Considerations for financing low carbon projects in your organisation
We explore the steps you can take to fund carbon reduction projects, ensuring your organisation can meet both its financial and environmental obligations.
Many businesses make small investments in energy efficiency as part of their yearly budget, to make their energy estate more cost efficient, resilient and sustainable. However, simple efficiency projects often won’t make a big enough impact on reducing carbon emissions. To achieve ambitious net zero targets, organisations need to deploy a broader range of long-term carbon reduction projects. When it comes to financing low carbon projects - what can you do if you don’t have the capital to pay for them?
The good news is that access to funding is growing by the day. And now the real challenge for energy managers is working out what pool of money to access.
Let’s take a closer look at the steps you can take when financing low carbon initiatives in your organisation.
1. Align your financial goals with sustainability
COVID-19 hasn’t had a uniform impact on businesses. Some are doing well, but others are continuing to struggle. With most organisations focused on their bottom line, organisations need to balance their sustainability ambitions with their financial goals.
Our research revealed that 89% of businesses agree that demonstrating a low carbon footprint will be essential for their brand by 2025. As such, businesses that want to accelerate their net zero plans need to ensure that their financial goals tie in with sustainability.
Over the last 2-3 years, there has been a huge shift in businesses focusing on the environment. An increasing number of employees, consumers, investors and governments are placing greater emphasis on environmental responsibility when making decisions.
However, 70% of businesses say they need commercial and technical expertise to help them realise the growth opportunities that energy can unlock. Historically, organisations have been primarily concerned with energy spend and resilience, and although these continue to be important, a focus on sustainability should be their goal for the future.
With the cost of environmentally-friendly energy sources such as solar power starting to decrease, now more than ever, the right financial choice is also the right environmental choice.
2. Ensure your strategy will scale
Many companies face a battle between a ‘go-for-broke’ and ‘pilot’ strategy. Whereas many energy infrastructures are commercially successful in the pilot phase, some don’t work when they’re scaled up. Therefore, you need to be prepared to commit to a long-term decarbonisation strategy and approach early stage planning with a long-term view.
Achieving net zero targets won’t happen overnight – it’s a long-term commitment that will probably involve several separate projects. One of the biggest challenges businesses face is handling internal misalignment. In some organisations, the finance team is removed from the company’s strategic goals around decarbonisation. Achieving early alignment between your energy manager and finance team is key to a successful decarbonisation journey.
Our research found that 63% of sustainable businesses have a detailed efficiency and distributed energy investment strategy. So, it’s important that you invest time in working out what your financial and commercial objectives are. This requires up-front thinking around the complexity of the financial strategy, the potential length of the contract and possible hesitancy of being locked-in with a partner.
A new energy strategy is delivering substantial cost savings, reductions in carbon emissions and improved patient care at St George’s Hospital.
3. Assess your appetite for risk
Your approach to risk will determine the financing timeframe around your strategy. For example, organisations that are willing to take on more risk will likely have longer timeframes. With a longer financing term, you can access technology that will potentially prove to be an asset in the future. It’s important to have a clear view on your approach to risk and decide how much financial capital you’re willing to spend yourself, if any at all. If you do choose longer-term financing, you also need to be clear on your objectives, as it can restrict monthly cashflow.
In addition, companies should also look for any national or local funding pots that they could benefit from, which would include funds like Green Stimulus packages. You should also ensure that your credit is up to scratch when entering into discussions, as sourcing money with bad credit is much more difficult.
It’s important to consider the bigger picture of where your organisation is heading. Financing low carbon energy strategies needs to be approached from a portfolio perspective, rather than as a single investment. You should consider whether accessing more financing will provide enough value and help you reach your net zero target sooner.
4. Explore your financing options
New energy technologies can deliver significant cost savings and importantly, reduce carbon. Our Distributed Energy Future Trends report finds that 73% of businesses agree that technology and better operational practices produce the biggest efficiency gains.
However, implementing technologies can be an expensive up-front cost and organisations often don’t have the financial means, or the appetite, to invest directly in capital expenditures. Companies need to look for more innovative ways to spread the cost.
According to our report, 66% of sustainable businesses are joining energy technologies and assets together to maximise ROI. Centrica Business Solutions can help you spread the cost of implementing an energy infrastructure through our flexible finance options. We’re currently supporting thousands of businesses globally, helping them to overcome barriers to investment.
There are a range of different options available for financing low carbon projects, each with their own benefits:
- Energy Services Agreement (ESA) finances the installation of multi-technology solutions over a period of up to 20 years, funded either by Centrica or 3rd party finance, including O&M.
- The Discount Energy Purchase (DEP) option finances on-site generation assets. Over the course of 7-15 years, you pay a fixed p/kWh unit rate for the electricity generated, inclusive of ongoing maintenance.
- A Power Purchase Agreement (PPA) finances on-site renewable generation over a period up to 25 years. This option uses a single agreement inclusive of the asset, financing and operation.
Alternatively, you could enrol in a Demand Side Response (DR) programme, where you can generate revenue from your energy estate and reinvest it into furthering your decarbonisation journey. Your organisation will benefit from reduced energy bills by adjusting consumption in peak periods. This can improve your site resilience and enable you to better manage risk through real-time energy asset monitoring. Organisations also benefit from gaining insights into operational activity and asset performance while accessing more energy markets and new sources of revenue.
5. Check if you are eligible for government support
The transition to a sustainable economy is increasingly being support by governments around the world, and the UK is leading the way in many respects.
Most recently in the Budget, the Chancellor of Exchequer Rishi Sunak announced a Super Deduction for businesses looking to implement capital projects. This deduction can help organisations reduce their corporations tax expenditure incurred from 1 April 2021 until the end of March 2023. Companies can claim 130% capital allowances on qualifying plant and machinery investments.
The government also continues to offer support through a range of schemes targeted at supporting the transition to sustainable business, including:
- Industrial Energy Transformation Fund
For installing energy & carbon reduction measures including heat pumps.
- £1bn Energy Fund
For public sector organisations or business looking to cut carbon emission footprint.
- Heat Networks Investment Project (HNIP)
For organisations requiring sustainably generated and utilised heat.
- Salix Energy Efficiency Fund
For improving efficiency, reducing carbon and lowering bills in the public sector.
When investigating decarbonisation projects, it’s vital that you have a solutions partner that can assist in accessing government support and incorporate that directly into your business case and commercial agreement.
Financing low carbon reduction projects: how we can help
Navigating your financing options can seem like a daunting task. That’s why at Centrica Business Solutions, we offer a range of zero-CAPEX options that enable you to implement advanced energy infrastructures without capital.
Discover how Centrica Business Solutions’ Energy Pathway can help you define your approach to energy implementation, establish your goals and identify opportunities.