Customers want to save capital, stay cash flow positive, and avoid risk. Here’s how you can provide that.
TL;DR
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Customers buying energy projects are worried about taking on debt and risk, which slows down your deals.
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New funding solutions are making it easier for customers to start their energy projects without impacting cash flow.
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As clean energy adoption rises, solution providers who provide innovative funding options will have a distinct market advantage.
Loan, debt, and obligation—these are words that slow deals and make customers more hesitant.
You know what sounds better? No upfront costs, cash flow positive, and minimal risk. By offering innovative funding options, solution providers can bring a new, exciting tone to the table.
In other words, how—and not just if—projects are funded directly benefits your closing rates and sales cycle.
The range of available funding options continues to expand. Your customers are looking beyond cash purchases and loans, to leases and performance contracting instead. These options help them save capital for competing business priorities, speed up project approval, and minimize risk.
And by empowering customers with more ways to repay, solution providers differentiate themselves and offer additional value. Doing so makes your solutions more attractive and bolsters momentum, helping projects get off the line before capital worries have a chance to slow them down.
Learn more about new funding options and unblocking customer barriers by signing up for our webinar, Beat clean energy sales objections and win your deals in 2023.
How do different funding options impact balance sheets?
Paying for energy efficiency solutions used to come down to two options: cash purchases and loans. Paying with cash is simple, but customers are increasingly protecting their capital, especially given the threat of a recession.
On the other hand, loans add risks to balance sheets. Loans can negatively impact existing debt terms and restrictions, especially for municipalities, universities, schools, and hospitals (MUSH).
Taking out a loan also obligates businesses to repay, even if the asset doesn’t deliver the promised energy savings. This uncertainty makes decision makers in your customer’s organization nervous. Whoever greenlights projects will worry about damaging their reputation if the project fails to deliver.
One alternative is leasing, and while this isn’t new, the leasing process is evolving. Leasing vehicles or specialized machinery is common, but more customers are also leasing on-site clean energy solutions, such as solar power arrays.
Performance contracting, such as energy service agreements and power purchase agreements (PPAs) present the least risk to your customer’s balance sheet. These allow your customers to repay based on their realized savings. That said, the biggest difference between traditional funding and performance contracting is that the latter is repaid as an operating expense. This removes the need to secure capital, simplifies the approval process, and minimizes customer-facing risk.
Solar leases, ESAs, and PPAs all support your customer’s balance sheets in different ways by removing upfront costs. Here are the benefits in more detail.
1. Solar Leases
One increasingly popular funding option is solar leasing. During the lease term, the leasing company owns the asset (and takes care of servicing), although customers have the option to purchase the solar solution once the lease is up.
A solar lease helps you sell more solar power systems by removing upfront costs. Instead, customers pay a fixed, monthly amount regardless of how much power is used.
The benefits (predictable, stable repayments) that leasing provides are already familiar to customers (i.e. from vehicle leasing). This familiarity reassures customers, making them more confident about starting your project.
Solution providers can further bolster customer confidence (and the value of their solutions) by offering monthly repayments that are lower than the solar solution’s estimated electricity savings, enabling customers to stay cash flow positive during their lease.
This makes your solutions particularly attractive to customers with variable or seasonal usage patterns, as it reduces cost fluctuations
For example, a commercial business installed a 33 kilowatt (kW) rooftop solar setup through a lease-to-own agreement. After rebates, the project came to $23,438. Before installation, the company’s monthly electricity bill was $2,256, while after it was $954. Overall, the project generated annual savings of $15,497.
By setting the lease repayments at $485 per month over five years, the company remained cash flow positive, with monthly net savings of $469.
2. Power purchase agreements
Power purchase agreements are contracts between solution providers and a customer for the sale of renewable energy. A key feature of PPAs is that customers only pay based on actual (as opposed to projected) electricity production, which reduces performance risk and allows the project to be treated as an operating expense.
Payments are based on metered energy consumption, specifically a fixed price per megawatt hour (MWh) or fixed percentage of the average market index price. This protects customers from price fluctuations.
This is especially important for offsetting the generating variability that comes with renewable energy solutions like solar.
That said, PPAs usually stipulate minimum usage levels, which (depending on accounting treatments) may place future repayments on balance sheets.
PPAs overcome sales barriers by assuring your customers maintain cash flow throughout the term, which speeds up your approval process. And faster approvals means more sales..
Moreover, customers can combine PPAs with other funding options within a larger project (e.g., using a PPA for a solar solution and an ESA for the accompanying battery).
This flexibility, together with the ability to turn capital expenses into operating expenses has boosted PPA use (and solar adoption rates). Corporate PPAs totalled over 33.6 gigawatts (GW) globally through 2022, 40 percent of which were in North America. The third quarter of 2022 alone saw a 77 percent global, year-on-year increase from 2021.
Furthermore, third-party ownership frees customers to focus on their core business, while enjoying cheaper electricity, no upfront costs, and not having to worry about upkeep. Electricity rates from PPAs are also lower than utility prices. And by accurately measuring usage, repayments can be structured to be less than the savings captured.
For example, Good Shepherd Community Care chose a PPA to add a 36 kW rooftop solar solution to its 7,000 square foot facility. The system cost $60,000, and generated annual savings from cheaper electricity of $8,500.
The solar project has an impressive return-on-investment (ROI) of over 35 percent, reducing the facility’s energy by 50 percent.
3. Energy service agreements
While PPAs secure savings through cheaper electricity, ESAs capture savings via energy efficiency upgrades that reduce usage.
With an ESA, customers only pay based on the solution’s performance (i.e. actualized energy savings). Overcoming customer concerns about future savings (i.e. will they materialize?) and project performance will increase the effectiveness of your sales team when dealing with sales blockers. And that always leads to revenue growth.
Energy service agreements are a type of performance contracting where the solution provider owns and operates the energy efficiency solution in question. ESAs are treated as operating expenses, with monthly repayments on a set schedule, helping solution providers overcome capital expense barriers and close more deals.
ESAs can be used to fund a single project, or dozens of upgrades across multiple facilities. And by offering long repayment windows (potentially over 15 years), ESAs tailor repayments to be lower than the solution’s monthly savings. This makes them more flexible and scalable than traditional funding options.
ESAs can leverage insights from smart electricity meters to improve savings predictions. Knowing how much your customer is saving on electricity allows repayments to be sized accordingly, keeping customers cash flow positive. By guaranteeing a certain level of savings, and eliminating upfront costs, customers are exposed to less risk.
A great example of how ESAs can complement other funding streams is the retrofit undertaken by the Marcus Garvey Apartments in New York City. The 32–building complex installed a 400 kW solar power system, a 300 kW / 1.2 MWh battery, and a 400 kW fuel cell.
The battery was funded through a ten-year, $1.2 million ESA, with a payback period of under seven years. The solar equipment was acquired using federal Investment Tax Credits (ITC) and incentives from the New York State Energy Research and Development Authority (NYSERDA). Lastly, the fuel cell was funded through a 20 year PPA.
These upgrades also support (and earn revenue from) demand response programs in New York. And as an added benefit, the 625 units in the apartment complex are all tied to one master meter. The lack of submeters streamlines performance and consumption monitoring.
Overall, the project reduces the complex’s electricity and heating bills by 15 percent, and lowers its peak demand (when electricity is most expensive) by 25 percent.
Do you have everything you need to secure funding? Download our checklist to learn what details to ask your customer for, and get your projects over the line.
EnPowered helps you leverage innovative funding options to grow sales
Leases, PPAs, and ESAs empower customers to move forward with your deals before hesitancy slows momentum. This will help your sales team overcome concerns about capital, and make your solutions more attractive by minimizing customer-facing risk.
Keeping monthly payments below savings, and structuring these payments as operating costs, helps overcome sales objections from decision makers concerned about debt.
Leveraging innovative funding options provides the jolt needed to jumpstart project momentum and get projects from 2022 over the line. And empowering customers to repay with a portion of their energy savings will also help boost your sales cycle in 2023.
You can learn more by joining EnPowered’s upcoming webinar, Beat clean energy sales objections and win your deals in 2023. On Monday, February 22, EnPowered Founder & CEO Tomas van Stee, and Director of Finance Corey Bonkowski will have an in-depth discussion on how the right funding options will overcome your sales objections, and accelerate new deals in your pipeline.
Are you ready to start moving more projects over the line? Sign up for our webinar today.
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