The Benefit in the Delay of Energy Efficiency Projects

Imagine that you are a local business owner looking for ways to save on your electricity bill. Your local IOU has a no-cost energy audit program. The energy auditor comes out take a look around hands you his final audit report. As soon as an energy auditor hands you a report saying you can save $1,000 per month, but you put off the project for a few months. Every month that passes by before that project is completed is $1,000 wasted.  Your fictitious business is like a lot of other out there where projects don't happen instantaneously, and may take months before approval and financing are secured.  This blog posting is meant to tell you about cases in which you should wait for better financing.

In one real example, a municipality wanted to install both LED lighting and several solar arrays on their buildings. Overall, the project cost was slightly less than $2 million and financed by the project designer at a low 3.6 percent. Below are the actual anticipated expenses and revenues from the project.

3.6% Financing over 20 years

This project is expected to save the City a total of $2,784,127 over the course of its 25-year expected life, which is pretty good! There’s some negative cash flow for the first 5 years, but that’s being negated by consistent positive cash flow for the next 20 years.

But...is there a way to get even more savings? Oddly enough, there is. The California Energy Commission (CEC) has a loan program for municipalities that provides funding at 1% interest, but the loan has to be repaid within 17 years. While shorter repayment terms will likely increase annual payments, would the interest rate compensate for that? Let’s take a closer look…

1% Financing over 17 years, compounded semi-annually

Wow! Not only do we save about $600,000 overall, We’ve saved about $600,000 just by lowering the interest rate, even though we’re paying it off 3 years sooner! We also see a much smaller hit to the cash flow. But let’s toss in a real scenario problem into the mix—the CEC program is currently out of funds. The program is a revolving loan fund, and is perpetually funded through payments and interest. It’s expected to be re-funded next year. So, let’s push the CEC project back one year, and let’s also factor in inflation too, which we default to three percent.

1% Financing over 17 years, compounded semi-annually, delayed by 1 year

As we’ve pushed back the project by one year, we’ve removed the savings associated with Year 1. It’s still a 17-year project, and due to inflation the cost has increased by about $60,000, but we’re still saving about $367,000 by waiting one year for better financing. We also experience a smaller cash flow hit.

What does this mean? There are two choices when it comes to doing this project:

1. Do solar now.
2. Do solar one year from now, and collect an additional $367,000 over the same 25-year span.

Which would you do?