Energy Companies Provide Project Financing and Guarantees

Energy Companies Provide Project Financing and Guarantees

by Jeff Wilder

Dated 2.1.99

Energy de-regulation, which is occurring in state after state, is spawning

new business for energy providers that can be a great boon to hoteliers. The

benefits include lower energy costs, complimentary consultations on energy

saving techniques, and financing and construction assistance in making your

hotel buildings more energy efficient. Why is this occurring and how might

you benefit by these marketplace changes? I’d like to thank my good friend, Tom

Fox of TJ Fox Hotel Brokers in Atlantic City NJ, for introducing me to a

major energy de-regulation program of which I had been unaware. I am certain that

this information will be as valuable to you, as it’s been to me.

The major source of revenue for power providers has historically been in the

selling of energy to regional customers served by the area's monopoly utility

company. This paradigm is rapidly changing as states increasingly recognize

the financial benefit to their local economies of de-regulating power.

And, as de-regulation spreads, it naturally creates new competition for your

"energy dollar." Energy providers who wish to stay in existence recognize that

thinning profit margins on selling power, itself, to a controlled customer

base requires them to alter their business model. So, they are morphing into

energy service companies, or ESCOs. One of the most intriguing new programs

they offer is the Energy Services Agreement.

ESCOs use their expertise in analyzing energy systems and costs, as well as

energy savings techniques, in trying to win your business by helping you to

control your energy costs. They are often prepared to win your business by

guaranteeing energy savings through the Energy Services Agreement. The basic

elements of these agreements include:

(a) identifying physical improvements that can be made to your property in

order to reduce its energy costs, (b) contracting to install the improvements

term financing for the improvements, whose debt service is largely offset by

the energy savings generated from the new equipment’s installation. The ESCOs

don’t even care whether they are your actual energy provider, so you can

still shop separately for the lowest cost energy provider.

Let me give you an example of how you can fold this new energy industry

service into your next project. Recently, a customer to whom we sold a

Pennsylvania hotel retained our firm to asset manage the property. We immediately

began an assessment of upgrading work necessary to improve the hotel’s image and make

the building more energy efficient. We saw the need for a new roof, windows, exterior

sheathing and an upgraded energy system, including new lighting. We hired an engineer

and architect with specific instructions to dovetail cosmetic improvements with energy

saving thinking and to assist us in quantifying the savings. The engineer hooked us up with an

ESCO who was interested in doing the construction project. They came in and

analyzed what savings would be generated by each element of the project.

The hotel upgrading included a new insulated roof, thermal pane windows to

replace sliding single pane glass doors, a new insulated vinyl exterior,

replacement of incandescent lighting, and modernization of the HVAC system.

The overall project cost was roundly $ 600,000. Energy savings amounted to

approximately $ 40,000 per year and the ESCO guaranteed those savings for 10

years in consideration of being hired to do the project. They also

arranged to finance that portion of the overall project where there were identifiable

energy savings, that being roughly $ 400,000. This included a nice portion of the cosmetic

upgrading which will, naturally, help us to improve our ADR at the hotel. The debt service on the

$ 400,000 is roundly $ 40,000 per year, and with the energy savings

guaranteed by the ESCO, it effectively assures that debt service on 66% of the

project is 100% covered by the reduction in energy costs.

There are many variants that go into the energy services agreement and each

one must be carefully negotiated to assure the best terms for you. But, this

is a wonderful new benefit that is available to you as energy de-regulation

spreads inexorably across the country.