5 Ways to Fund Your Energy Efficiency Project with Low or Zero Capex

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"Lack of capital" is the number 1 reason businesses defer their energy efficiency projects.

This article discusses 5 ways your business can fund your projects without hurting your bottom line.

Centropi manufactures investment-grade light fittings. By providing easily understood information you can decide which funding method is right for your business to undertake your energy-efficiency project.

Help Me Decarbonise!

Zero Capex Options - Zilch, Nada, Nothing.

#1 - Energy Services Company (ESCO)

What is an ESCO, and how does the model work?

An Energy Services Company provides energy-efficient technology and services to businesses looking to reduce their energy usage. Consider them a one-stop shop for your energy-efficiency projects.

Their services can include:

  • Design and implementation of energy savings projects,
  • Retrofitting,
  • Energy conservation,
  • Energy infrastructure outsourcing,
  • Power generation,
  • Energy supply,
  • Risk management, and;
  • Innovative financing.

In Singapore, the NEA runs an accreditation scheme for ESCOs to “enhance the professionalism and quality of services offered”. As of August 2023, there are 23 NEA-accredited ESCOs in Singapore.

This Sounds Expensive.

It won’t come cheap, but your company will not pay a single dollar upfront. Most modern ESCOs rely on innovative financing to fund client projects. Therefore they will bear the capital and credit risk, not you.

How is this possible?

Well, the ESCO model works by providing guaranteed energy savings. These energy savings translate to cost savings. These cost savings are then shared between the client and the ESCO. Which, in turn, The ESCO uses to pay back the capital investment of the project over a given period.

On the flip side, if the project does not provide a return on the investment, the ESCO is often responsible for paying the difference. So they better get it right!

When Will I See Returns?

You will see immediate returns following the installation of the upgrades, but they may not be as substantial as with other funding methods.

ESCO - Cash Flow Profile - Higher service fees lead to lower initial returns

To dig a little deeper, let’s break down some of the pros and cons.

Pros

Expertise: Using an ESCO, you are effectively onboarding a whole team of professionals who bring specialised knowledge and experience to the table. In theory, they will ensure effective project planning and implementation

Performance Guarantee: As mentioned above, ESCO costs are typically paid for via guaranteed savings and built on performance-based contracts, assuring the client of energy savings and ROI.

Off-Balance Sheet Financing: This sounds complicated, but all this means is that as your company will not pay anything, there is nothing to show on your balance sheet. For the most part, this is only made possible if the ESCO is financing the entire project. This removes the financial burden on a company’s balance sheet.

Cons

Contractual Complexities: If any of the above doesn’t seem that straightforward, well it’s not. ESCO agreements can be complicated and involve drawn-out negotiations, potentially leading to delays. Tread carefully.

Shared Savings: Shared doesn’t necessarily mean evenly shared. So, you may only get the cherry on top of the energy-savings cake. Why? Well, Given the risks the ESCO is taking, you can expect they will want a bit more of that energy-savings cake.

Perspective - How does this work for Lighting?

The ESCO will generally install power meters to gather data on lighting usage before and after the new LED lighting installation. They will use this data to run reports before the installation and every month during the service period. This data gets audited to prove they are saving what was promised. This is good, but as discussed above it costs much more, and the customer pays for it via higher fees (less savings). Therefore, lower returns.

#2 - Leasing model

What is a leasing model, and how does it work?

In the real estate world, this is called Rent to Buy. You want the house, but you can’t pay for it up front, so you “rent” it from the developer. A portion of that rent goes towards equity in your new home. After a while, you will own the home.

It is no different in an energy-efficiency project lease. The lease provider will undertake the energy-efficient upgrades at their cost. These upgrades should result in energy bill savings.

The monthly “lease” cost will equal these generated savings and be used to pay back the supplier’s costs.

When Will I See Returns?

You will see the financial benefits once these monthly savings have paid off the supplier's costs. And not a moment before.

Leasing Model - Cash Flow Profile - No initial financial benefits

Pros:

Keep Your Cash: Like with the ESCO model, there is no upfront cost, which allows the client to conserve cash while accessing the energy-efficient technology.

Simple Payments: It does keep things financially simple. The savings are generated and instantly used to pay back the supplier. This makes for easy budgeting.

Tech Upgrades: Like a mobile phone contract, leasing often includes options for upgrading to newer and more efficient equipment at the end of the lease term.

Cons

Overall Cost: Over the lease term, the total cost might be higher than an outright purchase. This is because you will never be paying back just the cost of the equipment. You will also be indirectly paying back the interest on the supplier’s loan they used to buy the equipment in the first place.

You Don’t Own Anything: The new equipment might be installed, but you don’t own the equipment. This might restrict certain financial benefits or decision-making.

Long-Term Commitment: We have all tried to break out leases in Singapore only to be told we must pay break clauses. It’s no different here. Early termination of leases can lead to penalties, and the commitment might extend beyond the technology's useful life.

Perspective - I can lease lights?

Yes, it is possible. However, depending on the efficiency of the lights, it might take at least two years to pay them back. If the technology is not selected correctly, the lease might expire beyond the useful life of the lights. Look for investment-grade fittings.

#3 - The “as a Service” Model

I thought it was just for computer software (SaaS).

It’s not; it is now being used by businesses to access higher-quality products that may otherwise be unjustifiable.

The as a service model (LaaS in the lighting world) is an ESCO and leasing hybrid but swings the financial benefits in the client’s favour.

Similar to ESCO and leasing, there are no initial costs involved. The supplier will install new energy-efficient equipment which will produce energy savings. Although the savings will still be shared, the cost for aaS is lower than that of ESCO. Therefore, the client will receive a larger portion of the energy savings.

How long will it take to see returns?

Immediately after new equipment is installed, you will see positive cash flow. The graph below shows the cash flow profile before, during, and after the service contract.  

as a Service Model - Lower service fee provides higher immediate returns

Pros

aaS Keeps It Simple: As with ESCOs, energy-efficient solutions are accessed without worrying about equipment ownership or maintenance. They are outsourced to a 3rd party.

It Can Grow With You: aaS models often allow easy scalability, enabling clients to adjust their service level as their needs change.

Keep Your Cash: The aaS model conserves cash. Nothing is paid upfront, and the monthly fee is paid via the generated savings.

Cons

The Risk Is With The Supplier: You are relying on the performance of the new equipment. This could lead to disruptions if the provider encounters problems. Being cautious when choosing partners.

Long-Term Costs: While upfront costs might be low, the cumulative costs of long-term subscriptions could potentially outweigh purchasing. But if savings are provided, and cash is conserved, many will dismiss this concern.

Solution Fit: aaS providers who specialise in a category of products and technologies may not offer the best-fit solution for you.  Engage providers who are experts in solving your specific needs.

Perspective - How does this work for Lighting?

LED lighting is one of the industries that has started using the aaS model. In Singapore, Lighting as a Service (LaaS) is available from energy services companies, lighting manufacturers, and at least one LaaS specialist.

Each company offers a different version of LaaS with varying commercial terms. They also offer differing grades of light fittings. Some offer commercial-grade lighting, and others offer investment-grade lighting.

Using LaaS is a great way to outsource your lighting. It will reduce your overhead in energy bills and maintenance costs.

Low Capital Options

One of the drawbacks of zero-capex models is that the total contract value is more than the cost of an outright purchase. After all, LaaS includes maintenance and the use of someone else's capital.

Companies who still want to reduce their upfront costs but would like to minimise the premium paid may be interested in these next two options.

#4 - Sustainability-linked financing -  Loans & Bonds

The most common form of the product is Sustainably Linked Loan (SLL). These are commonly funded through the issuance of green bonds.

How does it work?

A financial institution will offer the green bonds to its customers to invest in. The money raised from the purchases will be used to fund loans. The loans can only be taken out for carbon-cutting projects or by companies clearly defining and meeting their environmental targets. Thus incentivising positive contributions to our environment.

What is the benefit of “Green” Loans?

To encourage the use of these loans, the interest rate is lower than traditional loans. We all want to do good, but without incentives, these loans may not exist.

Green financing in Singapore

In 2021, Singapore launched the Singapore Green Plan 2030 a whole-nation movement to advance the national agenda on sustainable development. Capital investment is required to meet the targets set out in the Green Plan, and as such, there is a need for financing.

The Singaporean government announced in Budget 2022 that the public sector would get the ball rolling by issuing up to S$35 billion of green bonds by 2030. This will include bonds issued by the Government as well as Statutory Boards (NEA, PUB, and HDB).

These bonds can be purchased by institutions and consumers, and the proceeds would then be used to fund projects in the following 8 categories.

  1. Renewable Energy
  2. Energy Efficiency
  3. Green Buildings
  4. Clean Transportation
  5. Sustainable Water and Wastewater Management
  6. Pollution Prevention, Control, and Circular Economy
  7. Climate Change Adaptation
  8. Biodiversity Conservation and Sustainable Management of Natural Resources and Land Use

How does this work for my company?

Singaporean banks offer sustainable financing. UOB, DBS, and OCBC all have specific products. For example, UOB has targeted programs depending on your projects.

UOB Sustainable finance options - (source: UOB)

Your company can approach any Singaporean bank to check the availability of their offerings.

These banks may also have ties to ESCOs and other partners to assist with your energy efficiency projects. But as mentioned above you will be required to show that the loan is being used to fund a specific project, along with project reporting to show energy savings

When Will I See Returns - Cash Flow Profile?

You will see your returns immediately as you will still be paying for your upgrades upfront, and the savings will far outweigh the cost of the loan.

Pros

Incentivises Sustainability: Typically, the financing terms are linked to the project's environmental performance, encouraging eco-friendly projects.

Lower Rates: Projects aligned with sustainable goals might qualify for lower interest rates or better financing terms.

It will make you look good: Businesses prioritising sustainability can enhance their reputation and appeal to environmentally conscious consumers and investors.

Cons

Complexity: Determining and verifying the environmental impact can be complex, leading to potential disputes. This is how a good partner can ease the process.

Limited Availability: Sustainable linked financing might not be widely available from all financial institutions.

Uncertain Outcomes: There is always a risk that the project’s impact might not align with your projections, which may affect the financial terms. Again, check your partner's credentials to be sure you know what you are getting into.

Perspective - How does this work for Lighting?

Upgrading your LED lighting to commercial-grade or investment-grade light fittings will reduce energy consumption and carbon footprint.  This type of project will qualify for many of these loans.

LED lighting upgrades are low-hanging fruit for energy bill savings and you can reap the rewards immediately, making funds available for other areas of your business.

#5 - Government Grants

The final option is taking advantage of financing provided by Singaporean Statutory Boards NEA and PUB.

Through an application process, obtaining “free” money from the government to undertake energy-efficiency upgrades is possible.  

It is in the government's best interest to encourage these upgrades as it helps them meet the targets set out in The Green Plan.

Singapore National Environment Agency (NEA) Grants

The NEA currently has 4 available funds. Great news for those looking to lower capital requirements.

  1. 3R Fund - Read More
  2. Call for Ideas Fund - Read More
  3. Energy Efficiency Fund - Read More
  4. Research Innovation and Enterprise (RIE) Funding Initiatives - Read More

Energy Efficiency Fund (E2F)

As you might have guessed, the E2F fund specifically targets energy efficiency projects.

What are the criteria?

Your company:

  • generates less than S$500M in revenue
  • is a Singapore-registered owner or operator of an industrial facility
  • has not commenced the project (i.e. the company has not signed contract(s) with suppliers).

What can you get?

  • Up to 50% for carrying out detailed energy audits
  • Up to 50% to conduct design workshops to improve efficiency for new facilities or major expansions
  • Up to 70% to invest in energy-efficient equipment or technologies
  • Up to 50% to install energy management information systems to monitor energy consumption.

The application is typically completed in 1 to 2 months, and funds are dispersed when your supplier invoices you.

Singapore Public Utility Board (PUB) Grants

As an aside, the PUB also has grants available. Albeit not specifically energy efficiency, lowering your water consumption will inherently lower your carbon footprint.

  • PUB Water Efficiency Fund (WEF) - Read More
  • The Industrial Water Solutions Project Unit (IWSPU) - Read More

When Will I See Returns - Cash Flow Profile?

You will see your returns immediately, as you will still pay for your upgrades upfront. There is no monthly service fee to account for.

Using Government Grants - With minimised upfront costs immediate returns are optimised

Pros

Money helps: Grants provide cash, reducing your financial burden.

Stimulate Innovation: As mentioned above, people will put off projects because of a lack of capital. Therefore, government grants often encourage developing new technologies and approaches in the energy sector.

It’s good to talk about: Securing a government grant can enhance a project's credibility and positive public perception. It can be used as a great marketing piece for your company.  

Cons

Competitive:  Free money is attractive, so grant applications can be highly competitive, with no guarantee of approval.

You will have to fill in forms: The application process can be time-consuming, and you may need to submit lots of documentation.

You have to have your ducks in a row: Meeting grant requirements and reporting standards can be demanding, adding administrative overhead.

Perspective - How does this work for Lighting?

Upgrading your lighting to investment-grade light fittings will reduce your energy usage. Therefore, LED lighting upgrades are pre-approved for 70% coverage, resulting in extraordinary ROI.

Funding Sorted!

These 5 methods of funding your energy-efficiency projects remove  "Lack of Capital" as a roadblock.

Centropi can help you navigate funding and how to decide which is the right method for your business, so please get in touch with Ivan.

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