The economic justification for energy efficiency measures and renewable production is often favorable. This is especially true in places like New York and New Jersey, once you take into account the high cost of electricity and gas. However, the main barrier for many of these projects is the initial cost; While the long-term benefit is greater, the short-term impact on cash flow can be significant.
Even if a company has capital for energy efficiency and renewable generation projects, there is an opportunity cost – company owners and managers may prefer to reinvest these funds in their business to earn additional profit. Fortunately, there are many alternatives that make building upgrades easier to afford. Following are some examples:
- Get a loan with favorable conditions and use the savings to pay it off.
- Take advantage of tax incentives for energy efficiency and renewable generation.
- Utility company or government discount programs.
- Power purchase agreements (PPA), in the case of renewable generation.
The availability of these benefits may vary by location or type of project. Also keep in mind that not all projects provide the same return for every dollar spent upfront; Before proceeding with construction updates, identify the most promising projects through consultancy.
Make sure your projects are eligible for discounts and financing.
Financing building upgrade projects with low-interest loans
You can use the bank's money for energy efficiency measures and renewable generation systems and then repay the loan with the savings obtained. However, you need favorable loan terms to make this approach viable:
- If the project's savings are greater than the debt service, the project can pay for itself and still leave net savings in its pocket, from the first month of operation.
- If the debt service is higher you will still have to bear part of the cost of the project, but the net cost will still be lower than if you had paid in advance.
Loan financing involves giving up some of the project savings to cover the interest, but in return you get the upgrade with zero upfront cost. Financial analysis is very important: taking a high-interest loan for a project that offers moderate savings can actually result in losing money. In other words, energy efficiency and renewable energy upgrades are not something you can typically finance with a credit card.
Taking advantage of tax incentives
There are two main types of tax incentives: exemptions and credits. When a particular product or service is not subject to normally applicable taxes, you have tax exemption. On the other hand, a tax credit is a deduction you can claim against your tax bill. In both cases, the money that would have been spent on taxes stays in your pocket.
Let's look at the case of solar energy, which gets tax benefits in both New York and New Jersey. In both cases, photovoltaic technology obtains:
- Sales tax exemption
- Property tax exemption for any increase in property value attributable to solar energy.
- Federal tax credit of 30% of the project cost. In the case of New York, there is an additional state tax credit of 25% of the cost, limited to $5,000 per project.
Discount programs
Discounts are cash incentives for certain types of projects, which result in direct cost savings. Most equipment rebates in New York City come from Con Edison, while the New York State Energy Research and Development Authority (NYSERDA) manages rebate programs for solar and wind energy. In the case of New Jersey, most incentives are available through the NJ Clean Energy Program.
Rebates improve the financial performance of building modernization projects, but the approval procedure can be demanding. After all, the organization managing the rebates will want to ensure that their funds are used on projects that have a positive impact. To be eligible for rebates, your project must typically meet certain performance metrics, and the equipment used is typically subject to labeling requirements. For example, lighting rebates typically require program labeling such as ENERGY STAR or DesignLights Consortium (DLC).
Power purchase agreements (PPA)
If you install a renewable generation system through a power purchase agreement (PPA), you are not purchasing the equipment itself – instead, you are agreeing to purchase its power output for a predetermined period of time. The renewable energy system, typically a photovoltaic array or wind turbine, remains under the ownership of the supplier and they provide maintenance. You save from the first month of operation, as the price per kilowatt-hour in the PPA is lower than the electricity tariff.
In a PPA, your supplier keeps a portion of the savings as profit, which is factored into the agreed electricity price. However, in return you get savings with zero upfront cost and no need to worry about system maintenance.
While CAEs typically apply to renewable production systems, a similar concept exists for LED upgrades , called lighting as a service (LaaS). It follows a similar logic to PPAs: your lighting supplier owns and maintains the installation, and you pay a monthly fee that is less than the savings achieved.
Final Observations
There are ways to reap the benefits of energy efficiency measures and renewable generation systems without considerable upfront expense. However, having a well-designed project is important no matter how you purchase it. In fact, performance requirements may be higher for projects developed through loans and incentives, as organizations providing these benefits will want to ensure that their capital is used appropriately.
