Financing
Overview
Most of the existing signatories to the Commitments affirm that their work on sustainability saves money. But ensuring that cost savings can occur, that they are properly tracked, and, critically, that they can be reinvested in further climate actions, requires planning and support from several offices on campus. To fully understand the impact of the projects and the plan in its entirety, the financial impact on your bottom line must be made explicit. This will not only inform those internal to the institution but can assist those attempting project replication.
There are more options than ever before in terms of financing, and it’s arguably one of the most innovative areas of development for higher education in sustainability. From leveraging investment among partner institutions (say in a joint power purchasing agreement) to multiple options for generating small amounts of flexible funds to invest in projects, the possibilities are diverse.
However, higher education Institutions have complex structures, operationally and financially. Though they are often nonprofits, they function differently from regular nonprofit organizations (NPOs). Large endowments, tuition/service fees, and other programming help sustain them as institutions. The financial information needed to make important decisions for those within colleges and universities, may not always be transparent, accessible, or easily understood. And at some point in implementing climate action, particularly when creating deep cuts in emissions, there are still large bills to pay. That can be hard to swallow.
The following information will provide some highlights of options to consider across a range of higher education institutions, and some additional resources and case studies are also available at the end.
Assessing Costs and Benefits
Before deciding what sort of financing options to consider to initiate a project, one of your first steps is to assess the likely cost and benefit of a project. Of course, there are always multiple benefits to consider in sustainability action, not all of which are directly financial. A few considerations of the less quantifiable benefits include:
- Relevant public service to communities; project becomes a demonstration for others to learn from
- Students who will be a long-term contributor to solutions to climate change (and other complex problems) and have additional career opportunities as businesses and communities need different planners, technicians, etc
- Academic enrichment for students and faculty
- Improved recruitment and retention of new students and faculty who are increasingly supportive of colleges and universities that embrace sustainability and serious climate action
- Benefits from upgrades to the campus physical plant, e.g. newer equipment which uses less energy and costs less to operate, reduces maintenance requirements and costs, and may also enhance comfort and safety and thus improve academic and research productivity
- The possibility of attracting more research dollars for what are burgeoning fields of study (renewable energy labs, resilience centers etc)
- Substantial public relations and public image value
- A sense of relevance and pride from being on the cutting edge and among the leaders tackling the problem of climate change
- Contribution to overall capital improvement, and alignment with campus capital development plans, strategic plans and goals
At the same time, additional considerations – opportunistic investment, overlap with existing priorities, incentives available – can also be important drivers and benefits. For example:
- Are there incentives from government or utilities you can take advantage of?
- Does your college or university have a financing resource available from which to draw project funds, or do you need to considering borrowing funding?
- Are there grants from foundations that would be available to specific projects?
- Is there leverage that can be applied from other projects. For example, if an existing project or investment has overlap or synergy with a possible additional project, then overall costs might be reduced and benefits enhanced if both were coordinated.
- Can you scale up an existing project or invest in a new project that has potential to be scaled up?
- Is there interaction with state or regional greenhouse gas mitigation initiatives (e.g. the NE Regional Greenhouse Gas Initiative RGGI) that can provide wider benefit
- Are benefits transferable to the wider community or other schools and/or can you invest jointly in a solution, spreading both the cost and the benefit (e.g. with District Energy solutions, or in the case of resilience, investing in natural buffers for flood protection or heatwave-focused cooling centers etc)
It’s also important with all projects, to consider the capacity to undertake the work, even if the financing is available. If additional staff or contractors are needed that are not initially budgeted for, this can quickly derail a project.
In addition to all the considerations above, quantifying the potential costs and benefits is important for most administrators and helps to assess, over time, what projects yield the best returns of cost savings, emissions reductions, and of avoided costs in the future (from climate impacts for example). To that end, below is a table of different types of economic analysis that you can undertake in assessing cost/benefit.
| Economic Analysis | When to utilize | How to apply | Applicability to sustainability |
| Life-Cycle Cost Analysis (LCCA) | If there is new equipment being purchased, this analysis provides an overview of the cost of the equipment over its estimated life | Bridges the disconnect between capital and operating budgets and, in doing so, allows for more informed decisions about which projects
promise optimal returns over the installed lifetime of the equipment or facility in question. |
Many sustainability projects require higher upfront capital investments while promising greater life-cycle returns because the projects reduce energy consumption, maintenance hours, and other expenditures |
| Payback Analysis | An easy starting point for comparing projects that compete for funding. Payback is particularly relevant when an institution is interested in identifying projects that return capital in time for the institution to meet other obligations it has scheduled simultaneously | The period of time required for the investment to pay for itself; When conducting payback analyses, business officers should be sure to factor into their economic returns not only the headline source of returns (energy savings for efficiency projects, decreased energy prices or increased generation revenues for renewable power projects, etc.), but also operational cost savings and other “ancillary” sources of project returns | Payback analysis does incorporate operating cash flows that a project generates beyond its initial funding and unifies the capital/operating budget analysis process. |
| Simple Payback | Factors all project-related cash flows except for financing; relatively
straightforward metric for comparing projects that compete for a single source of funds or whose funding has yet to be determined |
Subtract the Energy Savings from the Capital Cost to get the Annual Cash Flow. After calculating the Annual Cash Flow for each year until the investment has paid for itself, the Cumulative Cash Flow can also be calculated based off each year’s cash flows | Some sustainability projects that cost more initially pay for themselves more quickly than their less expensive alternatives |
| Payback with Financing | When financing for the investment is taken into account and includes the interest and any financing terms | Same as the simple payback but takes the financing of the investment into account as well | Financing costs impact projects’ economic returns significantly and are an important component of any payback analysis |
| Return on Investment | In order to determine the project’s total profitability; projects can be ranked according to their ROIs to determine which projects will be funded | The ROI measures a project’s profitability by dividing the project’s positive cash flows by its investment costs. It is calculated over the project’s full useful life or a shorter period | Very commonly used for Energy Efficiency Projects |
| Net Present Value | It allows an institution to value a project based not only on the scale of the project’s cash flows, but also on the timing of those cashflows; it measure the profit potential or cost of a sustainability project, expressed in today’s dollars. NPV analysis helps decide between mutually exclusive projects | Sum the capital cost and the operating cost to determine the annual cash flow. The NPV is calculated using the discount rate. Institutions frequently choose the rate at which the institution might borrow money to fund the project | Used commonly to determine if installing a capital cost heavy system versus one which larger annual maintenance costs makes more sense |
| Internal Rate of Return | Used to identify the interest rate that makes the net present value of a project’s cash flows exactly equal to zero. Can be used to rank order projects, as with ROI, and to determine the cost of funding that, all else being equal, represents the breakeven point for project economics. | Removing the annual energy savings from the initial capital cost, the rate of return can be calculated over the period it takes to finance the entire project. | Because IRR analysis integrates the time-value sensitivity of NPV analysis in a metric that is not dependent on project scale and therefore lends itself more readily than NPV to project-by-project comparison, business officers frequently use IRR analysis to analyze and prioritize among sustainability investments. |
| Cost of Delay | By analyzing the cost of delaying a project in terms of energy savings or generation revenues foregone during the period of delay, business officers can check the common instinct to delay projects until internal funds become available rather than pay more for external funding immediately | Subtract annual payments for financing costs from the savings of immediate project investment to determine annual cash flows | Energy efficiency vendors emphasize the cost of delaying energy-saving investments in buildings and other infrastructure, and several online resources help building owners understand and implement this type of analysis. |
Having assessed cost/benefit using your preferred techniques, taking into account both direct and indirect advantages and investments, there are now a number of different options to actually finance the project. Below is a list of options with a few case studies below to illustrate some of these options in practice. We encourage you to send us more examples that we can highlight and use to illustrate successful approaches.
Financing Options
In recent years, there has been a surge of different options to finance sustainability actions, including carbon reduction and resilience. For example, a brief lists includes:
- Self-financing performance contracts
- Revolving funds that are replenished by savings generated by conservation measures as well as perhaps annual budget allocations
- Grants from government, foundations or business partners
- Energy efficiency and renewable energy incentives provided by government or utilities
- Borrowed money from tax-exempt bonds or other types of borrowing
- Financial instruments specifically designed to promote renewable energy development
- Alumni donations and other fundraising (e.g. UNC’s Sustainability Seed Fund)
- Student activity fees and graduating class gifts
We highlight a few below and then provide some case studies, examples, and additional resources.
Green Revolving Fund
(Description courtesy of the Sustainable Endowment Institute. More information on GRFs available from SEI in the Additional Resources).
A Green Revolving Fund (GRF) is an internal fund that provides financing to parties within an organization to implement energy efficiency, renewable energy, and other sustainability projects that generate cost-savings. These savings are tracked and used to replenish the fund for the next round of green investments, thus establishing a sustainable funding cycle while cutting operating costs and reducing environmental impact.
There are several advantages of GRFs that go beyond one-time investments. Revolving funds build the business case for sustainability, engage and educate the campus community, convey reputational benefits, and create fundraising opportunities in a way that conventional investments do not. GRFs are being successfully employed by a wide range of schools— including public and private institutions with varying sizes, locations, strategic priorities, and levels of endowment wealth. These funds regularly achieve high financial returns.
A case study (also listed at the end) of a college using a GRF: Denison University
This case study focuses on the Green Hill Fund at Denison, which is a Green Revolving Fund (GRF) assisted by the Sustainable Endowments Institute (SEI).
Tax Exempt Lease Purchase Agreements
Tax Exempt Lease Purchase Agreements (TELP) are a unique lease structure available only to tax-exempt organizations, such as government, education and not-for-profit entities. Leases are structured so that the full cost of the project assets is amortized over the lease period.
A lease is a contract between two parties wherein the lessee agrees to pay the lessor for use of an asset. Leases can be structured in a variety of ways which impact the fee schedule, term of the lease, renewal conditions, termination options, asset maintenance and a number of other factors. Lease rates often are lower than loan rates. Leases are divided into two categories: operating leases and capital leases.
In an operating lease, the lessor transfers equipment usage rights to the lessee for the term of the lease. There is no transfer of ownership or option to purchase the asset at a reduced rate, at the end of the lease. This does not affect the balance sheet because the lease is treated as an operating expense.
A capital lease is an on-balance sheet expense treated as a capital expense. There is flexibility in assigning payments, which often can be scheduled to coincide with savings from energy efficiency projects. The lessee often also has the option of purchasing the equipment at the conclusion of the lease for a price below market value.
Contracts typically include a nominal purchase option (e.g. $1) which is the lessee is expected to exercise at the end of the lease period. Given these structural elements, lessees may actually take title to the assets upon execution of the lease agreement, while the lessor retains a security interest in the assets during the contract. For energy efficiency projects, lease payments are generally structured so that energy savings resulting from the equipment are sufficient to cover principal and interest payments. Lease rates are lower than financing for commercial entities because interest paid to the lessor is not subject to federal taxes.
Benefits
- Clearly defined payment schedule
- Accounting advantages for operating leases (subject to change in the near future)
- Relatively low transaction costs and low financing rate
- Relatively long terms available for organizations with good credit
- Accelerated schedule for structuring and financial close
Challenges
- Capital leases are on-balance sheet
- Leases are largely credit-based transactions favoring building owners with stable credit – limited options for organizations with less than investment grade credit
- Pricing and length of lease depend on market conditions
- Relatively limited universe of capital providers (e.g. commercial banks)
- Strict lender requirements around choice of contractor and project size
Power Purchase Agreements
Power Purchasing Agreements (PPA) are primarily used for financing and implementing onsite renewable energy installations. A PPA is a contract between an independent power producer (provider) and private entity (buyer). The provider owns, operates and maintains a renewable energy system sited on buyer property for the life of the contract. The buyer essentially rents out a portion of their property, for example roof space, to the provider and agrees to purchase electricity generated by the system for an agreed upon price (often escalating) and time period. Where legal, a PPA can be established for almost any type of renewable electricity generation technology. Most commonly, PPAs have been used for rooftop solar photovoltaic arrays, although PPAs have also been utilized for windmill installations.
Buyers typically are property owners looking to reduce their energy costs over the long term. By entering into a PPA the buyer has a known price of electricity from a renewable source for the duration of the contract. At the end of the contract, the buyer owns a renewable system, and receives free electricity for the remaining lifetime of the system (excluding maintenance costs). In many cases buyers also are third parties such as utilities which need to supplement their load for reasons such as a requirement to purchase electricity from renewable sources, or private companies which need to meet a renewable portfolio standard (RPS), or other incentives to purchase electricity from renewable sources. Buyers always have the option of establishing a new and independent PPA to sell the electricity to a third party, such as a utility (selling the power back to the grid).
Benefits
- Costs to the buyer are clearly established at the outset and fixed for the duration of the contract
- No up-front cost to the buyer to install the renewables, as the PPA provider provides the necessary capital
- Provider assumes responsibility for equipment operations and maintenance costs
- Expected volume of electricity produced is stipulated, with various, predetermined, results for generation above and below agreed upon levels
- Often is some combination of tax credits, rebates and carbon credits available to both parties, which can improve the investment profile of the renewable installation
Challenges
- Buyer does not obtain the benefits of ownership of the asset (e.g. depreciation, tax)
- Arrangement results in a long-term lease on the property
- Contract terms can be long
- All-in cost likely more expensive than typical bank financing
An example (also found in the list of examples at the end) of a college using a PPA: Smith College, in Massachusetts.
An example (also found in the list of the examples at the end) of a college using a PPA: American University, Washington DC, and George Washington University, Washington DC, worked together on a joint PPA.
Efficiency Services Agreements (ESA)
An Efficiency Services Agreement (ESA) is a pay-for-performance financing solution that allows building owners to implement energy efficiency projects without any upfront capital expenditure. Under this power purchase agreement (PPA)-like structure for energy efficiency, an ESA provider pays for all development and construction costs. After a project is operational, the building owner uses a portion of the cost savings associated with reduced energy consumption to make periodic service payments over the ESA term. ESA payments vary by billing period according to the actual amount of achieved savings.
Like a typical utility bill, ESA service payments are based on a measured quantity of energy units, i.e. kilowatt-hours of electricity and therms of natural gas. However, ESA service payments are based on energy units that are saved, enabling building owners to implement and repay energy efficiency measures with no additional capital or operational costs. The price per unit of energy savings is an output-based charge (e.g. $.08 per kWh of electricity saved) that is set at or below existing utility prices.
For each project, the ESA provider enters into the ESA directly with the building owner and pays a third-party contractor (for example, an Energy Services Company – an “ESCO”) to engineer, implement and maintain the energy efficiency project. Although most ESA projects to date have been implemented with large ESCOs, the emergence of independent energy savings insurance products have opened the door for ESA providers to work with a broader range of contractors and energy service providers.
Key features of an ESA generally include:
- ESA provider funds 100% of all design, engineering, and construction costs
- Projects can include a broad range of energy efficiency technologies and measures
- ESA provider owns and is responsible for ongoing maintenance services for all equipment, with customer buyout options available
- ESA provider recommends efficiency improvement projects during the ESA term (i.e., the ESA provider adds in new sources of savings/efficiency measures over time)
- After the ESA term expires, the customer has the option to purchase the equipment at fair market value
- ESAs are designed to be treated as a services agreement and not as a lease, potentially allowing for off-balance sheet accounting treatment for the owner. Properly crafted ESAs are expected to maintain this treatment under future potential changes to lease accounting standards. However, each customer is responsible for making their own accounting review.
- The ESA is similar to the shared savings model, in which an ESCO funds the cost of an energy efficiency project and the owner agrees to repay the ESCO using an agreed-upon percentage of measured and verified savings from the project. This model is not widely offered by ESCOs today.
Benefits
- Owner can implement comprehensive efficiency upgrades with no upfront cost
- Cost of maintaining equipment (as well as measurement and verification of savings) is borne by ESA provider
- Owner has a significant degree of flexibility in negotiating the specific terms (e.g. contract length) of their ESA
- Turnkey approach in which the ESA provider is responsible for the time and resources required to develop a comprehensive project
- Owner is only responsible for making payments on savings that are realized
- ESA payments are an operating expense similar in nature to a regular utility bill, although each owner is responsible for conducting their own accounting review
- Treats energy efficiency as a resource; owners can redirect current utility expenses to cover ESA payments
Challenges
- Limited number of ESA providers in the market; model still in the proof of concept stage
- ESA terms generally do not exceed 12 years
- Projects generally need to be greater than $1mm
- Efficiency projects do not receive the same attractive tax benefits given to renewable energy projects
- Limited available sources of debt for ESA projects
- Lenders require a large ESCO performance guarantee or equivalent energy savings insurance
Managed Utility Service Contract
A Managed Utility Service Contract (MUSC) is an off-balance sheet financing mechanism in which a project developer installs energy efficiency measures at no upfront cost to the owner, and creates a special purpose vehicle (SPV) to assume payment of a building owner’s energy bill. As a part of the contract and in lieu of a monthly energy bill, the building owner pays the developer an amount that is equal to or slightly below their historical utility bill. From this payment, the developer is then able to pay the new (lower) utility bill, cover their financing costs on the project, and pay other ongoing equipment-related costs including maintenance. Similar to the Energy Services Agreements, the MUSC agreement has qualified for off-balance sheet treatment in the past although this cannot be guaranteed on an individual project. In this model the project developer assumes full responsibility for paying the building owner’s utility bill during the contract period.
Benefits
- Owners receives new equipment at no upfront cost
- Efficiency improvements are structured to be cost neutral to the owner over time
- Ongoing cost of maintaining equipment (as well as measurement and verification of savings) is borne by the developer
- Developers have a relatively high degree of flexibility in structuring deals
- Turnkey approach offloads the time and resources of developing a comprehensive energy project to a third party
- Owner is subject to fixed payments over time
- Developer may not need to obtain a security interest in the installed equipment, avoiding conflicts with existing lien holders on the property
Challenges
- Limited number of MUSC providers in the market
- Model still in the proof of concept stage
- Imputed cost of capital to the owner is higher than some other financing options
- Off-balance sheet accounting treatment cannot be guaranteed
- MUSC terms generally do not exceed 10 years
- Projects generally need to be greater than $1mm
- Owner payments may be adjusted during the contract due to significant exogenous factors such as extreme weather patterns or fundamental changes to the building’s energy use
Voluntary Student Tax/Green Fee, and Student Managed Funds
Though not typically a large fund, the student body of many schools has voluntarily decided to tax themselves in order to provide ongoing investment in sustainability projects. Often less than $25 a semester or a year, the student funds nonetheless provide thousands, and sometimes hundreds of thousands of dollars to put towards tangible projects. In some cases, the administration of the college has agreed to match funds, Often the fund is then managed by a student sustainability committee and the students decide on projects to fund, usually on a competitive basis.
Additionally, students sometimes have the opportunity to help manage a Social Impact Fund and these can be investment funds with obviously higher complexity and responsibility in managing the finances. These can provide intersection between economics, MBA or other finance-related students with sustainability and environmental focused students. Some of these funds are significant (hundreds of thousands of dollars individually).
Benefits
- Engages students in the decision-making progress and teaches about finance management, competitive grant making, and invests students in outcomes
- Cost per student is small, but impact can be significant
- Administration can match ‘green fee’ funding – relatively little cost for significant leverage – and builds administration’s relationship with students, student organizations and project teams
- Allows administration to combine returns on investment (through social impact investing) with locally visible and impactful results
Challenges
- Green fees usually don’t yield enough revenue to develop larger scale projects
- projects can reflect student priorities more than overall campus strategic priorities
- may not yield the maximum reduction in greenhouse gases (though not all will have that goal)
An example (also listed at the end) of a college using a green fee: Agnes Scott College in Georgia
An example (also listed at the end) of a college using a Social Impact Fund: Oberlin College in Ohio
Case Studies and Examples
This case study conducted by students provides an overview in environmental impacts, financial savings, and university-wide benefits.
This case study focuses on the Green Hill Fund at Denison, which is a Green Revolving Fund (GRF) assisted by the Sustainable Endowments Institute (SEI).
Provides case studies on campuses that have saved significant funds by investing in sustainability projects.
University of California, Berkeley- Sustainability Report 2014
This sustainability report gathers metrics and data about sustainability initiatives on campus, and their impact on various aspects of campus life.
Boston University- Sustainability Revolving Loan Fund
This case study depicts the usage of the RLF as part of Sustainable Endowment Institute’s Billion Dollar Green Challenge.
This example illustrates the use of a student-run Green Fee
This example focuses on one of Oberlin’s many sustainability-focused projects – the initiation of a Social Investment Platform that allows students a part in the management of funds
This example is an example of a solar power purchasing agreement
American University, and George Washington University,
The largest PPA (as of 2015) in higher education – an example of three institutions (also includes GW University Hospital) embarking on a joint PPA for solar energy.
Finance Resource Guide
(this is the financing-relevant component of a more complete resources guide)
| Type of Reference | Name of Reference | Description |
| Green Revolving Funds Power Purchasing AgreementsAccounting |
Sustainable Endowment Institute’s Green Revolving Fund GuideEPA’s Power Purchasing Agreement Resource | An introductory implementation guide providing practical guidance for designing, implementing, and managing a green revolving fund (GRF) at a college, university, or other institutionThis resource, while federally focused, provides training, webinars, a quick reference guide and more information on PPAs
Provides definitions of financial terms as applicable to to nonprofits specifically. Website in general provides free tips, advice, and important information for nonprofit institutions (including higher education institutions) |
| Nonprofit Finance Fund- Nonprofit Finance 101 | Overview of financial tasks and information related to managing nonprofit organizations. Provides key financial decision-making techniques that may assist those in higher education institutions. | |
| The Prince’s Accounting for Sustainability | Connects business strategy and sustainability, provides Key Performance Indicators (KPIs) and actions taken, and provides a Connected Performance Report, which is a balanced assessment of progress against agreed targets and towards intended outcomes. | |
| Project Sigma | Utilizes accounting terms and definitions previously created by those in the sustainability field, that are specific to institutions chasing sustainability | |
| Accounting for Sustainability: Practical Insights Study Guide | Provides practical definitions and applications of accounting terms specific to sustainability. Also provides case studies of application | |
| Wright State University | Written by a professor of economics, this provides a good understanding of reading financial statements, specifically for colleges and universities | |
| GWSCPA-Nonprofit Accounting Basics | Basic understanding of the relationships between different financial terms and financial statements. Gives an overview of nonprofit needs and financial implications |