Property owners frequently tell energy efficiency project developers that their property has not budgeted for the proposed project or that the project did not get approved for funding. To avoid this pitfall, developers should consider a strategy to address the “capital budgeting process”.
Before suggesting a strategy, a few words on the capital budget process. Business enterprises typically allocate capital for projects each year through an evaluation process that ranks and selects the most worthwhile opportunities. Common criteria include:
1. Will the project enhance the firm’s core business?
2. What are the risks?
3. What are the economic returns?
These are good criteria, and one might think that an energy efficiency project would rank well, but that is often not the case. The reason for this is that while most businesses want to be “green” and reduce operating costs, neither of these goals enhances the core business. In addition, performing a one-time installation that may or may not achieve savings has significant risk, and while energy projects may generate good returns, business owners may look for premium returns (30-50%) for non-core projects.
So what is a good strategy to avoid the “Capital Budget Trap”? Make this case for using third party financing and avoid the capital budget process:
1. Energy costs are a variable operating expense. Although this is true, many still view energy as a fixed cost — the challenge for project developers becomes one of shifting this common paradigm.
2. The property owner is currently buying energy they don’t need. Further to point #1, if energy costs are variable, then the potential for savings exists. Until a measure is implemented, the business is overpaying the utility.
3. By paying for the measure(s) with third party financing, the project will have eliminate wasted energy immediately and payments can be made from the reduced operating expenses.
Why delay the installation?
Treat the energy project as an operating expense and pay for it with operating savings, rather than waiting, evaluating it as a capital expenditure and competing for scarce capital funding.
Do you have thoughts, opinions, or questions about this article? Interested in financing a project of your own or want help avoiding the capital budget trap? Get in touch with HBC Energy Capital