Energy Financing De-mystified
By Cameron Millard, Energy Programs Director.
When I mention financing energy efficiency to my clients I’m often met with a critical reaction. This makes sense and borrowing money should always involve very thoughtful consideration. However, unlike financing a new car, which loses value over time, energy efficiency or renewable energy projects can actually increase in value over the years. If done correctly with the help of building improvement professionals, energy improvements can save a homeowner a great deal of money on their utilities. As utility costs go up over time, the value in savings also increases. For example, if the average cost of a therm of natural gas in Colorado is $.90 cents today, every therm saved by efficiency improvements will save $.90. If that amount increases to $1.10, then your energy improvement increases in value by an additional 20%. Unlike consumer goods that are typically financed, an energy loan is more like a long-term investment.
Some projects require extensive, and expensive, work putting efficiency upgrades out of most pay-as-you-go budgets.
Another great tool that helps to understand the value of efficiency improvements is the use of highly sophisticated energy modeling software. Our organization uses one of the best tools around in order to predict energy savings for our clients. While savings can vary because of human factors (we can’t predict how many times your kids will open the refrigerator, for example), the predictive capability of energy modeling software is astounding. One feature of the software we use is a bit of analysis called the MIRR, or Modified Internal Rate of Return. This number is similar to the interest rate in a savings account at a bank, but rather than interest being generated energy improvements generate utility bill savings. By comparing the MIRR to the interest rate on the loan, we can determine if the investment makes sense.
Energy modeling helps prioritize improvements as well as estimate a financial return-on-investment.
As an example, take a recent energy audit in Leadville which predicted an 8% MIRR on a $8,500 energy improvement package. The annual savings will be $967/year, or a 36% savings on energy costs (which is the equivalent of planting 128 trees or removing 1 car from the roads per year). The total cost of financing this job at 3.75% interest over ten years is $1,700 in interest. Yet the energy savings gained over ten years will be well over $9,000. It is pretty clear that financing this project will make the homeowner quite a bit wealthier by saving them so much money. This assumes that energy costs will stay the same, which they very probably won’t.
Sometimes you’ve got to take it down to the bones.
In conclusion, financing your energy project is smart financial sense. In most cases, the cost savings can far outweigh the interest amount on the loan. Remember, it is critical to have the improvements modeled through software and then installed by qualified professionals. Not only will your bank account thank you, but the environment will be better off, and you probably won’t notice those pesky drafts in the winter anymore.
Please see our financing page for more information on how to get started saving money.