Energy Saving Projects and Grants
Published on Wednesday, 30 July 2014 14:14:31 Written by Marc
If you have implemented energy saving projects in your company or organization, chances are you probably managed to get some grants at some point in order to improve the payback of your project(s). Most consultants working in the field of energy saving will be quick to inform their clients of the available grants and the wonders they can do for a project. On the surface, it does look great because often the grants are the equivalent of free money, and very few people will argue with that.
However, if these grants are so great, why do many governments and utility companies, which give them out, seem to have a hard time finding people that want their grants? This would appear, on the surface, to be illogical, as people should be jumping over each other to try to become one of the first to receive this free money. Yet, in reality this is not what is happening. To find the multiple reasons for this, one needs to look at the entire process. Getting an energy-saving project financed is only one part of the process, even if, like many others, it is a crucial one. If we look at the process of finding and implementing energy-saving projects, we have to start with the company’s policies. The way a company’s upper management sees energy-saving projects is the driver here. If management is not sold on the concept of energy-saving projects, then any project presented to management will be an uphill battle. This means that each energy saving project will normally be put in competition with projects from other departments like operations, maintenance, sales, and others. In addition, considering that energy-saving projects are often not considered critical, or having a risk for the company if they are not completed (please see our previous blog: Energy Saving: The Consultant and the Client Point of View for additional information relating to this topic). Then, the chances of getting an energy saving project funded will be low, even if the project has a good payback. In this case, getting a grant will mean nothing for the company, especially if the grant only improves the payback a little (e.g. bringing a payback down from 3 years to 2 years). With or without the grant, the project will not be implemented anyways. Therefore, management must be convinced on the concept of energy-saving projects. Without this, no amount or grant is going to change the fact that management approval can (and often is) the major roadblock. Yet, few energy consultants seem to understand this and instead are left wondering why their clients do not want to do a great energy saving project that carries an ever-greater payback that is partially paid for with free money. Consultants need to understand that if there is no management buy-in, then there is no project. Once this is well understood and once there is a real will to do (and fund) energy saving projects, there must be a clear definition of what will constitute a good, approvable project and what will management pass up on. Without this clear definition, people pushing to get their projects approved are just shooting in the dark. This is something that many people who are trying to promote their energy-saving projects to upper management do not understand enough, mainly because this is often where financial terms come into play. Upper management will want to hear terms like payback, internal rate of return and net present value. To be able to present project for approval, most of these terms should not only be well understood, but people presenting the energy saving projects should also know what exactly would be approved. For example, let’s suppose an energy consultant finds potential energy savings in a building for a client and presents a report that the project will cost one million dollars ($1M) to complete, and will bring in savings of one hundred thousand dollars ($100,000) per year. Rapid calculations give a simple payback of 10 years (1 million divided by 100,000). If the company’s policies are to accept projects with paybacks of 10 years and better, one might think that this project will be approved. However, while calculating a simple payback this way is a quick way to give an idea of how long it will take the project’s savings to be equal to the cost of the project, it is not sufficient to give a picture because in this calculation we consider the cost of money to be zero. In real life, we know this is not the case, as funding always comes with a cost. For example, if the company’s financing cost of capital is 10%, or if management has a lower cost of financing but still requires the people who submit energy-saving projects to use a 10% financing cost (sometimes the financing cost percentage used is higher than the actual cost of financing to help account for project risk), then the project has an infinite payback and cannot possibly be approved. Let us see why. If the payback of the project is:
As we can see here, although the project generates $100,000 of savings each year, because the financing cost of the project is also $100,000 each year (10% interest of $1M), the project will never manage to pay itself back because the savings only cover the interest each year. In this case, the project cost itself never is paid off, hence the infinite payback. This is where grants might help tip the balance in favor of the project. However, if the grants are the only thing that make the project viable, unless the company’s upper management has a firm promise that the grant will be coming, it will be difficult to get things moving. Also, some grants are tied to actual savings, not to the cost of the project, so in order to get the grants you need to do the project; then prove the savings (to various levels); and then get the grants.
Even in the case where only the proof of project completion is required, the simple notion of having to wait and get the grants once the project is completed, which could be many months after the projects were initiated, can be enough to block some projects. Finance people hate to guess about how much money will come in the form of a grant, so anything that is not clear upfront is not well received.
In order to get a project approved, it is best if the project can stand on its own two feet in front of upper management (or whoever approves the project for funding) without the help of any grant. If grants come to help improve the payback afterwards then it only makes the project look better. However, relying solely on grants from the start is a dangerous game to play. Yet, many energy consultants will push projects that have little chance to be funded, sometimes for clients, which do not have the full buy-in of upper management. They hope that the grants will make all the difference in the world and open the door of approval; only to have their clients come back to them, informing them that they have no budget this year. Does this sound familiar? To make matters worse, some energy-saving companies (ESCOS) will actually ask their clients what is the maximum payback that they can be approved and then package a number of energy-saving measures into a project, which just happens to have almost the exact same payback as the maximum accepted, by the client. However, if they forget to include the project financing information from the start, that project might never see the light.
Instead of trying to push for large projects with payback that, when including all the estimated grants, closely mirror the maximum payback period allowed by the company’s policies, it is best to start by finding good project which carry payback well under the maximum period allowed. Then, adding potential grants to the project can only make the project look better. If the grants never materialize, the project will still be a good one, which will receive management approval. While the grants look like a great benefit in theory, sometimes navigating through the different organizations that provide them to understand what is offered and how to get the grants can be a challenge. To make matters worse, some grants are not permanent and are often offered on a first come first serve basis. This means that if you have a project for which you think you are eligible for a particular grant, you need to get your project approved in time (both internally and towards the grant issuing organization) in order to receive the grant. From my personal experience, this can be tricky and it can help to know a good consultant that can assist you in navigating these waters if you are serious about getting grants.
Most companies will welcome energy saving projects with paybacks between two and three years (although some limit the payback to one year). If you do your homework well, chances are you can find grants, which will reduce the payback to an even more favorable period and this, will only help getting the project approved. However, starting with a project that carries a long payback and hoping to have it approved by attaching one or more grants, might not be the best recipe to build credibility towards the project approvers (often-upper management and finance people).
It is often best to do the opposite. Start by getting projects with great payback approved without any grants, and then increase the size of the projects, and over time; you can establish a good credibility of doing energy-saving projects. Once credibility and management buy-in is well established it becomes easier (or relatively easier) to get longer payback projects approved.
Bottom line, grants are great because they are the equivalent of free money, but do not rely solely on them to help tip the balance and get your project approved. Find good projects, which stand on their own, and the grants will only make the projects look better.
|Cost of the energy saving project||=||$1,000,000||=||$ 1,000,000||=||Infinite|
|(Annual saving - Financing cost)||$100,000 - $100,000||0|
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