Qualified Energy Conservation Bonds (Pete)

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Qualified Energy Conservation Bonds (Pete)

  1. 1. Qualified Energy Conservation Bonds Part 1: Overview of Tennessee Program and Best Practices Pete Westerholm, Program Manager Katie Southworth, Program Manager TDEC Office of Energy Programs
  2. 2. Disclaimer: This presentation is intended to serve as a general introduction to qualified energy conservation bonds to finance energy projects. Nothing contained in this presentation should be construed or relied upon as legal advice.
  3. 3. “You have no control over how much you pay for energy. The only thing you can control is how much energy you use.” -Mark Samuels, Maintenance Director Williamson County School District
  4. 4. Part 1: Overview of Tennessee Program and Best Practices • What are Qualified Energy Conservation Bonds (QECB)? • How can they be used to finance energy conservation projects and meet sustainability goals? • What opportunities exist in Tennessee under the Tennessee QECB program?
  5. 5. Bond Finance Basics: What is a Bond? Bonds are debt instruments issued by a government or business to raise money. Similar to loan or IOU. • Lender is holder of the bond (creditor) • Issuer of the bond is the borrower (debtor) • Coupon is the interest paid on the principal • Principal is the amount that interest is charged against (the amount “loaned”) • Maturity is the date by which the nominal amount must be repaid (also referred to as the “tenor”)
  6. 6. What are Qualified Energy Conservation Bonds (QECB)? • Low interest bonds that can be issued by states, territories, large local governments, and tribal governments to finance renewable energy and energy efficiency projects. • Attractive borrowing rates: 1%-5% effective interest rate. 70% of interest rate is subsidized. Issuer typically gets 3%- 4% subsidy from Treasury, lowering borrowing costs 15 to 22-year term • Created in 2008; greatly expanded by Recovery Act in 2009. • Total national allocation is $3.2 billion; Tennessee allocation is $64,676,000 • Issued for qualified energy efficiency, renewable energy, and energy conservation capital expenditures; qualified projects are broadly defined.
  7. 7. QECB Qualified Projects Capital expenditures incurred for purposes of: • Reducing energy consumption in publicly-owned buildings by at least 20% • Implementing green community programs (including the use of loans, grants, or other repayment mechanisms to implement such programs) • Rural development involving electricity produced from renewable energy resources • Energy-related research facilities and research grants • Mass commuting facilities • Demonstration projects (for energy-related processes) In Tennessee, bonds can only be issued if physical asset development or improvement is critical component of project
  8. 8. 8 QECB Criteria 1. 100% of the available project proceeds from issuance must be used for one or more qualified conservation purposes, used within 3 years of issuance 2. Bond is issued by a state or local government, and 3. Issuer designates such bond for the eligible purposes Also: • Up to 30% of Tennessee’s QECB allocation may be used for private activity • Federal Davis-Bacon (prevailing) wage and benefit requirements apply to projects funded with QECBs. Other ARRA requirements, such as Buy American, monitoring and audits, may apply • Issued as revenue bonds or general obligation bonds
  9. 9. QECB Case Study: Multifamily Energy Efficiency – Boulder, CO Context: The City of Boulder’s Housing Authority, Boulder Housing Partnership (BHP) faced the following challenges: • Limited ability to finance projects, weak rental economy beginning 4th qtr 2008 • Uncertainty about status of federal funding to support O&M • Increasing utility needs, rising costs to tenants • Need to continue providing services to low income families • Aging or outdated technologies, equipment, and facilities Challenge: Provide safe and adequate housing to a growing number of low- income residents while managing operating costs and delivering quality services.
  10. 10. QECB Case Study: Multifamily Energy Efficiency – Boulder, CO Process: DEVELOPED SUSTAINABILITY PLAN/ GOALS • Early 2009- BHP Energy Conservation & Sustainability Plan. RECOGNIZED OPPORTUNITY TO PERFORM BETTER, SPEND LESS • Set goal to be first housing net-zero energy housing authority. PARTNERED WITH AN ESCO (ENERGY SERVICES COMPANY), USED PERFORMANCE CONTRACT • April-May 2009- Identified energy services company (ESCO) to complete energy performance contract work. DETERMINED BASELINE: AN AUDIT IS A SNAPSHOT OF ENERGY PICTURE • Summer 2009- ESCO performed energy audits on eight BHP properties to determine the most cost-effective improvements. PRIORITIZE PROJECTS BASED ON NEED, ROI • Consulted with maintenance department about planned changes, because the staff would be unfamiliar with the new equipment • March 2010 - Board and HUD approval, final Energy Services Agreement (ESA) documenting the work to be completed (including staff training) and the guaranteed energy savings was executed IDENTIFY FINANCING STRATEGY • Nov 2009 - Applied to State for QECB allocation. Received $1.5 million Feb 2010. • May 2010- Request for Proposals for bond counsel. • August 25, 2010- Issued $1.44 million of 16-year QECBs to finance improvements as well as issuance and bond counsel costs associated with the offering.
  11. 11. Projects: Multifamily Energy Efficiency – Boulder, CO
  12. 12. QECB Case Study: Multifamily Energy Efficiency – Boulder, CO Results: • Guaranteed savings via performance contract • The energy savings realized, combined with HUD subsidy, cover the interest and principal payments on the bonds. • Energy Conservation & Sustainability Plan goals met • Will reduce its carbon footprint by over 450 mt/year. • 45% Water consumption savings • 28% Electric consumption savings • 29% Natural gas consumption savings
  13. 13. QECB Case Study: Multifamily Energy Efficiency – Boulder, CO Funding: • City of Boulder to Boulder Housing Partners (BHP) as conduit issuance • Amount: $1.44 million QECB for energy efficiency improvements to public housing sites (combined with small amount of BABs for water efficiency improvements) • Net interest cost: 2.79% • Maturity: 16 years • Lender: Bank of America BHP estimated that traditional financing would have cost at least 2 percentage points more than was achieved with this offering.
  14. 14. How QECBs Work: An Overview U.S. Treasury allocates QECB bond volume to states States allocate QECB issuance capacity to Qualified Issuers, who then sell taxable QECBs to investors Proceeds from bond issuance are used to fund a Qualified Energy Conservation Project Issuer pays a taxable coupon semi-annually to the investor and repays principal at the end of term U.S. Treasury pays issuer the lesser of the taxable coupon rate or 70% of the tax credit rate
  15. 15. How QECBs Work: An Overview U.S. Treasury pays the QECB issuer the lesser of (a) the taxable interest rate of the bonds or (b) 70% of the qualified tax credit rate (QTCR) as of the bond sale date. That Direct Payment is paid directly to issuers contemporaneously with the scheduled debt service payments to the bondholders if the issuer properly files for the Direct Payment. The Direct Payment reduces the NET interest rate that issuers pay to the investors. www.treasurydirect.gov/GA-SL/SLGS/selectQTCDate.htm.
  16. 16. How QECBs Work: An Overview Net interest cost example - 8/19/2013 • 6.00% = Taxable coupon rate • 5.33% = Tax credit rate (from Treasury Direct) • 70% = Subsidy on tax credit rate • (5.33 x .70) = 3.731% = Direct subsidy • 21 years = Maturity (can choose up to this term length) The Taxable Rate minus the Direct Subsidy equals the Net Interest Rate. 6.00% - 3.731% = 2.269% In this example, the net interest cost would be 2.269%.
  17. 17. How QECBs Work: An Overview From DOE QECB and CREB Finance Primer
  18. 18. Tennessee Program: Allocation, Re-allocation, Sub-allocation • Tennessee Legislation/ Authority • TDEC OEP and Tennessee Local Development Authority roles. Step 1- Allocation to Large Local Jurisdictions (LLJs) Step 2- Re-allocation to State QECB program Step 3- Competitive Sub-allocation to eligible issuers for qualifying projects
  19. 19. Tennessee Program: Large Local Jurisdictions Allocations June 2012 Large Local Jurisdictions (LLJs) in TN received a share of the $64.7 million based on their percentage of the population • Cities with populations of 100,000 or more • Counties with populations of 100,000 or more, not including any cities within the county that are large local governments 15 entities in TN received allocations, totaling $35.9 million. Blount County, Chattanooga, Clarksville, Hamilton County, Knox County, Knoxville, Memphis, Metro Nashville, Rutherford County, Shelby County, Sullivan County, Sumner County, Washington County, Williamson County, Wilson County “Allocation designees” may: • Authorize an eligible public entity such as a Development Authority to issue QECBs • Allocate all or a portion to an unrelated political subdivision within its jurisdiction (such as a city in a county – conduit issuer relationship) • Reallocate to the State
  20. 20. Next Steps: Re-allocation and Sub-allocation • OEP requested that all 15 Large Local Jurisdictions (LLJs) determine usage of QECB allocation by June 30, 2013. • Allocations not utilized by LLJs and reallocated to the State were combined with state government allocation. • Total allocation will be available to all qualified local governments and public universities through a competitive sub- allocation process. • OEP is currently evaluating the level of funding to be dedicated to the competitive round of sub-allocations; anticipated total is $46,542,400
  21. 21. Davis-Bacon, Reporting: An Overview Any project financed with proceeds of a QECB is subject to the Federal Davis-Bacon Act prevailing wage and benefit laws, including any private activity project financed with proceeds of a QECB Prevailing wage requirements do not apply to issuer employees but do apply to contracts entered into for construction, repair, or alteration Other ARRA requirements, such as Buy American, monitoring and audits, may apply Issuers of QECBs must file a Form 8038 with the IRS upon issuance of the QECBs Reporting on project impact to OEP will be required
  22. 22. 22 QECBs in Action Best Practices How do issuers determine which projects to pursue? What steps are taken to ensure success? Projects What types of projects have QECBs funded? Examples of how energy, and money, is being saved Next Steps How can QECBs be used in Tennessee? How can I learn whether QECBs are a good fit for me?
  23. 23. 23 Best Practices: Difference-Making Project Criteria • Project Feasibility – Viability of project, technology, budget, compliance • Project Impact – Jobs, energy savings, return on investment, environmental benefits • Project Strategy – Align with local sustainability strategy, support, part of vision • Project Readiness – Timeframe in place for bond issuance, shovel-readiness
  24. 24. 24 Best Practices: Performance Based Contracting Performance-based contracting - payment is conditional on achieving contractually specified energy savings Uses energy and utility dollars saved to pay for the project costs Also called Guaranteed Energy Savings Contracts with energy service companies (ESCOs) Contract for the evaluation, recommendation, or implementation of energy conservation measures Payments made over time Energy savings guaranteed to exceed costs
  25. 25. 25 QECB Case Study: Foley, AL Context: Limited ability to finance projects, aversion to debt Increasing utility needs, rising costs Lack of precise, reliable data for facilities, utilities Need to continue providing services Aging or outdated technologies, equipment, and facilities, combined with rapid growth Challenge: Manage operating costs while delivering quality services to a growing number of residents
  26. 26. 26 QECB Case Study: Foley, AL Process: Recognize opportunity to perform better, spend less Partnered with an ESCO (energy services company), used performance contract Determine baseline: an audit is a snapshot of energy picture Prioritize projects based on need, ROI Identify financing strategy Projects: Citywide energy management system, communication network HVAC, LED lighting, solar panels, rainwater harvesting, and irrigation control on 18 sites
  27. 27. 27 QECB Case Study: Foley, AL Funding: $2.8 M from QECB, effective interest rate of 1.3% for 20-year term $350,000 from state loan Results: Reduced utility costs by 33% Guaranteed savings via performance contract: $4.2 M over 20 years Equivalent of removing 1,663 cars from the roads
  28. 28. 28 QECB Utilization: Examples in TN Nashville $6,440,000 allocation used on energy efficiency upgrades for downtown Arena, issued August 2012 • Category: reducing energy consumption in publicly-owned buildings by at least 20% • Obtained certifications from construction engineers, anticipated savings approximately 30% • Resolution adopted by Metro Council granting issuing authority, general obligation bonds • Issued at 3.367% interest rate, interest paid semi-annually
  29. 29. 29 QECB Utilization: Examples in TN Clarksville $1,240,000 allocation being used on energy efficiency upgrades for LED street light conversion • Category: reducing energy consumption in publicly-owned buildings by at least 20% • Currently has over 10,000 street lights in the city; largely high pressure sodium street light fixtures • QECBs funding first phase of comprehensive replacement of all street lights with LED Light Fixtures • Both 250 Watt and 1000 Watt fixtures will be replaced with radio- controlled comparable illumination LED fixtures
  30. 30. 30 QECB Utilization: Examples in TN Memphis $7,000,000 allocation being primarily used on energy efficiency upgrades for upgrades to wastewater treatment plant • Category: reducing energy consumption in publicly-owned buildings by at least 20% • New Blower System at treatment plant to replace four obsolete single‐stage, centrifugal blowers • Modern system will have greater operational flexibility, lower maintenance costs • Project expected to provide an annual return on investment of $1 million based on the energy saved
  31. 31. 31 Bellingham, WA: Challenges and Opportunities Population: 81,000 The Issues: Growing maintenance needs across the city; maintenance often reactive (short fixes, putting out fires) Challenging properties: federal building, city hall, aquatic center
  32. 32. 32 Bellingham, WA: QECBs as a Part of Overall Energy Strategy The Strategy: Consistent with efforts to implement the city’s Municipal Facility Energy Conservation Strategy Reduces long term operating costs, greenhouse gas emissions, essential capital maintenance replacement while stimulating local economy Projects identified: lighting, HVAC, aquatic center renovations, controls of systems Performance Contracting with ESCO; budget neutral
  33. 33. 33 Bellingham, WA: Financed Various Projects QECB Bond (GO Taxable) $6,500,000 Interest & Debt Service $285,000 Administration $100,000 Facilities Repairs, Engineering $3,570,000 Machinery, Equipment $2,545,000 20% savings for 22 City-owned assets; net interest rate: 1.68%; 15- year term
  34. 34. 34 Bellingham, WA: Results Exceed Expectations Variety of measurement and Verification strategies used Guaranteed energy savings of $163,000 Trouble-shooting until performance achieved, improved comfort
  35. 35. 35 Next Steps: Utilization and Competitive Sub-Allocation OEP requested that all 15 Large Local Jurisdictions determine usage of QECB allocation by June 30, 2013 Allocations not utilized by LLJs and reallocated to the State were combined with state government allocation Total allocation will be available to all qualified local governments and public universities through a competitive sub-allocation process OEP is currently evaluating the level of funding to be dedicated to the competitive round of sub-allocations; anticipated total is $46,542,400
  36. 36. 36 Next Steps (continued): Utilization and Competitive Sub-Allocation OEP will evaluate requests for QECB allocations through a competitive process; guidelines in development Information on how to apply will be released in Fall 2013 Competitive sub-allocation process will still require adherence to appropriate regulations and conditions of original allocation End result: more places across TN saving money!
  37. 37. 37 Next Steps: Application Workshops to Assist Eligible Entities Workshops will be held showcasing QECBs: – September 3: Nashville Ellington Ag Center – September 6: Knoxville UT Conference Center – September 11: Jackson Energy Authority Training Center – September 12: Chattanooga Green Spaces All workshops will be from 10:30-1:30 local time. Locations and registration is available at http://tnenergy.org/events/
  38. 38. 38 Next Steps: Application Workshops to Assist Eligible Entities Each workshop will feature an overview of QECBs, industry expert testimony, detailed case studies, and opportunities to have questions and concerns answered Information will also be provided regarding the upcoming application process, and how eligible entities can prepare proposals this Fall Finance Directors, Facilities Directors, and other Officials are encouraged to attend Attendees will leave being able to make an informed decision whether QECBs are a good fit for their energy conservation needs
  39. 39. Thank You 39 OEP Energy Hotline: 615-741-2994 TDEC OEP Website http://www.tn.gov/environment/energy/qualified-energy-conservation-bonds.shtml Pete Westerholm Program Manager TDEC Office of Energy Programs Katie Southworth Program Manager TDEC Office of Energy Programs

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