A variety of federal, state, local, and utility-sponsored financial incentive programs are available to help you implement your energy efficiency and renewable energy projects.
Incentives are used to buy-down the initial investment requirement, and may serve to allow the inclusion of energy efficiency measures that didn’t quite meet the hurdle of the project or programs predetermined term.
Many established state Energy Saving Performance Contracting programs require the Energy Services Company (ESCO) to include all applicable incentives or rebates as a part of their scope of work considerations and obligate them as providers to manage the participation and reporting requirements.
Renewable energy projects may qualify for the Federal Investment Tax Credit. State and utility incentives vary however, but may also be available. Your team at Con Edison Solutions will make you aware of the programs available in your geographic region. It is best to check with your tax professional when planning to utilize tax incentives.
For additional information including links to the Database of State Incentives for Renewable Energy (DESIRE): http://www.dsireusa.org
The information provided is not, and should not be understood as, involving a recommendation or other advice as to whether or how to proceed with financing your energy services project. Not all options apply to all market segments that Con Edison Solutions supports and other financing options beyond those listed may be available.
Please be aware that Con Edison Solutions does not serve as a municipal advisor and cannot provide municipalities with advice, make recommendations, or provide analysis concerning off-credit funding structures, or how to compare financing structures.
The following is a list of common financing alternatives for energy service projects.
Some clients find that working with their local financier and/or bond counsel has particular advantages in light of other financial obligations supported by the financier. While rates are certainly an important factor in finance considerations, it is not the sole characteristic of value. Local institutions should be solicited to understand what role(s) and/or additional services they may be able to provide.
Cash or capital funding set aside for the purchase of capital or fixed assets can be used to complete energy efficiency and renewable energy projects.
Public and private entities with sufficient internal funds may want to consider self-financing their Energy Saving Performance Contracting (ESPC) project. A building owner or agency can fund such a project by drawing on its endowment, capital budget, or operating budget or by tapping funds for deferred maintenance or reserve accounts for investment in ESPC projects. Depending on the end user’s financial position, self-financing may represent the least expensive means of financing an ESPC because it avoids the need to pay interest and transaction costs on incremental borrowing. Internal financing also minimizes the additional paperwork and transaction considerations from using an outside financing source.
Attractive returns are possible in an ESPC when an institution, agency or end-user invests its own resources to pay for the upfront project costs in what is essentially a project equity investment to be paid back through energy savings. In many cases, building owners have chosen to take equity ownership (buy down a portion of the project), while paying for the rest of the upfront cost through a leasing or other debt mechanism.
General Obligation Bonds (GO)
“GO” bonds are a form of long-term borrowing in which the government issues municipal securities and pledges its full faith and credit to their repayment. Bonds are repaid over many years through semi-annual debt service payments.
General Obligation bonds are issued with the belief that a public entity (with bonding authority) will be able to repay its debt obligation through taxation or revenue from projects. No assets are used as collateral. Rates are established by the investor marketplace. Transaction and legal fees should be considered as part of the cost considerations of this financial vehicle.
Green Tags: Renewable Energy Certificates (RECs)
RECs, also known as Green Tags, Renewable Energy Credits, or Tradable Renewable Certificates (TRCs), are tradable environmental commodities in the United States that represent proof that 1 megawatt-hour (MWh) of electricity was generated from an eligible renewable energy resource.
These certificates can be sold and traded or bartered, and the owner of the REC can claim to have purchased renewable energy. While traditional carbon emissions trading programs promote low-carbon technologies by increasing the cost of emitting carbon, RECs can incentivize renewable energy by providing a production subsidy to electricity generated from renewable sources. It is important to understand that the energy associated with a REC may be sold separately and used by another party. The purchaser of a REC receives only a certificate.
In states that have a REC program, a green energy provider (such as a wind farm) is credited with one REC for every 1,000 kWh (1 MWh) of electricity it produces. A certifying agency gives each REC a unique identification number to make sure it doesn’t get double-counted. The energy produced is fed into the electricity grid (by mandate), and the accompanying REC can then be sold on the open market.
On the occasions that an Energy Savings Performance Contract includes renewable energy technologies, RECs can be used as an incentive or offset of the original principal required for these projects. They can alternatively be held and retired by the renewable host to claim full credit for the “green” attributes of the electricity.
State and local governments are under pressure to provide increasing levels of service to constituencies, but available funds seldom keep up with this demand. One valuable tool these entities possess is the ability to issue obligations on a tax-exempt basis. A municipal lease most often contains a non-appropriation clause that states that the only condition under which the entity may be released from its payment obligation, the lease, is when the legislature or funding authority fails to appropriate funds. Since the lessee is a municipality or an organization supporting the government, it is exempt from paying federal income taxes. Thus, the IRS doesn’t charge the lessor income taxes on this type of lease.
A tax-exempt municipal lease is offered only to state and local governments and their political subdivisions. They are structured as lease/purchases or conditional sales, both of which result in ownership by the government at lease end. Tax-exempt leases are typically far easier to execute than municipal bonds, as no bond referendum is required. Leases can be short or long, from one year to ten years and beyond. The size of a municipal lease is virtually limitless, as is the range of equipment that can be leased.
The tax-exempt lease benefits a state or local government ESPC project in a variety of ways, including:
On Bill Financing (OBF)
On Bill Financing is a utility-based method of providing seamless 0% financing through the monthly power bill for energy efficiency improvements.
OBF provides businesses with the opportunity to address energy costs as a “controllable” expense, thus helping the bottom line.
Where OBF programs exist or are being developed, some consideration should be given to the utilization of this methodology for the capital loan and subsequent repayment of Energy Saving Performance Contracting. This could prove particularly effective for commercial building programs that may have separate ownership and therefore interest in the facility versus the utility consumption and subsequent utility bill payment.
Power Purchase Agreements (PPA)
A Power Purchase Agreement (PPA) is a legal contract between an electricity generator and a power purchaser. The power purchaser purchases energy, and sometimes also capacity and/or ancillary services, from the electricity generator. Such agreements play a key role in the financing of independently owned (i.e. not owned by a utility) electricity generating assets.
Energy sales by regulated utilities are typically highly regulated, so that no PPA is required or appropriate. The PPA is often regarded as the central document in the development of independent electricity generating assets (power plants), and is a key to obtaining project financing for the project. Under the PPA model, the PPA provider would secure funding for the project, build, maintain and monitor the energy production, and sell the electricity to the host at a contractual price for the term of the contract. The term of a PPA generally lasts between 15 and 25 years. In some renewable energy PPAs, the host has the option to purchase the generating equipment from the PPA provider at the end of the term, may renew the contract with different terms, or can request that the equipment be removed.
One of the key benefits of the PPA is that the generating equipment is installed at little or no cost to the purchaser of the electricity. Any available tax incentives or other benefits are factored in to the ultimate cost of the electricity produced. Commercial PPA providers can enable businesses, schools, governments, and utilities to benefit from predictable, renewable energy.
Property Assessed Clean Energy (PACE) Bonds
One of the major drivers for commercial markets is finding a mechanism that helps overcome financial barriers. PACE bonds are designed to address various problems, including limited capital budgets, consumer incentives, lengthy payback periods, lending issues, and split incentives. The pacenow.org definition of a property assessed clean energy bond is:
“A PACE bond is a bond where the proceeds are lent to commercial and residential property owners to finance energy retrofits (efficiency measures and small renewable energy systems) and who then repay their loans over 20 years via an annual assessment on their property tax bill. PACE bonds can be issued by municipal financing districts or finance companies and the proceeds can be typically used to retrofit both commercial and residential properties.”
PACE Financing Standardized Steps
Property owners are attracted because of lower energy bills, and the fact that PACE provides lower initial capital expenditures than other private sector lending and therefore improved ROI. Lenders, on the other hand, see a low risk factor because the PACE funding is senior to mortgage debt. Also, the property value will continue to increase with energy-efficient measures installed, especially as federal and state legislation provide benefits and tax cuts for more efficient buildings.
The amount of seniority to the existing mortgage created by a PACE lien usually represents less than 1% of the property value. This is because upon foreclosure, only delinquent tax liens are paid, not the entire PACE loan.
For more information visit: http://www.treas.gov/
Residential and Commercial Solar Financing
Financing options for solar projects does vary depending on the location of the project. Please speak with Con Edison Solutions to learn more details on the options available for your project.
Revolving Loan Funds
Energy Saving Performance Contracts for public facilities can take advantage of revolving loan fund mechanisms by leveraging such funds—offering incremental financing that will either accelerate project development and implementation or expand the scope of ESPC projects—and can be matched three or four or five to one by funds from other sources. One way to consider accelerating project development involves offering a limited pool of funds for a limited time on a first-come, first-served basis. Expanding the scope of projects involves providing incremental project financing so that one or more long-payback technologies, such as boiler replacements or photovoltaic systems, can be added to a project.
Shared Savings was once used by the Energy Savings Performance Contracting (ESPC) industry to execute an ESPC project free of initial capitalization. Once savings began to be realized by the technology and system upgrades, a portion of the savings was retained by the owner with the balance going to the Energy Services Company (or an outside financier) to repay the investment. The title to the item usually remained with the vendor until its price was fully recovered from the savings. This concept has become fundamentally defunct as the financial marketplace grew in confidence of the industry’s ability to realize savings. Financiers and facility owners alike generally prefer one of the other methods of funding that support the Energy Savings Performance Contracting Industry.
Tax Increment Financing(TIF)/Bonds
Tax increment financing can fund infrastructure improvements through a partnership between local government and a company. Expected growth in property tax revenues from a designated area can be used to finance the bonds that pay for improvements in the TIF district. Some states also allow local sales tax and payroll tax revenues to fund the increment as well as property taxes.
Tax increment financing bonds are issued both as (1) pure revenue bonds, secured solely by incremental tax revenues or (2) as a type of double borrowed general obligation bond. With the general obligation bond approach, the bonds are credit enhanced by the full faith and credit of the issuer or plan sponsor. In the absence of this credit enhancement, the bond market would be likely to exact an interest rate premium or discount the revenue stream and reduce the amount of borrowing, or a combination of both. If the sponsor pledges its full faith and credit, the sponsor (and not the marketplace) will bear the risk that the projected incremental revenue will not materialize—meaning, if the incremental tax revenues are not sufficient to pay debt service on the bonds, the entity that pledges its faith and credit must pay.
The primary credit risk of tax increment financing for the tax increment district is that tax rates and the pace of private development in a project area lie outside the control of the redevelopment agency issuing the debt. Actual tax rates that generate the tax are set by the underlying taxing entities—cities, counties, or school districts, among others—that set their tax rates without consideration of the needs of the redevelopment agency.
Under tax increment financing, developers or companies continue to pay real estate taxes on the value of the property prior to the creation of the TIF district. As the improvements increase the value of their property, however, the new tax money is directed into a fund to pay debt service on bonds or for the improvements.
The TIF system relies on the appreciation in value of the land and buildings in a TIF district. If a development is profitable, then the costs will be paid for in the growth of property tax revenues. If the property fails to increase in value, the improvement costs fall back on the general taxpayer (assuming the bonds are issued as general obligation bonds and not pure revenue bonds). Forty-nine states use TIF bonds.
For more information visit: http://www.cdfa.net/cdfa/cdfaweb.nsf/pages/sep2004tlc.html
In environmental policy, white certificates (or tags) are documents certifying that a certain reduction of energy consumption has been attained. In most applications, the white certificates are tradable and combined with an obligation to achieve a certain target of energy savings. Under such a system, producers, suppliers or distributors of electricity, gas, and oil are required to undertake energy efficiency measures for the final user that are consistent with a pre-defined percentage of their annual energy delivery. If energy producers do not meet the mandated target for energy consumption they are required to pay a penalty. The white certificates are given to the producers whenever an amount of energy is saved so that the producer can use the certificate for their own target compliance or they can be sold to other parties who cannot meet their targets. Quite analogous to the closely related concept of emissions trading, the tradability guarantees in theory that the overall energy saving is achieved at least-cost, while the white certificates guarantee that the overall energy saving target is met.
A white certificate, also referred to as an Energy Savings Certificate (ESC), Energy Efficiency Credit (EEC), or White Tag, is an instrument issued by an authorized body guaranteeing that a specified amount of energy savings has been achieved. Each certificate is a unique and traceable commodity carrying a property right over a certain amount of additional energy savings and guaranteeing that the benefit of these savings has not been accounted for elsewhere. To the extent that White Tags continue to have marketable value, they can serve as an incentive or buy-down to the original capital requirements for an Energy Saving Performance Contract.