Innovative Internal and External Financing for Energy Projects. September 2016

Transcription

1 Innovative Internal and External Financing for Energy Projects September 2016

2 Building On Earlier Topics The goal of this workshop is to: 1. Change the way energy projects are financed internally 2. Understand how to finance energy projects with external capital

3 Retailers are just as diverse when it comes to energy issues as they are in their core business.

4 Internal Financing Models Section 1

5 adidas Group Case Study Internal Venture Capital Energy Fund

6 adidas Group Case Study $5.5 million Investment 49 Projects Averaged 33% IRR

7 Internal Finance Models Update Internal Purchasing Systems Best Buy: Updated Store Lighting Options Modify Project Proposal Process Kohl s: Embedding the Finance Department into the Energy Team

8 Internal Finance Models Green Revolving Loan Fund Single initial investment replenishes capital from earlier projects Internal Price on Carbon 437 companies reported an internal carbon price in 2015

9 External Financing Models Section 2

10 Why Use External Financing? State or utility incentives can make the difference between meeting and missing your hurdle rate Some financing options make your project cash flow positive from the start Do more projects

11 How to Narrow Down Your Options How many buildings will your project cover? How much will you spend? How much will you save? Do you own or lease your buildings? How long do you hold a typical location? How quickly do you need financing? Do you want to manage installation? Do you want to manage operations and maintenance? Can you take debt on your balance sheet?

12 As a General Rule If there are projects to be done, and money to be saved, somebody will finance your project.

13 External Financing Options Major Initiatives or Green Construction Green Bonds Traditional Energy Efficiency Finance Energy Performance Contract (EPC) Energy Service Agreement (ESA) Managed Energy Service Agreement (MESA) Specialized Financing Property Assessed Clean Energy (PACE) On-Bill Repayment (OBR/OBF) Tax-Increment Financing (TIF)

14 External Financing Options Major Initiatives or Green Construction Green Bonds Traditional Energy Efficiency Finance Energy Performance Contract (EPC) Energy Service Agreement (ESA) Managed Energy Service Agreement (MESA) Specialized Financing Property Assessed Clean Energy (PACE) On-Bill Repayment (OBR/OBF) Tax-Increment Financing (TIF)

15 Green Bonds Traditional debt with a twist: lower interest rates in exchange for commitments to sustainability or energy projects. Benefits A single bond offering can cover costs for many projects over multiple years. Autonomy over spending bond proceeds. Lower cost of capital compared to standard private-sector bond issuances. Challenges Very large offerings (typically $5 million or greater) 3 rd party verification of green designation

16 Apple s Green Bond $1.5 billion Issued in February 2016 Will finance: renewable energy energy storage energy efficiency projects green buildings resource conservation efforts

17 Apple s Green Bond $1.5 billion issuance 7-year repayment at 2.85% interest Assuming a 20 basis point (.2%) reduction in interest from green designation: $21,000,000 reduction in interest payment over the life of the bond

18 Starbucks Sustainability Bond $500 million issuance May year, 2.45% Funds go to supply chain infrastructure

19 External Financing Options Major Initiatives or Green Construction Green Bonds Traditional Energy Efficiency Finance Energy Performance Contract (EPC) Energy Service Agreement (ESA) Managed Energy Service Agreement (MESA) Specialized Financing Property Assessed Clean Energy (PACE) On-Bill Repayment (OBR/OBF) Tax-Increment Financing (TIF)

20 Energy Performance Contracts (EPCs) The ESCO model, where a 3 rd party financier takes on upfront project costs in exchange for a portion of future utility savings. Benefits Savings guarantees common Streamlined ESCO services Challenges Requires long-term (10-20 year) building ownership Increased security on project comes at expense of lower return on investment

21 EPCs A Classic Model

22 Energy Services Agreement (ESA) An innovation on the Energy Performance Contract, that incentivizes a wider range of projects and off-balance sheet financing. Benefits A PPA for all efficiency projects Can be structured as off-balance sheet debt Avoids major capital expenditures Easy to scale projects across a portfolio Challenges Long negotiation period for projects Generally for large projects (>$500k)

23 ESA Case Study: Metrus Energy

24 Managed Energy Services Agreement (MESA) A twist on the Energy Services Agreement, where a single firm manages equipment, maintenance, and utility bill payment. Benefits Pay one bill for everything energy-related Typically structured to immediately lower utility spend Challenges A 3 rd party must have access to buildings for ongoing maintenance and management of equipment Generally for large projects (>$500k)

25 External Financing Options Major Initiatives or Green Construction Green Bonds Traditional Energy Efficiency Finance Energy Performance Contract (EPC) Energy Service Agreement (ESA) Managed Energy Service Agreement (MESA) Specialized Financing Property Assessed Clean Energy (PACE) On-Bill Repayment (OBR/OBF) Tax-Increment Financing (TIF)

26 Property Assessed Clean Energy (PACE) A rapidly growing financing method that pays for 100% of a project s upfront costs and is repaid for up to 20 years with an assessment added to the property s tax bill. Benefits Long term financing (e.g. 20 years), even for projects with short paybacks Bill can be passed to future occupants or building owners Can be used for both large and small projects Challenges PACE legislation must be adopted by local jurisdiction

27 PACE: BrandsMart USA Home appliance and electronics big box discount retailer 3 separate PACE deals: $1.8 million, $2.225 million, and $3.1 million year repayment, tied to property Results 34% projected reduction in annual utility costs

28 PACE: Big Boy Restaurant Big Boy restaurant in Ann Arbor Small business Building controls, high-efficiency HVAC and lighting PACE assessment: $88, years, 4.75% fixed Results 19% projected reduction in annual utility costs = $8,300 annual savings content/uploads/2013/07/ ann-arbor- PACE_Big-Boy-Case-Study.pdf

29 PACE Is Not Available Everywhere

30 On-Bill Financing (OBF) Finance energy projects that are repaid through a line item on your utility bill, with zero or low interest rates. Benefits Leverages existing billing relationship Secure, low cost financing Financing tied to property Challenges Financing typically not long term Local utility must support on-bill program

31 Tax Increment Financing (TIF) A common type of gap financing used to fund additions or expansions of existing large projects. Benefits Can fund sustainability improvements onto an existing project at low cost (improves financial returns) Challenges TIF program must be offered by local or state government Deals are often customized and difficult to scale

32 Find A Structure That Fits Major Initiatives or Green Construction Green Bonds Traditional Energy Efficiency Finance Energy Performance Contract (EPC) Energy Service Agreement (ESA) Managed Energy Service Agreement (MESA) Specialized Financing Property Assessed Clean Energy (PACE) On-Bill Repayment (OBR/OBF) Tax-Increment Financing (TIF)

33 External Financing Exercise Section 3

34 External Financing Exercise You work for a small format electronics retailer with 100 locations across the country where you are responsible for utility costs. You have been given approval to look into external financing options

35 External Financing Exercise Annual Budget: $2,000,000 # of Stores: 100 Financing Options: Internal Funding PACE (10 stores) ESA (all stores) Potential Projects: Energy Management System LED Retrofit Hurdle Rate: 10% Payback must be <3 years

36 Full LED Retrofit, No Financing 95 stores LED Cost: $1.19 million Savings: $475,000 per year 3-Year NPV: $102,000 3-Year IRR: 22% Simple Payback: 2.5 Years

37 EMS Retrofit, No Financing 50 stores EMS Cost: $2 million Savings: $750,000 per year 3-Year NPV: $47,000 3-Year IRR: 13% Simple Payback: 2.7 Years

38 LED + EMS Retrofit, No Financing 95 stores LED 20 stores EMS Cost: $1.99 million Savings: $775,000 per year 3-Year NPV: $120,000 3-Year IRR: 18% Simple Payback: 2.3 Years

39 PACE + Internal Funds 95 stores LED 33 stores EMS 10 stores used PACE Cost: $1.98 million Savings: $970,000 per year 3-Year NPV: $588,000 3-Year IRR: 55% Simple Payback: 2.0 Years

40 Energy Services Agreement 95 stores LED 100 stores EMS Cost: $0 Savings: $75,000 per year 3-Year NPV: $187,000 3-Year IRR: Infinite Simple Payback: Immediate

41 ESA + Internal Funds 95 stores LED 85 stores EMS Cost: $1.96 million Savings: $787,500 per year 3-Year NPV: $174,000 3-Year IRR: 22% Simple Payback: 2.5 years

42 Metric of Choice Aside from PACE deals Greatest 3-Year IRR: Internal LED Retrofit Greatest 3-Year NPV: Energy Services Agreement Greatest Cash Flow: ESA + Internal Funds

43 External Finance Exercise

44 What If You were to do this with a company and budget ten times the size? You also had to do a full HVAC replacement in 10 stores this year? To meet new greenhouse gas reporting requirements, your CEO is requiring that all stores track energy consumption? Your CFO has limited the total energy project budget to $4 million (cash spent + financed projects)?

45 Tools & Resources Section 4

46 RILA External Financing Calculator

47 RILA External Financing Calculator

48 RILA External Financing Calculator

49 RILA External Financing Calculator

50 RILA External Financing Calculator

51 RILA External Financing Calculator Available on RILA s website Condenses this conversation into 15 minute tool

52 Thank you! Contact us: Adam Sledd: Andrew Feierman: