Leveraging Financial Offsets and Programs for Energy Efficiency Projects to Reduce Operating Expenses

Energy Efficiency Projects Overview

When identifying energy efficiency projects for a particular client, we follow a process to achieve the same or better results using less energy. Every commercial or industrial building has unique heating and cooling systems, equipment, building controls, and processes. Our engineers and technical experts come to work every day knowing that they can help our clients save energy and money through energy-efficiency strategies and customized solutions.

Once we engage with clients, we discuss their challenges and goals. Most organizations have energy efficiency goals driven internally, externally, or both. Once the challenges and goals are understood and we identify a target project or projects, we can start developing a scope of work. The scope of work often requires focused study to identify where the efficiency opportunities lie. Sometimes, our team needs to develop a customized study, while at other times, we can utilize a pre-existing process or template. For example, if the scope involves conducting an ASHRAE Energy Audit, we can tailor the study to the level of audit required. If we are doing a compressed air leak survey in a plant, we use specialized equipment and a specific process to detect the leaks. If we are doing retro-commissioning, we have developed a streamlined approach with precise calculations.

When the scope of work is complete and we have a consensus to move forward, we draft a proposal. The proposal typically includes the project goals, the scope of work, the process or type of study or survey used, and the job cost. Of course, the primary goal of any energy efficiency project is to reduce energy use and associated operating expenses.

Upon the project’s approval, our team starts the process outlined in the proposal. One of the deliverables usually involves a detailed report outlining the recommended energy efficiency measures, including the return on investment.

One important consideration when working on energy efficiency projects is project financing. Many programs are available to help offset the cost of energy efficiency projects depending on the type and use of the facility or facilities, the location, the scope of the project, the timing, the existing financial structure, the profit/non-profit status, and other variables. Several of the energy-efficiency financial offset and financing programs we have helped our clients leverage are listed below. A complete listing of the available programs by geographic area can be found here: https://www.dsireusa.org/

Funding Sources and Programs

• Utility Program Incentives
• C-PACE
• Tax Incentives (179D)
• Grants
• Efficiency-As-A-Service

Next let’s take a closer look at each category listed above to better understand where they may be applicable and what sort of financial assistance they can provide.

Utility Programs

Utility programs offer financial incentives to commercial and industrial facilities to encourage them to invest in energy-saving upgrades to their equipment and buildings. Depending on the utility, these programs offer rebates on the cost of installing energy-efficient lighting, HVAC systems, motors, controls, and other qualified measures, which can potentially reduce their overall energy consumption and lower utility bills. Standard utility incentives are based on estimated energy savings. Most utilities also  offer rebates for more complex energy-reducing solutions that typically require more engineering-intensive calculations, such as retro-commissioning. Larger projects that involve replacing old equipment with higher-efficiency equipment fall into this incentive category. Energy Sciences works with our clients to determine if there is a good fit for any of the available utility program rebates, and we can do the required engineering and complete the applications.

Commercial Property Assessed Clean Energy (C-PACE)

The C-PACE Program is a legislatively enabled, state-sponsored financing tool that allows building owners and developers to access capital for energy efficiency upgrades in existing buildings or for higher-performing, energy-efficient new construction projects. The acronym stands for Commercial Property Assessed Clean Energy. Most commercial property types are eligible for C-PACE funding. This type of funding offers low-cost, long-term financing for energy efficiency, water conservation, and renewable energy projects. The projects can be financed with no money down, and the loan is repaid through a special tax assessment. There are mandated requirements regarding the “capital Stack” that must be evaluated, and the property’s market value and other considerations will be part of the equation. One of the advantages of C-PACE funding for a building owner or developer is that the PACE loan obligation transfers with the building if it is sold since it is a tax assessment. Our team can work with our clients and the local C-PACE Administrator to help navigate the program.

Tax Incentives- Internal Revenue Code 179D

The best information on the Tax Incentives-Internal Revenue Code 179D can be found here: https://www.energy.gov/eere/buildings/179d-energy-efficient-commercial-buildings-tax-deduction

As explained by the DOE on the website cited above, “Section 179D of the Internal Revenue Code (hereafter referred to as 179D) provides federal tax deductions for placing in service (installing) eligible energy efficient property in commercial buildings. 179D has been amended by the Inflation Reduction Act (Public Law. 117-169) for taxable years beginning after Dec. 31, 2022”.

“Energy efficient property, referred to as “property,” installed as part of the following building systems may be eligible for this deduction: interior lighting; heating, ventilating, and air conditioning (HVAC); hot water (service water heating); and/or building envelope. This applies to property placed in service as part of a new construction or a building upgrade project. Other energy-efficient processes or equipment loads are not eligible”.

“The tax deduction amount ($/ft²) increases with greater improvements in energy efficiency. The deduction amount also increases five-fold if the project meets certain prevailing wage and registered apprenticeship (PWA) requirements. For more information, please refer to the IRS rule on PWA requirements”.

“There are two ways to pursue a 179D tax deduction: the Traditional (Modeling) Path and the Alternative (Measurement) Path. To be eligible for a tax deduction through either pathway, at least 25% savings must be achieved (modeled total annual energy and power cost savings for the Traditional [Modeling] Pathway and measured site energy use intensity savings for the Alternative [Measurement] Pathway) for property installed in 2023 and after. The deduction amount increases as savings increase”.

For the taxable year 2025, if the property only meets the 179D energy criteria, the maximum deduction amount is $0.58–$1.16 per Square Foot. Savings increase by $0.02 for each percentage point of energy savings above 25% up to a maximum of $1.16.  If the property meets all 179D criteria (energy, prevailing wage, and apprenticeship, the deduction amount ranges from $2.90-$5.81 per Square Foot. Savings increase by $0.12 for each percentage point of energy savings above 25% up to a maximum of $5.81.

Energy efficiency projects eligible under 179D are interior lighting, HVAC, Hot water (service water heating), and building envelope. The building owner or designer can apply for the 179D deduction.

This is a very specialized field, and we work with a few tax firms that have the expertise to pursue the 179D IRC tax deduction. For more information, visit the IRS website directly at https://www.irs.gov/credits-deductions/energy-efficient-commercial-buildings-deduction.

Grants

One of the many ways Energy Sciences can help facilitate energy-efficiency projects is through Federal and State grants. We continually review multiple sources to identify strategies for offsetting the costs of implementing energy efficiency measures. This remains a moving target, and we are closely monitoring opportunities. For example, we have helped a few communities obtain CEM Grants through EGLE, the Michigan Department of Environment, Great Lakes, and Energy (https://www.michigan.gov/egle).

Efficiency-As-A-Service (EAAS)

This option involves a third-party contractor providing 100 percent of the capital expense for an energy efficiency project, handling the purchase, installation, and long-term maintenance of all systems.  The building owner or customer will be responsible for repaying this project through shared energy savings for the duration of the agreement.

For example, a comprehensive retrofit of a facility might require new lighting, HVAC system, controls, and solar panels. This type of project would result in significant energy savings and sustainability benefits for the customer. However, this large of a project would also require a substantial capital outlay.  If the savings calculations indicate that this project would result in a 30% reduction of their annual energy costs, then an Efficiency-As-A-Service agreement would establish repayment terms equal to 30% of the annual energy costs for a stipulated period. EAAS provides all new equipment to the customer without using a single dollar of capital budget and carrying no debt on its balance sheet.  Once the duration of the EAAS agreement is fulfilled, the customer owns the equipment and reaps 100% of future energy savings.

Examples of Energy Efficiency Projects and Financial Offsets / Programs Leveraged

Below is a table listing some examples of the energy efficiency projects we work on and the potential financing offsets or programs that may apply to those projects, for your reference. This list is representative of possibilities. Please note that each case is unique and may not be suitable for a particular program.

As outlined above, numerous approaches exist to establish energy efficiency goals and develop a strategy to prioritize energy efficiency measures to help a building owner or stakeholder reach those goals. Our team at Energy Sciences has been working with clients in virtually every vertical market segment since 2008 to define their energy efficiency and sustainability goals, reduce their operating expenses, and find an optimal path to reach them. We’ve found that the best possible approach includes implementing the low-cost, no-cost measures first to free up capital and resources, then leveraging available financing offsets and programs to optimize operational cost savings.

Article co-authored by: Diana Nash, Customer Engagement Manager & Matt Huffman, Senior Outreach Professional