Most people will be aware that there are now companies in the LED market place who are offering “A No Upfront Investment/No capital Expenditure” solution to reducing your lighting costs. On the face of it this appears to be a great solution especially if you are experiencing Cash Flow issues and also given the current squeeze on lending.
The proposition is very similar to an ESCO or EPC contract where the business relies on the product supplier to finance the deal through the savings generated. What happens in practice is that the Supplier tells the Business that they will supply and install the light fittings and give a 5 year warranty and undertake to maintain the lights for the next 5 years. Generally the offer will look something like;
No Capital Investment
No Maintenance for Five Years
Immediate Cash Savings
Provides Immediate Energy Return
Guarantees a hard financial return for both parties, Win Win
Typically the company making this offer will say things like;
Why does everyone want all their money up-front and expect you to wait years for your return?
We make all the up-front capital investment, we carry all the risk of maintenance for 5-7 years and you get immediate savings of 70% on your energy costs.
If you are looking at upgrading your lights and/or have received an offer such as this it’s in your interest to read on.
We need to pose the question:
“Has anyone taken the time to analyse these offers and see who benefits the most and if the client is really receiving a Win Win offer?
There is only one way to do this and that is to take a typical example and compare the “No Capital Investment” offer to actually purchasing the product up front. There is also a third option which is to Finance the Capital Expenditure independently. We will come back to this later.
Let’s take a Walk Through Audit of a warehouse/offices facility. If we say that the facility has the following fittings burning at the following hours and rates:
We now look at the recommended LED solution:
In this scenario the client will pay €68,696.00 to purchase the required LED fittings up front. To calculate the ROI for the client we need to build in, a) The Incentives Available and b) The maintenance, parts and labour savings.
In summary, by buying the product up front, the business will:
Save €83,763 on Energy alone year on year for 5 years, €419,315.00
Save €6,870.00 on maintenance, parts and labour
Receive €21,046.00 in Incentives (on average up to 30% of the project)
Have the investment back within 6 months
We now need to look at what a “No Up Front Investment” offer looks like. The figures used here are based on a sample of actual offers in the market place. This example is based on the supplier company taking 50% of the total savings. In practice they can take between 53% and 63%.
When we look at the two scenarios, we can see that a company purchasing the product outright will spend €47.650.00. Whereas a company using the “No Up Front Investment” model will spend €226,585.00, over five years. In essence to borrow €47,650.00 over 5 years will cost them €226,585.00. Expensive Finance!
When we revisit the claims made by these companies and apply what we have just learned they may not look as attractive:
No Capital Investment: The short term finance cost is astronomical
No Maintenance for Five Years: LEDS typically have a 5 year warranty and are a no maintenance product
Immediate Cash Savings: Applies no matter which route you take
Provides Immediate Energy Return: Applies no matter which route you take
Guarantees a hard financial return for both parties Win Win. Applies no matter which route you take except that the business that purchases upfront benefits more than the supplier, which is the way it should be.
Typically the company making this offer will say things like;
Why does everyone want all their money up-front and expect you to wait years for your return? The savings are immediate once the fittings are installed.
We make all the up-front capital investment, we carry all the risk of maintenance for 5-7 years and you get immediate savings of 70% on your energy costs. There is no risk of maintenance as the products are covered by warranty. They also take 50%+ of your savings so you don’t benefit from the 70%
By probing a little deeper you will see that they also keep the Incentives that are available. (Up to 30% of the project value). By retaining this incentive they are more than covering the cost of the Installation.
Finally there is the question of ownership. Typically these companies will retain ownership of the product until the 5 years have passed. At that point they will offer you the option to purchase for a negotiated sum or to continue the project for a further two years. Not having ownership of the asset provides its own challenges.
Overall, what appears, on the face of it, to be a very good offer is actually a very expensive finance proposal?
This brings us right back to the finance options. Although we are currently working through the most stringent financial times, that many of us have ever experienced, there are a number of avenues available:
High St. Banks - have funds ring fenced for Energy projects. Their criteria are often based solely on the proposal. If the proposal enhances the Cash Flow of the business and the cost of finance is less than the savings the banks will look at it on its own merits.
Crowd Funding – is now a genuine alternative and investors look very favourably on projects that save money for the business.
EPCs and ESCOs – can be structured much more favourably than the proposals outlined above. It’s possible to negotiate the terms of an ESCO where the business takes the lion share of the savings.
EASi - Speak with a reputable supplier/manufacturer and negotiate favourable terms.
In summary you should look very carefully at the detail if approached with an offer to replace and install new lighting “At No Upfront Investment” As the saying goes;
“ If it looks too Good to be true, it probably is”