Off-Balance Sheet Financing for Industrial Energy Efficiency Projects

Traditionally, energy efficiency projects have been financed by energy service companies (ESCOs) under a shared savings arrangement known as performance contracting. Essentially, performance contracting packages engineering, procurement and construction management services with project finance to provide companies with an ability to implement energy efficiency projects on an off-balance sheet basis. For large industrials, who have ready access to engineering services, the real attractiveness of performance contracting is the off-balance sheet nature of the financing. However, as every energy manager has experienced, selling the next shared savings deal internally can be a difficult task at best. Financial types react coolly to transactions in which the effective interest rates can range from 15% 30%. The ideal product for industrials would be a pure financing arrangement, that is off-balance sheet, low cost and capable of being funded by banks and leasing companies. Specifically, a traditional asset-based lending product, called an off-balance sheet loan (OBL), can be adapted to the financing of energy efficiency projects. Structured properly, an OBL can provide industrials with the same off-balance sheet benefit as performance contracting, but at a greatly reduced cost. Typically, the interest rate on an OBL will approximate an industrial's incremental borrowing rate and is currently around 8.0% -10.0%