Financing Industrial Energy Efficiency & CHP

National Governors Association Policy Academy Philadelphia, Pennsylvania March 6th, 2013 Ethan Rogers, Senior Program Manager

Strategies for Financing Projects Conventional Financing • Operating Funds • Company Cash • Conventional Bank

Financing • Equity Financing

Non-Conventional • Community Banks • Utility/Energy

Efficiency Programs • Government Lending

Programs • Public Bond

Financing • Third-Party

Financing

Opportunity with Community Banks

• BancAlliance – lending  “club”  that  allows member banks to turn to the alliance for fast-growing customers who require loans too large or too complex for the community bank to underwrite on its own

Utility/Energy Efficiency Programs

• Incentives and rebates • Revolving loan funds • Conventional loans • On-bill financing

• ACEEE report: http://aceee.org/research-report/ie121

• 2010, >$1B spent on IEE deployment; • ~75% spent by utilities

On-Bill Financing

• Public Utility Commission (PUC) allows/requires the creation of a utility-based financing program that allows for repayment through an on-bill tariff

• States with legislation in place: Illinois, Hawaii, Oregon, California, Kentucky, Georgia, South Carolina, Michigan, and New York

USDA Rural Small Business Lending

• Business and Industry Guaranteed Loan (B&I) Program

• Intermediary Relending Program (IRP) • Biorefinery Assistance Program/Biorefinery

Assistance Loan Guarantees (Section 9003) • Rural Energy for America Program

Guaranteed Loan Program (REAP Loans—Section 9007)

• Rural Economic Development Loan and Grant (REDLG)

Examples of State Loan Programs

• Alabama Saves uses ARRA money to subsidize loans via a loan loss reserve and interest rate buy down that result in loans of $50,000 to $4 million for 1% for projects with payback from energy cost savings of ten years or less. (www.alabamasave.com)

Examples (continued)

• Colorado Housing and Finance Authority provides financing to manufacturers for a variety of projects that could include distributed generation using the proceeds  of  a  “manufacturing  mini  bonds”.  (www.chfainfo.com/business/manufacturers/manufacturers.icm)

• Pennsylvania Pollution Prevention Assistance Account (PPAA) offers low-interest loans to help small businesses (<100 FTE) to implement energy efficiency and pollution prevention projects. Loans may be up to 75% of the project costs or $100,000, whichever is less, with terms of up to ten years. This program  is  funded  through  the  agency’s  budget.  (www.portal.state.pa.us/portal/server.pt/community/financial_assistance/10495/ppaa_loan/553247)

Examples (continued)

Tennessee: Pathway Lending, Community Development Financial Institution (CDFI) • Borrows from conventional financial

institutions (who receive a tax credit for doing so) at lower than normal rates and relend the money.

• TVA loan, EPA settlement funds, government grants, other

Public Bond Financing

• Communities financing assistance to local companies include loans, loan guarantees, loan collateral, gap funding, credit enhancement, equity, tax abatements, grants, and tax credits.

• Funded through bonds sold to the investing public and then paid off with the future tax revenues from the increased tax base that results from the investments.

Public Bond Financing Development Bond Funding, including: • 501 c-3 bonds for not-for-profits; • Exempt facility bonds for municipal facilities, which

can include energy generating facilities; • Enterprise Zone Bonds (EZBs); • Clean Renewable Energy Bonds (CREBs) that can

fund renewable energy public power producers (PPPs); and

• Qualified Energy Conservation Bonds (QECBs) that enable the issuers to provide tax credits from the federal government for qualified conservation purposes.

Third-Party Financing

• Private equity/venture capital (VC) • Lease-purchase agreements • Performance contracting (e.g., Energy

Service Companies and Energy Savings Performance Contracts)

• Service outsourcing (e.g., compressed air or steam system)

State Tax Incentives

• Arizona property tax exemption for renewable energy systems in 2006 and expanded it to include CHP and energy efficient building components in 2009.

• New Mexico, a corporate tax credit for sustainable buildings that have been registered and certified LEED Silver by the US Green Building Council (USGBC)

• Kentucky offers a corporate energy efficiency tax credit of 30% up to $500 for energy-efficient heating, ventilating, and air conditioning (HVAC), hot water, and interior lighting systems.

EXAMPLES

Master Limited Partnerships

Master Limited Partnerships (MLPs) are business structures that are taxed as partnerships, but whose ownership interests are traded like corporate stock.

This enables investors to lower their tax liability and improves the cash flow of such investments.

Currently, certain oil, gas, and some biofuel projects qualify as MLPs, but clean energy projects do not.

Expanding the definition MLPs could provide efficiency and CHP projects access to a $350 billion market that lowers project costs and provides investors with a desirable rate of return.

Limitations of Financing Strategies All financing strategies have different strengths

and limitations, all of which can change over time with the firm, economy, and market.

• Many have higher transaction costs than conventional financing

• Increased uncertainty in eligibility & future availability of lending program

• Some only work for certain size projects • Some sources have size & scope limitations (Eg.,

REDLG loans are constrained & can only apply for them every few years)

Contact Information: R. Neal Elliott, Ph.D., P.E. rnelliott@aceee.org 202-507-4009 Ethan A. Rogers erogers@acee.org 202-507-4751 Anna Chittum achittum@aceee.org 206-938-7585 Daniel Trombley dtrombley@aceee.org 202-507-4008 Chris Russell crussell@aceee.org 202-507-4749