Energy Tax Savers, Inc. EPAct Presentation

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Helping Clients Improve
Economic Return with
Energy Project Financing
Energy Tax Savers, Inc.
Charles Goulding
[email protected]
Why Finance an Energy Project?

Rapid economic payback
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2
Large, immediate energy savings can be realized
sooner

Match the debt with the energy savings

Outdated building equipment can be
retrofitted immediately

Many market finance options now available
that did not exist just a few years ago
Energy Project Financing

Building energy products & alternative energy
investments offer excellent economic returns

In recent years multiple energy-financing project
strategies have become quite popular
–

3
CPA's to assist their clients in reducing operating costs while
enhancing their ability to obtain related tax incentives
Leading lenders are increasingly interested in this
strong expanding market
Financing Options
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Vendor Provided
Financing
Bank Financing
On Bill Utility
Financing
State/Municipal
Loan Programs
Municipal LeasePurchases
 Property Assessed
Clean Energy Bonds
(PACE)
 Preferential Treatment
for Green/EE Buildings
 Performance
Contracting
 Power Purchase
Agreements
 Energy Service
Agreements
Vendor Financing

Capital Lease:
–
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5
End users with tax capacity are advised to structure these as
capital leases to take the EPAct tax benefits
Operating Lease:
–
Lessor owns the equipment and leases it out for a pre-determined
contract period
–
Lessor takes the tax benefits, and lessee writes off the lease
payments as a business expense
With energy efficiency equipment, vendor often guarantees that
the customer will pay no more for the lease than the energy
savings it generates
Vendor Financing

The energy efficiency savings realized from new
equipment can offset the lease payment
–

6
This will result in a positive cash flow situation for the
company.
Cost and length of available finance terms will
depend on the equipment itself as well as the
parties’ own creditworthiness
Vendor Financing

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Often tailored to the product being sold.
–
E.g., vendor lighting will typically cover installation and old fixture
removal.
–
Bank financing is often limited to hard costs and won't cover soft
costs, such as:

Installation

Removal of old equipment.

Bank financing is often document intensive.

Bank financing usually requires:

Additional security

Down payments
Vendor Financing

8
Try to piggy-back existing credit approvals
–
This may save you and your client a lot of time
and effort.
–
For example, multiple major hospital equipment
lenders such as GE, Philips and Siemens are also
in the lighting business and the same lines of
credit can be used for energy projects.
Bank Financing: Mortgage-Backed
Energy Efficiency Financing

9
Energy Efficient Mortgage (EEM):
–
Provides additional borrowing capacity
–
Better terms to borrowers buying new energyefficient home or investing in energy
improvements in existing home

Energy efficiency financing is rolled into
home mortgage

Requires compliance with the Home Energy
Rating System (HERS)
Bank Financing: Mortgage-Backed
Energy Efficiency Financing

Either for purchase or refinancing

EEM assumes that energy savings exceed
amortized cost of improvements
–
10
Results in NOI positive investment that improves the
borrower’s ability to pay, hence lowering risk of default
Bank Financing: Mortgage-Backed
Energy Efficiency Financing

11
Energy Star Mortgage programs in Maine, New
York, and Colorado inject capital into mortgage
products to “buy down” the interest rate charged to
borrowers as an incentive to finance energy
improvements
CPE Questions

Should clients with tax capacity structure
vendor financing as an operating lease or
capital lease?
–

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What are the ramifications of each?
What is the major benefit to using vendor
financing over traditional bank financing?
On Bill Utility Financing

The utility, fuel commodity supplier or a third
party financier covers the up-front cost of an
energy efficiency upgrade
–

Customer repays the investment through a
charge on their monthly utility bill
Major advantage:
–
Overcomes program set-up barriers

13
Leverages existing billing relationship utilities have with
customers and builds on access utilities have to energy
use information
On Bill Utility Financing

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14
Two types:
–
Loans tied to the customer: if the customer
moves, the balance must be paid
–
Loans tied to the meter: if customer moves, the
next building occupant has an obligation to pay
Most utility-administered on-bill financing
programs offer low or no interest loans and
short repayment periods
On Bill Utility Financing

Utility Examples:
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15
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United Illuminating
Hess
Public Service Company of New
Hampshire
New Hampshire Electric
Cooperative
National Grid
Sempra Utilities
Manitoba Hydro (Loans)
Midwest Energy How$mart
(tariff)
Nstar
PG&E
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–
–
–
–
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New London Resource
Project
Electric Cooperatives
of South Carolina
Clean Energy Work
Oregon
AFC First Financial
MACED: How$martKY
City of Portland
Housing Bureau
ECG
NYSERDA
State/Municipal Loan Programs

American Recovery and Reinvestment Act:
–
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16

$11.6-bil in 2010 to state and local governments
States allocate funds from:
–
General fund
–
Federal grant allocations
–
Ratepayer funds
Loans to ratepayers cover up-front project
costs
State/Municipal Loan Programs

Ratepayers pay loan back via an additional charge
on their utility bill

Example: Pennsylvania’s Keystone HELP

–
Secured loans for basic retrofit improvements
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5-7% over 3, 5, or 10 year terms
2011: California, Connecticut, Hawaii, Maine, New
Hampshire, New York, Texas, and Washington
–
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Made critical advancements to unlocking financing for
energy efficiency and green building
State/Municipal Loan Programs
18
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Biggest advantage: consolidation of information and
resources across governmental agencies

Biggest disadvantage: Access to secondary sources
of capital are typically necessary, such as:
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Bank debt
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Foundation investments
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Municipal bonds
CPE Questions

What are the two types of on-bill utility
financing?
–

19
What are the differences between them?
What is the major benefit to using vendor
financing over traditional bank financing?
Municipal Lease-Purchases

A conditional sales or installment sales agreement
–

Lessee’s payment obligation usually terminates if lessee
fails to appropriate funds to make lease payments
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Market alternative to a cash purchase or municipal bond issue
So lease may be kept off balance sheet
Municipal Lease-Purchases


During term of a municipal lease:
–
The municipality holds title to the leased equipment
–
Lessor retains a security interest
–
With each payment municipality establishes an equity interest in the
equipment.
At the end of the original lease term:
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Security interest is removed and the municipality has clear title to the
equipment.
Municipal Lease-Purchases

Interest is tax free to the investor
–

May not be considered debt by municipality
–

Right to walk away if funds not annually appropriated; no
credit for prior payments
Lessor tries to control as much as possible
–
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If rate is lower than commercial rates
Eg. Municipality prohibited from engaging in further similar
project transactions if in default on this one
Municipal Lease-Purchases

Two key ancillary forms
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838G
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Opinion of Counsel
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Confirms tax exempt municipal instrument
Signed by municipality’s counsel
Municipal bankruptcies
1.
2.
3.
4.
5.
Central Falls, RI
Birmingham, AL
Vallejo, CA
Stockton, CA
San Bernardino, CA
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Other California cities are in a precarious
position
Property Assessed Clean Energy (PACE)
- Residential

City/municipal liens on home value to enable
community-wide energy efficiency funding

A secured benefit district of land or real
property

City/municipality will provide financing for the
project
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Typically by selling bonds secured solely by
payments made from participating property
owners
Property Assessed Clean Energy (PACE)
- Residential

Homeowners who receive a financing benefit
from the municipality accept a property tax
assessment or charge for up to 20 years

Problem:
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Objections by the Federal Housing Finance
Agency have largely closed this PACE options for
residential energy efficiency financing
PACE - Commercial

Program funds energy improvements on:
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Long-term loans
Secured by a lien on owner’s property
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Multifamily (>4 units)
Commercial
Industrial
Paid back via a charge on property tax bill
PACE - Commercial
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Municipal loan pools funded by:
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Mortgage-holder’s consent required
DOE:
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Issuing bonds
State/federal grant funding
Reduced monthly energy bills should more than
offset the additional charge on property tax bill
PACE - Commercial
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Carbon War Room (think-tank) example:
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Project developer obtains exclusive right to
market PACE
Creditworthy contractor implement efficiency
measures
Contractor guarantees energy savings
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Capital provider offers low-interest short-term loan
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Works with third party to underwrite insurance policy to
back guarantee
Loans bundles into long-term bonds and sold to
institutional investors
CPE Questions
30

What results if a municipal lessee fails to
allocate the funds to make a lease payment
on energy-efficient equipment?

How does a commercial property owner
repay the municipality for PACE loans?
Preferential Treatment for
Green/EE Buildings

So far mortgage lenders and insurance
providers largely do not recognize the lower
risk/higher return attributes of investments in
energy efficient buildings
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Despite documented findings about the
innumerable benefits to a “green” building,
These parties need to be convinced with
robust data to give preferential treatment
Preferential Treatment for
Green/EE Buildings
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Being a first mover in this area could be
attractive to institutional investors to received
positive PR benefits and gain access to a
high-quality demographic with substantial
opportunities for add-on services and brand
loyalty.
Performance Contracting
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A method for developing and implementing
comprehensive energy efficiency or clean energy
projects

Typically provided by an Energy Service Company
(ESCO)
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Typically used for projects in federal government buildings
and in public institutions such as municipalities, universities,
schools and hospitals (MUSH)
Performance Contracting
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Dodd-Frank:
–
ESCO’s won’t be able to administer programs or originate
loans unless they are registered Municipal Financial
Advisors
–
Administrator/originator role will be taken by 3rd party
companies who will add full finance consulting to their loans
or to specialty brokers
Performance Contracting

After project completion, the ESCO monitors energy
savings and maintains equipment
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The savings produced typically exceeds the loans
payments over the term of the contract
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During the contract:
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After contract term:
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Customer shares in a portion of the savings
Customer ceases payments and enjoys all of the residual
energy savings
Performance Contracting
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
In nearly all of these projects implemented in public
buildings the ESCO guarantees the savings to the
customer
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If retrofits produce less than the guaranteed savings,
the ESCO will pay the difference

The value of savings in excess of the guaranteed
savings remains with the customer
Performance Contracting
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These projects take several months to
develop, involve complex contracts, and
blend several sources of funds:
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Utility incentives and rebates
Public revolving loan funds
State/federal government grants
Bonds
Tax equity
Loans
Leases
Performance Contracting
Advantages and Disadvantages
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Advantages
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Disadvantages
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Reduced risk involved in comprehensive retrofits
Can be combined with other incentive programs to
enhance project returns
Rigorous monitoring and verification
A time-tested, standardized methodology
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Substantial negotiation and documentation
Increased transaction costs
Difficult to finance smaller projects
CPE Questions
39

What incentive is there for institutional
investors to become first movers in the field
of preferential financing for “green”
buildings?

What result for the customer after the
performance contract term has ended?
Power Purchase Agreements
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Contracts between two parties:
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Seller generates electricity
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Buyer who is looking to purchase electricity
Various forms of Power Purchase Agreements
differentiated by source of energy harnessed
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Solar
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Wind
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Geothermal
Power Purchase Agreements
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Financing for the project is delineated in the contract,
which also specifies:
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Relevant dates of the project coming into effect
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When the project will begin commercial operation
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Termination date for which the contract may be renewed or
abandoned.
Power Purchase Agreements
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All sales of electricity are metered to provide both seller
and buyer with information about the amount of electricity
generated and bought
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Rates for electricity are agreed upon in the contract between both
parties
Such agreements play a key role in the financing of
independently owned (i.e. not owned by a utility)
electricity generating assets
Power Purchase Agreements
43
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The seller under the PPA is typically an independent
power producer, or "IPP."

Commercial PPA providers can enable businesses,
schools, governments, and utilities to benefit from
predictable, renewable energy
Solar Power Purchase Agreements
(SPPA)

From EPA’s website:
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“A Solar Power Purchase Agreement (SPPA) is a financial
arrangement in which a third-party developer owns,
operates, and maintains the photovoltaic (PV) system, and
a host customer agrees to site the system on its roof or
elsewhere on its property and purchases the system’s
electric output from the solar services provider for a
predetermined period. This financial arrangement allows the
host customer to receive stable, and sometimes lower cost
electricity, while the solar services provider or another party
acquires valuable financial benefits such as tax credits and
income generated from the sale of electricity to the host
customer.”
Solar Power Purchase Agreements
(SPPA)

From EPA’s website:
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“With this business model, the host customer buys the
services produced by the PV system rather than the PV
system itself. This framework is referred to as the “solar
services” model, and the developers who offer SPPAs are
known as solar services providers. SPPA arrangements
enable the host customer to avoid many of the traditional
barriers to adoption for organizations looking to install solar
systems: high up-front capital costs; system performance
risk; and complex design and permitting processes. In
addition, SPPA arrangements can be cash flow positive for
the host customer from the day the system is
commissioned.”
States with Renewable Energy
Portfolio Standards
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Arizona: 15% by 2025
California: 33% by 2030
Colorado: 20% by 2020
Connecticut: 23% by 2020
DC: 20% by 2020
Delaware: 20% by 2019
Hawaii: 20% by 2020
Iowa: 105 MW
Illinois: 25% by 2025
Massachusetts: 15% by 2020
Maryland: 20% by 2022
Maine: 40% by 2017
Michigan: 10% by 2015
Minnesota: 25% by 2025
Missouri: 15% by 2021
Montana: 15% by 2015
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New Hampshire: 23.8% by 2025
New Jersey: 22.5% by 2021
New Mexico: 20% by 2020
Nevada: 20% by 2015
New York: 24% by 2013
North Carolina: 12.5% by 2021
North Dakota: 10% by 2015
Oregon: 25% by 2025
Pennsylvania: 8% by 2020
Rhode Island: 16% by 2019
South Dakota: 10% by 2015
Texas: 5,880 MW by 2015
Utah: 20% by 2025
Vermont: 10% by 2013
Virginia: 12% by 2022
Washington: 15% by 2020
Wisconsin: 10% by 2015
Leading Commercial PPA Utilities
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Pacific Gas & Electric
Xcel Energy
San Diego Gas & Electric
Duke Energy Corp.
NextEra Energy Resources
Power Purchase Agreements –
The Good News
48

The installed cost of solar P.V. has plunged

Many states are offering solar incentives

Projects that didn’t pencil out two years ago
may have totally different results today
Power Purchase Agreements –
The Bad News
49

The solar industry is rapidly consolidating

Some large players have gone bankrupt or
withdrawn from the U.S. market

There have been warranty issues in the past

Solutions:
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Deal with major players that have staying power
–
Warranties are only as good as your ability to
reach the warrantor
Energy Service Agreements

Special Purpose Entity (SPE) established for each
project
–

Capitalized by 3rd party investors to finance the costs of the
efficiency improvement
Host agrees to pay either a fixed or floating rate for
energy savings received
–
Fixed: based on a cost per avoided energy basis

50
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E.g., dollars per kWh avoided or dollar per therm of natural gas
avoided
Floating: equal to a percentage of actual utility rate
Energy Service Agreements
51

SPE retains ownership of installed equipment and
returns cash flows to investors

The fund owns all environmental attributes, grants &
rebates, and tax incentives
Energy Service Agreements
52

This structure enables energy efficiency to be
treated as a service and an off-balance sheet
transaction

Investors commonly obtain multiple tax incentives
including:
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Typical losses during the first year
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Accelerated depreciation
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Any federal, state, or utility incentives
Energy Service Agreements

53
Since many projects yield equity rates of return, the
opportunity exists for private equity to provide upfront financing if there were sufficient ability to
aggregate contracts, monitoring, and services
CPE Questions
54

What are the three leading types of Power
Purchase Agreements?

Who retains the environmental attributes,
grants & rebates, and tax incentives when
there is an Energy Service Agreement?
Finding the Right Energy
Efficiency Finance Strategy

55
Scale efficiency financing to bring down
capital and/or transaction costs and increase
the deployment of funding to efficiency
projects
About the Speakers
56
Charles Goulding is an
Attorney/CPA and
President of Energy
Tax Savers, Inc. ETSI
specializes in advising
building owners,
architects, engineers
and designers on tax
benefits related to
energy saving building
investments.
David Ingram is the
Director of Program
Management in the
Clean Technology
Business Unit at De
Lage Landen Financial
Services. De Lage is a
global provider of
leasing and business
financing solutions.
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