Energy has become one of the largest variable cost items for many businesses. Financiers therefore want to see how you manage this expense — and which savings are truly dependable.
Until a few years ago, energy in a finance application was merely a standard line in the operating budget. Today, for many manufacturing, cold storage, and hospitality businesses, it represents the difference between a healthy and a razor-thin margin. Lenders therefore ask searching questions: what contract do you hold, when does it expire, what happens to your bottom line if tariffs shift, and what measures have you implemented?
This article explains how to anticipate those questions and substantiate sustainability investments without relying on over-optimistic assumptions.
What a lender wants to see
- Your current contract structure and expiry date, and whether rates are fixed, variable, or partially hedged
- Annual consumption, split between grid draw, feed-in, and peak demand
- Fixed standing charges and grid fees resulting from your contracted capacity
- A sensitivity analysis: what happens to your operating profit if tariffs rise or fall
- Which measures have already been implemented and which are planned, including capital outlay and projected impact
Distinguishing hard from soft savings
Not all savings carry equal weight. Lower contracted capacity is a hard saving: it reduces a fixed cost irrespective of market prices. Avoided electricity draw through self-generation is fairly robust, but contingent on your tariff. Revenue from feed-in or energy trading is soft: it fluctuates with market prices and regulatory frameworks.
Therefore, do not present a single headline return figure, but a breakdown showing which portion of the savings is fixed and which varies with the market. Lenders will model their own downside scenario anyway; presenting this thoroughly yourself demonstrates superior preparation and keeps you in control of the underlying assumptions.
Scenarios to include
The purpose of these scenarios is not to be pessimistic, but to demonstrate that your plan holds up even without the most favourable assumptions. An application that only stacks up under perfect conditions will either be rejected or offered on worse terms.
- Base case using your current tariffs and consumption
- A scenario where energy tariffs are substantially higher upon contract renewal
- A scenario where the investment is commissioned later than planned
- A scenario where a grant is not awarded
Documents to prepare in advance
- Annual energy statements and, where available, 15-minute interval metering data covering twelve months
- Your current supply contract, including expiry date and tariff structure
- Quotes for the proposed energy measures
- An energy audit or technical appraisal validating the expected impact
- An overview of applied-for and approved subsidies or tax incentive schemes
Common mistakes
- Calculating savings using peak-year tariffs, making the payback period look overly optimistic
- Overlooking fixed grid fees, even though reducing contracted capacity offers tangible cost savings there
- Factoring in an investment without accounting for installation or lead times and their cash flow impact during that window
- Booking a grant as guaranteed income before it has officially been awarded
- Ignoring what happens upon contract renewal, even though it frequently falls within the term of the financing
Next steps
- Consolidate your annual bills, supply contracts, and consumption data in one place
- Determine which portion of your savings is locked in and which moves with the market
- Model at least three scenarios and incorporate them into the application
- Align the financing tenure with the technical useful life of the asset
- Submit the complete package before entering into contractual commitments with suppliers
Frequently asked questions
- Why does a lender ask about my energy contract?
- Because the expiry date and tariff structure determine how sensitive your financial results are to price volatility during the loan term.
- Which saving carries the most weight with lenders?
- A reduction in contracted capacity, as it cuts a fixed overhead regardless of market price movements. Revenue from feed-in or energy trading carries less weight because it fluctuates.
- Should I include subsidies in my financial projections?
- Disclose them, but do not treat them as guaranteed cash flow until formally awarded. In addition, model a scenario where the grant is not secured.