When pitching energy efficiency projects, providing an economic analysis of project benefits is an essential sales technique. However, the traditional approach of estimating energy and maintenance savings is not enough - it shows your customer only part of the picture.
This article provides examples showing the importance of each of these three financial components. By including these in all proposals, customers will see the entire picture when reviewing your project's economics. As you know, an informed customer is much more likely to say yes!
Missing Component #1: Special 2019 Tax Benefits
In 2019, HVAC retrofits can be written off for 100% of the installation cost in the first year based on a recent update to Section 179 of the tax code. Most of your customers will not know about this benefit and it has a huge impact on project economics. The same special 2019 Tax Benefits also applies to replacements of roofs and systems installed to provide fire protection, alarms and security. A technique to include special 2019 Tax Benefits is shown further below.
As you know, your customer’s assessment of the benefits of deploying capital for a project (especially if unplanned) is critical in their decision making. The CFO must consider whether additional funding capacity is available given the investments already approved in the budget. So, even if they like your project, if liquidity is tight, they will have a bias towards a repair without you even knowing.
Therefore, you should offer financing in all your proposals. Otherwise, the CFO will not know it's available. Don't wait for them to ask because CFO’s do not like to ask vendors for financing. I would have shuddered at the thought of doing so when I was a CFO.
So, let's assume your customer uses their own capital to fund the project. You still benefit if your financing proposal shows how annual debt payments are offset by project savings and Special Tax Benefits for 2019. Though actual debt payments will differ slightly, your customer will see a snapshot of how project savings plus tax benefits offset debt payments.
By including these first two financial components, you've given your customer a much clearer picture - but there's one more piece that's missing.
For example, assume Project A and Project B have identical costs and payback periods. The equipment in Project A has a relatively short economic life while Project B has a life of 25 years. The long-term project economics for Project B are clearly superior and are captured when viewing Cumulative Net Savings (see below).
Let’s Put It All Together
We are going to create a set of project assumptions and show you a comparison of what your customer sees under four very simple scenarios:
Scenario 1: The Traditional Approach - Project Savings Only
To show estimated Project Savings (see Total Annual Savings below) over the next ten years, your presentation might look something like below. For simplicity, the examples below do not assume a degradation in Total Annual Savings.
Your customer can easily see their annual savings of $100,000 for $500,000 project - simple payback of five years.
Scenario 2: Add Special 2019 Tax Benefits
Now, let’s layer in the Tax Benefits in addition to the traditional Total Savings analysis above using the same assumptions.
Tax Benefits increase the project’s Year 1 true Total Savings from $105,000 to $205,000. The tax benefits of $105,000 are 21% of the Total Project Cost. By including the Year 1 Tax Benefits, your project pay back is 4 years instead of 5.
• Year 1 Savings: $205,000 (from the box above)
• Year 2 - 4 Savings: 300,000 ($100,000 for 3 years)
• Total Savings: $505,000
"Special 2019 Tax Benefits are a game-changer in evaluating project economics. "
Scenario 3: Add Financing & Annual Debt Payments
Now, let’s look adding a Financing proposal showing annual debt payments over a 5-year period. At first glance, your project has recurring negative net cash flow in Years 2 - 5.
Scenario 4: Add Cumulative Net Savings
The observation in Scenario 3 is quite misleading. It ignores the Year 1 Tax Benefits highlighted in yellow below AND Cumulative Net Savings in purple. The project has positive Cumulative Net Savings for Years 1 through 4 and is ~ break-even in Year 5.
After the debt is paid off in Year 5, Cumulative Net Savings goes through the roof!
"In order to truly assess a project’s economics, you must show your customer Cumulative Net Savings which includes project savings, Special 2019 Tax Benefits, and annual debt payments over a long period of time."
So don’t forget to include these three financial components when submitting project proposals.
1. Show Special 2019 Tax Benefits, which are very substantial and lower your project’s true Year 1 cost by 21%.
2. Offer a Financing proposal - CFOs do not like to ask vendors for financing. The financing proposal must include annual debt payments showing how they are offset by project savings plus Special 2019 Tax Benefits.
3. Show Cumulative Net Savings, which pulls everything together reflecting the real benefits of replacing long life HVAC equipment.
By combining all three of these financial components, your customer will see a complete picture of your project's economics. An informed customer is always more likely to say YES to projects with strong economics.
By Larry Derrett,founder and CEO, EnFlux Building Solutions
Interested in learning more from Larry on financing energy efficiency projects? Join us at ELEMCON in Denver in May for Larry’s workshop, Financing Sustainability Projects: Why CFO’s Love C-PACE and Other Financing and Tax Considerations.
