It's not surprising that CFOs are a little nervous about investing hundreds of thousands of unbudgeted dollars in projects with hard-to-believe savings estimates. Unfortunately, this industry is somewhat a victim of its success - the better the products, the harder the estimates are to believed.

Financing - The single largest roadblock for energy-saving projects

Dave Jaros | Noesis Energy

What was the impetus for the survey on energy projects?

Our charter here at Noesis is to help C&I energy professionals get more energy projects (both efficiency and distributed generation) underway and completed so as to reduce ongoing energy costs. This is driven by our experience and what we hear from energy pros - from internal energy managers to consultants and product/service providers. That is, that a surprisingly low number of projects that are proposed get funded and approved. It’s surprising because so many of the products and services focused on reducing energy costs have incredible ROIs and payback periods.

So, in order to make sure we are focused on the right things, we decided to survey our users to see how many energy projects they propose, what percent were getting approved and, for those that don’t get funded, understand why not.

We had been noticing a seemingly insatiable appetite for any information and advice with regard to third-party financing of energy projects. For example, we regularly get hundreds of people registering for our free financing webinars, and recently a project finance cheat-sheet that we made available for free on our website was downloaded more than 800 times in less than two weeks. So, we also wanted to understand the potential role of financing to help unlock these stalled or shelved energy projects.

What were the main findings?

I won’t go into all of the findings here since a more detailed summary can be found in the survey results available on our website, but the punch line was that it was true that most projects were not getting approved: 50% of consultants/auditors get less than one-quarter of their projects approved. Internal energy managers fare better, with 75% getting at least one in four projects approved.

So, why weren’t these projects getting approved? It turns out that, for financially viable energy projects (that is, those that exceed internal hurdle rates), the two main reasons are “not budgeted” and a “lack of certainty” of the estimated savings. In other words, what project managers are hearing is: “there’s no money and, even if there were, we’re not sure we trust the savings that you’ve forecast.”

What was really telling was when we peeled it back another layer. That is: if their proposals get rejected so often because of lack of budget, why don’t energy professionals introduce third-party financing options? The lack of budget should not come as a surprise because the reality is that often these projects are opportunistic and are rarely budgeted a year in advance. What we found out was that for the internal energy managers, most say they don’t offer third-party financing options because they fund things internally, but for the consultants and product/service providers, 68% said they didn’t know enough about financing options or didn’t have time to research it. So, more than half the time, projects are not getting approved because of lack of budget, but the folks making the proposals aren’t offering alternate financing solutions. This certainly helps to explain the thirst for information about project finance.

What lies behind these findings?

What we found out here is not earth-shattering news; it’s pretty obvious to people in the industry. We have energy professionals who specialize in identifying and evaluating energy savings opportunities. They are incredibly good at determining the most compelling energy conservation measures and doing the ‘energy math.’ However, they’re rarely trained in project finance and are often understandably uncomfortable talking with CFOs about various financing options. And, with less than one in four projects getting approved, they’re extremely busy finding and developing new business!

Are there other roadblocks that lie in the path of getting energy-efficiency projects funded?

This is a good question and the answer lies in looking at the other side of the equation – the lenders. To be sure, there are many banks and niche financing firms who have earmarked millions, if not billions, of dollars to finance energy projects, yet they often lack the deal flow. That is, they have the money, but don’t see enough project proposals. And, when they do see project proposals, they’re all unique. It’s not apples to oranges; it’s one apple to one orange to one banana. There’s no standardization on the proposal, the analysis, the measurement of the savings, etc. This is a big problem: not only linking those who are proposing the projects to the lenders, but standardizing the process – much like in the mortgage industry – so these applications can be reviewed efficiently and investment can happen much more quickly. The longer it takes to originate a deal, the more it costs, which manifests itself in higher costs of capital for the building owner.

What advice would you give to those just starting the process for a new project?

If you’re looking at finding financing for a new project, my advice is to not go it alone. For one, the financing environment is complex – from PACE to ESAs to leases; it’s confusing even for those who live and breathe it. Also, once you get the financing options, you may want someone at your side when you present it to the CFO or building owner. This is often the part that scares folks the most, and a third party can help you do it.

What is the average $ value for projects that are more likely to be successfully funded and carried out?

Well, the value of the project doesn’t really affect the project’s probability to get funded. What the dollar amount determines is what types of financing vehicles are available. For example, if you have a $10,000 lighting upgrade, a lease if pretty much your only option. If you’ve got a multi-million dollar project, there are other vehicles open to you, including ESAs and MESAs, both of which are shared savings agreements.

The other variable that impacts the ability to get a project funded is the credit-worthiness of the building owner. This is something that financing vehicles like PACE are trying to address where they look more at the project than the building owner to determine the viability of financing.

Are there certain types of projects that are more likely to be successful?

From a financing standpoint, pretty much any energy project can be successful. A lot depends on the project itself, not necessarily the type of project (e.g. lighting).

To maximize the probability of getting your project approved by the CFO or building owner, once you get the financing issue resolved – either by agreeing on internal funding or using a 3rd party lender – you need to address the issue of trust. It’s not surprising that CFOs are a little nervous about investing hundreds of thousands of unbudgeted dollars in projects with hard-to-believe savings estimates. Unfortunately, this industry is somewhat a victim of its success – the better the products, the harder the estimates are to believed. And it’s this that confounds so many – the returns are so good and the decisions are seemingly so obvious, why are so many CFOs and building owners not approving these projects? At Noesis, we believe that part of the answer lies in getting the decision makers to trust the estimates, which can really only be done by getting a third party to verify the analysis and savings forecasts. “Show me the CARFAX!” — isn’t that what we’re supposed to say when buying a car instead of trusting what the seller is telling us?

What is Noesis Energy's role in enabling this marketplace?

We offer a premium service called Noesis Pro Project Services (often called Pro Projects), which is a solution that performs "back office" and "front office" tasks for energy project proposals. Specifically, our project specialists work with you using our online tools and collaboration platform. We first compile/validate/prepare the energy and financial analysis using industry standards and protocols, and then package it up into an energy project appraisal, which presents the energy and business case that's easy for CFOs & other decision makers to read and understand.

We use the appraisal with our syndicate of financing lenders to identify third-party financing options – from leases to PACE to shared-savings agreements. Finally, after the project is completed, we deliver 12 months of online savings reports to monitor the project savings. We can also be on the phone to help you propose your energy project analysis and explain the financing options. In all, the services speed up the proposal process and improve your changes of success by delivering a standards-based, independently verified energy and financial analysis and options for third-party finance.

Again, we’re all about helping get more C&I energy projects done so building owners can realize more energy savings. If you think Noesis can help you, we’d like to hear from you.

 

DAVE JAROS - Vice President, Marketing, Noesis Energy

Dave has worked at several successful software companies, most recently leading worldwide marketing programs and demand generation for SolarWinds (SWI). Prior to that, Dave held marketing leadership positions at Blue Coat Systems and 724 Solutions. Dave has also worked as a management consultant in New York City and got his start as a software developer at Computer Sciences Corporation. Dave graduated from the University of California at Berkeley and received his MBA in Finance from the Wharton School at the University of Pennsylvania.


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