Reports of hospitals and health care systems reducing energy use by as much as 20 percent and saving hundreds of thousands and even millions of dollars over relatively short periods are no longer uncommon.
Despite the potential benefits, hospitals can find it difficult to fund up-front capital when budgets are tight, when staff are limited to investigate and implement efficiency measures and when clinical issues frequently take precedence. Fortunately, there are a variety of financing mechanisms that hospitals can consider to meet the challenge.
To help advance energy efficiency and sustainability, the American Council for an Energy-Efficient Economy, Health Care Without Harm and Practice Greenhealth recently issued a paper called “Energy Efficiency Financing for Hospitals: A Discussion of Both Tried-and-True and New Opportunities.”
“It can be an issue of ‘Yes, I’d like to do these things, but I don’t have time to look for the money’ or ‘I don’t know where to look for the money.’ So, with all the facility-related fires that staff are putting out, determining how to finance energy-efficiency projects tends to fall off the radar,” says Paul Lipke, senior adviser, energy and buildings, Health Care Without Harm.
The paper discusses the strengths and weaknesses of four financing options that are available to hospitals to varying degrees, including:
- Self-financing, leveraging utility incentives and revolving funds;
- Energy service companies;
- Commercial property-assessed clean energy programs (C-PACE);
- On-bill financing and on-bill repayment programs.
The most common approach for hospitals to finance energy projects is a capital-budget allocation. Related to that are utility incentives, which are commonly available and can provide additional funding to reduce project costs.
The most common utility incentives are precalculated for specific energy-saving measures such as payments per light-emitting diode (LED) fixtures or per ton of cooling capacity for high-efficiency air conditioners, the paper states. Custom incentives employing engineering calculations to pay a specific amount per kilowatt hour reduced for energy savings are also common incentives.
With the revolving fund option, the health care facility tracks energy savings and deposits the money into a dedicated fund to finance future energy-efficiency projects. After the initial capital allocation, future projects become self-funded as energy savings grow, the paper states.
The advantage of capital funding is that it is potentially available to any hospital, particularly onesin areas where substantial utility incentives can be leveraged, according to the report. Disadvantages are that hospital capital budgets are often tight and approval can take years.
Energy service companies, or ESCOs, commonly use a performance-based contracting method in which the company identifies, implements and finances energy-efficiency measures. The ESCO’s compensation is directly linked to the actual energy cost savings, which the company commonly guarantees
ESCOs obtain financing and guarantee savings, making them attractive to hospitals without capital and risk-averse. But ESCOs prefer large projects, with most looking for projects with investments of $1 million or more.
Hospitals with financial expertise and capital can achieve greater net benefits by financing projects themselves, the paper advises, and savings claims by ESCOs may need to be monitored by a third party to guard against exaggerated energy reduction.
Another financial option involves C-PACE, which is expanding in availability. C-PACE is a special type of financing provided through municipal or state governments that provides the up-front capital through low-interest loans to property owners that make energy-efficiency or renewable-energy investments. Typically, property owners pay an additional assessment to pay the loan.
Tax bills have a low default rate, which means that financing is low-risk and rates are favorable, the paper states. But C-PACE involves a tax lien on the property, which may make it unsuitable for some facilities.
In the last financing option listed in the paper, utilities and other program administrators sometimes offer to fund the portion of energy-efficiency upgrades not covered by program incentives through loan payments that are included on the hospital’s utility bill.
Commonly, the value of the energy savings is greater than the loan payments, providing immediate cost savings. The drawback is that the on-bill refinance/repayment option is not commonly offered to large customers such as hospitals, according to the paper.
Visit Practice Greenhealth’s website to access the paper.