Special Financing
Models for Energy
Management Projects
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Session Objectives
• To discuss ways you might pay for energy management projects at your small water system / organization, focusing on five
FINANCING ENERGY
MANAGEMENT
CAPITAL PROJECTS
AT YOUR UTILITY
What is an Energy Upgrade?
• An energy upgrade to water or wastewater facility is really just a capital
improvement
• You can treat energy upgrades just like any other capital improvement
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Smart Management for Small Water Systems
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How Do We Pay For Our Great
Ideas?
Discussion
• How might you pay for energy management projects?
• How have you already paid?
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Five Special Financing Models
for Energy Management
1. Internal revolving energy funds (“virtuous cycle”)
2. Credit for proposing green projects to the territorial set-aside for DWSRF
3. Performance Contracting (ESCOs) 4. PPA: Power Purchase Agreements
5. QECB’s: Qualified Energy Conservation
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Funding a Plan:
Energy Revolving Funds
• Capitalized as a “bank” from which
departments and divisions can borrow to fund energy efficiency, renewable energy or energy conservation projects.
• Allows municipalities to provide a continual stream of funds for energy efficiency
improvements without tapping into existing capital cycles.
Discussion
• Have any of you already set up an internal revolving energy fund at your small system? • If so, how is it working for you? Do you
recapitalize the “bank” as planned? Have
you expanded its capitalization across time? • If not, is this something that sounds
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Credit for proposing green projects
to the territorial set-aside for DWSRF
DWSRF Program: Background
• Under the Safe Drinking Water Act, states operate Drinking Water State Revolving Funds (DWSRF) • There is also a similar fund for wastewater, the
Clean Water State Revolving Fund (CWSRF) • DWSRF and CWSRF funds may address:
– Water and Sewer capital needs
– Stormwater, green stormwater infrastructure – Source water protection
– Land conservation
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SRF Green Project Set-Aside
• Drinking Water SRF
– The 2012 DWSRF appropriation did not require any Green Project Reserve. Therefore, states like North Carolina will have no green project reserve. If the 2013 Capitalization Grant includes a Green Project Reserve, the Section will meet it following procedures
described in the 2011 Capitalization Grant IUP.
• Clean Water SRF (http://www.ncwater.org/pws/srf/Pages/dwsrf_gpr.htm)
– Not less than 10% will be provided for green projects – 0% interest to green projects
– Priority rating system give priority to projects that are:
• Restoration of streams, wetlands, and estuaries; • Stormwater BMPs for existing sources of pollution; • Reclaimed water utilization; and
USVI Territorial Set-Aside for DWSRF
• The Virgin Islands Department of Planning and Natural Resources (DPNR) administers this program for the territory.
• It is termed the Territorial Drinking Water Capital Improvements Grants Program.
• A description of this program, and drinking water systems in USVI in general, may be found here:
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USVI Territorial Set-Aside for DWSRF
• All funds under the USVI Territorial
Drinking Water Capital Improvements Grants Program are grants; there is no revolving loan fund such as in N.C.
• If you are a small water system, you may apply annually for grant funds.
• Extra points may be awarded for “green” drinking water system projects, when
Discussion
• Have any of you already applied for a grant under this program?
• If so, was your project funded as part of the Intended Use Program (IUP)?
• If so, what was that process like for you?
• If not, are you interested in applying for such a grant?
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Three More Financing Models for
Energy Management Projects
• Energy Performance Contracting (ESCOs)
– An Energy Service Company (ESCO) is a
synonym for an energy performance contractor
• Power Purchase Agreements (PPAs) • Qualified Energy Conservation Bonds
(QECBs)
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What is Performance Contracting
• An ESCO proposes and designs a package of energy cost reduction measures, installs or
implements those cost reduction measures, and guarantees the savings of the cost reductions. • Typically, the ESCO puts up all of the capital for
the energy projects.
• The ESCO pays itself back for the package
over time using the stream of revenue provided by the energy reduction measures.
• Third party verifies ESCO reconciliation report.
Why not do it yourself?
• Often opportunities to reduce energy costs are well known but owners are unable to take advantage of them
• Capital • Expertise • Manpower
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Performance Contracting Advantages
• A process with a single point of responsibility (rather than multiple contractors for various projects).
• Provides you with the ESCO’s capital. • Provides you with the engineering and
project management expertise of the ESCO. • Guaranteed performance / savings.
Performance Contracting Pitfalls
• Failure of owner to perform due diligence. • Failure to understand contract.
• Overly optimistic expectations / promises. • Poor project specifications:
• IGA (Investment Grade Audit)
• M&V (measurement and verification)
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Steps to a Successful Project
• Assemble stakeholders
• Create data packet for project (application) • Issue RFP
• Evaluate responses (select ESCO) • Perform IGA
• Negotiate contracts
• ESCO contract
• Financial contract (in some cases)
• For govt. agencies: get approval from appropriate government agency
Potential Performance Contracting Timeline RFP
15 weeks
IGA and 3rd Party M&V
24 weeks
ESA and Financial contract
11 weeks
Govt. Approval and Execute ESA
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Measurement & Verification
• Actual savings measured are compared to
guaranteed savings by third party.
• If actual savings less than guaranteed
savings, ESCO pays the difference to the governmental unit.
• The cost of the required third party M&V
Funding
Before Improvements After Improvements
Annual Operating Budget
Utility Costs
(Gas, Electric, Water) Maintenance Costs Maintenance Costs Utility Costs Savings Repay Improvements
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$
Proj ect Im plem enta tion Operations Budget or Utility Bill Debt Service Cash Flow M&V Costs Gu ar an teed Sav in g s Operations Budget or Utility Bill Operations Budget or Utility BillPerformance Contracting - A Comparison
Plan/Bid/Spec Performance Contracting
Financial Capital/Bond/Cash $$ You are already Spending – Operating Budget Relationship Scope? Completion? Commissioned? Warranty…Gone Continuous Partnership over life of contract
Upfront Fees Yes None
Performance & Financial Guarantee
None Operational & Financial
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Discussion
• Have any of you already done an energy management performance contract?
• If so, what was your experience like? For how many years was the contract term? • Would you use this process again?
• If you have not done so before, are you
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Power Purchase Agreement
• A company such as FLS Energy, Inc., finances some of, or all of, a renewable energy project. You may not have to put up any capital at all. • For example, Hawaii PPA contract for large
solar hot water project (1,400 homes). FLS has also done Camp Lejeune marine base. • Sell electricity under long term sales contract
– possibly lock in much lower electric rates than today.
PPAs and Tax Equity
• USVI citizens and businesses do not pay federal income tax.
• However, if a company like FLS Energy from the mainland comes to contract a PPA with you, they can still qualify for the 30% federal investment tax credit for renewable energy. • This may allow them to put up 100% of the
necessary capital. And you may get much lower electric rates.
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PPA Example
• Going back to the case of Hawaii and FLS Energy, base electric price is about 28-29 cents per kWh.
• Selling BTU thermal equivalent of hot
water in kWh terms may reduce this rate sharply (e.g. down to 20 cents per kWh), saving significant money across the long term (e.g. 10-15 years).
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Bonds
• Review: In general, a bond is a written promise to repay borrowed money
– on a definite schedule and usually at a fixed rate of interest for the life of the bond
• Usually, government entities issue one of two kinds of bonds:
– General Obligation (GO) – Revenue
Qualified Energy Conservation Bonds
• Two main avenues for QECBs:
• Conduit bonding avenue territory must take action – but end recipient is “on the hook” in case of default on the bonds.
• Green community program – territory must take action – but TEO (or issuing govt.
department) is on the hook in case of default on the bonds by end recipient.
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Qualified Energy Conservation
Bonds
• Tax-credit bonds (issuer pays back
principal and reduced interest because bondholder receives federal tax credit in lieu of interest)
• Total USVI allocation for QECBs is $1,140,000
– Includes 2008 and 2009 federal QECB authorizations
Qualified Energy Conservation
Bonds
• 1%-5% effective interest rate for issuer
– Issuer gets 3%-4% subsidy from Treasury – 15 to 20-year term
• Qualified projects are broadly defined, including 20 percent reduction of energy use in public facilities
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Funding Matrix
• Be sure to look at the funding matrix we have compiled for the U.S. Virgin Islands! It should be on the table in front of you. • This contains reference information for
some of the government-funded options you may consider, such as the drinking water territorial set-aside program.
Don’t Burn your Bridge With a
Funder
• If you are funded, report your results thoroughly and on time
• Give the funder recognition:
– Include credit/logos in your
reports/publications (with permission) – Invite funder to relevant events
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Track Progress and
Communicate Success
But not just to get funded again…..
If you don’t know where you’ve been and don’t know where you are going – then you
won’t know when you get there! (And neither will anyone else!)
Thank You
David R. Tucker Project Director
Environmental Finance Center
School of Government, UNC-Chapel Hill
drtucker@sog.unc.edu
(919) 966-4199
Additional PPP Slides
• The following are additional slides on the broader concept of PPPs, Public Private Partnerships.
• An ESCO or PPA arrangement might fall under this category; a QECB arrangement certainly could be a kind of PPP.
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Different Kinds of PPPs
• Many variations exist. Principal types include: – O&M Contract – DB: Design-Build – DBO: Design-Build-Operate – DBOM: Design-Build-Operate-Maintain – Lease-Purchase
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Pros of a PPP May Include:
- An additional funding source
- Private partner can take advantage of tax credits - Private entities have access to different dollars - Cost-savings derived from management,
technical, operational, or other efficiency of the private partner
- Reduce public partner’s role from day-to-day
operational management to contract management, to allocate scarce staff or other limited public
Cons of a PPP May Include:
• Cost of capital usually is greater; gov’t bond rates tend to be lower than private sector • Projected private sector cost savings /
efficiencies do not always materialize • PPP transactions can be very complex,
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PPP
Additional ESCO Slides
• The following are additional slides on the subject of performance contracting for
energy management projects, i.e. on the subject of ESCOs (energy services
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Assistance available from TEO may include:
• Application assistance (project identification) • Standard RFP available
• Standard Investment Grade Audit Contract available
• Standard Energy Services Agreement available
• Proposal Evaluation Training available
• List of qualified engineering service / M&V providers
Benefits of PC
• Solutions to Infrastructure & Operational Needs • Guaranteed Results = Minimal Risk
• Reduced Operating & Utility Costs
• Best Life Cycle Cost, Not Just Lowest Price
• Turnkey Project Development & Implementation • Saves Time & Provides Solutions
