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Answer by Alejandro Morell (Creara)
Financing is one of the most important parameters for the success of an EPC. The investment required for implementing the energy saving measures can be undertaken both by the ESCO and by the client. This initial election will often be decisive in determining the suitability of each model.
What financing options are there?
Both the client and the ESCO may choose to use their own resources (internal financing) or seek support from a financial institution (external financing). The three most common alternatives are listed below:
- Full equity: investments are assumed by own resources. This has the advantage of accelerating the process, but it is rarely chosen since it requires a large financial capacity.
- Corporate finance: financing is requested from a financial entity such as a bank, guaranteeing the repayment in the period being negotiated.
This option is one of the most common, since allows customer to invest in other projects which can be more profitable for him.
- Leasing: under this model, the financial entity owns the equipment during the term of the lease, and rents it to the ESCO or to the client for a monthly fee.
Once the contract ends, the person or entity requesting the lease has the right to acquire the equipment by paying the residual value. This allows parties to afford the VAT that applies to new items. However, the scheme is not widely known by leasing entities, and consequently rarely used.
To conclude, the EPC customer needs to carefully assess its own needs and short term financial capability in order to choose the best financial scheme, comparing the investment on the EE project with any other options of interest. Once the decision has been made to use either internal or external resources, the parties may negotiate the percentage of shared savings.
Which model is most common?
Shared savings contract is the most popular, since the client usually prefers not to assume the investment and associated costs.