In a time when technology advances offer the ability to greatly improve operational efficiency, more companies are looking to new technologies to drive productivity and low-carbon growth. According to a recent survey, adoption of combined heat and power (CHP) systems and battery storage grew by 11 percent in 2019 compared to the previous year report. While the advantages of new technology are clear, financial and risk constraints are preventing these strategic efficiency projects from moving forward.
To better understand these financial barriers and how companies can overcome them, we spoke with Tanner Smith, a financing expert at Sparkfund.
Q: What do energy managers struggle with the most when it comes to business case approval for energy efficiency projects?
A: Most people think financial barriers are the biggest hurdle to get an efficiency project started. And that can be true, but for most of our customers, the bigger hurdles are with time and risk.
Click to tweet: “The financial problem really comes down to competing priorities for capital and balancing the opportunity costs”
The organizations we work with have ambitious goals for their energy efficiency projects, and they want to do them right and do them fast to achieve results quicker. They spend a lot of time and effort de-risking these projects, making sure they're getting a good deal or that it's the right decision from a technology standpoint for their facility. So for these organizations, the financial problem really comes down to competing priorities for capital and balancing the opportunity costs.
For example, say you only have $1 million to spend, and you spend it on chiller upgrades, you can’t invest in a new facility that will grow your business. But if you spend the $1 million on the new facility and forego the chiller upgrade, it could fail and you’ll lose business because your buildings are too hot.
Q: How can companies address the opportunity cost dilemma to achieve both business growth and efficiency savings?
A: This is exactly the situation that Sparkfund and Schneider Electric are working together to address. In the same way that companies like Netflix have helped people access movies, a subscription or energy-as-a-service model can help organizations access energy infrastructure for their commercial spaces without the upfront capital burden. So if you use our subscription model for chiller upgrades, you’re not purchasing the equipment, Sparkfund is, so you can keep your $1 million to buy that new building and simultaneously reap the rewards of that efficiency upgrade.
Click to tweet: “We prefer to use Total-Cost-of-Use, which includes the cost to acquire, operate and maintain assets”
But it’s not just about access to capital: the opportunity cost is about risk as well. By owning the technology for our customers, we can de-risk what customers care about the most: that their equipment is going to work as they expect it to. Through our partnership with Schneider Electric, we have the global technology and energy expertise to ensure the performance of those assets and guarantee outcomes such as lumens emitted, tonnage of cooling capacity or annual energy cost savings.
Q: What advice would you give to energy managers who are making the business case for new equipment?
A: Energy managers might want to start with the benefits of an efficiency project, but with a CFO, using hard numbers is often the best way to get your point across. Most people use traditional metrics like IRR and NPV, but they don’t always capture the true economic impact of an efficiency project. Even total cost of ownership overlooks key costs such as staffing your maintenance crew, repair parts, and other long-term expenses to operating equipment. We prefer to use Total-Cost-of-Use (TCU), which includes the cost to acquire, operate and maintain assets. TCU also accounts for balance sheet treatment, how much the new equipment will save the organization in energy bills starting on day one, and how that will continue over time. (Click to enlarge image at right)
For example, one of our customers is saving more than $345,000 per year with a subscription that covers lighting and HVAC, despite adding net new lighting outdoors. Their CFO is a huge supporter of the technology subscription because, as he told us, it’s “incredibly easy” to scale the solution across their portfolio so they can stay focused on their customers.
To learn more about innovative funding models for your efficiency project, download our toolkit
Contributed by Tanner Smith, Sr. Director of Partnerships at Sparkfund
Sparkfund offers commercial and industrial customers the smartest way to deal with their energy systems. With Sparkfund’s innovative subscription model, customers get the heating, cooling, lighting and resiliency they need to run their business for less than it costs them today. Sparkfund will maintain, repair and upgrade C&I customers’ energy assets, and manage the process, so they can focus on their core business. Learn more at www.sparkfund.com.