5 Ways to Finance Energy Efficiency Projects
As businesses try to balance managing costs with answering the calls to be more environmentally conscious, more are turning to energy efficiency as the answer to both. But let’s face it, funding energy efficiency projects can be a major hurdle for many businesses.
In this article, we will explore 5 ways that businesses can finance energy efficiency projects. By taking advantage of these financing options, your business can get access to the energy cost savings , reduce environmental footprint, and improve bottom line.
The first method we will explore is grants and schemes. These aim to assist businesses in enhancing their energy efficiency and can originate from a variety of sources including central and local government, trade associations, chambers of commerce, or even private foundations.
Grants can be awarded on either a criteria or competitive basis, where some require organisations or individuals submit proposals for projects that meet specific criteria, whilst others may be automatically available to those who meet certain eligibility criteria, such as location, business type, or income level.
One example that we have been involved with since it’s launch is Chamber Low Carbon, a programme that offers free 1-2-1 consulting to SMEs based in Lancashire, to improve energy efficiency and develop low carbon products and offer customised support to help businesses identify energy efficiency opportunities, access funding and incentives, and develop low carbon products.
Other grants and schemes may be available for different types of businesses or industries. For example, some programmes may be targeted towards engineering, chemical or food and drink manufacturing.
Grants and schemes can be helpful in financing energy efficiency projects and providing businesses with funding and support that they may not otherwise have access to. However, they may only be available to certain businesses based on region or size, and they may be geared towards specific, niche project types. Therefore, businesses that do not meet the grant criteria may not be able to receive funding or move forward with their plans.
Businesses looking to invest in green technologies with the aim of improving energy efficiency or reducing their carbon emissions can apply for funding opportunities through competitions.
These competitions are typically funded by the government but run by organisations such as Innovate UK. For example, in 2022, Innovate UK announced a Small Business Research Initiatives (SBRI) competition worth £5 million, which aimed to showcase and execute inventive solutions that incorporate environmental and climate considerations into financial services.
Essentially, Innovate UK and similar entities run these competitions with the winners receiving the required funding so that the businesses can carry out environmentally friendly projects. However, it is important to note that there is a potential downside as funding for a project usually comes in stages, meaning that it may be cut or removed altogether if the project does not demonstrate promising results after the initial feasibility phase.
There are many private finance options available for businesses looking to finance energy efficiency projects, including Power Purchase Agreement (PPAs) and private finance for capital expenditure.
PPAs are contracts between a business and a third-party provider of renewable energy, such as a solar panel provider. The business buys energy from the panels at a fixed rate for a set time, without upfront costs. However, keep in mind that the rate is fixed for a long period, and the funder will structure the deal for a long-term investment return, which you are essentially paying for.
Businesses can also finance energy efficiency projects through private financing options, such as a bank or private investor. Investment would fund the purchase and install costs and in return would expect to receive a payment, essentially a share of the energy savings as a result.
Loans can be used to buy energy-efficient equipment, lighting, or other improvements. However, interest on the loan will eat into the savings, so it’s crucial to have an accurate long-term payback model with plenty of financial headroom.
Businesses can also turn to Capital Expenditure (CapEx) to fund energy efficiency projects. CapEx are funds used by a company to acquire, upgrade, and maintain physical assets like buildings, equipment, and technology, and can also be used to finance projects like solar energy installation.
From a financial perspective, when a business purchases a tangible asset using CapEx, the cost of the asset is gradually written off over a period of several years through a process called depreciation. This means that the business may pay more at the start of the period and less towards the end, reflecting the decrease in the asset’s inherent value over time.
The current high energy prices make energy efficiency an attractive investment, and using CapEx to fund these projects can offer a good return on investment (ROI). But, having the necessary cash available can be a challenge for many businesses.
Businesses can bootstrap their way to energy efficiency by adopting a subscription based financing model. This method uses internal resources rather than external financing. This approach can be advantageous for small-scale projects or those that don’t qualify for traditional funding.
By allocating small amounts of operational expenditure (OpEX), businesses can release cash by making dents in their energy consumption. These energy savings are kept within the budget but are reinvested back into the next efficiency project for the business, each time releasing more cash to reinvest in the next project. Although these projects may start small, the cumulative savings and compounding benefits of each project over time can lead to a better overall outcome.
It is important to consider that opting for a bootstrapped route might take longer, but it will be less reliant on other organisations supporting the process and at the end, all the savings are yours to keep. In addition, opting for this model means CapEx and financing options can be used elsewhere in the business, supporting that critical balance of survival, growth, and sustainability.
A good example of a subscription model is our Energy Management as a Service (EMaaS). It is a flexible, subscription-based solution that helps medium and large businesses manage energy better, control energy consumption, and improve performance. EMaaS achieves this by converting energy data into practical insights, filling resource gaps, and establishing an energy management framework that delivers desired results.
Careful consideration of available financing options and seeking expert advice is crucial for businesses to determine the most suitable way of funding energy efficiency. Our team of experts are readily available to offer guidance. Get in touch with us today to explore your options.
Author: Andy Bardsley, Head of Energy Management
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