By Alissa Burger
Investment in energy efficiency saves money, enhances productivity and competitiveness, and is highly cost-effective. Yet energy efficiency is often underutilized by the small commercial sector. A National Small Business Association (NSBA) survey found that 52 percent of small commercial businesses see cash flow as the primary barrier to investing in energy efficiency.
Even if the investment saves money over time, cash flow is a major barrier to taking action. One of the main barriers for small commercial customers is the access to capital necessary to cover the upfront cost of the efficiency measures. Electric distribution companies (EDCs) that break out small commercial savings provide evidence that this customer segment can be difficult to reach – and yet successful outreach and participation can mean big savings for all involved.
There are currently three key programs to increase investments in energy efficiency that are available to the small commercial class – energy savings performance contracting (ESPC), demand response, and on-bill financing. However, every business is different with varying needs, and given these varying approaches, it important to note that some are better fit than others.
Energy Savings Performance Contracts
Energy savings performance contracting is a financing mechanism that supports energy efficiency upgrades through avoided energy costs. Small commercial entities with short-term leases may be able to financially benefit from engaging in smaller scale energy conservation measures. However, smaller scale ESPC projects typically do not attract large and experienced ESCO companies or lenders. Establishing a mechanism to bundle several small scale projects into a larger offering could attract the larger ESCO companies and facilitate financing. In addition, market development to promote smaller ESCO companies and niche lenders could be developed to service the small commercial market. In absence of these activities, ESPC financing may not be a good fit for the small commercial market.
Demand response programs allow the end users of electricity, such as small commercial entities, to get paid to reduce their electricity usage. For example, small commercial entities could get paid for turning up the temperature setting on their air commercial on hot days, shutting down high-energy use production equipment, or turning off lights. Demand response is a conservation program, not an energy efficiency program. Therefore, small commercial could adjust their behaviors in order to earn payments through participation in demand response programs and these payments could be used to finance energy efficiency upgrades. While potentially financially lucrative, this model does not help address the cash flow and upfront capital barriers identified to energy efficiency investment for the small commercial class.
On-bill financing is a mechanism that allows a customer to repay the cost of energy efficiency improvements on their utility bill. On-bill financing has been in existence for several decades, beginning with small pilot programs in the early 1990s. Increasingly, on-bill financing has become more ubiquitous across the U.S. with over 22 programs currently in existence. On-bill financing differs slightly from that of on-bill repayment. On-bill repayment is when the utility bill is used as the vehicle for the loan repayment but the financing for the loan comes from a party other than the utility.
On-bill can compliment a state’s energy efficiency resource standard (EERS) by providing the missing capital and help to incent more costly, whole building retrofits that rebates alone cannot address. By optimizing the available financing by way of upfront capitol through on-bill, businesses are able to afford deeper energy conservation measures, while benefiting from ease of repayment on their utility bill. On-bill repayment can be the mechanism that “connects the dots” between the more fragmented financing options currently in existence.
An on-bill repayment program will help lessen the following barriers that have kept the small commercial class from consistently investing in energy efficiency such ease of transaction, access to upfront capital, and addressing split-incentives.
On-bill repayment programs vary widely with regard to program components, i.e. eligible energy efficiency measures, customer eligibility, financing terms, and loan obligation (customer or meter). This variability illustrates how on-bill is “uniquely positioned” to accommodate existing regulatory structures and market conditions across different states.
While there can be notable costs involved in laying the groundwork for a program, like updating a utility’s billing system, the payoff over the longer term should not be underestimated. The on-bill program is not only self-sustaining as a loan program, but the convenience and scalability of on-bill has the potential to spur additional private investment and foster additional innovative practices for financing a suite of energy conservation measures and capital improvements in this customer class and others.