met.

Source: US Department of Energy – Office of Energy Efficiency and Renewable Energy.[/expand

Energy Savings Performance Contracting Guidelines for State Agencies

The State Energy Conservation Office, in collaboration with energy service companies and end-users, developed Energy Savings Performance Contracting Guidelines for State Agencies. These guidelines offer step-by-step guidance specific to projects developed under Texas Government Code Section 2166.406, the enabling legislation of ESPCs for State Agencies.

Although developed for State Agencies, the guidelines provide a structure that can also be used by other public entities including K-12 schools and local governments. They include helpful tools, like a Request for Qualifications (RFQ) Template for an ESPC as well as an outline contract, to support public institutions in their performance contracting process. SECO can also provide Measurement and Verification Provider Certification Forms, Third Party Review Certification Forms, and review checklists for Chief Financial Officers and General Counsel.

The U.S. Department of Energy developed the Energy Savings Performance Contracting Toolkit as a comprehensive resource for establishment, implementation, and evaluation of ESPC projects.

Highlights of the Better Buildings ESPC Toolkit include:

• • Customizable Sample Documents and Contracts for every stage of an ESPC project, including RFQs, RFPs, Base Contracts, a full Energy Savings Performance Contract, and Financing Solicitations.
  • Best Practices for Selecting an ESCO, which include a spreadsheet template to evaluate proposals, a recommended step-by-step process to evaluate proposals, and specific questions to ask ESCOs during the interview process
  • Financing Decision Tree that helps local governments identify financing options for ESPC projects

Explore the entire Better Buildings ESPC Toolkit here to learn more

Other ESPC Resources

• • Energy Savings Performance Contracting: Improving Infrastructure & Turning Waste into Wins
  • Energy Services Coalition

The City of Fort Worth has successfully used energy service performance contracting to reduce energy consumption in more than 200 city-owned buildings, saving an estimated $5.9 million in energy costs in their first year, with an estimated 11 year payback. The State Energy Conservation Office (SECO), HARC, and SPEER developed a case study of Ft. Worth’s experience detailing anticipated construction costs and energy savings, payback period estimates, and actual energy and cost savings over a ten year period.

Read the City of Fort Worth’s ESPC case study here.

Funding efficiency projects through existing budget or capital improvement funds enables cities to manage more aspects of the financing without relying on external partners. However, internal financing requires a high level of communication among various city departments to ensure all parties understand the project details, the agreed-upon process, and the saving goals.

The Better Buildings Financing Navigator provides guidance on internal funding to assist local governments who are considering this option. The Navigator outlines advantages and drawbacks of several internal methods that cities can use finance energy conservation projects including:

• • Operating or Capital Budget Expenditure
  • Self-Funded Energy Service Performance Contract
  • Capital Investment Fund
  • Revolving Loan Fund
  • Internal Carbon Pricing

Learn more about each internal funding option at the navigator here.

The City of San Antonio finances energy conservation projects through its own internal revolving loan fund. The fund was established in 2011 with seed funding from the American Reinvestment and Recovery Act (ARRA).

The city uses this fund to manage energy efficiency building measures as well as efficiency improvements in larger capital projects. As the efficiency projects realize savings, the city returns a portion of the savings to the fund to be used in future projects.

Benefits of the city’s revolving fund include a reduced debt burden for energy efficiency projects, positive cash flow, the flexibility to implement projects quickly, internal management of projects, and significant energy reductions.

Read the full San Antonio “Revolving Loans for City Efficiency Projects” case study.

Lawrence Berkeley National Lab (LBNL) created a detailed report entitled “Current Practices in Efficiency Financing: An Overview for State and Local Governments.” This guide covers all customer-facing financial products that state and local governments use to finance energy efficiency.

The report contains information on traditional financing products (unsecured loans, secured loans, and leases) and specialized financing products (on-bill financing, PACE, ESPC, and more) along with information on the advantages, disadvantages, and tradeoffs of each approach.

For information on PACE Financing, including how local governments can create PACE Districts, please see our PACE Financing module.