Energy Finance Article Hero

Financing options for green retrofits

Sept. 7, 2022
A common barrier to undertaking integrated, systemwide energy retrofits is a lack of capital. Read what funding sources commercial and residential building owners now have available.

Buildings that undertake comprehensive retrofits through federal, utility, and energy-service company programs can achieve 15% to 40% in energy savings, according to a May report by the American Council for an Energy-Efficient Economy (ACEEE). Deep, integrated, and systems-based retrofits, which include optimizing building operations, equipment and component upgrades, and maintenance practice improvements, can achieve 2.5 to 7 times more energy savings than single-measure strategies, such as retrofitting light sources to LEDs but nothing else.

Despite this level of savings, not to mention associated increases in comfort, productivity, and building value, these retrofits are not happening anywhere near the pace needed to limit global temperature rise to 1.5 degrees Celsius, the ultimate goal of the Paris Agreement, which the Glasgow Climate Pact reaffirmed. Several financing options exist to encourage commercial and residential building owners to take action.

Lack of money or lack of will?

While many factors must align to realize ambitious energy reduction targets, the work will not happen if the capital is not available, according to Joe Indvik, who spoke at the Department of Energy’s (DOE's) 2021 Better Buildings, Better Plants Summit. However, continued Indvik, the head of clean energy finance and carbon solutions at McLean, Va.–based RE Tech Advisors, clean energy finance options might offer a path forward. 

Financing models for green retrofits include on-bill financing, where the customer repays the retrofit costs via their utility bill; and commercial property assessed clean energy (C-PACE) financing, where the customer repays the costs via their property tax bill.

For a no-money-down option, efficiency-as-a-service is another way to implement energy upgrades in commercial properties. This path typically comes with performance guarantees.

Finally, organizations can utilize internal funding options that tap into their existing financial resources, such as green bonds, which work similarly to traditional bonds except the funds are publicly stated to be earmarked for sustainability-focused projects. Organizations also can use a green revolving fund to pay for efficiency upgrades.

This article will explore further each option.  

On-bill financing and repayment

For retrofit projects in the $5,000 to $350,000 range, owners seeking a simple financing option with convenient repayments can consider on-bill financing (OBF) and on-bill repayment (OBR). OBF uses public money, ratepayer funds, or utility shareholder funds to pay for clean energy projects. OBR uses private capital from third-party investors. In both cases, the money is paid back through regular payments added to the owner's utility bill. However, not all states and utilities offer on-bill financing.

C-PACE funding

Like OBF, commercial property-assessed clean energy funding is used for energy efficiency retrofits, renewable energy implementation, and resilience improvements. The funds are paid back by adding an assessment or charge to the property’s tax roll once the funds are disbursed.

This is a good option for owners who want to keep the loan off their balance sheet or plan to sell in the short term because the financing arrangement remains with the property even after the sale. These deals can be complex to navigate but, unlike OBF, they can cover a range of improvements beyond energy improvements. However, C-PACE is only available in certain jurisdictions.

Energy savings performance contracts

Available since the 1980s, energy savings performance contracts (ESPCs) are a newer financing vehicle for the commercial building industry. Previously, ESPCs were used primarily in the MUSH (municipality, universities, schools, and hospitals) market. For commercial retrofit projects exceeding $1 million, an ESPC allows an owner to outsource installation, project management, maintenance, and savings measurement and verification to a third party—often an energy service company (ESCO).

However, the customer must fund the project via cash on hand or through a lender. Most ESPCs are backed by an on-balance sheet financing mechanism such as a loan, capital lease, or bond issuance. In the past, ESCOs often supplied the financing; however, with the passage of the Dodd-Frank Act in 2010, new rules by the U.S. Securities and Exchange Commission (SEC) limit the ESCO role in that they can’t arrange financing unless they register with the SEC.

The ESCO typically assumes project performance risk and guarantees that the energy savings will be sufficient to cover the customer’s annual debt obligation and any service fees the ESCO charges.

Green bonds

For owners embarking on a substantial, capital-intensive retrofit (upwards of tens of millions of dollars), wanting a publicity bump, and possessing a strong credit rating, green bonds may be for them. A green bond is much like a traditional bond, but it applies only to projects related to energy efficiency, renewable energy, and sustainability.

According to the DOE, green bonds are rising in popularity. In 2019, $51.3 billion was issued in the U.S. alone. Fannie Mae is the single largest green bond issuer in the world, accounting for 9% of 2019 issuances. In the U.S. market, most issuers of green bonds are corporate or city governments. Some municipalities can issue green bonds, which tend to raise between $5 million and $20 million. The DOE’s Better Buildings Partners Solution Center and the sustainability office of an owner's local government are good places to begin searching for green bond providers.

Green revolving fund

Perhaps the most accessible financing option is a green revolving fund, a self-replenishing, long-term mechanism for improving energy performance while demonstrating a commitment to sustainability. A green revolving fund can be used for projects small in scope up to multimillion-dollar retrofits. It is an organizational reinvestment mechanism that takes sustainable projects out of the budgeting process.

Getting the ball rolling on a green revolving fund often takes one individual or a small group acting as a champion, says Mark Orlowski, executive director and founder of the Sustainable Endowments Institute, in Cambridge, Mass. That person might be someone in a sustainability role, an energy manager, a facilities director, or anyone with a passion for making their corporate headquarters, health care facility, school, or neighborhood more energy efficient. Orlowski estimates that an individual or small group can launch a green revolving fund model by committing a few hours a week for a few months.

Building owners and companies uninterested in internally financing their green retrofits may not find their traditional bank to be informed on lending for efficiency projects. They may need the services of a green bank or a green investment bank.

Building owners and companies uninterested in internally financing their green retrofits may not find their traditional bank to be informed on lending for efficiency projects. They may need the services of a green bank or a green investment bank

Green banks and GIBs are forming across the country at the state, county, and city level. Because GIBs and other green finance organizations have a mission to drive clean energy investment, they have developed products and strategies for commercial building owners and contractors to fund substantial green retrofit projects.

In the U.S., green banks have been historically underfunded. However, they could be getting some much-needed help soon. The Inflation Reduction Act of 2022 creates a $27 billion Greenhouse Gas Reduction Fund, $20 billion of which will be set aside for federal investments, with 40% of that amount designated for low-income and disadvantaged communities. The remaining $7 billion would go to state green banks.

For more clean energy financing information and specifics, the DOE’s Better Buildings Solution Center offers comprehensive information and tools to help owners determine the best funding option for their project; search results can be filtered by location and building type. And regardless of which funding method an owner chooses, the Building Owners and Managers Association International's free and comprehensive Energy Performance Contracting Model (BEPC) offers another useful planning tool. The BEPC provides a conceptual framework and supporting template documents to help building owners and operators develop and execute investment-grade energy efficiency retrofits. This tool considers the owner’s investment criteria and core goals to determine the project scope. The financing-agnostic tool is applicable for several internal and external financing models.

At the country's current rate of energy retrofits, ACEEE estimates updating all domestic residential and commercial properties will take centuries. Several states are offering incentives to speed things up; for example, Washington has the Clean Buildings Performance Standard, which will take effect June 1, 2026. The state's Department of Commerce offers early adopters complying before then an incentive payment of $0.85 per gross square foot of floor area, excluding parking, unconditioned, or semi-conditioned spaces.

For jurisdictions without standards or policies in the works, they can join a national effort to act sooner than later. In January, President Biden launched the National Building Performance Standards Coalition. Comprising state and local governments across the country, the coalition will work toward designing "equitable building performance standards and complementary programs and policies" to address buildings across their life cycle after initial construction. The coalition is aiming for the development and adoption of those standards by April 22, 2024—Earth Day.

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About the Author

Traci Browne

Traci Browne is a Cheltenham, Pa.–based writer specializing in manufacturing with a focus on emerging technology, engineering, robotics, and IIoT.

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