Creative financing for energy management projects

Leasing can be much easier, and more cost effective, than traditional methods of acquiring energy efficient equipment such as variable speed drives.
By Siemens Industry Inc. October 10, 2013

Figure 1: The potential financial benefits of alternate methods of financing energy management projects are substantial. Courtesy: SiemensReducing energy costs is the major motivator for industrial companies to upgrade to more energy efficient technologies and business practices. However, constrained access to capital across the world continues to be a barrier to investing in energy efficient equipment.

In mature western economies, corporate access to capital has been highly restricted for the past several years, and the squeeze continues due to slow economic growth and concerns about stability in the Eurozone.

In rapidly developing economies, pressures on capital availability are more subtle; governments are eager to restrict soaring rates of corporate debt out of fear that such borrowing will be unsustainable in the long term. They are building industrial infrastructure that must be financially sustainable long into the future.

Western banks are only gradually easing corporate lending criteria. Despite these conditions, western corporations are extremely keen to have access to capital to invest in energy efficient equipment. As a result, they are exploring alternative methods to standard corporate borrowing to meet the challenge of a tight credit market.

In more rapidly developing economies, such as China and Turkey, the authorities are concerned about ensuring controlled and sustainable growth and are applying pressure on the availability and cost of funds to counter racing inflation and inappropriate borrowing.

Affording energy efficient investments

So how can firms across the world access capital to make energy efficient equipment investments? Even in rapid growth economies, companies with meteoric growth may have reached their borrowing ceiling and yet continue to need financing in order to make further investments, including energy efficiency initiatives. Moreover, emerging market companies want to ensure that their energy efficient investments are financially sustainable in the longer term.

Various forms of asset financing techniques are coming to the fore as effective, alternative methods of funding energy efficient equipment upgrades. These techniques aim to offset the monthly cost of the new equipment against the energy savings that it enables.

In some cases, finance payments even flex with the energy saving or energy generation outputs from the new equipment. These forms of financing—which are separate from standard bank lending—are increasingly important, given that recent research has shown that the greatest concern of corporations is the lack of confidence over whether energy efficient investments will deliver the promised savings. Combined financing and equipment solutions overcome this obstacle since the finance providers in this area understand what the solution should deliver and design the financial vehicle around projected savings being met.

Financing techniques, such as leasing and renting, are increasingly being used in a number of countries to provide organizations of all sizes with financing for energy efficient equipment where the energy savings pay for the equipment investment. Where possible, these techniques wrap everything into one financing package, including energy efficiency assessment, the equipment itself, installation, etc. Payments are at least equal to—or less than—the energy savings. In many cases, purchasing equipment via these alternative financing strategies delivers saving and net positive cash flow immediately after the equipment is installed.

Where a project cannot completely offset the equipment upgrade with energy efficiency cost savings, the financing arrangement can still subsidize a large part of the upgrade cost. In the manufacturing sector, this is often highly attractive as up-to-date equipment may not only lower energy costs, but also boost productivity and extend manufacturing capability, generating more revenue and margin.

A finance agreement under this kind of integrated strategy has the advantage of being tax efficient and offering fixed payments for the agreement term. These are calculated by taking into account numerous factors, such as: the type of equipment, its expected working life, and the customer’s individual circumstances. This allows for creating payments that can be offset by expected energy savings. Figure 1 shows the potential financial advantages of these alternative financing strategies.

Priority areas for industrial energy efficiency

Once a feasible method of financing has been identified, a business must identify projects in which to invest. Whether making individual energy efficient equipment investments or engaging in an entire facility performance contracting arrangement, businesses need an awareness of which key areas of their infrastructure can offer the greatest payback on energy efficiency initiatives. Businesses should systematically evaluate their own facilities in order to identify the highest priority areas for their sites as a one-size-fits-all approach does not exist. Key areas include:

  • Heating, ventilation and air conditioning
  • Biomass heating
  • On-site solar and wind power
  • Supply voltage optimization
  • Power management solutions
  • Increased factory or process automation
  • Intelligent lighting controls and low-energy lighting
  • Building controls
  • Monitoring and targeting systems
  • Lubrication
  • Water-cooling
  • High-efficiency motors
  • Variable speed drives.

We have been able to quantify the advantages, in terms of saved electricity costs, of adopting variable speed drives (VSDs).

VSDs and industrial motors

VSDs optimize the voltage and frequency input into an industrial motor to change its speed of operation, rather than the traditional method of “choking” constant speed motors. This greatly reduces consumption of electricity. Correctly designed VSD systems typically reduce energy consumption by up to 70%, depending on the application. The most receptive applications tend to be pumps, fans, and centrifugal compressors, although worthwhile savings may even be achieved on more demanding applications such as mixers, centrifuges, reciprocating compressors, and extruders.

Figure 2: Energy efficiency upgrades can consider energy, maintenance, and repairs as part of the life cycle cost of equipment. Energy is by far the largest share of the costs. Courtesy: Siemens

In addition to providing substantial energy reduction, other VSD benefits include soft start-up of the equipment, reduced current on starting, reduced mechanical stress, and high power factor. VSDs are intelligent devices that can easily be integrated into energy management systems, and may also be a key component in dynamic power management by helping with rate management and demand reduction. Figures 2 and 3 show potential financial advantages of deploying VSDs—and using alternative financing methods for their purchase.  

The gains to be made from installing VSDs should not be confused with the process of installing motors, which themselves are more energy efficient. Both activities—installing VSDs and replacing inefficient motors with more energy efficient models—will yield energy cost savings.

Figure 3: Table details, for various operating hours per year, percentage of totals costs for a variable speed drive, maintenance and repairs, and energy costs. Energy costs are more than 95% of total costs in all three examples. Courtesy: Siemens

As far as industrial electric motors are concerned, legislative efforts have been underway in several countries for more than a decade to encourage the transition to more efficient electric motor driven systems. These include the implementation of Minimum Energy Performance Standards (MEPS) requiring that electric motors meet a certain efficiency level to enter the national market.

Governments have clear incentives for implementing these policies. Electric motor systems use approximately 40% of total global electricity, and their share in industrial electricity consumption is much higher, standing at 65% according to the International Energy Agency.

With the global cost of electricity on the rise, any equipment that results in energy savings constitutes a valuable investment. The case for energy efficiency becomes all the more compelling in the light of the fact that more than 95% of the lifetime cost of an industrial motor is the cost of the electricity it consumes.

Implementing VSDs in appropriate processes offers greater energy savings than simply upgrading to more energy efficient motors. Moreover, the full energy and cost-saving potential of VSDs is a long way from being realized. Globally, the penetration of VSDs (as a proportion of installed motors) is still low. Information in this area is limited, but evidence indicates that the highest levels have been achieved in the U.S., at nearly 20%. The UK and China are at a mere 10%, and figures suggest Europe stands at no higher than 15%. However, in Germany estimates show that 30% of industrial electric motors are currently sold with a VSD.

Quantifying savings from greater VSD implementation

In order to give an idea, country by country, of the level to which greater implementation of VSDs could offer cost savings to industry, Siemens has drawn on its data sources and customer experiences to create a financial model.

All aspects of this model are designed to be cautious and conservative, at each stage choosing the lower end of reported experiences to ensure that the resulting estimates are likely to understate the situation rather than exaggerate it.

The starting point is industrial energy consumption for the 10 countries studied. This number is published by a number of official sources, as is pricing for industrial electricity. The most complete, verified dataset for industrial electricity prices and consumption across these 10 countries is for 2010. Therefore, this data has been used for the model, factoring out escalating factors such as increased consumption and rising prices. This is the first point at which the model introduces a note of careful conservatism.

Figure 4: Estimated savings from variable speed drive implementations vary by country. Courtesy: Siemens

Next, a number of sources testify that, throughout the world, over 60% of industrial electricity is used to drive electric motors. However, in the countries studied, between 10% and 20% of industrial motors are controlled through a VSD. Therefore, industrial energy consumption must be reduced by this proportion, which is already energy efficient.

In addition, not all motors are applied to variable speed processes (i.e., where the motors do not run at constant speed all the time). Sources testify that at least 50% of industrial processes would benefit from variable speed drives, and that the proportion could be nearer 70%. The lower of these numbers has been used in the model.

Finally, what level of energy efficiency gains do VSDs typically enable, and how much can electricity costs be reduced? Most sources cite a range between 20% and 70%, depending upon the application. To ensure the model generates a conservative estimate, a low average savings level of 25% was used.

When this highly conservative model is applied to industrial electricity consumption in the 10 countries studied—USA, UK, France, Germany, Spain, Poland, Turkey, Russia, India, and China—the numbers shown in Figure 4 are revealed.

This is a careful estimate of the amount of money that industrial enterprises will potentially waste over the next five years, as a direct result of not implementing VSDs on all appropriate industrial processes.

Positive prospects  

The projected sums for the potential energy cost savings to be gained from full implementation of VSDs in industrial enterprises serve to illustrate what could be gained from just one of many possible energy efficiency initiatives that industrial enterprises adopt.

Appropriate financing arrangements are now available for industrial companies to employ. These financing tools provide an alternative to standard bank borrowing, offset equipment investment costs against energy cost savings, and effectively offer businesses a zero-net-cost method of acquiring energy efficient equipment. This not only saves on energy costs, but is often more productive than the equipment it replaces, and is less expensive to maintain and service than previous generation technology.

It appears that, with innovative financing methods now widely available, the outlook for energy efficiency investment is positive.

This article is an excerpt from a whitepaper titled “Turn Down the Power” written by Siemens Financial Services. Edited by Sidney Hill, Jr., contributing content specialist, CFE Media. For more information, visit finance.siemens.com.

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This article is part of the Industrial Energy Management supplement for CFE Media publications. 

See the links at the bottom of this article to read other articles in this supplement.