There are multiple approaches to funding microgrids. Eric Dupont, executive vice president and chief commercial officer at PowerSecure, discusses why CAPEX versus OPEX become important considerations in this interview with Yasmin Ali, Microgrid Knowledge contributor.
What is the difference between capital expenditure (CAPEX) and operational expenditure (OPEX)?
Eric Dupont: Capital expenditures are a one-time purchase, usually a significant outlay of cash associated with purchasing a physical asset, a piece of equipment. The decision making process for spending CAPEX centers around return on investment; how long will it take to get my money back and what type of return will I get on this investment? Unless it’s a core asset that has to be replaced, or it’s a piece of equipment that must be put in place to continue to operate the business, companies usually impose return on investment metrics that must be met.
The OPEX is a company’s annual operating budget. Based on the expected revenues, the annual operating expenses associated with delivering those revenues are calculated during the budgeting process.
How do CAPEX budgets impact energy projects?
Eric: Companies have a multitude of CAPEX projects to do, and a limited amount of capital. There are core projects that are business critical or regulatory requirements; companies have to invest in these to continue to operate. As such, energy infrastructure projects like distributed energy resources or microgrids can slip down the list of priorities. This puts you in a difficult spot if you want to improve energy efficiency and resiliency of your facilities.
As a CEO or CFO, you are concerned about the balance sheet implications of CAPEX. If you borrow money, it could limit your ability to borrow in the future. If you put capital into your fixed assets, you increase the asset side of your balance sheet, but also the liability side. You are constantly trying to maintain certain financial metrics.
Why is OPEX sometimes more attractive from an accounting standpoint?
Eric: You can structure transactions into ‘energy as a service’ or ‘resiliency as a service’. If structured correctly, you can avoid balance sheet implications. You will pay through OPEX, but the economic benefits could help pay for or offset the increased service fee that will be added to the OPEX. From a profit and loss (P&L) perspective, it could be neutral.
As you think about OPEX versus CAPEX, you’re weighing up the benefits that help reduce the cost of risks against the service fees being paid for a particular asset.
There are also tax implications associated with capital purchases. OPEX isn’t a better option every time; it depends on your balance sheet, P&L, and tax situation. There are a lot of factors that go into creating the right investment strategy and approach. As well as understanding the technical elements of putting in place an energy asset, you have to work with your customer to understand all the financial and risk implications of putting this asset in place.
Can an organization really increase their energy resiliency and reliability with zero CAPEX?
Eric: It’s definitely possible. We’ve been doing this for a long time. We put resiliency assets at customer sites and the benefits associated with those assets help pay for the installation and the system. We’ve structured deals where there is no CAPEX, and in some cases no P&L implications for our customers; so the service fee is offset 100% by benefits associated with the system.
Can you share an example of PowerSecure building a microgrid for an organization with no CAPEX?
Eric: One example is a major retailer based on the East Coast. Storms and hurricanes have impacted their business; they were looking for resiliency. They’re located in an area where utility tariffs make it favorable to reduce demand charges. Operating the energy assets in a way that allows the customer to take advantage of load management opportunities creates savings that pay for those assets.
PowerSecure funds this type of project, so no CAPEX is required from the retailer. The energy savings pay for the investment over a long-term contract. At the end of the day, the retailer was looking for resiliency. Reduced demand charges, curtailment programs, or other available value stacking opportunities pay for the cost of the resiliency measures.
Are there other types of industries that should consider CAPEX versus OPEX for funding microgrids?
Eric: There are tangible economic benefits associated with energy projects, so options and flexibility exist for funding these capital projects. I think OPEX versus CAPEX decisions apply across the entire market and to all industries. At PowerSecure, we have deployed projects and invested capital across many customer bases. I’ve seen it utilized in data centers, healthcare, and manufacturing. The federal government is constantly looking at ways to fund energy projects without paying out. They use vehicles like energy savings performance contracts.
It comes down to what the customer’s key objectives are, and what they are trying to achieve by focusing on their energy assets. Is it resiliency, return on investment, reduction in carbon footprint, or a combination? Once this is established, you can step back and start building the business case. You can bring the right types of technologies and economic benefits together to help customers achieve their goals.
Eric Dupont is the executive vice president and chief commercial officer at PowerSecure.