CDFA Spotlight: Renewable Energy Finance Solutions By Jerry Arkebauer, CDFA Bond Finance Course Advisor

There is a wide range of financing programs available to help renewable energy projects and the key may be mixing and matching the programs to the projects. In addition, defining a new need often leads to the development of new programs, too.

A panel composed of a bond counsel and Oregon and Portland renewable energy officials address those issues while providing “Renewable Energy Finance Solutions” on May 12, 2010 at the Council of Development Finance Agencies Annual Summit in Portland, Ore.

Harvey W. Rogers, a partner in the Portland law firm of K&L Gates, gave an overview of terms and trends related to renewable energy. He said there are two techniques to consider: reducing project costs and reducing borrowing costs. He identified several ways to do that in both cases.

Reduce Project Costs: one obvious way to reduce project costs is through grants. Tax credits under which a taxpayer can deduct certain amounts against federal or state income tax liabilities offer more limited possibilities. “Tax credits only have value to taxpayers with tax liabilities,” Rogers said.

Federal tax credits include production tax credits over 10 years based on the capacity of the project and a one-time 30% investment tax credit when the project is placed in service. Unfortunately, he said, construction of the project must be started this calendar year, and applications for the credit must be filed by Oct. 1, 2011. The credit applies to the owner of the project, which may be transferred from the original owner to an investor. The credits are normally not compatible with government-owned projects or with tax-exempt style financing.

Rogers said Oregon has a Business Energy Tax Credit of 35% to 50% of the costs of a qualifying asset over five years against personal income or corporate excise tax liabilities. The program allows a direct pass through of the BETC so it can benefit local governments and non-profits that “pass through” the benefits to a partner who makes a lump sum payment and takes the credit over five years.

Reduce Borrowing Costs: To finance what’s left after project costs have been reduced, Rogers pointed to credit enhancement, and what he called “tax advantaged” bonds.

Various credit enhancement vehicles exist, he said, such as letters of credit, state bond banks such as Oregon’s and general obligation bonds for renewable energy projects such as that offered by Oregon. Rogers said loan guarantees provided by the U.S. Department of Energy encourages early commercial use of new or significantly improved technologies in biomass, hydrogen, solar, wind, and hydropower, advanced fossil energy coal, and other areas. Seven conditional commitments have been made since 2009 by USDOE.

Tax Advantaged bonds, Rogers explained, also can help reduce borrowing costs. These include tax exempt bonds which provide about a 2% interest rate savings over taxable bonds, Recovery Zone Facility Bonds which also are tax-exempt but must be issued prior to Dec. 31, 2010, and tax credit bonds providing a credit “over time” or a direct federal subsidy to the issuer of the interest paid.

Rogers also pointed to Build America Bonds, which are taxable bonds with a 35% federal subsidy and which provide “some advantages for longer maturities.” For government projects, he said Recovery Zone Economic Development Bonds are taxable bonds with a 45% federal interest subsidy.

Direct Subsidy Bonds also might fit particular projects, Rogers explained. Qualified Energy Conservation Bonds and New Clean Renewable Energy Bonds are taxable bonds with a federal subsidy of 70% of the interest paid. Both are subject to allocations and require compliance with federal Davis-Bacon prevailing wages.

Mike Grainey, a renewable energy advisor to Oregon Business Development Department in Portland, cited Oregon as the sixth largest producer of wind energy and the ninth largest producer of solar energy in the country. The State’s policies are designed to reduce energy usage and to produce 25% of electricity from renewable sources by 2025 when virtually all of Oregon’s electric load growth must be met by renewable energy.

Grainey, who was director of the Oregon Department of Energy from 2002 to 2009, reviewed the history of the state’s Small Scale Energy Loan Program (SELP) which permits the State to issue general obligation bonds for energy efficiency and renewable energy loans. He said the program, established in 1979 by the State Legislature and ratified by voters in 1980 as a Constitutional change, has made nearly 1,000 loans for more than $450 million. He said almost $100 million in energy has been saved or produced each year because of the program. Administered by the Oregon Department of Energy, Grainey said the program is self-sustaining through fees and interest rate revenues.

Of the loans made through 2008, 650 have been for energy efficiency projects, 76 for geothermal, 75 for solar, 33 for hydro, 30 for biomass, and others for waste heat, wind, and other types of projects.

He noted that sections of the IRS tax code reduce the federal tax credit for State grants, State and local tax-exempt financing, and State and local direct or indirect subsidized energy financing. “These have a big impact on individuals and businesses,” Grainer said.

He said the American Recovery & Reinvestment Act repealed the restriction for community wind, but other restrictions remain.

Bob Repine, the newly appointed Acting Director of the Oregon Department of Energy, explained that SELP, which is just one of several energy financing programs offered by Oregon, works to assist energy conservation efforts and renewable energy resource development for homeowners. The low, fixed interest rate loans are secured by borrowers’ fees and interest payments at no cost to Oregon taxpayers. Eligible projects must either save energy, or produce energy via water, wind, geothermal, solar or biomass; use recycled materials to create products; or use alternative fuels. Repine said loans have ranged from $20,000 to $20 million with terms of 5 to 20 years. SELP is take-out financing and not construction financing, although incremental SELP payments are permitted.

He said capital for the SELP loans comes from general obligation bonds issued by the State.

Repine also explained Oregon’s Energy Efficiency and Sustainable Technology (EEAST), a low cost loan program created in 2009 to help weatherize existing homes and small businesses and for producing renewable energy. He said EEAST was created to help with smaller projects than SELP. The EEAST program is expected to be ready in the Fall, 2010.

Under EEAST, a large block of loan dollars can be authorized to project managers who would make the smaller, individual loans. The local project managers would define criteria for contracting the work and loan repayment terms and conditions. Borrowers would repay the loans through additional amounts paid on their utility bills.

Repine said there also is a pending recommendation to provide up to $5 million of lottery proceeds to the program.

He explained that Oregon’s original Business Energy Tax Credit (BETC) program, enacted in 1979, provides certain tax credits to the business owning an energy producing facility. Currently, the Oregon Legislature has set a $300 million biennial cap for renewable energy projects and a $200 million cap for manufacturing projects. Maximum wind tax credits for projects of more than 10 MW are reduced from $10 million to $3.5 million for 2010, to $2.5 million in 2011, and to $1.5 million in 2012.

He pointed out that combining the BETC, SELP, and ARRA bonds have helped six landfills and several wastewater treatment facilities begin to capture methane to produce electricity.

Patrick Quinton, business and industry division manager of the Portland Development Commission, explained Portland’s Clean Energy Works program which offers low cost loans to finance homeowners upgrading their homes to provide energy efficiencies with no upfront costs to the homeowner. Launched in 2009, this program helps finance improvements such as insulation, duct sealing and window sealing up to $10,000 a home. Seeded with funds under ARRA, from the City, and from the Living Cities Foundation, the pilot phase intends to target 500 single family owner occupied homes.

An energy advocate performs an audit to tailor the work to each home. Quinton said loan underwriting includes a credit check and a history of payments to utilities. Interest rates range from 5.99% to 3.99% with terms of 15 to 20 years. The City takes a subordinate position on the property as collateral and collection is made through the primary heat source utility bill. A 10% loan loss reserve has been funded to handle defaults. The City is considering securing the loan to the utility meter or as an assessment against the property.

Management of the fund is under a community development financial institution, and contractors selected for the program must agree to hire workers from a pool specifically trained for the program. As an additional economic development opportunity, local companies which can provide component products such as windows or foam insulation, caulking or gaskets are utilized.

To date Quinton said over 100 loans have been made, with 200 more “in the pipeline.” Based on the success, consideration is being given to increasing the maximum to more than $10,000 a home since the median cost per home to date is $9,800. The approximate annual energy savings has been estimated at $500 for each home.

The panel discussion was led by Tina K. Neal, senior vice president of Piper Jaffray & Co., of Powhatan, Va. Neal also is a member of the Board of Directors of CDFA.

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