Sustainable Building Technical Manual - Etn-presco.net

Financing OptionsThere are many alternative forms of financing available to local governments, includingsome that provide positive cash flow from the outset. Traditional financing methodsinclude allocating local government funds for building systems, issuing bonds, ortaking out loans. Alternative financing can include third-party financing and leasepurchaseagreements.L O CAL OPTIONS.Self-FinancingSelf-financing of resource-efficient buildings is achieved through budget allowances fromoperating or capital funds. This option expends scarce financial resources, but also allowsthe local government to retain control of system operation and to receive all of the savings,which can be used to retire the debt on the project. For environmental measuressuch as energy efficiency, funds can be allocated to the capital budget so that expendituresare carried as an investment rather than an operating cost.Some local governments or municipal utilities have established revolving funds in whicha percentage of energy savings are reinvested for new efficiency projects. Thus, an initialinvestment essentially becomes an environmental endowment whereby energy savingsfrom one project fund the creation of another. This allows energy savings to growthrough continued building retrofits and purchasing of high-end energy efficiency systemsin new buildings.Direct BorrowingDirect borrowing allows for project funding without increasing the government’s capitalbudget. Local governments can borrow money from commercial banks, pension funds,insurance companies, or other financial institutions, and then use the savings from thefunded project to pay the financing costs. While the local government maintains controlof the project and receives all of the potential savings, it also assumes the entire risk forthe project.Bonds are similar to loans and can generally be offered at lower interest rate since theinterest on them is tax-free. Bonds are generally more complex to arrange than loanssince legal fees and processes can be extensive. General obligation bonds are a typicalmeans of issuing debt and usually require a referendum vote. Revenue bonds are issuedin direct anticipation of future savings from the financed project and are typicallyreserved for large projects, such as co-generation plants where the energy savings andsales can be projected with relative certainty.Third-Party FinancingUtilities, large energy equipment manufacturers, or other private businesses often undertakeperformance contracts with public or private entities as a means of financing energy-efficiencyretrofits. These third parties will finance and install an energy-savingsystem in return for a share of the energy cost savings for that site during the length ofthe contract. After the expiration of the contract, the local government owns a more efficientsystem and can allocate savings to other portions of its budget. The following table(Table 1) shows the varying financial methods available to local governments to workwith a third-party financier under a performance contract.