Financing Tools Include Energy Performance Contract, Energy Service Agreement

Financing an energy efficiency project with third-party contracts allows facility managers to choose the level of involvement they're most comfortable with. Besides an operating lease, third-party contracting generally also includes two other categories of agreements: the energy performance contract and an energy service agreement.

With an energy performance contract, the vendor takes a lot of the risk for performance, and guarantees energy savings. Performance contracts work best on large, often-several-million-dollar projects. The idea, however, is that there is no initial capital outlay, and owners pay for the contract and financing out of the savings from the efficiency projects.

In the case of an energy service agreement, this is an arrangement that, according to Kim, is a way to "minimize performance risk and O&M responsibility." It is essentially a full-service outsourcing arrangement, by which a third-party company owns and operates energy efficient equipment in a facility. According to Charles Goulding, president of Energy Tax Savers, an energy service agreement "enables energy efficiency to be treated as a service."

This type of contract resembles what had been previously known as a "shared savings" contract, a term Audin says has gone out of style. But the same idea applies. Owners pay for the contract only based on the actual energy saved, either as a fixed dollar amount per kWh saved or a floating amount based on a percentage of the utility bill. So, truly, "the owner and the provider have the same incentive to maximize savings," says Kim. Additionally, like an operating lease, but unlike a performance contract, an energy service agreement is no-debt financing, but Kim cautions that each organization has to determine how to account for the contract — whether as a service agreement, operating lease, or capital lease.

Energy service agreements are a type of financing that is really gaining market traction rapidly, says Kim. As well, several variations on the basic energy service agreement, some with their own brand names, are available. Some of these include the option to have the vendor actually pay utility bills for an organization, a total soup-to-nuts solution.

Status of 179D 'Tax Extender Package' for Energy Upgrades In early December 2014, Congress passed a "tax extender package" that extended from Dec. 31, 2013, to Dec. 31, 2014, the tax deductions for energy efficiency upgrades first spelled out in EPAct 2005. As well, facility managers can now obtain any missed tax incentives retroactively for any project completed between Jan. 1, 2006, and Dec. 31, 2014, without having to amend previous returns. "It's a very unusual tax revision," says Charles Goulding, president of Energy Tax Savers. "You're allowed to calculate anything you missed for the last nine years. And in nine years, almost every building has done something." The ability to claim deductions from past projects is significant because in the early days of the deduction, there was much uncertainty and confusion about how to apply for the deduction, so many organizations skipped it. Now, they can re-acquire that tax benefit for eligible HVAC, lighting, and exterior projects. But what does the future hold for this valuable tax deduction? Marky Moore, CEO of Capital Review Group, says she's hopeful the new Congress will revisit this deduction, and ideally make it permanent. Goulding agrees, suggesting that if the tax structure as a whole is overhauled, then the deduction might disappear. "But it looks less and less likely that major tax reform will happen, so I think (the 179D deduction) will be extended," he says. — Greg Zimmerman

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