Basics of Energy Project Financing 143The solution to this problem is known as energy savings perfor-
mance contracting (ESPC). In essence, the government (or any other
organization) can contract with an ESCO for energy efficiency projects
throughout its facilities, but it will be the ESCO that will have to incur
the cost of implementing the energy-savings measures. In exchange for
this, both the ESCO and the government will derive the benefits from
the savings generated by the more efficient equipment. For example, for
every $10,000 saved, the ESCO will get paid $8,000 and the government
keeps the other $2,000. This is a win-win situation, since the ESCO will
be very motivated to keep the equipment in peak operating condition
in order to generate the greatest amount of revenue over time. Another
benefit of this methodology is that the government or your organization
will consider the ESCO payments an operating expense rather than a
debt obligation. Your chief financial officer will appreciate that!
With ESPC, the ESCO, not the customer, has to find the financing.
For small to mid-size energy projects, the ESCO may choose to use com-
mercial banks or leasing firms that will lend money based on the ESCO’s
creditworthiness. The federal projects mentioned above are so large (in
the tens and hundreds of millions of dollars) that few, if any, ESCOs will
qualify for traditional bank loans.
Bankers and specialized investment companies are increasingly be-
coming involved in ESPC. They are offering an innovative loan program
known as full-recourse project financing, which is shown in Figure 10-2.
They will review the ESCO’s financial statements, but they will also re-
view the customer’s financial statements and the project specifics prior
to making a lending decision. The term “full-recourse” is derived from
the right which the lender will have to take back any asset of the bor-
rower should the loan not be paid on schedule.
As some lenders become more comfortable with energy projects,
they may be willing to structure what is called “non-recourse project fi-
nancing.” In this case, the loan is made to a single-purpose entity (SPE),
which then owns the equipment of the project and contracts with the
ESCO to perform the energy services. Figure 10-3 will show how non-
recourse project financing is different than a full recourse arrangement.
If the project fails to perform as expected, the lender only has recourse
to the project equipment in the SPE. The lender cannot reach the assets
of either the customer or the ESCO. The single-purpose entity concept is
also used in the asset sale financing programs.