financing energy efficiency projects in michigan
TRANSCRIPT
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Financing Energy Efficiency Projects in Michigan
Wastewater Administrators Conference
January 25, 2018
Andrew Dow, Donohue & Associates
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Funding Mechanism Overview
Qualified Energy Conservation Bonds
Utility Provider Rebate Programs
State Revolving Loan Program
Performance Based Contracting
Other Options:
WIFIA Loans (Nationally Administered)
Energy Revolving Loan Fund
SAW Grants/Loans
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Acknowledgements
City of Battle Creek
City of Wyoming
Genesee County Drain Commissioner
City of Marquette
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Qualified
Energy
Conservation
Bonds
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Qualified Energy Conservation Bonds
Format Low-interest borrowing
Benefits
• Access to capital for bigger projects• Some of the lowest interest financing available
(federally subsidized bonds)• Minimizes debt service and revenue requirements
AdministratorMichigan State TreasuryMichigan Agency for Energy
ApplicationAnnual deadline (varied timing)2016 – May2017 – July
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QECB Background
Authorized by Congress in 2008
Michigan Allocation: $104M
$3.2 Billion Allocated Nationally
Allocation to large local governments in proportion to population
Unused Local Allocations Waived to State
Redistribution via Competitive Selection
Process
$30M in
Application Evaluation Criteria:• Project Development (40%)• Alignment with State Priorities (40%)• Impact on Community, Region, or State (20%)
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Case Study: Battle Creek WWTF
Project Drivers
Energy Conservation
Aged Facilities: Outdated Blower Technology
Aged Facilities: Manual Aeration Control
Process Improvements: Nutrient Deficiency Issues
Chemical Savings: Phosphorus Control
Design Capacity: 27 mgdAverage Flow: 9 mgdIndustrial Organic Loadings
Kellogg’sPostConAgraOthers
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Improvements Implemented
ImprovementEstimated
ConstructionEstimated Annual
Savings
Aeration Blowers $2.55M $121,000
Aeration Controls $1.54M $99,000
BPR Modifications $1.58M $110,000
Nutrient Feed Controls 0.365M $68,000
Total $6.04M $398,000
High Efficiency Blowers
Advanced Aeration Controls
Reduce Facility
Energy Use 20%
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Proposed High Speed Turbo
Blowers
(Photo © APG-Neuros, Inc.)
QECB Application
Existing Positive Displacement
Blowers
Key Application Points:
• 20% Reduction in Energy
• Green Community Program
• Local Economy Impacts:
• Supporting Industrial Activity & Growth
• Keeping User Rates Low
• Construction Employment
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Financing Summary
Project Cost Project Funding
Construction Cost: including
equipment, materials, and labor$7,634,600 QECB Request Allocation $5,365,636
Design Engineering Services $550,000 County QECB Allocation $1,407,864
Construction Engineering Services $680,000 Consumers Energy Incentive/Rebate $226,500
Legal & Financing Fees $135,400 Local Match Revenue Bonds $2,000,000
Total Project Cost $9,000,000 Total Project Funding $9,000,000
Funding strategy primarily bonds, supplemented by utility rebate
Mix of QCEB (county and requested state allocation) and significant community match of revenue bonds
Funding breakdown proposed in May 2016 application:
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Actual Cost of Financing
$0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
Total Principal(Bond Par Value)
Total Debt Service Net Debt Service
QECB Subsidy: $2.66M
20-Year Financing Period
Attributed Principal: $8.89M
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Utility Rebate
Programs
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Utility Rebate Programs
Format Grant (“cash incentive”) after project completion
Benefits
Direct monetary award to applicantApplicable to small or large projectsCan offset significant portion of smaller project costsImproves effective project payback
Administrator Energy Provider (e.g., Consumers Energy)
ApplicationRollingTwo Steps: Pre-Notification & Final
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Utility Rebate Program Background
Stems from state legislation (recently renewed)
Programs provided by energy utilities throughout Michigan
Customers pay into the program
Savings goals determined for electricity and gas categories
Example program: Consumers Energy Business Energy Efficiency Solutions
Prescriptive and Custom Rebate Incentive Categories
• Prescriptive: lighting, HVAC, building automation, small motor VFDs
• Custom: larger scale or more complex energy conservation projects
Custom Incentive
• Simple payback: 1-8 years
• Capped at 50% of project cost or $1,000,000
• $0.10 per annual kWh saved
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Utility Rebate Program Background
Submit Pre-Notification Application
Submit Final Application within 60
days of project completion
Receive Check 6 to 12 weeks after final
approval
Project Engineering and Energy Savings Estimate
Application Approval & Project Completion
Final Approval by Consumers Energy (possible monitoring & verification)
From Consumers Energy Custom Incentive Form
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“Request for Proposals” Program
Related Consumers Energy program
Competitive bidding process to request customized incentive amounts
Intended to enable implementation of large-scale projects that would not otherwise move forward through standard incentives based on:
Annual customer caps or project cost-based incentive caps
Payback outside acceptable limits
Case-specific affordability, scope, and savings considerations
Pre-notification required
13-month window to complete projects after incentive is reserved
Minimum annual savings of 250,000 kWh
Applications due March 2, 2018
Program manager: Jim Coulter ([email protected])
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Case Study: Wyoming CWP
Aeration system
3 basins operating
3 MG each
5,100 diffusers in each
5 – 500 HP blowers
DO and ORP control
Electrical Usage
$660,000 annual aeration cost
(50% of facility electrical usage)
Had consistently been using 3 to 4 blowers (at times called to run all 5)
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Wyoming Energy Savings Project
Project Cost Summary
Project Expense CostEstimated
Savings Payback Rebate
Diffuser Replacement $220,000 $138,000 2 years* $110,000
Diffuser Pre-Testing and Post-Testing
$16,500
Evaluation and Engineering Services
$57,547
Total Spent $294,047
50% of eligible project cost (cap)
37% of total project cost
*1.3 years effective payback
Oct 2016
Diffuser Replacement &
Testing Completed
Dec 2016
Final Application Submitted
Jan 2017
CheckAwarded
Feb 2016
Initial Engineering Eval and Diffuser
Testing Completed
April 2016
Energy RebatePre-Application
Submitted
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Genesee County District 3 WRRF
$39,000
$29,000
Nitrification Towers
Aeration Basins
• Previously custom incentive rebate: blower upgrades• New project:
• Advanced aeration control system• Ammonia monitoring• Reduced blower energy use and nitrification
tower pumping energy
Ammonium Probes
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Genesee County Project Financing
Project expenses include:
New butterfly valves with electric actuators
Ammonia probes
Air flow meters
Programming and PLC
Financed with combination of operating budget and rebate incentive
Estimated incentive rebate: $78,000 (pre-notification request)
2018 operating budget expense: $232,000
Requested rebate will be 25% of total anticipated project cost
$67,000 annual energy savings -> 5-year payback (3.5 with rebate)
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SRF Loans
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State Revolving Fund Loans
Format Low-interest borrowing
Benefits
• Access to sufficient capital for bigger projects• Streamlined, comprehensive project financing• Long loan terms at low interest rates• Minimizes debt service and revenue requirements
AdministratorMichigan Department of Environmental Quality (MDEQ)Michigan Finance Authority (MFA)
ApplicationAnnual deadlineProject plan submission by July 1
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SRF Features
FY 2018 Interest Rates:
2.00% - 20-Year Loan
2.25% - 30-Year Loan
Loan term depends on useful life of project assets
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
20-Year SRF LoanInterest Rate
Qualified EnergyConservation
Bond
Typical 20-YearMunicipal Bond
Yield (Low)
Typical 20-YearMunicipal Bond
Yield (High)
Effective Interest
Rate
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SRF Scope/History
*FY2017 Annual Report of Michigan’s State Revolving Fund and Strategic Water Quality Initiatives Fund, Michigan Department of Environmental Quality and Michigan Finance Authority
Michigan Projects Funded by Category (1988 - 2017)*
Michigan Funding Commitments:*
$123 million in 2017 (11 projects)
$4.78 billion since inception (1988)
One third of project loans went
to small communities (< 10,000)*
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Green Project Reserve
Enacted by Congress in 2010
Directs portion of state SRF program funds to “Green Projects”
GPR projects can be eligible for principal forgiveness
All or parts of project can qualify
Four qualifying categories:
Green Infrastructure
Water EfficiencyEnergy
EfficiencyEnvironmentally
Innovative
• Renewable energy projects (including biogas CHP)• Projects achieving 20% reduction in energy consumption• Energy management planning
CategoricallyEligible
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Case Study: Marquette, MI
Sewage Lift Station and Forcemain Upgrades (2002-2003)
BEFORE
AFTER
Energy saving components:
New “right-sized’ pumps with premium efficiency motors and VFDs
Aged constant-speed, low-efficiency, oversized pumps
Improved pipe/ sizing (reduced headloss and pumping energy costs)
Upgrades to Four Lift Stations 5000+ feet of new forcemain
Total cost: $3.47M
CWSRF Loan at 2.5%(first of several for the City)
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Performance
Based
Contracting
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Performance Based Contracting
Format Cost sharing or external financing (negotiated payment plan)
BenefitsMinimizes risk to ownerCan be good for projects with tight timeline
Administrator Facility owner and “solutions implementer”
Application Not applicable
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Performance-Based Contract Overview
Agreement between a business and facility owner based on a specified reduction in operating costs
Business makes a performance guarantee
Business designs and installs energy efficient solutions
Savings used to pay back capital investment
ESCO – Energy Service Company (common PBC approach for energy savings projects)
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Financial Basics
Before Program Term
Costs
-Utilities-O&M-Capital Plan
OperatingFunds
Operating Budget Operating Budget
OperatingFunds
During Program Term
Savings
Costs
-Utilities-O&M-Capital Plan
Investment
-Modernization-Energy Retrofits-Upgrades
After Program Term
Operating Budget
OperatingFunds
Utility Budget-Lights-Air Conditioning- Heating
Investment-Modernization
Savings
Operating Budget
OperatingFunds
After Program Term
OperatingFunds
Savings
Costs
-Utilities-O&M-Capital Plan
Investment
-Modernization-Energy Retrofits-Upgrades
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Project/Mechanism Drivers
Political resistance to bond or rate increases
Insufficient capital funds
Insufficient borrowing capacity due to debt limits
Existing bond covenants
Procurement rules/state laws are restrictive
Contracting options
Client specific constraints/desires
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Procurement Benefits
Design/Bid/Build
Procurement - Lowest responsive bidder
Multiple prime
No choice of equipment suppliers
Risk - Owner responsible
Funding - Many times generated through increased rates or capital reserves
Performance Risk - Energy savings not verified or guaranteed
ESCO
Procurement – Best life cycle value
Single Prime (turn-key design/build)
Choice of equipment suppliers
Risk - ESCO responsible
Funding - Generated though re-allocation of existing operational spending (savings)
Performance Risk - Savings guaranteed and verified
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Funding Mechanism Summary
Mechanism Format Application Period
Administrator
Qualified Energy Conservation Bonds
Low-interestborrowing
Annual State TreasuryMichigan Agency for Energy
Utility Rebate Grant (cash incentive)
Rolling Energy Provider
State Revolving Fund Low-interestborrowing
Annual MDEQMichigan Finance Authority
Performance Based Contracting
Cost sharing / external investor
N/A Facility Owner
WIFIA Low-interestborrowing, flexible terms
Annual or Semi-Annual
USEPA
Multiple mechanisms can be combined to finance eligible projects
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Financing Energy Efficiency Projects in Michigan
Wastewater Administrators Conference
January 25, 2018
Andrew Dow, Donohue & Associates
35
WIFIA Loan Program
Similar to Clean Water and Drinking Water SRF programs in terms of the eligible projects, borrowers, and requirements
Intended as alternative (or more likely a supplement) to SRF loans for BIG projects
Interest rates are generally not as low as the SRF loan interest rates would be. WIFIA rates must be no less than yield on U.S. Treasury securities of similar maturity
Disbursement and repayment schedule is intended to be extremely flexible on project-specific basis to structure around other debt service and cash flow considerations
Minimum project size is $20M in total eligible costs for served population of >25,000
Minimum project size of $5M for small communities
WIFIA loan is capped at 49% of the eligible project costs (so it cannot be a stand-alone financing solution)
Significant application fees for loan negotiation and execution
Multiple projects can be combined and submitted under one WIFIA loan application if the total eligible costs meet the $20M (or $5M) minimum
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Energy Revolving Loan Fund
Administrator: Michigan Economic Development Corporation
Source/Origin: American Recovery and Reinvestment Act of 2009
Maximum Loan: $2,500,000
Loan-Term: Up to 6 years
Interest Rate: 3% (fixed)