January 2002 

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Finding Money For Your Energy Efficiency Projects 

A Primer for Public Sector Energy, Facility, and Financial Managers 

From the U.S. Environmental Protection Agency’s ENERGY STAR® Program 

 

Are you having trouble getting energy efficiency projects approved and implemented? If so, this article 

from ENERGY STAR is for you. It describes how tax-exempt lease purchase agreements and performance 

contracts may offer you a practical solution when no money is available in the current budget for further 

improvements. This article also provides clear financial reasoning and cost modeling, which demonstrate 

that energy efficiency projects really can pay for themselves out of existing operating budgets. It equips 

you to persuade the decisionmakers within your school district, city, county, community college, 

university, or state that energy efficiency upgrades should be implemented as soon as possible. 

ENERGY STAR is a voluntary government-industry partnership offering a suite of resources and tools to 

help businesses, government agencies, organizations, and consumers become more energy efficient in the 

workplace and at home. Through ENERGY STAR, an organization can learn how to apply energy best 

management practices and technologies that result in improved energy performance and financial wellbeing. 

Introduction 

While the reasons for delaying projects may vary, most energy efficiency projects stall due to one or a 

combination of the following perceived barriers: 

(1) Lack of money. 

(2) Lack of time or personnel to design and plan the projects because of 

other, higher priorities. 

(3) Lack of internal expertise to implement the projects. 

 

This article focuses on the perception that no money is available in your 

organization’s budget for energy efficiency projects. As you will see 

later, resolving this first barrier frequently provides the solution to the 

second two. 

When you propose energy projects to the decisionmakers within your city, county, school district, 

community college, university, or state, the financial barriers they commonly raise can be characterized as 

follows: 

• If it is not in this year’s budget, it simply has to wait. 

• Equipment improvements must be paid from the capital budget. 

• Paying lower interest (by floating bonds) or no interest (by delaying the project and planning it into 

future budgets) saves more money and, therefore, is in the best interest of our organization. 

• Taxes or fees will have to be increased to pay for these improvements. 

• Performance contracting with an energy service provider (ESP) is expensive and unreliable. 

• Tax-exempt lease-purchase agreements don’t lend themselves to energy projects and are expensive 

alternative funding solutions. 

“Anyone who doesn’t have an 

energy efficiency program is 

acting fiscally irresponsible.” 

– Walter George

Anne Arundel County

Public Schools, Maryland

July 2001
 

 January 2002 

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Some of these comments may sound familiar. In fact, they are common misconceptions, which the 

information presented here can help you overcome. This article defines some standard financial terms, 

presents financing options, and shows a “cost of delay” model that has proven effective in gaining the 

support of financial and administrative officials for energy efficiency projects. The next time you face 

your board, city council, chief financial officer, chief operating officer, or other decisionmaker, you will 

be equipped to persuade them that energy efficiency upgrades can pay for themselves and should be 

implemented as soon as possible. 

The brief case studies appearing in the sidebars throughout this article illustrate how three different public 

entities worked through their financial hurdles to implement energy efficiency upgrades. For example, 

when Brooklyn College (part of the City College of New York) officials realized they did not have 

enough money to install all the energy-efficient equipment 

needed to successfully complete their project, they chose a 

lease-purchase agreement performance contract and spent 

the dollars they anticipated saving from future operating 

budgets. As no capital budget commitment was necessary, 

the college purchased and installed the new equipment 

right away. In Shenendehowa Central School District, 

officials knew that a tax increase was out of the question. 

Using a guaranteed performance contract, they found a way 

to pay for energy improvements within their existing 

approved budgets. State of New Hampshire officials 

insisted on minimizing any impact on the state’s bond 

(credit) ratings while energy efficiency improvements were 

being implemented. After careful study, state officials 

settled on a master lease program that financed energy 

efficiency improvements using the dollars saved from 

future utility bills. 

What do these three examples have in common and why 

were their outcomes successful? The State of New 

Hampshire, Brooklyn College, and Shenendehowa Central 

School District all found that using performance contracts 

with reputable energy service providers (ESPs)—combined 

with tax-exempt lease-purchase agreements as the 

financing vehicle—provided the best, most cost-effective 

solution. Other public agencies undertaking similar energy 

efficiency projects include Pennsylvania’s Allegheny County, which turned to performance contracting 

when its capital budget was reduced by 20 percent; Mississippi, Virginia, and Maryland, which initiated 

statewide Energy Efficiency Master Lease Programs (MLPs); and Florida’s Miami-Dade County School 

District, which added energy efficiency projects to an existing lease-purchase Certificates of Participation 

(COPs) program as the lowest cost alternative. 

Background: Operating Expenses versus Capital Expenses 

To argue the advantages of a tax-exempt lease-purchase agreement and a performance contract, facility 

managers must be conversant with the roles that the operating expense budget and the capital expense 

Brooklyn College, New York City 

By 1998, most of the equipment that 

produced chilled water for campus air 

conditioning systems was approaching the 

end of its useful life. Because this 

equipment was decentralized, the college 

faced much higher replacement costs than it 

would have for a shared chilled water plant. 

The total cost of the project was $23 million, 

of which The Dormitory Authority of the State 

of New York (DASNY) agreed to provide $15 

million. Brooklyn College officials, however, 

were still $8 million short of the funds 

necessary to install the most efficient 

equipment they knew should be purchased; 

and using capital budget dollars was not an 

alternative. So they negotiated an energy 

efficiency performance contract that included 

an $8 million lease-purchase agreement to 

cover the shortfall. The energy service 

provider projected the savings over 12 years 

and structured the lease-purchase payments 

to be 85 percent of the projected savings—

guaranteeing that the savings realized in the 

project would be sufficient to cover the lease 

payments. The agreement also included 

non-appropriation language, making the 

lease payments an operating rather than a 

capital expense.
 

 January 2002 

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budget play in their organization. Typically, capital expenses are those that pay for long-term debt and 

fixed assets (such as buildings, furniture, and school buses) and whose repayment typically extends 

beyond one operating period (one operating period usually being 12 months). In contrast, operating 

expenses are those general and operating expenses (such as salaries or supply bills) incurred during one 

operating period (again, typically 12 months).1

 For example, repayment of a bond issue is considered a 

capital expense, whereas paying monthly utility bills is considered an operating expense. 

The disadvantages associated with trying to use capital expense budget dollars for your energy efficiency 

projects are as follows: (1) these capital dollars are usually already committed to other projects; (2) capital 

dollars are often scarce, so your projects are competing with other priorities; and (3) the approval process 

for requesting new capital dollars is time consuming, expensive, and typically requires voter approval. 

The advantage of using a lease-purchase agreement is that it can finance the purchase of assets, yet the 

repayment can be treated as an operating expense. Because the source of repayment is already in the 

utility line item in your operating budget, this often makes a lease-purchase agreement ideal for financing 

energy efficiency projects. There may be cases, however, when a lease-purchase agreement is not 

advisable; for example, (1) state statute or charter may prohibit such financing mechanisms from being 

used; (2) the approval process may be too difficult or politically driven; or (3) other funds are readily 

available, e.g. bond funding that will soon be accessible, or excess money exists in the current capital or 

operating budgets. 

Understanding Performance Contracts and Tax-Exempt 

Lease-Purchase Agreements 

 

Performance Contracts 

In many parts of the United States, performance contracting is a common way to implement energy 

efficiency improvements and frequently covers financing for the needed equipment, should you chose not 

to use internal funds. Properly structured Performance Contracts can be treated as an operating expense. 

Common financing options under a performance contract include (1) ESP-based financing and (2) taxexempt lease-purchase agreements. As a facility manager, you can overcome the “lack of time and lack 

of expertise” barriers mentioned at the beginning of this article by outsourcing the work to qualified, 

reputable energy service providers using a performance contract. Under a performance contract, the ESP 

insures that the actual energy savings will match the projected savings, and the contract identifies the 

procedures by which these savings will be measured and verified. In a Guaranteed Savings Agreement 

(GSA)—the most popular type of performance contract used in the public sector—the energy 

performance of the equipment is guaranteed by the ESP or an insurance company, who agree to reimburse 

the sponsoring organization for any shortfalls. A GSA bundles equipment purchasing and performance 

guarantees, and it may also include financing, energy costs, and maintenance. ESPs usually borrow at 

taxable interest rates, while public agencies are able to issue lower cost tax-exempt obligations. As a 

result, GSAs usually incorporate tax-exempt lease-purchase agreements as the underlying financing 

instrument. 

 

1

 According to Barron’s Dictionary of Accounting Terms, capital expenditures are “outlays charged to a long-term asset account. 

 A capital expenditure either adds a fixed asset unit or increases the value of an existing fixed asset.” Operating expenditures are 

costs “associated with the ... administrative activities of the [organization].” 
 

 January 2002 

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Tax-Exempt Lease-Purchase Agreements

Tax-exempt lease-purchase agreements are the most common public sector financing alternatives that are 

paid from operating expense dollars rather than capital expense dollars. This is an effective alternative to 

traditional debt financing (bonds, loans, etc.) and allows a public organization to pay for energy upgrades 

by using money that is already set aside in its annual utility budget. When properly structured, this type 

of financing mechanism allows public sector agencies to draw on dollars saved from future utility bills to 

pay for new, energy-efficient equipment today. 

A tax-exempt lease-purchase agreement, also known as a municipal lease, is like an installment-purchase 

agreement rather than a rental agreement. Under most rental agreements (such as those used in car 

leasing), the renter returns the asset (the car) at the end of the lease term, without building any equity in 

the asset being leased. A lease-purchase agreement, however, 

presumes that the public sector organization will own the equipment 

after the term expires. Further, the interest rates are appreciably 

lower than those on a taxable commercial lease-purchase agreement 

because the interest paid is exempt from federal income tax for 

public sector entities. In addition, a tax-exempt lease-purchase 

agreement usually does not constitute a long-term “debt” obligation 

because of non-appropriation language written into the agreement. 

This language effectively limits the payment obligation to the 

organization’s current operating budget period. Therefore, if for 

some reason future funds are not appropriated, the equipment is 

returned to the lender, and the repayment obligation is terminated at 

the end of the current operating period without placing any 

obligation on your future budgets. 

Public sector organizations—schools, community colleges, 

universities, and local and state governments—should consider using 

a lease-purchase agreement to pay for energy efficiency equipment 

when the projected energy savings will be greater than the cost of the 

equipment plus financing, especially when a creditworthy energy 

service provider guarantees the savings. If your financial 

decisionmakers are concerned about exceeding operating budgets, 

you can assure them that this will not happen because lease 

payments can come from the dollars to be saved on utility bills once 

the energy efficiency equipment is installed. Utility bill payments 

are already part of any organization’s standard year-to-year 

operating budget. Although the financing terms for lease-purchase 

agreements may extend as long as 12 to 15 years, they are usually 

less than 10 years and are limited by the useful life of the equipment. 

Tax-Exempt Lease-Purchase Payments are Not Considered 

“Debt.” Because of the non-appropriation language typically included in tax-exempt lease-purchase 

agreements, this type of financing may be considered an operating expense rather than a capital expense. 

As a result, the payments would not be considered “debt” from a legal perspective in most states and 

would rarely require public approval. Your organization will, however, have to assure lenders that the 

energy efficiency projects being financed are considered of essential use (i.e., essential to the operation of 

your organization), which minimizes the non-appropriation risk to the lender. 

The State of New Hampshire 

The New Hampshire Building Energy 

Conservation Initiative of 1997 prompted the 

evaluation of how to improve the energy 

efficiency of state-owned buildings. 

However, the state’s Treasury Department 

was concerned about increasing the state’s 

debt, which might adversely affect its credit 

rating. After discussions with energy service 

providers (ESPs) and finance professionals, 

state officials determined that by separating 

the financing activity from the technical 

performance obligations under a 

performance contract, the state could obtain 

lower cost financing (i.e., by setting up a taxexempt master lease program (MLP) to 

underwrite the performance contracts). 

After a year of reviewing similar programs, 

all parties agreed that the non-appropriation 

language of the MLP would allow the lease 

to be repaid from operating funds and thus 

have minimal impact on the state’s credit 

rating. 

This low-cost financing permitted New 

Hampshire officials to install a broader 

range of energy-efficient equipment than 

they would have if they had used the 

financing bundled into the ESP’s 

performance contract. As a result, more 

projects met the legislated payback 

requirements. New Hampshire’s credit 

rating did not change as a result of the 

energy conservation MLP. And, the state 

got better pricing by consolidating all their 

projects under one agreement. 
 

 January 2002 

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How is Debt Defined? It is important to be aware of the different interpretations of “debt” from three 

perspectives—legal, credit rating, and accounting. As mentioned above, most lease-purchase agreements 

are not considered “legal debt,” which may prevent the need to obtain voter approval in your locality. 

However, credit rating agencies, such as Moody’s and Standard & Poor’s, do include some or all of the 

lease-purchase obligations when they evaluate a public entity’s credit rating and its ability to meet 

payment commitments (“debt service”). These two perspectives (legal and credit rating) may differ 

markedly from the way lease-purchase agreements are treated (i.e., which budget is charged) by your own 

accounting department and your organization’s external auditors. 

In general, lease-purchase payments on energy efficiency equipment are small when compared to the 

overall operating expense budget of a public organization. This usually means that the accounting 

treatment of such payments may be open to interpretation. Most public sector entities recognize that the 

energy savings cannot occur if the energy efficiency projects are not installed. As such, the projects’ 

lease-purchase costs (or the financing costs for upgrades) can be paid out of the savings in the utility 

budget. Outside auditors, however, may take exception to this treatment if these payments are considered 

“material” from an accounting perspective. Determining when an expense is “material” is a matter of the 

auditor’s professional judgment.2

 While there are no strictly defined accounting thresholds, as a practical 

guide, an item could be considered material when it equals or is greater than 5 percent of the total expense 

budget in the public sector (or 5 percent of the net income for the private sector). For example, the 

energy budget for a typical medium-to-large school district is around 2 percent; therefore, energy 

efficiency improvements will rarely be considered “material” using this practical guideline. 

Know Your State’s Rules. Many public entities 

already lease equipment. Adding an energy project 

to an existing lease agreement may be surprisingly 

easy, especially if a Master Lease is in place with a 

lending institution. Governing statutes vary from 

state to state;3

 and the use of tax-exempt leasepurchase agreements may differ across schools, 

municipalities, and counties even within the same 

state (see map). Public sector organizations should 

always consult legal counsel before entering into 

lease-purchase agreements. 

 

2 According to Dr. James Donegan, Ph.D. (Accounting), Western Connecticut State University, an amount is “considered 

material when it would affect the judgment of a reasonably informed reader when analyzing financial statements.” 

3

 California and Indiana use “abatement leases” rather than “non-appropriation” leases Under abatement theory, the 

lease is not considered “debt” because the yearly payment is limited to the ability to use the asset during the current 

operating period; if the asset cannot be used, then the payment can be reduced or “abated”. 
 

 January 2002 

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States Take Advantage of Energy Savings To Fund 

Energy Efficiency Projects 

Many states have recognized that the savings realized by installing energy efficiency equipment can be 

used to finance the equipment. For example: 

• In Pennsylvania, public sector organizations are authorized to use funds designated for operating 

expenses, utility expenses, or capital expenditures to meet lease-purchase or installment payments 

under performance contracts.4

 

• School districts in California are authorized to enter into energy efficiency financing relationships 

that “can be repaid from energy cost avoidance savings.”5

 

• In Florida, “it is the policy of this state to encourage school districts, state community colleges and 

state universities to reinvest any energy savings resulting from energy conservation measures into 

additional energy conservation efforts.”6

 

• In Minnesota, “a district annually may transfer from the general fund to the reserve for operating 

capital account an amount up to the amount saved in energy and operation costs as a result of 

guaranteed energy savings contracts.”7

 

• In Texas, lease-purchase payments are to be “made from maintenance taxes” and “shall not be 

considered payment of indebtedness.”8

 

Many other states support the idea of funding energy efficiency projects from future utility bill savings. 

Obtaining your accounting department’s cooperation may be easier than you think, especially if 

determining the legal precedent in your state is a matter of doing a little research 

Getting the Best Deal 

If tax-exempt lease-purchase financing is so good, why are some public organizations reluctant to use it to 

fund energy efficiency projects? One reason may be the higher stated interest rate when compared to that 

of a bond. Recently, a financial manager was heard to say, “We float bonds at around 4 percent; why 

should we enter into a tax-exempt lease-purchase agreement at 5 percent?” There is, unfortunately, a 

common misconception that the lowest interest rate is always the best deal. If your finance 

decisionmakers make this assumption, you need to remind them that two factors must be addressed to 

determine the best financing alternative: (1) net interest costs and (2) the costs of delay. 

 

4

 Pennsylvania Guaranteed Energy Savings Act 29 of 1996 - §5(b) 

5

 California Education Code 17651 (a) 

6

 Florida Statutes Title XVI, Chapter 235.215 (1) 

7

 Minnesota Statutes 2000 Chapter 123B.65 Subdivision 7 

8

 Texas Statutes Chapter 271 – Public Property Finance Act - §271.004 
 

 January 2002 

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Net Interest Costs 

Every borrower seeks the best deal. As stewards of public funds, managers in the nation’s public schools, 

community colleges, state universities, and local or state government agencies seek to provide the best 

quality service for the lowest net cost. Bonds at 4 percent interest sound better than a lease-purchase 

agreement at 5 percent; however, the real savings become 

clear only when the net interest cost has been calculated. 

Typically, lease-purchase agreements do not include any extra 

costs or fees outside the interest rate (with the exception of 

fees related to setting up an escrow account needed to manage 

funds during the construction period in case “construction 

progress payments” are necessary). The legal opinion for a 

lease-purchase agreement usually requires little or no research 

and can be provided by internal counsel. 

On the other hand, a bond will require obtaining an extensive 

(and expensive) legal opinion, setting up a trustee, and 

retaining accounting services to ensure compliance. Bond 

issues may also incur costs to rate the bond, obtain insurance, 

set aside a cash reserve for the first year, and pay for printing 

or marketing fees—additional costs that can easily exceed 

$50,000. Adding these bond issuance costs to the cost of 

energy efficiency projects can dramatically change the 

economics of the projects, especially for smaller projects. 

Therefore, the financing alternative that generates the lowest 

total payment (the net interest cost) is the best deal—and this 

may not be the one with the lowest stated interest rate. 

Political, as well as financial, issues must be taken into 

account when determining lowest net cost. A tax-exempt 

lease-purchase agreement is not considered legal debt and is 

typically easy to implement, whereas voter approval must be 

obtained to enter into new debt, which is a capital 

expenditure. Therefore, two additional costs must be added to 

the aforementioned calculation: (1) the out-of-pocket cost of 

advertising and staffing for a vote, and (2) the intangible 

political cost of asking the taxpayers to approve “new debt.” 

Frequently, this political cost is the greater of the two. 

The Costs of Delay 

Quantifying the costs of delaying the installation of an energy 

efficiency project adds a new dimension to the financial 

decision. School district and local or state government officials often feel that postponing the installation 

of energy efficiency equipment until such time as the operating or capital budget dollars are available—

rather than financing the installation immediately—is a better financial decision. They reason that if 

internal budget dollars are used, paying interest can be avoided completely. However, delaying the 

installation will delay the point at which energy savings can begin. 

Shenendehowa Central School District, 

Clinton Park, New York 

In 1996, the school district was facing 

escalating energy and maintenance costs for 

seven buildings constructed between 1952 

and 1969. During that period, lowest first-cost 

had been the primary consideration, instead 

of life-cycle cost, when selecting the energy 

equipment. Three of the buildings relied 

exclusively on electricity for heating and air 

conditioning. Shenendehowa officials needed 

to make capital improvements at these 

facilities, but budgets were already strained. 

Further, they were unwilling to approach 

taxpayers for additional bond money. 

To address these problems, school officials 

decided to install new energy-efficient 

equipment that could be paid for from future 

energy cost savings. With assistance from 

the New York State Energy Research and 

Development Agency (NYSERDA), they 

issued a Request For Proposal (RFP) for an 

energy service provider (ESP) that could 

provide a performance contract to address 

their needs. The winning ESP guaranteed 

the equipment performance and energy 

savings, which were verified using rigorous 

measurement and verification techniques. 

Instead of bundling the financing under the 

performance contract, the school district 

chose to obtain the funds directly from a 

commercial lender using a tax-exempt leasepurchase agreement for a term of 10 years. 

The lease-purchase agreement contained 

non-appropriation language, which limited 

payments to the operating budget savings, 

thereby avoiding the capital budget. This 

financing option allowed Shenendehowa 

school officials to successfully install needed 

energy-efficient equipment without raising 

taxes.
 

 January 2002 

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 For example, if a $500,000 project has a 5-year simple payback, the average monthly savings will be 

about $8,333 per month ($500,000 divided by 60 months). Under this scenario, if the project is 

delayed by 12 months, the public sector organization will pay the local utility $100,000 more (12 

times $8,333) during the delay period than it would have if energy efficiency equipment had been 

installed immediately. 

 If financing for the lease-purchase is available at 5 percent for a term of 7 years (reasonable 

conditions for a traditional project), the total interest paid during the 7-year period will be $93,624 in 

absolute dollars, or about $6,375 less than the energy savings realized during the first 12 months of 

use ($100,000 minus $93,624). In other words, the savings realized by installing the equipment 

immediately rather than waiting for 12 months effectively reduces the interest rate for borrowed funds 

to less than 0 percent! 

 The savings are in fact even greater, considering that a dollar paid for interest 7 years in the future is 

worth less than a dollar saved this year. Allowing for a real cost of money (or discount rate) of 3 

percent, the $93,624 in financing charges translates to $84,352 in current dollars, or a real savings of 

almost $15,650 if equipment is financed and installed right away rather than waiting for internal 

funds to become available. Using third-party financing initially and paying it off early with approved 

future budget dollars may be the way to maximize an energy project’s total cost savings. 

This cost of delay calculation is more complicated when comparing two different financing alternatives 

with different interest rates and terms, but the result is no less stark. For example, compare a bond or loan 

issued at 4 percent interest against a lease-purchase agreement offered by a local lender at 5 percent 

interest for the same project. Ignore, for the moment, any additional fees that must be added to the bond 

and focus on the unavailability of the funds for 12 months, while the lease-purchase funds are available 

immediately. A comparison of the consequences of these examples, based on the same $500,000 

equipment cost and 5-year simple payback results in the following: 

Option 1 Option 2 

Instrument Lease-purchase Loan or Bond 

Budget Operating9 Capital 

Term 7 years 7 years 

Interest rate 5.0% 4.0% 

Monthly payment $7,067 $6,834 

Surprisingly, the difference in the monthly payments on this $500,000 project is only $233 a month 

($7,067 minus $6,834), while the energy efficiency savings lost would be equal to $8,333 a month (as 

shown in the text above). 

The key question becomes: How long will it take for the lost energy savings to consume the total savings 

realized from the lower interest rate financing? The answer: Just over 2 months (see Appendix B for 

calculation). 

 

9

 Non appropriation or Abatement leases; actual treatment may vary by state. 
 

 January 2002 

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The following chart demonstrates these costs of delay based on waiting for the 4.0 percent “cheaper 

money” (rounded to the nearest $100): 

Each month the 

project is delayed Savings or Loss 

1 $8,700 

2 $300 

3 ($8,000) 

4 ($16,300) 

5 ($24,700) 

6 ($33,000) 

7 ($41,300) 

8 ($49,700) 

9 ($58,000) 

10 ($66,300) 

11 ($74,700) 

12 ($83,000) 

As shown, a delay of 12 months amounts to a loss of $83,000, or almost 17 percent of the original project 

cost. (Please contact Melissa Payne, USEPA ENERGY STAR, at payne.melissa@epa.gov if you would 

like a copy of the Microsoft ExcelTM spreadsheet that calculates these costs of delay, using your own 

project specifics). 

The true cost of delay may be even greater, as none of these calculations includes the higher 

administrative costs of the loan or bond, nor the environmental benefits of installing the energy efficiency 

equipment sooner rather than later. 

Conclusion: Improving Energy Performance and Fiscal Management 

Energy efficiency equipment differs from other capital equipment. Because the dollars saved by 

installing energy efficiency equipment can be used to pay for its financing, this equipment can be 

installed without having to increase operating costs or use precious capital budget dollars. In fact, as long 

as the lease payments are lower than the energy dollars saved, a positive cash flow is created that can be 

used for other projects. Extending the repayment terms will reduce the monthly payment, providing even 

more cash. 

In today’s tightening economy, with uncertain and often increasing energy prices, a good energy 

efficiency policy is a necessity. As stewards of significant assets, public sector facilities and finance 

managers must aggressively manage all costs and maintain effective cash management programs. 

Accelerating the installation of energy efficiency equipment will improve not only your facilities but also 

your financial statement. In addition, it will demonstrate that public sector managers are acting 

responsibly as stewards of their constituents’ resources. 

ENERGY STAR has resources and tools available to assist your organization in developing a roadmap to 

better energy performance. To learn more about ENERGY STAR, please contact Melissa Payne, USEPA 

ENERGY STAR, at payne.melissa@epa.gov. 
 

 January 2002 

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Appendix A 

Chart of all financing options:

 CASH BONDS MUNICIPAL 

LEASE 

PERFORMANCE 

CONTRACTS 

Interest Rates N/A Lowest tax-exempt 

rate 

Low tax-exempt 

rate 

Can be taxable or taxexempt 

Financing Term N/A May be 20 years or 

more 

Up to 10 years is 

common and up to 

12-15 years is 

possible for large 

projects 

Typically up to 10 years 

but may be as long as 15 

years 

Other Costs N/A Underwriting legal 

opinion, insurance, 

etc. 

None May have to pay 

engineering costs if 

contract not executed 

Approval 

Process 

Internal May have to be 

approved by tax 

payers or public 

referendum 

Internal approvals 

needed. Simple 

attorney letter 

required 

RFP usually required, 

internal approvals needed

 

Approval Time Current budget 

period 

May be lengthy – 

process may take 

years 

Generally within 

one day 

Generally within 2-3 days 

once the award is made 

Funding 

Flexibility 

N/A Very difficult to go 

above the dollar 

ceiling 

Can set up a 

Master Lease, 

which allows you 

to draw down 

funds as needed 

Relatively flexible. An 

underlying Municipal 

Lease is often used

 

Budget Used Either Capital Operating Operating 

Largest Benefit Direct access if 

included in budget 

Low interest rate 

because it is a 

general obligation 

of the public entity 

Allows you to buy 

capital equipment 

using operating 

dollars 

Provides performance 

guarantees which help 

approval process 

Largest Hurdle Never seems to be 

enough money 

available for 

projects 

Very time 

consuming 

Identifying the 

project to be 

financed 

Identifying the project to 

be financed and selecting 

the ESCO 

 

 

Appendix B 

How long will it take for the lost energy savings to consume the total savings realized from the lower 

interest rate financing? The calculation is straightforward and can be done using any financial calculator 

or Excel/Lotus spread sheet. The variables in the formula are: 

PV= present value 

n= number of payments 

pmt = monthly payment 

FV = future value 

i = interest 
 

 January 2002 

Page 11

If you use a financial calculator, by entering four of the five values, the calculator will automatically 

calculate the fifth value (or unknown one). Using a financial calculator, start by entering the monthly 

payment of the readily available (more expensive) financing. We know the term (n) is 7 years, or 84 

months, the Future Value (FV) is zero. Use the interest rate of the lower, “better deal” as the discount 

rate in order to calculate the present value (PV). This calculation provides the Net Present Value of the 

interest rate differential, which in this case is $17,013 more than the original project cost. Based on the 

monthly energy efficiency savings of $8,333, the break-even point is 2.0 months ($17,013 divided by 

$8,333). 

Appendix C 

Putting Together a Proposal 

In developing a proposal for an energy efficiency project to present to your agency’s financial 

decisionmakers, the following steps are recommended: 

1. Define the decision process and decisionmakers. 

- Whose approval is needed for a decision? 

- What are the decisionmaker’s sensitivities or “hot buttons?” 

- How does the project respond to organizational priorities? 

- Who are the potential “champions” of this project? 

2. Quantify why this is a good project to implement. 

- How much will energy costs be reduced? 

- What are the other associated cost impacts, such as reduced labor costs, O&M costs, and lifecycle costs? 

- What are the likely employee impacts (e.g., on productivity or morale)? 

- Does the project meet/exceed established profitability criteria (such as payback period or returnon-investment)? 

- Does it create positive cash flow? How much? How might any extra saved energy dollars be 

spent to support other pressing projects or programs? 

- Does this help address indoor air quality (IAQ) problems or reduce the deferred maintenance 

budget? 

- What are the associated environmental impacts and public relations opportunities? 

3. Show how the project can be funded. 

- What subsidies/credits are available to reduce net costs (such as from your state energy office, 

utility, or public benefits program, if deregulated)? 

- Can a performance contract and tax-exempt lease purchase agreement be used if other funds are 

not available? What would be the terms and conditions of such an arrangement? 

4. Identify the costs of delay. 

- What would be the cost of waiting for internal funds to become available? 

- What would be the cost of waiting for lower interest-rate financing to become available?