For public sector leaders, the challenge to modernize energy infrastructure often hits a wall when it meets the reality of municipal bond limits and competing budget priorities. The ability to incorporate microgrids, electric vehicle (EV) fleets, and high-efficiency building systems is not limited by a lack of vision but by the lack of available capital.
Traditional project delivery relies on a pay-up-front model that many agencies simply cannot sustain in an era of rising costs and economic volatility. However, the solution lies in a fundamental shift in how public projects are financed and procured. By leveraging the financial case for Public-Private Partnerships (P3s), agencies can move beyond budget constraints, shifting from a mindset of ownership and debt to one of performance and predictable service.
To help navigate P3 options, Schneider Electric developed a P3 Playbook centered on three models: energy savings performance contracts (ESPC), power purchase agreements (PPA), and energy as a service (EaaS). This is the second in a series of articles to help public leaders learn about the benefits of P3s. Additional articles in the series include:
- Strategic Financing is Accelerating Critical Energy Infrastructure Projects
- Selecting the Right Energy P3 Model
- Bridging the Expertise Gap to Successfully Deploy P3 Models
- Streamlining Procurement to Ensure Smarter Infrastructure Delivery
Use the value of private capital to break funding bottlenecks
The most immediate hurdle for any large-scale infrastructure project is the initial capital outlay. Whether it’s a regional airport’s power plant or a city’s transit electrification project, the significant upfront costs and traditional procurement methods often leave agencies capital-strained. Traditional procurement methods often focus on the lowest initial cost, which fails to deliver future-ready innovation and best total cost of ownership, including maintenance, repairs, and technical refresh.
P3s address this by tapping into the vast pool of private capital. Rather than raising taxes, waiting for the next bond measure to pass, or for a rare federal grant to arrive, P3s allow public entities to more easily implement projects. The private partner provides the necessary financing, covering the costs of design, construction, operation, and maintenance. Agencies then pay a fixed monthly fee over 15-30-year terms, transforming large upfront Capital Expenditures (CapEx) projects into predictable Operating Expenses (OpEx) line items. This enables smoother budget planning and reduces exposure to surprise failure and replacement costs.
This approach allows agencies to tackle large-scale, complex energy projects that would otherwise be difficult to fund through traditional tax revenues or public debt alone. By using private financing, the public sector can preserve its own funds for essential services that cannot be privatized, such as public safety and education.
Keep debt off the books to preserve financial flexibility
For public financiers and CFOs, one of the most compelling reasons to pursue a P3—specifically through an Energy-as-a-Service (EaaS) model—is the potential for off-balance sheet treatment.
When a public entity issues a bond to fund an infrastructure project, that debt is recorded on the balance sheet, which can impact credit metrics and bond ratings. In a world where maintaining a high credit rating is essential for keeping borrowing costs low, taking on massive new debt for a big project is a significant financial risk.
Structured as a service agreement, a P3 allows the project to be treated as off-balance sheet for the public entity. Because the private partner owns the energy assets, the public entity does not carry the project debt. In the energy context, P3 project delivery approaches either yield energy savings (ESPC) that offset project costs and keep utility budgets neutral or lower when adjusted for rate fluctuations, or generate on-site energy (PPAs or EaaS) that offset what the public entity might otherwise pay its local regulated utility. In either case, the project fees are reflected in existing utility budgets, which typically make these project delivery models easier to internalize.
Shifting from CapEx to OpEx provides budget certainty
The primary challenge with traditional energy infrastructure delivery is the potential for budget and schedule overruns. When unforeseen construction issues arise, costs often rise, creating a funding gap before the project is complete. This uncertainty can continue into the lifecycle of the asset, as the public agency is responsible for the operations and maintenance (O&M) costs that are difficult to forecast.
P3 models like EaaS solve this by shifting the financial structure from CapEx to OpEx. Under this model, project costs are treated as predictable operating expenses, much like a standard utility bill. This provides three distinct financial advantages:
- Overrun mitigation: Standard infrastructure procurements often suffer from underestimated CapEx and poorly understood O&M costs. P3s transfer that risk through bundled, performance-based contracts.
- Avoided CapEx smoothing: Costs to build the project are recovered through levelized payments, often articulated in $/kWh, over the life of the contract, typically 15 to 30 years, rather than high up-front payments hitting an agency budget all at once, reducing exposure to schedule-related carrying and financing risks.
- Utility budget predictability: Fixed utility payments for on-site energy infrastructure reduce exposure to energy market price volatility.
The true value of P3s is the transfer of risk to the private sector
The most significant financial benefit of a strategic P3 is the transfer of risk to the private partner, because they are the party best equipped to manage risk. By transferring these risks, the public sector protects itself from the financial downside of complex projects. Key risks transferred include:
- Construction and delivery risk: The private partner bears the cost of delays or overruns.
- Operational risk: If a system fails to perform, the private provider bears the financial burden through performance-based penalties.
- Maintenance and lifecycle risk: A P3 can transfer certain risks, such as construction delays, cost overruns, operational efficiencies, maintenance, and technological obsolescence, to the private sector.
Download our P3 Playbook to learn more about P3s
With energy costs climbing, demand surging, and maintenance backlogs reaching a critical stage, public leaders can no longer rely on traditional funding alone. The financial case for P3s is clear: They provide immediate access to private capital, preserve vital debt capacity, and ensure budget certainty by shifting risk away from the public. By embracing these innovative models, leaders can deliver the efficient and resilient energy infrastructure their communities require. Download our P3 Playbook to learn more about P3s.
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