Alternative or Green Energy has become a popular item in today’s world. The opportunity to produce your own power or to install equipment which uses less electricity and is more efficient is appealing to most of us. Not only do we save money, but we are also helping the environment. Who would be against that?
Clearly there is a large upfront cost in producing your electricity or in purchasing equipment that uses less electricity. Sometimes this comes to the lender in the form of a loan request. How do you treat such a request? Conventional wisdom would figure an estimate of the dollars saved in energy costs which could be used for other operational or loan servicing expenses. Thus, one would add the savings back to the net operating income number and calculate debt service and free cash flow after based upon that. But this leads to the question, “Will the borrower actually see these savings?”
A September 9 article from the BBC is titled, “Solar Panels: Thousands of Customers Complain.” The article starts with a retired man from Rowlands Gill who took out a loan with Barclays of £10,000 over 10 years to install solar panels on his roof after being contacted by a salesman for PV Solar UK. He was told the power savings would pay for the debt service requirements. But the system fell woefully short and he had to dip into retirement saving in order to pay the loan. An independent study found that even after 20 years of production, the income from the panels would not cover the loan.
The Financial Services Ombudsman has seen over 2,000 complaints and Barclays Bank is setting aside £38MM to deal with potential claims.
A little closer to home, in one of my banking positions, we had a food warehouse decide to update their entire cooler system with units which they were told, would use 2/3 of the power. They made the decision to replace all of these, since the debt requirements were less than the projected savings on their electric bill.
A year after the new equipment was operational, the company was seeing savings, but only 1/3 of what they were promised. The company was able to continue to make all the debt payments, but the expected cash flow was not there.
The City of Georgetown, Texas decided in 2016 to power the entire city by wind and solar sources. They used grants and loans to establish their own power sources and purchase power from renewable fields with 20-25 year contracts for the energy. By late 2018, the city was rethinking this structure as the cost of power for wind and solar energy ended up 20% higher than budgeted. The city also paid more in 2016 and 2017 than was they expected to pay for power. One city council member said the city’s accounting staff never considered what would happen if the price of electricity would go down when they created the forecasts.
In the case of Georgetown, the higher expense is devastating to the city budget. Power storage is also a problem. Using only the renewable sources, there is enough power built up for electrical needs for one evening during a cloudy day in the winter.
In each case, substantial amounts of money were spent on power producing or efficient electrical equipment or on renewable energy purchase contracts. These all promised savings which did not materialize, leaving the owner with the additional cost of the debt or the opportunity cost of their cash investment.
The lesson here for the lender, is to not fully count all the energy usage savings or the income from power generation from renewable sources when considering a credit request that would use renewable energy production or energy efficient savings when underwriting a credit. True there may be some savings, but without substantial history, this projection is an unknown. Basing your debt repayment on projected utility savings is risky and the projections often do not come true.