Jen Weiss is a Finance Analyst at the Environmental Finance Center.
Quick … what do you think of when you hear the word “revolving?” A revolving door? A revolving restaurant? Perhaps a revolving credit card?
In the environmental finance world, the term “revolving” is being paired up with the equally unassuming term “green” to create an effective energy efficiency and renewable energy financing tool called a green revolving fund. At its core, it is a revolving credit instrument, operating much like a credit card which, according to Merriam-Webster, is a pretty straight forward financial tool: “a credit which may be used repeatedly up to the limit specified after partial or total repayments have been made.” But a green revolving fund is not your everyday Visa or Mastercard with a $5,000 upper limit. It is the more sophisticated older sibling of the credit card, the sibling that has grown up and gone off to college. And while it is there, it is making a significant contribution to the bottom line.
Unless you are the administrator of a college or university, you may not have heard about the recent growth in the use of green revolving funds to finance campus-wide energy conservation projects, but hundreds of colleges and universities have started to take a closer look at this important financing tool, and with good reason. Green revolving funds can be used to fund multiple types of projects with different timelines, payback periods, and returns. In addition, green revolving funds can be used to overcome some of the challenges associated with certain energy conservation projects, including project management, accounting, and the always important measurement and verification of energy use reductions.
How it works
A green revolving fund is designed to leverage investment from one or more sources (sometimes referred to as seed money). The initial investment is used to fund energy conservation projects and is repaid from the operational savings (or a portion of the savings) that result from the projects. The savings are tracked, monetized, and returned or “revolved” back into the green revolving fund. As the fund is repaid from these energy savings – or, more accurately, avoided energy costs – the balance can be used to finance new projects, creating a leveraging effect not always experienced with other financing tools.
Green revolving funds can be set up using only one type of initial investment (i.e. from student fees); however, for many colleges, universities and other organizations, a robust green revolving fund will likely require that the initial investment come from multiple sources including external loans, endowment fund investment, alumni donations, grants and allocations from operating budgets. Just as each college has its own unique energy conservation projects, the green revolving loan fund can be established from a unique set of funding sources designed to make the most of the college’s resources.
Why it works
To see how effective a green revolving fund can be, here’s a simplified example:
E. Green College has approximately 2,000 students and 90,000 square feet of building space. Because the school was built in 1950, much of its lighting and equipment is aging and inefficient. A group of enthusiastic E. Green students – being the environmentally conscious people that they are – developed a proposal to upgrade the lighting fixtures in some of the larger and most used campus buildings. They estimate the cost will be $30,000 and it will reduce electricity costs by approximately $15,000 a year.
At the same time, the equally ambitious facilities group at E. Green College has made a recommendation to upgrade the aging HVAC equipment and energy management systems at the school. They have a range of projects they would like to do to improve the efficiency of the heating and cooling of the buildings ranging from installing programmable thermostats to an upgrade of their central plant boiler. In total, the projects will cost $470,000 to implement and reduce electricity costs by $100,000 annually.
Both groups approach E. Green’s president with their proposed projects, excited for the opportunity to help the college reduce its energy bills and promote sustainability on campus. The president, while preferring to complete all the projects at one time, realizes that the school has capital and debt constraints and must do the projects in phases. She expects that the college will be receiving a $50,000 grant to do energy conservation projects and believes that she can set aside another $50,000 from her operating funds. She decides to ask her network of generous alumni for an additional $100,000, bringing the total available to fund the projects to $200,000. As a savvy college president, she knows that she can leverage the $200,000 she has available into $500,000 worth of projects by utilizing a green revolving fund, repaying the fund each year with the reduction in energy expenditures that result from each project (the avoided energy costs). With her initial funds, she decides to move forward with the $30,000 lighting project and $170,000 of the heating and cooling projects.
In five years, E. green College has completed $500,000 worth of energy conservation projects with initial funding of $200,000. Plus as earlier projects are repaid (like the lighting project in the example above), the additional savings from reduced energy usage can be allocated by the college to other departments or, in some cases, the additional savings can be put back into the green revolving fund for investment in even more energy projects.
The Bottom Line
This is, of course, a simplified example of what an actual green revolving fund would look like. There are multiple considerations to be made when implementing a green revolving fund including the development of a fund committee, an over-riding energy policy for campus and an accounting and tracking mechanism for repayment of the fund. But for colleges (and let’s be honest, any organization with energy projects they’d like to implement), a green revolving fund is a great financing tool to consider.
So, now what do you think about when you hear the word “revolving?” I’ll bet you it’s no longer a door!