How To Finance Energy Projects

Transcription

1 COMMERCIAL SECTOR CLEAN ENERGY FINANCE MODELS FOR MINNESOTA Matthew H. Brown Principal

2 BIG PICTURE There is very little demand for capital to fund energy efficiency. AND. There is only modest demand for energy efficiency installations. Why is that the case? D E M A N D

3 THE CONCEPT OF ENERGY SERVICES Energy Services = Energy + Technology Acquiring Energy is simple and convenient (a utility does not ask an energy user to borrow money to buy a kwh). However.. Acquiring Energy Efficiency is complex, difficult, risky and requires capital For instance: Evaluate options and choose project Make design and engineering decisions Procure contactor(s) and negotiate price Acquire capital Manage installation Operate and maintain new equipment Take performance and energy saving risk T H E C O N C E P T O F

4 SOLUTIONS To increase the uptake of Energy Efficiency it must be simple to acquire. Consequently, programs should be designed to provide confidence, capital and convenience: 1. Reduce reliance on rebates (which only enable energy users who can access the non-rebated portion of the installation, probably 20 30% of energy users) 2. Offer a loan option (factor in underwriting and loans enable approximately 65% of all of energy users) 3. Or a service agreement option (a service agreement options enables more customers to qualify for financing, given more inclusive underwriting) W H A T C A N B E D O

5 MODELS The following models provide convenient, low-cost, contractorcentric and, possibly, off-balance sheet financing (to serve the commercial and other sectors): On-Property Tax Bill: Commercial PACE On-Utility Bill: Loans or Service Agreements Energy Services and Managed Energy Services Agreements (ESA/MESA) Equipment Lease programs And to support these programs, green funds and banks can provide low-cost capital which can be leveraged with private funds.

6 ON-PROPERTY TAX BILL: COMMERCIAL PACE 1. Energy efficiency deals are originated with commercial property owners by qualifying originators, thus creating a PACE assessment (payment obligation) 1. Bonds are sold and the proceeds are used to fund the EE/RE improvements 2. Local governments create a special tax assessment to collect repayment for the energy project, secured by a tax lien against the property 1. Property owners then repay the debt through a line-item on their property tax bill, over a fixed period of time (up to 20 years)

7 PACE SIMPLIFIED STRUCTURE Program Administrator Typically Oversees Marketing, Project Qualifications, Contractor Approvals, Underwriting. Capital for EE Improvements Customer EE Cost Property Tax Assessment Payments Local Gov t Bondholders Capital Secured as a First Position Lien on Real Estate, With Senior Lender Assent

8 ON-PROPERTY TAX BILL: COMMERCIAL PACE Benefits Provides a secured financing mechanism Increases access to capital for property owners Repayment obligation may transfer to new property owner Longer repayment times than typical unsecured loans (often up to 20 years, but local government can set a longer or shorter loan tenor) Possibly a lower interest rate than similar commercial loans (although rates are currently not at significant discount) Possible off balance sheet treatment (meaning the PACE assessment does not impinge on borrowing capacity of property owner. Limitations Legal and administrative expenses are significant May not be appropriate for small towns and cities without a statewide or regional aggregation process -- as scale is necessary to reduce costs Senior mortgage holder approval required Typically, project have seen a long sales cycle New and as yet unproven method of generating deals although showing promise in Minnesota and elsewhere.

9 ON-UTILITY BILL: LOANS OR SERVICE AGREEMENTS An energy project is identified by the property owner and or contractor The project is funded either by the utility or a third party The utility places the periodic payment on the customer s utility bill The utility collects payments and either credits its own ratepayer account with those payments or remits payments to a third party investor. If the obligation is a loan, it is due and payable on vacancy, if the obligation is a service, it is transferable to the next occupant

10 ON-UTILITY BILL: LOANS OR SERVICE AGREEMENTS Ratepayers Utility Ratepayers May Cover Part/All of Actual Losses P&I/Bill $$s Financial Institution Loan/Lease Customer EE Cost

11 EXAMPLES OF ON BILL FINANCE/ON BILL REPAYMENT California Hawaii Required development of On bill pilot programs, with ratepayer funding of approximately $200,000,000. On bill collections may mean that failure to pay the finance charge results in service disconnection. In some cases, energy costs savings must exceed financing charges (bill neutrality). On bill repayment means third party capital funds ee projects with collections through the utility bill. On bill finance means ratepayer or shareholder funds used for lending capital. Looking at on bill repayment and financing structures, for PV and solar hot water systems. Other on bill programs in: Colorado, Connecticut, Illinois, Kansas, Kentucky, Massachusetts, New Hampshire and elsewhere.

12 ON-UTILITY BILL: LOANS OR SERVICE AGREEMENTS Benefits Energy user benefits from convenience of on bill repayment Possibly lower cost depending on level of security provided by threat of shut off Transferable to successor occupant if a service Inexpensive, simple security with shut off Off-balance treatment possible sheet if deemed a service (meaning no impact on property owner s borrowing capacity. Limitations Added complexity if the utility collects funds from customers and then must remit funds to an investor. Uncertainty as to reaction from investors investors may, or may not, find the on bill structure attractive. Utilities are often reluctant to engage in on bill financing programs due to potential regulatory hurdles and liabilities, IT costs and related concerns.

13 ENERGY SERVICES AND MANAGED ENERGY SERVICES AGREEMENTS (ESA/MESA) Large commercial property owners often cannot or will not take on debt to fund energy projects and are reluctant to allocate available cash on an energy problem that they don t see as a core threat to or opportunity for their business. However at zero upfront cost and with a turnkey approach to efficiency project development, and easy access to financing, a property owner is more likely to consider a major project. The distinction among ESA and MESA is that under MESA the Energy User makes monthly utility payments into a lock-box and the service provider pays the utility. Under the ESA structure the property owner makes both the utility bill payments and the payments to the service provider based on verified energy savings.

14 (INNOVATION) MASTER LEASE ARRANGEMENTS (NON-UTILITY CAPITAL) Customer EE Project Payments based On Saved Energy Debt & Equity Investors Special Purpose Entity $$ Efficiency Contractor Eg. Metrus Energy

15 ENERGY SERVICES AND MANAGED ENERGY SERVICES AGREEMENTS (ESA/MESA) Benefits The obligation is potentially off-balance sheet Eliminates the need for upfront capital Makes use of the existing performance contractor industry (ESCos) A performance guarantee is provided by third party Limitations Interest rates are typically higher than government subsidized programs Changes to accounting standards may change off-balance sheet status The property may pay higher project margins to ESCos if project costs are not transparent The ESA providers face a lack of debt financing, limiting availability of capital to fund the product The sales cycle is long and so far the structure has demonstrated only modest deal flow

16 EQUIPMENT LEASING 1. An agreement is established for: 1. Minimum and maximum leasing terms (rates, length of lease etc.) 2. Partnership between utility company and lease company to generate project deal flow 3. Credit support (loss coverage) to bring investors to the table at attractive rates/terms. 2. Lease company underwrites leases with individual customers, based on credit of that customer. 3. A Contractor installs the project 4. The Property Owner makes lease payments to the lease company 5. In case of default, credit support will cover limited amount of losses

17 EQUIPMENT LEASING EXAMPLE: MICHIGAN SAVES 1. Michigan Saves selected Ervin Leasing, a lease company. Michigan Saves provided: 1. 20% credit enhancement to cover losses to the investor. 2. Contractor management/qualification complementary to what is provided by Ervin Leasing. 3. Availability of capital from a Foundation, to cover leases in moderate income areas. 2. Ervin Leasing provided: 1. Full lease origination services 2. Full lease servicing 3. Some contractor management 4. Partial corporate credit support (10%) 5. A bank investor to buy leases, once originated by Ervin

18 EQUIPMENT LEASE ARRANGEMENTS Ratepayers Utility Utility Ratepayers Provide Credit Support Financial Institution Lease Payments Lease to Customer Customer EE Cost

19 (INNOVATION) MASTER LEASE PROGRAMS 1. Lease investors fund master lease line of credit for the Utility 2. Program Administrator underwrites individual applications and makes recommendations to the Utility 3. If the Utility approves the application and agrees to fund the project, it provides funds to the Program Administrator 4. The Program Administrator signs contracts with the Contractor and Property Owner, agrees to an installation schedule and progress payments, and funds the project 5. The Contractor installs the project 6. The Property Owner makes lease 7. Payments are divided into servicing, loss share, and principal and interest, remaining principal and interest payments are remitted to investors

20 Lease (INNOVATION) MASTER LEASE ARRANGEMENTS (NON-UTILITY CAPITAL) Ratepayers Utility P&I/Bill $$s Financial Institution Customer EE Cost

21 EQUIPMENT LEASE OR MASTER EQUIPMENT LEASE ARRANGEMENTS Benefits No upfront capital required for customer Payments can be on-bill Below market rates if the utility provides a credit enhancement Utility could use shut-off to provide additional security and to lower rates further Uses the expertise of the lease industry The utility can control the process in the case of a master lease Limitations Utility must put up its balance sheet in the master lease arrangement The master lease arrangement requires substantial integration between utility and Lease company Origination costs add to overall cost to the customer, thus increasing interest rates for small consumers Some security and collateral issues can be challenging for individual equipment installations (as is the case with many energy efficiency projects.