Having been in this business long enough at this point, an interesting pattern emerged that just didn’t quite make sense to me: Energy Services Companies (ESCO’s) seem work almost exclusively in the Municipal, University, Schools and Hospitals (MUSH) market, and don’t really seem to touch on similar buildings in the commercial sector. Why would this be? What is it about institutional buildings that works so much better for performance contracting?
First, it’s important to understand how ESCO’s fund projects in the MUSH market. These are funded through Tax Exempt Municipal Leases provided by banks or other investors. These agreements are multi-year the MUSH client is able to sign on as long as the agreement includes a “subject to appropriations” clause which makes the agreement a series of one-year contracts, with funding appropriated annually.
Given the need for annual appropriations, it would seem that providing for performance contracting in a commercial (non-MUSH) setting would be even less complicated, so the question remains- why does this market remain largely untouched through performance contracting?
To get the answer, I looked no further than HB&C Principal and MUSH market guru, Dave Carey. Here is his take:
Non-MUSH clients avoid financing energy projects for two reasons:
- Commercial enterprises manage capital on one side of the business and run operations on another side. They have limited access to capital (reported to investors in their balance sheet) and therefore they limit the use of capital to funding “capital” assets (equipment and property related to their core business). They particularly don’t like the idea funding non-core business, depreciating assets (energy equipment) with their scarce capital.
- CFOs think they can get cheaper money (which they frequently can) but they often don’t follow through and wind up responding with answer #1 above.
- Energy efficiency is rarely deemed either urgent or important to upper management (CFO and CEO).
And projects rattle around in the #1 and #2 loop until everyone forgets about it.
(If, for some reason, the CFO or CEO consider the project to be either urgent or important, the project may have a much better chance of being implemented).
So it seems, rather than some esoteric regulatory barrier (as I might have guessed), the issue is the structure and decision-making process in a commercial enterprise. So I asked Dave what can solve this problem.
- Lease agreements particularly operating leases (to the extent they are available in the future)
- PACE (a tax obligation, tied to the property tax bill, with transferability)
- On-bill (an obligation tied to the utility bill, with transferability)
- Shared savings and other service agreements, so long as the CFO can be persuaded that using third party capital makes more sense than getting lost in the #1 and #2 loops described above.
Let us help you fund your project with the type of financing that makes the most sense! www.hbcenergycapital.com is a full service clean energy finance brokerage, working across multiple financial vehicles and diverse sources of capital to meet each project’s needs.
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