AEP - C2 - Week 3 Slides

8/17/2019 AEP - C2 - Week 3 Slides

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CERTIFICATE PROGRAM

Developed by:

With generous support from:


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WEEK 3

PROJECT FINANCE INSTRUMENTS

COURSE INSTRUCTOR: Jack S. NymanExecutive Director, The Steven L. Newman Real Estate InstituteZicklin School of Business, Baruch College, The City University of New York


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WEEK 3: LEARNING OBJECTIVES

Explain the various sources of funding for retrofit projects alongwith the benefits and drawbacks of each

Compare the specialized energy finance instruments

Describe project metrics and their use in retrofit projects


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WEEK 3: REQUIRED READINGS

The Energy Management Handbo

ok, Chapter 25: Financing Energy

Management Projects

“Energy Star’s Building Upgrade Manual, Chapter 4: Financing,” US EPA.

“Property Assessed Clean Energy Financing: The Ohio Story,” Headen,et al. The Electricity Journal , 1-2/2011.

“GE Dumps Primestar: Sustainability Needs to be Economically Sound,”The New Republic, 12/2013.


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A 2012 Rockefeller Foundation-DB Climate Change Advisors reportfound historical financing sources for retrofits have included :

Direct investment (equity) from balance sheet / cash flows

Parent-company debt

Asset-secured debt

Energy services company (ESCO) agreements

Rebates, subsidized loans/capital

Unfortunately, each of these approaches has built-in obstacles.

Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,” March 2012 (Pages 35-36).Rockefeller Foundation / DB Climate Change Advisors.

HISTORICAL SOURCES OF FINANCING:FUNDING RETROFIT UPGRADES


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Purchase Lease Other

Cash Loan Bond Operating Capital MunicipalPerformance

Contract

Down Payment (%) 100 20 to 25 0 0 0 0 0

Transaction Cost --- Medium High --- Low Low Medium

Balance Sheet AssetAsset and

Liability

Asset and

Liability---

Asset and

Liability--- ---

Tax Deductions DepreciationDepreciation

and Interest

Depreciation

and Interest

Lease

PaymentsDepreciation --- ---

Interest Rate --- Medium Low --- High Low ---

Financing Term --- 3 Years 10 to 20 Years --- 3 to 5 Years Project Life Project Life

Approval Process Internal Bank Referendum Internal Lessor Lessor Internal

Approval Time Short Medium Very Long Short Short Short Short

FlexibilityUsually Small

Projects

Limited to

Equipment

Value

Large

Projects Only

Usually

Small

Projects

Equipment

Cost + 20 to

40 Percent

100 Percent

of Project

Cost

100 Percent

of Project

Cost

Capital or Operating Budget Either Capital Capital Operating Capital Operating Operating

Evaluation

Factor

Source: Energy Star Building Manual Chapter 4 - Table 4.2 “Comparing Financing Options”

COMPARING FINANCING OPTIONS:FUNDING RETROFIT UPGRADES


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Example of Purchase

Under a retrofit upgrade purchase, the entire cost of theretrofit is paid out at the onset of the project. These high upfront costs are then recovered over the life of the upgrades.

Efficiency Retrofit Lease

Lease payments are designed to be less than the costsavings created by the project, thereby providing customers

with cash flow savings in addition to avoiding upfrontcapital costs.

Efficiency Retrofit Lease Source: http://ecoassetsolutions.com/services-2/sustainability-financing-solutions/efficiency-retrofit-lease/

COMPARING FINANCING OPTIONS:FUNDING RETROFIT UPGRADES


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COMPARING FINANCING OPTIONS:LEASING VS. PURCHASING

Year 1 2 3 4 5 6 7

Purchase:

Down Payment $5,000

Repairs $1,000 $1,500 $2,500 $3,000 $3,500 $4,000 $4,500

Loan Repayment $10,564 $10,564 $10,564 $10,564 $10,564 $10,564 $10,564

Tax Reduction $3,912 $3,914 $4,045 $4,024 $3,990 $3,942 $3,879

Salvage Value $31,000

Net Cost $12,652 $8,150 $9,019 $9,540 $10,074 $10,622 ($19,815)NPV of Cost $34,862

Economic: Year 1 2 3 4 5 6 7

Repairs $1,000 $1,500 $2,500 $3,000 $3,500 $4,000 $4,500

Tax Reduction $3,912 $3,914 $4,045 $4,024 $3,990 $3,942 $3,879

Actual Depreciation $10,000 $4,000 $3,000 $3,000 $3,000 $3,000 $3,000

Capi tal Cost $4,400 $3,907 $3,374 $2,799 $2,178 $1,507 $783

Net Cost $11,488 $5,493 $4,829 $4,775 $4,688 $4,565 $4,404

NPV of Cost $31,327

Lease: Year 1 2 3 4 5 6 7

Up Front Charges $3,000 $3,000 $3,000

Lease Cost $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500

Tax Reduction $2,940 $2,100 $2,380 $2,940 $2,100 $2,380 $2,940

Lease Penalty $1,000 $1,000

Net Cost $7,560 $5,400 $5,120 $7,560 $5,400 $5,120 $7,560

NPV of Cost $32,564

CashFlo

CashFlo

CashFlo

Source: Energy Star Building Manual Chapter 4 - Table 4.2 “Comparing Financing Options”


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Purchasing Equipment and

Services

• Cash

• Loans

• Bonds Leasing

• Operating Leases

• Capital Leases

• Municipal Leases

Performance Contracting

Unconventional Opportunities• Utility Incentives

• State Assistance

• Foundations and NonprofitOrganizations

Source: Energy Star Building Manual Chapter 4 – (Pages 41-46)

FINANCING OPTIONS: EXAMPLES


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MUSH: Municipal and State Governments, Universities, Schools, Hospitals

SEU: Sustainable Energy UtilitySource: Marshal Salant - Energy Finance: Where We Are Market Update - 3.1-marshal-salant (Slide 4)

ENERGY EFFICIENCY FINANCING SOLUTIONS

MUSH Residential Commercial R/ECorporate /

Industrial

Large Single ProjectYes N/A Difficult

Yes

• Various

Pooled Asset Deal

Yes

• Green Campus

Yes

• RenewableFunding

Difficult Yes

ESCO/ESA/Two Factor Credit

Yes N/A

Yes?

• Credit

Enhancement

Yes

• Accounting

Treatment

SEU

Yes

• DelawareN/A N/A N/A

PACEN/A Yes - On Hold

Yes

• With Consent• Various

Yes?

On-Bill Finance

Yes?

Yes

• Pari Passu

• Various

Yes Yes?

Energy Efficiency Sector

S

olution

/ProductType


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ENERGY EFFICIENCY FINANCING:FINANCING PROGRAMS

Property-Assessed Clean Energy (PACE)

On-Bill Tariff

On-Bill Loan

Equipment Lease Financing

ESCO Performance Contracting

Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,” March 2012 (Pages 35-36).Rockefeller Foundation / DB Climate Change Advisors.


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Evaluation Factor ESA PACE On-Bill Tariff On-Bill Loan

Description

Lender funds cost of improvements

& ass umes responsibility for

payment of energy bill.

Emerging integrated developer /

investor fir ms s eeking to us e PACE

structure to fund retrofits

Utility funds upgrades. Customers

repay through monthly charge tied

to the meter

Util ity programs funded via rate

pay proceeds, government funds,

and/or private loans and repaid

through monthly util ity cha rges

Financing Source Private Public and/or Private Public Public and/or Private

Project Size $250,000 to $10 Mil lion $2,000 to $2.5 Mill ion $5,000 to $350,000 $5,000 to $250,000

Upgrade Scope Extensive Retrofit Extensive Retrofit Selective Interventions Selective Interventions

Source of Repayment Energy Savings

Property Tax Pa ss -Through of

Energy Savings or Tenant Recovery Energy Savings Energy Savings

Recipient of Energy Savings Lender Owner / Tenant Owner / Tenant Owner / Tenant

Collateral / SecurityEquipment, UCC1 Financing

StatementTax Lien

Equipment; UCC1 Financing

Statement

Equipment; UCC1 Financing

Statement

Recourse / Guarantee

None in US / In Austral ia - Low

Carbon Trust loan loss reserve of 3

yrs P&I

Remedy for Non-Payment

Non-payment of utili ty bill ;

dis continued service and tenant

disruption

ForeclosureReferral to c oll ection agency

and/or utility disconnection

Referral to col lection agency

and/or utility disconnection

Incremental Cost to Borrower None Higher tax ass essment less energysavings and any recoveries

Financing Costs (P&I) funded

through utility bill less energy

savings

Loan appli cation fee, payments tofinanci ng entity, less energy savi ngs

Typical Term Average 10 years Typically 5-10 Years 5 to 10 Years 2 to 10 Years

Underwriting Cri teria / Data

Required

1. Property Due Diligence (DD)

2. Market DD

3. Borrower DD/Credit Qual ity

4. Audits & Engineering models (i nc

savings calcs)

5. Construction contractor DD

6. His toric data re: energy effici ency

projects

1. Property Due Diligence (DD)

2. Market DD

3. Borrower DD/Credit Qual ity

4. Audits & Engineering models (inc

savings calcs)

5. Construction contractor DD

6. His toric da ta re: energy effici ency

projects

1. Customer payment history -

Customer for 2 years, no

disconnections in past year

2. Energy Audit

1. Strong customer payment history

2. Good customer credit qual ity

3. Energy audi t

Measurement & Verification

Requirements

Active energy management via

continuous remote monitoring and

diagnostics

Specific to each program /

governmental guidelines and

requirements

Pre / Post Inspection Pre / Post Inspection

Sale RestrictionNone. Ca n be trans ferred or

terminated

None. Obli gations remain with

propertyTariff s tays wi th the property

Must payoff loan pr ior to property

sale

Geographic Availability USA 20 US States 34 US States 7 US States

Barriers Addressed SI, LC SI, D SI, D, LC, ST SI, D, LC, ST

**SI = Split Incentive; D = Data; U = Underwriting; LC = Lack of Collateral; L = Legal; UTC = Uncertainty of Tax Credits / Incentives; ST = Small Ticket Item


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Description: Municipal governments offer a specific bond toinvestors and then turn around and loan themoney to consumers and businesses to puttowards an energy retrofit. The loans arerepaid over the assigned term via an annualassessment on the property tax bill. The loan

is attached to the property rather than anindividual.

Project Size: $2,000 to $2.5 million

Typical Term: Typically 5-10 years; Generally does notexceed expected useful life of theimprovements

Geographic Availability: Enabling legislation in Australia;28 US States + DC have authorized PACE(27 states have passed legislation, whileHawaii permits it based on existing law)

Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,” March 2012 (Page 38).

Rockefeller Foundation / DB Climate Change Advisors.

FINANCING MODELS:PROPERTY ASSESSED CLEAN ENERGY (PACE)


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FINANCING MODELS:PROPERTY ASSESSED CLEAN ENERGY (PACE)

Graphic Source:

https://financere.nrel.gov/finance/content/funding-sources-property-assessed-clean-energy-pace-programs


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BENEFITS OF PACE FINANCING FORCOMMERCIAL REAL ESTATE OWNERS

There are several benefits of PACE financing for commercial landlords:

No up-front costs

Immediate benefit to cash flow raises Net Operating Income

Increases value & efficiency of the property

Treated like other property taxes and assessments

No additional debt load

Source: PACE Now http://pacenow.org/about-pace/commercial-pace-programs/


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PACE: THREE TYPES OF BONDS

Framework Description

Pooled Bonds Multiple PACE applications are bundled, and a singlebond indenture is used to fund all of the projects inthat pool

Stand-Alone Bonds Large projects are funded by the capital raised throughan exclusive bond indenture

Owner-ArrangedBonds

An organization establishes a direct relationship witha lender, and a PACE arrangement is worked out onterms that are acceptable to both parties

Source: U.S. Department of Energy, PACE Primer.


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PACE: AVAILABILITY IN THE UNITED STATES

*The Federal Housing Financing Agency (FHFA) issued a statement in July 2010 concerning the seniorlien status associated with most PACE programs. In response to the FHFA statement, most local PACE

programs have been suspended until further clarification is provided.

http://www.fhfa.gov/webfiles/15884/PACESTMT7610.pdfhttp://www.fhfa.gov/webfiles/15884/PACESTMT7610.pdf


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FINANCING MODELS:ENERGY SERVICES AGREEMENT (ESA)

Description:

Pay-for-performance financing solution thatallows customers to implement energyefficiency projects without upfront capitalexpenditure.

Project Size: $250,000 to $10 million

Typical Term:Typically 5-10 years; Generally does notexceed expected useful life of theimprovements

Geographic Availability: Nationwide (United States)

Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,”

March 2012 (Page 38). Rockefeller Foundation / DB Climate Change Advisors.


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FINANCING MODELS:ENERGY SERVICES AGREEMENT (ESA)

Source: http://www.energyrealplay.com/?page_id=96


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ESA PROVIDERS: METRUS ENERGY

Source: www.metrusengery.com


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FINANCING MODELS:ON-BILL TARIFF

Description:

On-bill tariffs are actually attached to the meter, sothat when a customer moves, the next customer atthat meter continues to repay the financing. On-billtariffs are significantly more complicated to set up,

but they allow a longer financing term.

Project Size:$5,000 to $350,000 (depending on size of bill,nature of customer, etc.)

Typical Term: 5 to 10 years

Geographic Availability: Available in up to 34 US States

Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,”

March 2012. Rockefeller Foundation / DB Climate Change Advisors.


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FINANCING MODELS: ON-BILL TARIFF

Government /Utility Regulator

Energy EfficiencyLender / Investor

Energy

Contractor Prequalified by utility

Property Owner

• No upfront cost

• Tariff stays with meter

Utility

Company

Gov’t or rate

payerssubsidize loan

Enablingutility

legislation

Payment for building upgrade

Retrofit Productsand Services

EnergySavings

Repays Loan on Utility Bill (P&I)

Optional:Principal and

InterestRepayment

Optional:Loan toUtility

UtilityDisconnectUCC Filing

Money Flow

Services/Agreements

Security/Remedy

Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,” March 2012. Rockefeller

Foundation / DB Climate Change Advisors.


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Advantages

Savings are paired directly withrepayment on the same bill

Capital may be raised from avariety of sources;

Agreements can be structuredto meet the needs of differentmarkets;

The repayment is effectively asecured revenue stream, as

failure to pay can result inutility disconnection; Past bill repayment can be used

as a proxy for credit; and

On-bill tariffs allow for longer-term investments

Disadvantages

Utilities may be reluctant totake on the role of financingentity

Exposure to consumerlending laws and changes tobilling systems may berequired when companiesdo

Complexity

Source: http://www1.eere.ener gy.gov/wip/solutioncenter/financialproducts/onbillrepayment.html

The US Department of Energy describes some pros and cons of On-Bill Tariffs:

BENEFITS OF ON-BILL TARIFFS

http://www1.eere.energy.gov/wip/solutioncenter/financialproducts/onbillrepayment.htmlhttp://www1.eere.energy.gov/wip/solutioncenter/financialproducts/onbillrepayment.htmlhttp://www1.eere.energy.gov/wip/solutioncenter/financialproducts/onbillrepayment.htmlhttp://www1.eere.energy.gov/wip/solutioncenter/financialproducts/onbillrepayment.html


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FINANCING MODELS: ON-BILL LOAN

Government /Utility Regulator

Energy EfficiencyLender / Investor

Energy Contractor • Prequalified by utility

Property Owner

• No upfront cost

• Loan repaid if property sold

Utility

Company

Gov’t or rate

payerssubsidize loan

Enablingutility

legislation


RetrofitProducts

AndServices

EnergySavings

Repays Loan on Utility Bill (P&I)

Optional:Principal and

InterestRepayment

Arrange dealfor lender,terms, etc.

UtilityDisconnectUCC Filing

Loan

Repayment


Money Flow

Services/Agreements

Security/Remedy

Alternative Funding Path

Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,” March 2012 (Page 45). Rockefeller Foundation / DB Climate Change Advisors.


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BENEFITS OF ON-BILL LOANS

Very similar to personal or business loans -- when the customermoves, it must repay the full loan.

Offers one of the most practical solutions to energy financing: thesavings are seen on the same bill as the repayment.

The model has proven to be a good fit for programs serving thesmall commercial and MUSH markets.

MUSH: Municipal and State Governments, Universities, Schools, Hospitals

Source: http://www1.eere.energy.gov/wip/solutioncenter/financialproducts/onbillrepayment.html

http://www1.eere.energy.gov/wip/solutioncenter/financialproducts/onbillrepayment.htmlhttp://www1.eere.energy.gov/wip/solutioncenter/financialproducts/onbillrepayment.html


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FINANCING MODELS:EQUIPMENT LEASE FINANCE

Description: Bank backed by governmentguarantee borrows at favorablerates in capital markets to lend to

commercial banks at favorablerates.

Project Size: Unlimited


Geographic Availability: International

Source: “United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models,” March 2012 (Page 39).Rockefeller Foundation / DB Climate Change Advisors.


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FINANCING MODELS:EQUIPMENT LEASE FINANCE

Corporate and

Investment Bank

Energy efficient or

production

equipment SPV

Energy efficiency

service provider

(e.g. utility)

End-use

IndividualLease

AggregatedLease

EquipmentCost ($)

Secondary Market

PotentialSecuritization of

Asset-secured termLoans into green

bonds

Principal andinterest

payments ($)

Asset-secured termloan ($)

Leasepayments ($)

Aggregate leasepayments ($)

EquipmentProvision

EquipmentOEM



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EnergyCost

(Paid to Utility)

$100

ESCO

$15

Organization$15

EnergyCost

(Paid to Utility)

$70

Energy Efficiency Upgradesare put into place

Guaranteed Savings fromPerformance Contract are

split between the ESCO andthe Organization

Annual Energy Costs arereduced from $100 to $70

after the upgrades

After EnergyEfficiency Upgrade

Before EnergyEfficiency Upgrade

EnergySavings

Source: Energy Star Building Manual, Chapter 4

ENERGY PERFORMANCE CONTRACT


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Description:

3rd party capital to fund upgradesdesignated by turnkey providers,generally backed by performance

guarantee. Payments tied tosavings.

Project Size: Unlimited


Geographic Availability: International


ENERGY PERFORMANCE CONTRACT:(ESCO MODEL)


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THREE MAJOR BARRIERS

What can prevent quality projects from being implemented?

There are a variety of reasons, including three very common barriers:

1. Insufficient Marketing (Under-marketing a project’s value)

2. Insufficient Education and Collaboration (Not expanding the valueof a project)

3. Insufficient Funds (Not having a positive cash flow solution)

If a project can not overcome any of these three barriers, then it probablywon’t be implemented. Focus on the projects that will.

Source: Energy Project Financing – Resources and Strategies for Success. Thumann and Woodroof


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BARRIERS TO ENERGY EFFICIENCYFINANCING (MUSH)

1. Agency or institutional policiesthat fail to incentivize energy-efficiency investments

2. Inefficient agency or institutional

responses to market incentivesthat require change

3. Limited human resources todevote to projects, including eventhose that are already known to

be cost-effective

MUSH: Municipal and State Governments,

Universities, Schools, Hospitals

Photo: Citrus Zest, via Wikipedia.


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PAYBACK PERIODS FOR TYPICALENERGY CONSERVATION MEASURES (ECMs)

Source: Payback source DBCCA and Transcend Equity analysis, 2011. EIA and DOE Build ing Data Book, 2010; DBCCA A nalysis 2011. Paybacks are pre

subsidy and reflect a simple return of capital invested wi thout add itio nal return. Payback periods are estimates and t here are no assurances that st ated

payback periods will be achieved.

3-4

2-4

1-3


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LED Exit

Signs

CFL Lighting

Variable Flow

Systems

Variable Speed

AHUs

Lighting Control

Controls

Retrofit

T8 Lighting

VAV Technology

Boiler Conversion

High Efficiency Fully

Condensing Boiler

New Chiller

Simple Payback in Years

Source: US Building Energy Efficiency Retrofits (Page 8)

PAYBACK PERIODS: BY ECM


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WHAT IS A PERFORMANCE METRIC?

A metric is a standard definition of any measurable quantity, and aperformance metric is a standard definition of a measurablequantity that indicates some aspect of performance.

A “valuable and practical” performance metric should:

Be measurable (or determinable from other measurements) Have a clear definition, including boundaries of measurements

Indicate progress towards a performance goal

Answer specific questions about the performance

Source: National Renewable Energy Laboratory, http://www.nrel.gov/docs/fy06osti/38700.pdf

http://www.nrel.gov/docs/fy06osti/38700.pdfhttp://www.nrel.gov/docs/fy06osti/38700.pdfhttp://www.nrel.gov/docs/fy06osti/38700.pdf


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WHO USES PERFORMANCE METRICS?

Policy makers

Owners

Designers

Operators

Researchers

Source: National Renewable Energy Laboratory, http://www.nrel.gov/docs/fy06osti/38700.pdf

Photo: Ejay, via Wikimedia Commons



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THE USE OF PERFORMANCE METRICS?

Begin with goals and objectives in mind

Metrics should be a good fit for the data being analyzed

Existing buildings may offer less flexibility – Focus on what’s there

Source: National Renewable Energy Laboratory, http://www.nrel.gov/docs/fy06osti/38700.pdf Photo: Brocken Inaglory, via Wikimedia Commons.



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WEEK 3: HOMEWORK

Consider the Imperial Building from the AEP portfolio. In a 1-2page write-up, propose an energy-saving improvement project,and presume that any of the financing frameworks covered by thisweek’s materials are available in the Imperial’s jurisdiction.

Choose one of the energy-efficiency financing programs to finance

your proposal.Explain why this financing program would be an effective way todefray the costs of your proposed project. Note that the Imperial isone of the oldest buildings in the portfolio, and consider how thismight influence the types of projects that may be warranted. Detail

why you chose your project and your financing approach.

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