Energy Project Financing : Resources and Strategies for Success

10 Energy Project Financing: Resources and Strategies for Success

Unlike the other arrangements, the delivery company’s fee is a less

expensive substitute for PizzaCo’s in-house delivery expenses. With

the other arrangements, PizzaCo had to pay a specific financing cost

(loan, bond or lease payments, or dividends) associated with the truck,

whether or not the truck actually saved money. In addition, PizzaCo

would have to spend time maintaining the truck, which would detract

from its core focus—making pizzas. With a performance contract, the

delivery company is paid from the operational savings it generates.

Because the savings are greater than the fee, there is a net savings.

Often, the contractor guarantees the savings.

Supplementary note: Combinations of the basic finance arrangements

are possible. For example, a guaranteed arrangement can be structured within

a performance contract. Also, performance contracts are often designed so

that the facility owner (PizzaCo) would own the asset at the end of the

contract.

FINANCIAL ARRANGEMENTS:

DETAILS AND TERMINOLOGY

To explain the basic financial arrangements in more detail, each

one is applied to an energy management-related case study. To under-

stand the economics behind each arrangement, some finance terminol-

ogy is presented below.

Finance Terminology

Equipment can be purchased with cash on-hand (officially labeled

“retained earnings”), a loan, a bond, a capital lease, or by selling stock.

Alternatively, equipment can be utilized with a true lease or with a

performance contract.

Note that with performance contracting, the building owner is not

paying for the equipment itself but the benefits provided by the equip-

ment. In the Simple Example, the benefit was the pizza delivery. PizzaCo was

not concerned with what type of truck was used.

The decision to purchase or utilize equipment is partly dependent

on the company’s strategic focus. If a company wants to delegate some

or all of the responsibility of managing a project, it should use a true

lease, or a performance contact.^10 However, if the company wants to be