When the American Recovery and Reinvestment Act (the stimulus bill) passed in April it included $3.2 billion in bonding authority for states in Qualified Energy Efficiency Bonds (QECBs). The QECB program was actually increased from the $800 million that was passed in October of last year. Most states and local governments in the Northwest haven’t yet figured out exactly how they are going to use this new capacity to borrow money for clean energy projects. But they know it’s a bandwagon to jump on for cost savings, energy savings, and job creation.
Here’s a quick review of how bonds work. Bonds are issued by government or a private entity and they are essentially financial instruments or loans of money based on conditions set by federal or local government. In the simplest terms they are debt, sort of like the debt you might take on with a home equity loan or a credit card. Like a home equity loan governments and businesses often issue bonds for improvements they can’t afford now but think will add benefit in the form of equity or increased ability to generate revenue. For governments there are specific requirements and stipulations about how much they can borrow using bonds and how they spend the money once they borrow it. Some bonds are issued with very low interest rates but they are also very low risk. Or the buyer (the party loaning the money) might get their return from their loan in the form of tax credits instead.
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The QECB program allows state, local, and tribal governments to borrow money for energy efficiencies and renewable energy projects. But the legislation actually stipulates a lot of possible uses for the bonds. Section 54(D) is the sweet spot. QECBs can be used to pay for:
- capital expenditures incurred for purposes of reducing energy consumption in publicly-owned buildings by at least 20 percent;
- implementing green community programs (including the use of loans, grants, or other repayment mechanisms to implement such programs);
- rural development involving the production of electricity from renewable energy resources from any qualified facility including wind, biomass, hydro, solid waste to electricity (excluding coal) and regardless of when the project came on line;
- research facilities and research grants to support research in cellulosic ethanol or other non-fossil fuels, technologies for the capture and sequestration of carbon dioxide produced through the use of fossil fuels, increasing the efficiency of existing technologies for producing non-fossil fuels, automobile battery technologies and other technologies to reduce fossil fuel consumption in transportation or technologies to reduce energy use in buildings;
- mass commuting facilities and related facilities that reduce consumption of energy, including expenditures to reduce pollution from vehicles used for mass commuting;
- demonstration projects designed to promote the commercialization of green building technology, conversion of agricultural waste for use in the production of fuel or otherwise, advanced battery manufacturing technologies, technologies to reduce peak use of electricity, or technologies for the capture and sequestration of carbon dioxide emitted from combusting fossil fuels in order to produce electricity; and
- public education campaigns to promote energy efficiency.
Now why would I take up so much space laying out all the possibilities? Because it is a pretty comprehensive list (the only thing off the list is coal) and the Northwest states together have been allocated (based on population) more than $132 million in bonding capacity for clean energy projects. That’s $15.8 million for Idaho, $67.9 million for Washington, and $39.3 million for Oregon. That is a lot of potential savings, clean energy and possibly a lot of green-collar jobs.
The great thing about QECBs is that they allow the funding of all sorts of programs as well as capital improvements. And the QECBs come with no interest charge to the borrower because the benefit to the lender is in the form of federal tax credits. So a city, for example, pays no interest but the buyer benefits from tax credits. That means less cost for the city and more profit for shareholders. All this makes this bonding tool incredibly versatile.
One clever way to engineer this kind of loan is to set it up so the energy savings created by the project is used to pay back the debt. For example, Representative Hans Dunshee introduced legislation last session in Washington State to retrofit schools and pay down the debt with cost savings. The legislation failed, but this idea—called Green Increment Financing– has been embraced in other places like Wisconsin for retrofitting an entire city (Wisconsin’s senator Russ Feingold sponsored the QECB legislation).
So far Washington seems to have done the most to access these dollars with its Department of Commerce taking the lead. A conference was held in Bellevue at the end of last month to sort out which local governments and agencies might use these bonds. Washington’s Department of Commerce has already determined local allocations based on the federal guidelines and have started the process of considering project proposals. Most of this money has to be tapped into by end of next year.
In a quick survey of Idaho and Oregon’s Commerce and Energy Department websites, I didn’t find much about QECBs. In fact, the only reference I have found to these bonds was in meeting minutes from the Oregon Facilities Authority. During the meeting it was mentioned that a trucking company wanted help making its fleet more efficient, just the kind of project envisioned by the QECB legislation. But a member of the committee pointed out the Authority’s legislative mandate wouldn’t allow them to participate in the program. This is evidence that, like in other programs, sometimes additional money and capacity call for more planning and innovation from states and local government.
Oregon has, however, made good use of the Clean Renewable Energy Bonds or CREBs. This program, though, has a much more limited volume allocated by Congress, and
participants must first apply to the Internal Revenue Service for an allocation of authority to issue the bonds for use within a limited window of time. The CREBs program doesn’t include efficiencies in buildings, only renewable energy.
And often local governments worry about the obligation of too much debt or they struggle to find the right projects to fit a particular bond vehicle. Most communities in the region should jump at a chance to create local jobs, retrofit buildings for better energy efficiency, and stimulate local economies in the bargain. Washington State’s example of how to take advantage of this resource will be an important one for other states in the months ahead.
One correction, energy conservation bondholders will receive only 70% of the full rate set by the Treasury Department – so bond issuers will have to pay some increment to make up the 30% – and probably a little more because investors may not value tax credits exactly as cash.
Thanks Matt. You are correct. Here is a paragraph from Jones Hall describing the rate structure: “The rate is 70% of the rate set by the Treasury for qualified tax credit bonds. In theory, QECBs could provide a borrower with a 0% interest rate, but it is likely that purchasers will require adiscount on the QECB or a supplemental interest payment. Any supplemental interest earned on a QECB is federally taxable.”So a local government would likely end up paying part of the taxable portion. Still, this could make sense depending on the project.