Retrofit.LA / the Los Angeles Better Buildings Challenge is currently developing a more localized Financing Navigator and financing resources slated to launch in early 2024. Until then, we’ve compiled a list of curated resources to help meet your project goals.
Building performance upgrades can hedge operating costs and enhance property values, but for many organizations the upfront investment is a significant barrier. There are a range of incentives and rebates available to offset the upfront costs that generally come on the backend after the project is complete.
According to American Council for an Energy-Efficient Economy (ACEEE), the rate of retrofits needs to increase by 5x to meet our GHG reduction targets outlined in Los Angeles’ Green New Deal, which means we need to increase access to capital.
Retrofit.LA and the Los Angeles Better Buildings Challenge are partnering with Los Angeles Department of Water and Power and the Mayor’s Office to develop programs that leverage all components of the Green House Gas Reduction Fund.
Efficiency-as-a-service is a pay-for-performance, off-balance sheet financing solution that allows customers to implement energy and water efficiency projects with no upfront capital expenditure. The provider pays for project development, construction, and maintenance costs. Once a project is operational, the customer makes service payments that are based on actual energy savings or other equipment performance metrics, resulting in immediate reduced operating expenses. The energy services agreement (ESA) is the most common type of arrangement, but other models such as lumens-as-a-service and energy subscription agreements are also in use.
A lease is a simple financing structure that allows a customer to use energy efficiency, renewable energy, or other generation equipment without purchasing it outright. The two most common types are on-balance sheet capital leases and off-balance sheet operating leases. Solar leases are a unique structure available for solar energy projects, and public sector organizations can also take advantage of tax-exempt leases. At the end of the lease, the customer may have the option to purchase the equipment, return the equipment, or extend the contract, depending on the type of lease used. Lease financing is offered by many equipment manufacturers and vendors as well as third-party lessors. (Note that operating leases must be reported on balance sheet as of 2019-2020.)
Commercial property-assessed clean energy (CPACE) is a financing structure in which building owners borrow money for energy efficiency, renewable energy, or other projects and make repayments via an assessment on their property tax bill. The financing arrangement then remains with the property even if it is sold, facilitating long-term investments in building performance. CPACE may be funded by private investors or government programs, but it is only available in states with enabling legislation and active programs.
Under an Energy Savings Performance Contract (ESPC), an energy service company (ESCO) coordinates installation and maintenance of efficiency equipment in a customer’s facilities and is paid from the associated energy savings. The ESCO typically provides a savings guarantee. The improvements are usually owned by the customer and may be installed with little or no upfront cost if the ESPC is financed. ESPCs are suited for larger ($1 million+), more complex projects with high upfront costs, though they have sometimes been used for smaller projects. ESPCs are also called energy performance contracts (EPCs).
On-bill financing (OBF) and repayment (OBR) are financing options in which a utility or private lender supplies capital to a customer to fund energy efficiency, renewable energy, or other generation projects and is repaid through regular payments on an existing utility bill. The benefits of OBF/OBR include low-to-zero interest rates, simple contract structure, and streamlined repayment. However, OBF and OBR are only available in regions where utilities support on-bill programs.
Customers can borrow money directly from banks or other lenders to pay for energy efficiency, renewable energy, and other generation projects. The customer must then arrange the purchase, installation, and management of equipment by a third-party contractor or in-house staff. Loan financing is offered by many equipment manufacturers, vendors, and contractors as well as third-party banks and lenders. Loan terms and availability may be affected by the creditworthiness of the customer, limitations on debt that can be taken on the balance sheet, or current debts held by the customer.
Internal funding refers to the use of an organization’s existing financial resources to pay for energy efficiency, renewable energy, or other generation projects, rather than seeking external financing. This is often the most simple and direct method for funding projects, and it allows the organization to capture the full financial benefits of energy projects rather than paying a portion to a financing provider. Methods for internal funding include operating or capital budget expenditures, self-funded energy savings performance contracts (ESPCs), capital investment funds, revolving loan funds, and internal carbon pricing.
A Power Purchase Agreement (PPA) is an arrangement in which a third-party developer installs, owns, and operates an energy system on a customer’s property. The customer then purchases the system’s electric output for a predetermined period. A PPA allows the customer to receive stable and often low-cost electricity with no upfront cost, while also enabling the owner of the system to take advantage of tax credits and receive income from the sale of electricity. Though most commonly used for renewable energy systems, PPAs can also be applied to other energy technologies such as combined heat and power (CHP).
A green bond is a fixed income debt instrument in which an issuer (typically a corporation, government, or financial institution) borrows a large sum of money from investors for use in sustainability-focused projects. Green bonds work similarly to a traditional bond issuance, except the funds are slated for use in energy efficiency, renewable energy, or other projects that meet certain sustainability requirements, often formalized in a green bond “framework” developed by the issuer. Green bonds typically involve one or more third-party firms to underwrite, certify, and monitor the bond issuance.
The information provided here does not constitute professional tax advice or other professional financial guidance. It should not be used as the only source of information when making decisions regarding design, purchasing, investments or tax implications of energy or other building upgrades, or when executing other binding agreements.
This page will be updated periodically, as guidance on the implications of the Inflation Reduction Act is ongoing. In the event that there is conflict between information provided on this webpage and guidance or notices published by the IRS, information published by the IRS will always take precedence. Last updated Aug. 4, 2023