Comparison and Evaluation of Financing for Energy Performance Contracting Projects

Availability of financial resources is one of the key success factors for the implementation of Energy-Contracting¹ projects. (Pre-) Financing energy efficiency investments has become increasingly burdensome for ESCo’s as well as their customers, because they reach their credit lines, credit liabilities and fixed assets burden balance sheets and Basel II and international accounting guidelines like US GAP cast their shadows.

Consequently, innovative finance options like operate, finance lease or “pure” Forfeiting options have to be considered (and developed further!) and compared to classical finance instruments like credits. Also the question of who is best capable of providing financing – customer, ESCo or a finance institution (FI) as a third party has to be considered. ESCo’s are not necessarily the best source for finance themselves. But they can certainly help to arrange for financing.

The approach of this manual is to start from the perspective of ESCo’s and their customers (companies, real estate owners or public institutions), who wish to lend money for project financing (demand side). We introduce a comprehensive customer demand profile to describe the customers financing requirements and specific framework. The customer demand profile encompasses criteria such as

1. Direct financing cost
2. Legal aspects
3. Securities/collateral required
4. Taxation implications
5. Balance sheet & accounting implications
6. Business Management expenditures

On the financial supply side, we describe properties of different finance offers (credit financing, operate and finance leasing and forfeiting) with regard to the criteria introduced in the customer demand profile. The properties are also summarized in a comprehensive matrix in the appendix.

To conclude, we compare the above financing offers with the customer demand, discuss their advantages and disadvantages and give recommendations for the finance preparation. We consider factors such as financing cost and fees, tax aspects, balance sheet effects, credit lines, Maastricht criteria, applicability of subsidies as well as suitable project sizes.

As a result we advocate a comprehensive look at the sum of all business implications of any finance option. A sole look at direct financing cost as expressed in interest rates or fees will not deliver your optimal financing solution. The best finance package depends on the borrower’s background, subsidies as well as the specific project cash flow. And it requires the integration of bookkeeping and tax consultancy into the financing decision.

The proposed customer demand profile offers this comprehensive perspective and may serve as a checklist to be adapted to the specific situation of the customer. Likewise, the attached comparison and evaluation matrix of the different finance options allows taking a comprehensive look at the variety of implications, which can be individually adapted to compare concrete finance offers.

Finally we propose to take advantage of innovative financing options, which in return require knowledgeable (leasing) Finance Institutions. For future development, e.g. a “pure” Forfeiting finance option based on selling the future project cash flow to an FI would be a very desirable from the customer perspective. This kind of finance model would also help to overcome some of the current balance sheet problems and share project risks according to the project partner’s strength and capabilities.

If you have questions or remarks to this manual, your feed back is highly welcome. You can reach the authors at Grazer Energy Agency Ltd, attention to Jan Bleyl (bleyl@grazer-ea.at).