Talking Point: What price to pay for sustainability?

Whole building energy: solar, LED, insulation

What energy improvements should hoteliers get funded?

Charles Ogilvie, director at energy services project developer Joule Funding, explains the steps hoteliers can take to negate the upfront costs associated with sustainability improvements.

Hoteliers have been bombarded with sustainability messaging for some years now. We know that energy efficient LEDs can cut lighting electricity consumption by as much as 80%. We know that taking better control of heating and cooling, which accounts for around 60% of a hotel’s total energy spend, can significantly reduce costs and at the same time improve the guest environment.

Why, then, have many hoteliers been slow to make these changes? Is there a risk that, despite incentives like the EU’s Energy Savings Opportunities Scheme (ESOS) and the compelling financial and reputational benefits, some will continue to do nothing?

For many, the reason behind the stasis is not down to ignorance or lack of desire – but more a lack of readily available funds. Capital constraints in any growing business make for tough choices and it’s hard not to sympathise with a decision to focus investment on areas that more directly impact on guest experience.

Competitively, this is disastrous, isn’t it? Won’t those that have already put in place sustainability measures be alone in the charge to a newer, greener hospitality future, and be reaping the cost savings associated with efficient new technologies? Probably not.

Because, at the other end of the scale, ESOS requires all large organisations in the UK with 250+ employees or with a turnover of over €50m and a balance sheet in excess of €43m, to undertake a comprehensive audit of energy use, achieve compliance with government regulations, and notify this to the Environment Agency – by 5 December 2015.

Under ESOS, organisations (and the boards that govern them) will have their energy use clearly laid out before them. They’ll be able to see their (in)efficiencies, and will be encouraged to reflect on what they could and should be doing better. At this point the organisation - in this case the hotelier - should have all the information it needs to make a business case for sustainability improvements that make good environmental/guest/financial sense.

The challenge remains capital constraints, but with the right funding partner sustainability programmes, particularly in the area of energy efficiency, can be carried out with no upfront capital contributions, with the cost of the finance paid from the savings achieved. This makes for a hugely compelling win-win for the hotelier and for the climate.

It is completely understandable that smaller, independent hoteliers - frequently faced with slim profit margins - find it difficult to make the long-term investment into sustainability measures when guest improvements are the more immediate focus. Even schemes that have a pay-back of one or two years are often dismissed, meaning that hoteliers are missing out on long term cost savings, as well as environmental and reputational benefits.

With energy prices predicted to continue rising in the long term, savings of this type will become increasingly important to bottom line performance. These opportunities should be taken – and there are financial solutions available to help.

Some potential funding solutions
Some hoteliers might take advantage of a funding package where, with the right technology, sustainability programmes can be free at the point of installation, with finance payments made from the savings achieved, leaving a healthy share of the savings in their pocket (on the bottom line).

This can feel like a free sustainability upgrade – with lower cost energy bills into the bargain.

For larger projects this upgrade can be funded off balance sheet. For example those seeking to make the switch to LED lighting can apply for a funding package that looks a lot like a service contract, but includes a full refresh of lighting.

If you move ahead with a lighting services agreement, you’ll make energy cost savings from day one. The costs of the technology products and the installation will be charged, based purely on a share of actual savings made, so the technology and installation are de-risked.

Tax breaks for smaller projects
Smaller projects can be financed through simple hire purchase arrangements, meaning that whilst on balance sheet, hoteliers qualify for an Enhanced Capital Allowance (ECA). ECAs provide a tax break on energy saving products, and, for example, good quality LEDs fall within this category. Businesses can currently count 100% of the value of the asset as a capital write down in the first year.

When to fund?
Accessing funds of this type hasn’t always been easy and in the past applicants may have been reluctant to enter into a protracted decision-making period. As technology has matured, investors have become less wary, and now there is a critical mass of operational and successful projects, the funding pool is significantly bigger.

The key to a quick decision time (and to substantial funding pots) has been a more streamlined, investor-friendly approach. Lenders like security and if you work with one that has taken time to understand and pre-approve technologies in advance, the time needed for a decision can be significantly reduced.

For investors it de-risks the process. They know that they’re supporting a system that will deliver guaranteed efficiencies through market leading kit which will ultimately deliver customer business objectives at zero capex.

A range of funding packages exist of different sizes, and include the option of peer-to-peer funding.

If you know where to look sustainability doesn’t have to come with a cost attached. It simply needs a commitment to do things better.

Charlies Ogilvie is a director of Joule Funding.

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