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CapEx vs OpEx and The Best Option for Energy Efficiency Upgrades

CapEx vs OpEx and The Best Option for Energy Efficiency Upgrades

By Vanessa Peng

Energy efficiency is a hot topic right now and for good reason. Having energy efficient equipment at your facilities helps you save money, meet corporate sustainability goals, increase worker productivity and morale, and deal with less maintenance issues, among many other benefits.  Whether you are looking to update your facility with new equipment or looking for ways to improve on the equipment you already have, the biggest question you are faced with is how do I pay for it all?

As you may be aware, there are two options for you when it comes to procuring new equipment and technology for your facility: 1. Purchasing them as a new capital expenditure (CapEx) or 2. Purchasing them as an operating expenditure (OpEx). Here are the differences between CapEx vs OpEx.


What is CapEx?

CapEx or capital expenditure is the money your company spends on long-term fixed assets, including the initial purchase of new equipment and improvement and maintenance costs. Usually, CapEx purchases are seen as investments that will benefit the company in the future. Some examples of CapEx are:

  • Equipment
  • Vehicles
  • Building Improvements


What is OpEx?

OpEx or operating expenditure refers to ongoing, day-to-day costs that keep a business running, such as office supplies and subscription services.  Some examples of OpEx are:

  • Wages and salaries
  • Utility expenses
  • Yearly service agreements

 

What is the difference between CapEx and OpEx?

CapEx refers to large, long-term purchases that will be used by the company well beyond the accounting period in which they were purchased. CapEx purchases are paid upfront, all at once. The more money a company spends on CapEx, the less money it has in the budget for other expenses. Usually, CapEx is funded by internal financing or external financing via a bank loan. Internal financing involves buying the asset outright, while bank loans help spread out the cost of expensive purchases, but both options are reflected as debt on the books. 

OpEx are short-term expenses and tend to be used up in the tax year in which they were purchased. OpEx purchases are paid weekly, monthly, or annually and are deducted from a company’s budget as they are incurred. Unlike CapEx, OpEx are tax-deductible in the tax year they are made. 

The ROI of CapEx takes much longer to realize than OpEx.

Is CapEx or OpEx better?

Not only do CapEx purchases require a capital expense and upfront costs, but you also have to consider purchasing supporting infrastructure for your new equipment as well as installation costs. You’ll have to do some forecasting before a CapEx purchase can be justified. Inevitably equipment ages and with CapEx sometimes companies are forced to hang onto old equipment for much longer than they should have due to ROI concerns. 

OpEx purchases are an easier pill to swallow for most companies since they don’t require a huge upfront cost. OpEx purchases don’t have as much red tape and hoops to jump through as CapEx purchases do. Energy efficiency equipment can be expensive, especially if you want to upgrade your entire facility. We often hear from well-meaning managers they see a huge need for LED lighting, solar, or other green improvements to their facility, but they never receive the green light from upper management due to budgetary concerns. 

Traditional OpEx financing methods, like leasing equipment, still require you to do most of the heavy lifting, i.e. figuring out which products will actually work in your facility, hiring skilled crews to install the equipment, or dealing with warranties when the product doesn’t work properly. 

Thankfully, there is a financing option available to you that is neither CapEx or OpEx, but has the most benefits and will make energy efficiency upgrades at your facility possible. It is known as Energy as a Service.

What is Energy-as-a-Service?

Energy-as-a-Service, or EaaS, is a monthly subscription agreement for energy efficient technology at your facility, including LED lighting, solar, energy storage, and power monitoring. The subscription doesn’t just cover the cost of the system, but also includes the installation of the system, management of available utility incentives, and maintenance for the life of the asset should you ever need any. Energy as a Service allows you to avoid showing new debt on your balance sheet since it will be deducted from your operating expense. The cherry on top? You will see immediate cash flow from day one!

Here are the benefits of Energy-as-a-Service:

Outsourcing is maintenance-free: When you sign-up for an Energy as a Service business model plan you never have to worry about maintenance costs and issues again. We take ownership of the technology so you don’t have to spend precious time or resources on things breaking down or having to replace parts or fixtures.

 

Allows you to complete retrofits at all your properties: Budgetary issues can hold you back from wanting to move forward with an important and necessary lighting or solar project. When you see cash flow from day one you more than likely can afford to complete projects not just in one facility, but your entire portfolio.

This is how: the energy savings you generate from the more efficient energy system will be greater than the payment, so it’s like a double-dip. You do not need any new capital to cover the payments and you are able to expense the monthly payments as you pay them. For example: Let’s say you are currently spending $12,000 a month on your lighting energy bill. After a LED lighting retrofit project is completed your energy bill drops to $6,000 a month and your Energy as a Service subscription payment is $3,800 a month. This not only allows your new energy savings to cover the EaaS amount but also provides an additional $2,200 a month in positive cash flow back to your bottom line. You can find out more about how Energy as a Service works by clicking here.

Increased morale, productivity, and safety: Modernizing your facility with up-to-date technology will increase employee morale, productivity, and safety. Many areas of your facility could currently be under-lit and aren’t meeting safety standards. With updated lighting you can fix those hazardous situations. If you also incorporate power monitoring into your building you will be able to make sure equipment is functioning properly and not putting employees in harm’s way. 

Upgrade your outdated, inefficient equipment with the best financing option – Energy as a Service.

A project for a more energy efficient facility shouldn’t be put on hold. Here’s why: 

  • This is the perfect time to update your facility with energy efficient equipment since you more than likely have less people in the office due to the pandemic. You won’t have to worry about disruptions to the daily workflow. While our installers are very careful to work around your schedule, this makes it even easier for our crews to be efficient with installation.
  • The longer you wait, the more expenses you rack up when you choose to continue running your facility with outdated equipment.
  • With Energy as a Service, budgetary concerns are put to rest.

At U.S. Energy Recovery, we offer Energy as a Service because we want our customers to be able to get the energy efficiency technology they need. We don’t want you to worry about how you’ll get the upgrades, and instead relax and enjoy the benefits you’ll receive once the equipment is up and running. Many of our partnerships are built around the Energy as a Service business model. Please feel free to contact us at (800) 834-8737 to see if you qualify for the EaaS program. Remember, the longer you wait the more money you lose!