When it comes to implementing clean energy solutions, businesses are most attracted to three potential benefits: cost savings, resiliency, and sustainability.
“Usually, a mix of those three is the catalyst for customers looking into this and trying to find an alternative generation source,” said Brian DePonte, Senior Vice President of Clean Energy for Key Equipment Finance, in a recent podcast interview with the Monitor.
During the discussion with Rita Garwood, Monitor Editor in Chief, DePonte described:
- Kinds of clean energy benefits made possible by financing
- Different types of clean energy solutions
- Types of financing that support clean energy programs
“For anybody who's been considering getting into the energy market,” he said, “it's a great time to get involved.”
Three main motivations for implementing clean energy solutions
1. Cost savings
Cost savings is, not surprisingly, a key benefit attracting businesses to consider financing clean energy solutions. Customers can look at cost savings from two different vantage points: buying power at a lower cost through a renewable Power Purchase Agreement and/or insulating their operation from further cost increases by investing directly in their own on-site generation assets, DePonte said.
“If you’re looking at your current utility bill, and you have peak charges and other costs that you have no control over, there are opportunities to add on-site generation, perhaps with some storage. You can peak shave with that storage, which means you save the excess power that you generated in a battery on site,” DePonte said. “Then, you have controls that will manage the disbursement of that power to coincide with when the utility is charging you a higher dollar amount at peak times during the day.”
2. Resiliency for uncontrolled factors
A business may find itself in a situation of controlled power outages due to fires or extreme weather-related circumstances. If a business has on-site power generation, it can maintain production schedules by using its own power.
3. Sustainability to reduce carbon footprint
Many businesses are trying to implement environmental, social and corporate governance practices, and incorporating sustainable operations is one way to achieve those goals.
Kinds of energy solutions
Energy solutions that are readily financed include solar, wind, fuel cells and combined heat and power, DePonte said. Lenders may also have an appetite for these types of distributed generation devices.
"There's a lot of runway here to enter the market and get into some of these projects. The projects are replicable, scalable and sustainable. By forming relationships with developers and with clients who have multiple locations, these clean energy projects may result in long-lived assets for the business."
Two main financing structures
Businesses can utilize two primary energy financing structures: partnership flip and sale leaseback. Both are relatively simple concepts, DePonte said, with lending mostly driven by monetizing tax benefits.
There are several different tax benefits available, but primarily, the investment tax credit for energy and depreciation are most common.
- Partnership flip - In a partnership flip, the developer finds a tax equity partner (an entity that needs or wants the associated tax credits and who can also monetize depreciation and other tax benefits), fills in the capital stack with debt (which may also come from the tax equity partner), and then usually, the developer rounds out the full cost of the project with some equity of their own (“sponsor equity”). The total of all three elements needs to be enough to cover the cost of constructing the project.
“At the beginning of that, 99% of the benefits go to the tax equity partner until they have achieved their target rate of return, and then that ownership structure flips to where the tax equity partner only has around a 5% interest,” he said, “and/or the developer can buy them out.”
- Sale leaseback - A sale leaseback is a single investor lease, where the lender provides most (if not all) of the funds necessary for the project, including the tax equity and the debt. “That same lender will also take some form of a true residual,” DePonte said. “They take the form of a fair market value lease.”
Usually there’s an early buyout offer after 61 months, and when all of the tax credits have been vested. “It's a fairly agile structure relative to a partnership flip,” DePonte said. “But both are used in the industry and are very common forms of documentation.”