Should companies self-finance or borrow for a microgrid project? Sustainability is a worthy investment with numerous benefits, but businesses with carbon reduction commitments or clean energy initiatives have choices to make regarding how they finance these endeavors. Many companies manage to scale while avoiding unnecessary debt and paying from profits, while others take on calculated debts to grow strategically. But sustainability initiatives with higher upfront costs might need to be financed differently. CFOs, boards, and other key decision makers need to be aware of all the financing options in the microgrid industry before determining the best way to pay for an onsite energy system.
Options for Financing Onsite Energy
There are a few options to choose from when paying for an onsite energy system. Lenders often create variations of these, but the financing really boils down to:
- Pay for the project build yourself upfront using your company’s available cash
- Pay for the project build using a blend of equity and debt
- Pay for the project build using debt
- Layer in some grants and incentives
Cash Pay for Onsite Energy
Available cash on hand is an excellent – and often the easiest – way to pay for any capital improvement. We can’t argue the merits of using the asset portion of your balance sheet (cash) to pay for anything, but there are valid reasons to look into the other options below.
Fund Onsite Energy with Equity
Equity is expensive and often only relevant for larger corporations who have the ability to raise capital by diluting their existing shareholders. It can be complicated when they have to engage with investment bankers and the secondary market or private equity.
Borrow to Cover Onsite Energy Expenses
Some businesses are wary of debt. Currently, with rates at historic lows, it makes sense to investigate options using forms of debt. Factor in available incentives and tax credits, and lenders can build some attractive packages. Whether it’s a standard loan, leveraged lease, or back-levered term loan, onsite energy debt solutions can range from simple to complex. There is one solution that has gained in popularity due to its simplicity and not requiring any upfront money – Energy-as-a-Service via Power Purchase Agreements (PPA).
What is Energy-as-a-Service?
Energy-as-a-Service is an innovative business model that makes sense for many organizations. Energy-as-a-Service (EaaS) offers various energy-related services rather than just supplying electricity alone. Third party Energy Service Providers (ESPs) bundle asset installation, financing, and electricity allowing microgrid customers to avoid paying anything upfront.
In What Financial Metrics for Onsite Energy are Most Meaningful for CFO Buy-In?, we pointed out that with self-financing, onsite energy systems require significant CAPEX investment to cover costs associated with design, supply, construction and commissioning of the system. The Energy-as-a-Service PPA model alleviates this by converting the traditional upfront Capital Expenditure (CAPEX) installation/purchase charges to Operational Expenditures (OPEX) charges that may be spread out over the life of the onsite energy project. This enables companies to not pay anything upfront, while lowering their electricity cost, reducing their carbon footprint, and/or increasing their resiliency.
Adoption of the Energy-as-a-Service model has been widespread globally, with Australia, China, Finland, Ireland, Italy, Japan, Sweden, the UK and the US all enjoying the benefits and flexibility that EaaS has to offer. With advances in technology and prices coming down, companies are often able to avoid paying anything at the onset of the project and are immediately able to enjoy lower electricity costs that last the life of the EaaS contract. As part of the OPEX, these contracts are also considered off-balance sheet financing vehicles. Exclusion from balance sheet calculations is another win.
Grants and Incentives
Some states, including California, Connecticut, Maryland, Massachusetts, New Jersey and New York, have clean energy incentives. There may be state or federal grants for microgrid expenses. Tax incentives also exist if companies use certain technologies in their onsite energy system. Be sure to pursue any free funding through grants and incentives.
Our Recommendation for Onsite Energy Financing
There are too many variables for us to make a broad-sweeping recommendation for which microgrid financing your organization should choose. But how businesses obtain that financing is easier than ever with VECKTA. The VECKTA marketplace makes it easy to connect with a variety of financing options during any stage of designing, installing, and deploying an onsite energy system. Reach out to learn more.
Written By Erin Hunzeker