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Table of Contents
Linking Sustainability and the Focus on Funding with the New Administration .......................................... 4
What is funded in the American Recovery and Reinvestment Act? ......................................................... 4
Funding Options............................................................................................................................................ 5
Performance Contracting.......................................................................................................................... 5
Why Performance Contracting? ........................................................................................................... 5
How Does Performance Contracting Work?......................................................................................... 6
Equipment Leasing.................................................................................................................................... 6
Measurement and Verification ................................................................................................................. 7
Third‐party Ownership.............................................................................................................................. 7
Advantages and Disadvantages of Third‐Party Ownership .................................................................. 7
Financial Structure of Third Party Ownership....................................................................................... 7
Other Funding Sources.............................................................................................................................. 8
State Public Benefit Funds .................................................................................................................... 8
State Clean Energy Funds...................................................................................................................... 8
Utility Rebate Programs ........................................................................................................................ 8
Federal Incentives for Public Sector Organizations (REPI).................................................................... 8
Federal Investment Tax Credit.............................................................................................................. 8
Monetizing the Attributes of Renewable Energy.................................................................................. 9
Renewable Energy Certificates ............................................................................................................. 9
Energy Efficiency Certificates................................................................................................................ 9
Verified Emissions Reductions .............................................................................................................. 9
Summary ..................................................................................................................................................... 10
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4.
Linking Sustainability and Financing in the New Administration
With the passage of the American Recovery and Reinvestment Act (ARRA) of 2009, achieving
sustainability has become an important objective for both public and private sector organizations
seeking lower energy costs, reliable energy supplies, and reduced greenhouse gas (GHG) emissions. The
Obama Administration has taken a bold approach to establish new partnerships with schools, colleges
and universities, state and local governments, and businesses to double renewable energy production in
America over the next three years. Already, these organizations have begun to adopt both renewable
energy and energy efficiency measures, such as the installation of solar panels, wind turbines, wood
boilers, lighting and mechanical (HVAC) systems, insulation, and window replacement to offset
increasing fuel consumption. In addition, they are accelerating their progress towards sustainability to
ensure their competitiveness and create long‐term sources of revenue, while providing local economic
rewards and protecting the environment.
With renewable energy and energy efficiency at the center of both public and corporate agendas,
questions remain about how projects will be financed and what incentives will be provided to ensure
their feasibility.
There is a growing number of federal and state financial incentives, grants, and tax rebates to help offset
the up‐front costs of installation. For instance, Performance Contracting and Third‐party Ownership are
some of the most common methods to secure financing, and other funding options include the use of
state public benefit funds, state clean energy funds, utility rebate programs, federal investment tax
credits, and federal incentives. With nearly $17 billion in ARRA funds available for direct spending, the
government is well‐positioned to finance renewable energy and energy efficiency projects despite the
current economic climate. This paper seeks to highlight the best practices for securing financing with
federal stimulus money and promoting renewable energy and energy efficiency in the most cost‐
effective way.
What is included in the American Recovery and Reinvestment Act?
In 2009, the US government approved the American Recovery and Reinvestment Act (ARRA) to help
stimulate the economy, and the bill contains many provisions relating to renewable energy and energy
efficiency projects, in the form of financial incentives as well as direct spending. Approximately 90% of
ARRA spending will occur between the years 2009 and 2014. ARRA funding for renewable energy and
energy efficiency includes:
$3.2 billion in energy efficiency and conservation block grants,
$6.3 billion for local and state governments to invest in energy efficiency programs,
$300 million to purchase energy efficient applications,
$250 million to increase energy efficiency in low‐income housing,
$4 billion to the Department of Housing and Urban Development (HUD) for repairing and
modernizing public housing,
$11 billion to create a “smart” grid,
$5 billion for weatherizing low‐income housing,
$4.5 billion for the Office of Electricity and Energy Reliability to modernize the nation's
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5. electrical grid,
$4.5 billion for state and local governments to increase energy efficiency in federal
buildings,
$2.5 billion for energy efficiency research,
$3.2 billion toward Energy Efficiency and Conservation Block Grants,
$300 million to buy energy efficient appliances,
$300 million for state and local governments to purchase energy efficient vehicles, and
$250 million to increase energy efficiency in low‐income housing.
ARRA illustrates the Obama administration’s commitment to advancing renewable energy and energy
efficiency into the American mainstream with a substantial amount of capital. The Committee on
Appropriations stated that the “American Recovery and Reinvestment Bill is the first crucial step in a
concerted effort to create and save 3 to 4 million jobs, jump start our economy, and begin the process of
transforming it for the 21st century.”
Funding Options
Most on‐site renewable energy and energy efficiency projects can be funded by ARRA with:
Performance Contracting, which allows organizations to fund renewable energy facilities
with cost savings from energy efficiency measures through loan or lease mechanisms.
Third‐party Ownership, which provides organizations with the ability to enjoy some of the
benefits of renewable energy through service contracts while avoiding the risks associated
with direct ownership.
Performance Contracting
Performance contracting is an increasingly popular financial model that enables organizations to fund
energy efficiency and renewable energy projects in the absence of available capital. Many public
organizations are unable raise sufficient capital to install on‐site renewable energy facilities without first
raising taxes or issuing bonds through referendums. As a result, performance contracting has been an
especially attractive funding option for academic institutions and state and local governments, whereby
energy and operational savings accumulate over a specified time period and are used to fund
infrastructure improvements through a lease arrangement provided by third‐party financial institutions.
Why Performance Contracting?
The advantages associated with performance contracting include:
Guaranteed energy savings enable organizations to finance up‐front costs of energy
efficiency measures and installation of on‐site renewable energy facilities in the manner
that best suits their financial needs.
All aspects of financing are performed by a qualified third‐party financial institution.
Energy and cost savings are guaranteed. (Otherwise, the contractor is required to
reimburse the organization for the difference in cost.)
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6. The organization owns the Renewable Energy Certificates (RECs) generated from on‐site
renewable energy facilities and may sell credits on the open market.
An Energy Services Company (ESCO) uses performance contracting for a comprehensive approach by
analyzing all aspects of the building environment, such as—lighting, HVAC, and water efficiency—to
maximize the structure’s overall efficiency, savings, and greenhouse gas reductions. This distinguishes
ESCOs from other contractors who typically focus on a single energy efficiency solution like lighting.
How Does Performance Contracting Work?
Although Performance Contracting is a complicated process, it can be divided into six simple steps:
1. A detailed investment‐grade sustainability audit is performed on the organization’s facilities
by a trained professional. The auditor identifies opportunities to improve energy efficiency
of building envelopes, such as leaky windows, doors and wall seams, lighting, heating,
ventilation, and air conditioning systems.
2. Results from the sustainability audit then undergo a technical review.
3. A performance contract is written following the technical review.
4. Once the contact is executed, energy efficiency measures can then be performed and
construction of the on‐site renewable energy facility can begin.
5. When the construction phase is completed, all new equipment from the renewable energy
facility must be properly operated and maintained over the course of the contract–which
can last between 10 and 20 years–to ensure that the projected energy production rates are
achieved.
6. Finally, cost savings are then recorded over the specified time period to ensure they equal
or exceed guaranteed cost savings agreed upon in the performance contract.
Equipment Leasing
Public sector organizations may be required to own new equipment and facilities, whereby traditional
loans or lease‐to‐own funding may be obtained from a financial institution. The following lease options
exist to benefit the particular needs of those organizations:
Capital or financed lease arrangements allow the lessee to purchase the equipment for a
nominal fee at the end of the lease period.
Tax‐exempt or municipal leases exist for state and local governments, state universities,
school districts, fire and police departments.
Operating lease arrangements require the lessee to rent equipment, however, provide
inexpensive and reliable energy at fair a market value.
Shared savings arrangements allow vendors to install the equipment at cost and receive a
negotiated percentage of the cost savings that the system generates. The organization may
then purchase the equipment at fair market price.
When using the performance contracting model to finance energy efficiency projects, the risk of
performance belongs entirely to the Energy Service Company (ESCO). The projects are designed so
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annual energy production and operational savings are greater than or equal to the required payments
over the term of the contract, leaving a net neutral impact on a customer’s budget.
Measurement and Verification
The primary benefit of using performance contracting as a procurement tool for ARRA is that it often
provides the customer with an annual report validating energy cost savings. The transparency of this
approach is a critical requirement of the stimulus package; performance contracting programs provide
customers with the annual date to share for the life of the contract. Measurement and verification
guarantees that projects are successfully managed and ensure a degree of oversight of funds.
Third‐party Ownership
As an alternative to performance contracting, third‐party ownership is gaining in popularity. Under a
third‐party agreement, one organization permits another to install on‐site renewable energy facilities on
its property. For instance, a company may enter into an agreement with a financial institution to install
solar photovoltaic panels on the rooftop of its buildings. The company then purchases the power
generated from the solar panels, but it does not own or maintain the panels themselves.
Advantages and Disadvantages of Third‐Party Ownership
While third‐party ownership is a very attractive funding option, there are certain disadvantages when
choosing this type of funding:
Should electric rates fluctuate, an organization could find itself under contract to pay above‐
market electrical rates for a specified time period.
The third party has the right to claim it is using power produced from renewable energy
sources. This is especially important for organizations seeking to enhance their public
image.
Financial Structure of Third Party Ownership
Funding for installation of solar panels can come from three primary sources:
1. A grant from the local electric utility,
2. The sale of Renewable Energy Credits (RECs), and
3. Local investors.
Third‐party funding is popular in states where:
Peak electricity rates are relatively high,
State and utility incentives are available, and
There are pecial renewable energy incentives–such as higher REC prices for power produced
from solar photovoltaic cells.
In this model, the third‐party is responsible for installing, operating, and maintaining the on‐site
renewable energy facility, which results in low operational risk for the power purchasing organization.
By negotiating a long‐term agreement to purchase power from a renewable energy facility –anywhere
between 6 and 25 years – an organization can secure a constant rate, should energy prices rise. Even if
the organization (a non‐profit) is tax‐exempt, it can still make use of tax incentives to install on‐site
renewable energy facilities by partnering with a third‐party who would ultimately benefit from them.
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Other Funding Sources
In an attempt to fund a renewable energy and energy efficiency project, an Energy Service Company
(ESCO) can obtain capital from other sources. They include: state public benefit funds, state clean
energy funds, utility rebate programs, federal investment tax credits, and federal incentives for public
organizations.
State Public Benefit Funds
These funds are typically financed through small surcharges on consumers’ utility bills. Twenty states
use these funds to provide financial support for renewable energy projects. For instance, Vermont’s
Clean Energy Development Fund has set aside approximately $6 million ‐ $7.2 million annually to
provide financial support for energy efficiency and renewable‐energy projects through March 2012.
Eligible renewable energy projects include solar PV, solar hot water, wind, geothermal heat pumps,
farm, landfill, and sewer (methane) gas recovery.
State Clean Energy Funds
These are funds that state governments typically set aside to finance large‐scale renewable energy
facilities. One example is the Kansas Energy Efficiency Program (KEEP) which provides up to 50% of the
total loan amount for a variety of home energy efficiency and energy conservation measures including
solar water, space heaters, and photovoltaics.
Utility Rebate Programs
Since renewable energy systems can sometimes delay construction of new generating capacity, reduce
peak loads, and distribute power generation, many utilities provide financial incentives to customers
who install them. For example, the Modesto Irrigation District is a publicly‐owned utility that provides
light and water in California’s Central Valley. Under the utility’s Photovoltaic Rebate Program, all
customers – commercial, residential, nonprofit, local government, state government, and agricultural –
can receive a rebate for installing solar PV systems. The peak output capacity of a system must be 1 kW
or greater to participate. The rebate is $2.80 per installed watt, not to exceed 50% of total project costs
up to 30 kW. Public agencies can receive an additional $0.50 per watt, bringing their incentive up to
$3.30 per watt up to 30 kW.
Federal Incentives for Public Sector Organizations (REPI)
The Renewable Energy Production Incentive (REPI) pays 1.5 cents per kWh to Tribal Government,
Municipal Utilities, Rural Electric Cooperative, and State/local governments that generate electricity
from solar electric, solar thermal, landfill gas, wind, biomass, geothermal, livestock methane, tidal
energy, wave energy, ocean thermal, and fuel cells. The organization is required to sell at least some of
the electricity generated to a utility or someone else.
Federal Investment Tax Credit
The federal investment tax credit (ITC) reduces federal income taxes for qualified tax‐paying owners
based on their capital investment in renewable energy projects. It is a one time payment based on the
total investment the day the electric generating facility is placed in service. For instance, homeowners
and businesses that generate power from wind, geothermal, biomass, hydropower, marine and
hydrokinetic, landfill gas and trash facilities, as well as, solar energy are eligible for a 30% federal tax
credit as approved by ARRA.
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Monetizing the Attributes of Renewable Energy
When an organization reduces its emissions of greenhouse gases through energy efficiency and
renewable energy projects, those reductions have financial value. Companies, utilities, and
governments are willing to purchase emissions reductions to voluntarily offset their own emissions or to
satisfy government mandates.
Renewable Energy Certificates
Renewable Energy Certificates (RECs) represent the environmental attributes of electricity generated
from renewable resources and delivered to the power grid. RECs represent the total emissions avoided–
greenhouse gases and pollutants–when electricity is generated from renewable resources rather than
fossil fuels. For instance, when a municipality generates electricity from landfill gas (methane) and sells
it to a utility, the municipality earns one REC for every 1,000 kWh of power generated. RECs can then be
sold on the open market to anyone wishing to offset their consumption of electricity produced from
fossil fuels.
Energy Efficiency Certificates
Similar to RECs, Energy Efficiency Certificates (EECs) are earned for reductions in electricity usage
through energy efficiency measures. Each EEC represents 1,000 kWh of electricity savings. The credits
are created when an organization upgrades equipment, lighting, and energy management systems or
operations, resulting in lower usage of electricity. Three states – Connecticut, Pennsylvania, and Nevada
– incorporate energy efficiency into their renewable portfolio standard (RPS). Several other states are
considering adopting similar mandates. EECs are then purchased on the open market by companies
seeking to offset their greenhouse gas emissions.
Verified Emissions Reductions
Verified Emissions Reductions (VER) represent reductions in CO2 emissions resulting from renewable
energy or energy efficiency projects, as well as certain agricultural and forest management activities that
reduce carbon emissions. They are measured in metric tons of carbon‐equivalent emissions and are
sold on open markets for carbon offsets alongside RECs. To maximize their market value, VERs should
meet certain minimum requirements which include:
Additionality: the underlying project was in addition to business‐as‐usual and would not
have occurred if it didn’t generate VERs that could be sold to produce revenue.
Sustainability: renewable energy projects, in addition to reducing emissions, have a positive
impact on the sustainability of local communities are oftentimes preferred by VER buyers.
Reliability: VERs should be registered to ensure that they aren’t sold to multiple parties.
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