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Energy Project Economics and Financing Mary Tiger
Energy Project Economics and Financing
Mary Tiger
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Comparing costs
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Simple Payback Period: Definition
• Also known as Payback Period or Simple Payback.
• Does not account for the time value of money.
• The SPB method calculates the length of time over which cumulative energy savings and other project benefits will be equal to (or “payback”) the initial project investment. To calculate the SPB, divide the total project cost by the total expected benefit.
Source: NYSERDA, “Water & Wastewater Energy Management: Best Practices Handbook,” 2010.
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Savings v. Avoided Costs
Source: Energy Information Administration, 2009, Annual Energy Outlook, cited in ACEEE’s report on NC’s energy future: http://www.energync.net/Portals/14/Documents/EnergyPolicyCouncil/ACEEE_03182010_final_report_text.pdf
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Life-Cycle Cost (LCC) Analysis
• LCC analysis considers the initial cost of the project as well as all of the costs and benefits over the lifetime of the project. The LCC approach incorporates the time value of money, the volatility of utility costs and other factors, such as operation and maintenance or other costs.
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Net Present Value (NPV) • NPV can be one of the most useful ways of assessing
to “go” or “no go,” and rank, projects. Calculating an NPV crunches all the numbers into one positive or negative dollar number for the value of the project as a whole.
• NPV takes into account the time value of money by summing up all the individual (e.g. annual) cash flows at all the different points in time for the project, and discounting them by the discount rate (interest rate) to “compare apples to apples.”
Where i = discount rate, N = total number of periods, t = the time of any given cash flow, and Rt = the net cash flow at time t.
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Resources
• NYSERDA’s Payback Analysis Tool http://www.nyserda.ny.gov/Energy-Efficiency-and-Renewable-Programs/Commercial-and-Industrial/Sectors/Municipal-Water-and-Wastewater-Facilities/MWWT-Tools-and-Materials.aspx
• Department of Energy’s MotorMaster+ http://www1.eere.energy.gov/manufacturing/tech_assistance/software_motormaster.html
• Department of Energy’s Life Cycle Cost Analysis for Sustainable Buildings http://www1.eere.energy.gov/femp/program/lifecycle.html
FINANCING CAPITAL PROJECTS AT YOUR UTILITY
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How Do We Pay For Our Great Ideas?
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What is an Energy Upgrade?
• An energy upgrade to water or wastewater facility is really just a capital improvement
• You can treat energy upgrades just like any other capital improvement
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Capital Finance in the Old Days...
• Local governments took advantage of the federal government’s ambitious construction grants program of the 1970s and 1980s
• Everybody loved their “free” money
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Capital Finance Today
• The money never really was “free”—it came from tax dollars
• Today, the financial burden has been shifted away from federal and state tax dollars to funds raised by the local government or utility. For example...
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$0
$2
$4
$6
$8
$10
$12
$14Total (in 2000 Dollars)
CWSRF
EPA Line Item
Construction Grant
EPA Wastewater Spending (1970-2000) In Billons of Dollars Per Year
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FINANCIAL INDICATORS: ARE YOU READY?
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Operating Ratio
A measure of self sufficiency. The revenue you get from daily operations, divided by the expenditures or expenses you make to keep operations running (see next slides) - some entities may ask you to switch the numerator and denominator-
Natural Benchmark: > 1.0
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Expenses vs. Expenditures
• Operating Expenses includes asset depreciation in the calculation
• Operating Expenditures do not include asset depreciation in the calculation
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Quick (or Current) Ratio
A measure of short-term liquidity: ability to pay your current bills
Accepted Benchmark: > 2
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Days Cash on Hand
A measure of the ability of the utility to weather a significant temporary reduction in revenue to continue paying for daily operations
Benchmark? At the very least, enough to last a billing cycle or when you expect a substantial inflow of cash
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Debt Service Coverage Ratio
A measure of the ability to pay debt service with operating revenue: Operating revenue left over after daily operation expenditures, divided by debt service. This is a conservative estimate. Non-operating revenues can be added into the numerator to measure annual revenues available for debt service coverage.
Natural Benchmark: > 1
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Infrastructure Condition* *Caveat – This indicator is only as good as your depreciation schedule and even then historic pricing is likely to distort the results.
Benchmark? Don’t get close to 100%
= Total Accumulated Depreciation Total Assets Being Depreciated
A measure of how much of your total assets have already depreciated. As you approach 100%, your system is near the end of its expected life.
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Can You Afford Capital Improvements?
• Is your utility (public enterprise) self sufficient?
• Can your utility meet its short term obligations?
• If your customers stop paying their bills, how long can you maintain operations?
• Are you able to cover your debt service after paying for your day to day operations?
• How much of your utility’s expected life has already run out (and how much is left)?
Operating Ratio
Quick Ratio
Days Cash on Hand
Debt Service Coverage Ratio
Asset Depreciation
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Can your customers afford capital improvements?
Calculating affordability…
Average Annual Household Water Bill
Median Household Income
the household that is half-way in the spectrum of all households in terms of income is spending X% of their annual income on water and wastewater
=
Natural Benchmark: utility specific
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Energy Improvements and Capital Planning
• Energy improvements are a type of capital improvement not all that dissimilar from pipe replacements, tank painting, etc.
• How you choose to pay for energy improvements ties into your utility’s philosophy of how to set rates and pay for capital
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Where Capital Funding Comes From
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Where Capital Funding Comes From
• Rates / Monthly bills
• Impact fees to new customers
• Special assessments to current customers
• Transfers from the general fund (tax revenue)
• Debt market, including State Revolving Funds
• Private partnerships
• Grants
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Ways to Pay
• Fund balance (save in advance and pay)
• Pay as you go (current receipts)
• Pay later (someone loans you money)
• Grants (let someone else pay)
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How does your utility pay for capital improvements?
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User Fees
• Charged regularly to all customers: industrial, commercial and residential
• Customers’ bills relate to their consumption (usually)
• Utilities can develop rates based on their expected costs
• Example – water/sewer/stormwater utility fees
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Basic Principles
• Aim at full cost pricing • Set equitable rates • Share rate structure with customers • Rate should be easy to understand • Rates should be examined annually • Consider fixed costs vs. variable costs • Allow for reserve account(s) • Promote water conservation? • Promote economic development?
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Before You Begin: Rank Your Utility’s Rate Setting Objectives
1. ________
2. ________
3. ________
4. ________
Full cost recovery/ revenue stability
Encouraging conservation
Fostering business-friendly
practices
Maintaining affordability
(keeping rates low – to whom?)
Refer to this list and focus on the highest ranked objectives when following the
guidelines for selecting the appropriate rate structure design.
Rank your objectives
A. Full cost recovery/revenue stability
B. Encouraging conservation
C. Fostering business-friendly practices
D. Maintaining affordability
E. Other
Full c
ost re
covery
/reve
nu...
Encoura
ging c
onserv
ation
Fost
ering b
usiness
-frie
nd..
Main
tain
ing a
fford
ability
Other
20% 20% 20%20%20%
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Rates & “Full Cost Pricing”
• Operations & maintenance expenditures
• Taxes and accounting costs
• Contingencies for emergencies
• Principal and interest on long-term debt
• Reserves for capital improvement
• Source water protection
• Value (“opportunity costs”) of the water
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Guidelines: Elements of Rate Structure Designs
1. Customer classes/distinction 2. Billing period 3. Base charge 4. Consumption allowance included with base
charge 5. Volumetric rate structure 6. (If applicable) Number of blocks, block sizes and
rate differentials 7. (Optional) Temporal adjustments 8. Frequency of rate changes
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Impact Fees
• One-time charges to new users
• Typically assessed when building permits are issued
• Close cost/benefit relationship equity
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Assessments
• A recurrent charge to a sub-group of the population
• The sub-group receives benefits from an environmental service or improvement not enjoyed by others in the area
• Close cost/benefit relationship equity
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Taxes
• Charged against:
– Income (federal/state level)
– Property (local level)
– Sales (state level, with surcharges at the local level)
• Local Sales Tax
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The Debt Market
• Two types—Loans and Bonds
– Loans are universally available
– Bonds are typically only available to large systems with significant revenues and managerial capacity
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Loans
• Drinking Water and Clean Water State Revolving Funds
– Water and Sewer capital needs
– Stormwater, green stormwater infrastructure
– Source water protection
– Land conservation
– Failing decentralized wastewater systems
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SRF Green Project Set-Aside • Clean Water SRF (http://www.ncwater.org/pws/srf/Pages/dwsrf_gpr.htm)
– Not less than 10% will be provided for green projects – 0% interest to green projects – Priority rating system give priority to projects that are:
• Restoration of streams, wetlands, and estuaries; • Stormwater BMPs for exisiting sources of pollution; • Reclaimed water utilization; and • Energy efficiency projects at wastewater treatment facilities
• Drinking Water SRF – The 2012 DWSRF appropriation did not require any Green
Project Reserve. Therefore, North Carolina will have no green project reserve. If the 2013 Capitalization Grant includes a Green Project Reserve, the Section will meet it following procedures described in the 2011 Capitalization Grant IUP.
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Bonds
• Less applicable to smaller governments
• A written promise to repay borrowed money (on a definite schedule and usually at a fixed rate of interest for the life of the bond)
• Different types exist:
– General Obligation (GO)
– Revenue
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Qualified Energy Conservation Bonds
• Tax-credit bonds (issuer pays back principal and reduced interest because bondholder receives federal tax credit in lieu of interest)
• Total NC allocation is $95.7 million
– $65.6 direct allocation to large local governments
– $30.1 million distributed across the state
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Qualified Energy Conservation Bonds
• 1%-5% effective interest rate for issuer
– Issuer gets 3%-4% subsidy from Treasury
– 15 to 20-year term
• Qualified projects are broadly defined, including 20 percent reduction of energy use in public facilities
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The Thing About Loans/Bonds is …
they need to be repaid!!
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Other Financing for Energy Projects
• Energy Performance Contracting
• Public-Private Partnerships
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Different Kinds of PPPs
• Many variations exist. Principal types include:
– O&M Contract
– DB: Design-Build
– DBO: Design-Build-Operate
– DBOM: Design-Build-Operate-Maintain
– Lease-Purchase
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Pros of a PPP May Include:
- An additional funding source - Private partner can take advantage of tax credits - Private entities have access to different dollars - Cost-savings derived from management,
technical, operational, or other efficiency of the private partner
- Reduce public partner’s role from day-to-day operational management to contract management, to allocate scarce staff or other limited public resources
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Cons of a PPP May Include:
• Cost of capital usually is greater; gov’t bond rates tend to be lower than private sector
• Projected private sector cost savings / efficiencies do not always materialize
• PPP transactions can be very complex, involving new kinds of administrative tasks
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Grants
• Some limited Federal, State and Private grants available for water and wastewater work and for energy improvements
• Catalog of Federal Funding Sources for Watershed Protection
–http://cfpub.epa.gov/fedfund
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About Grants
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NOT a good way to find a grant!
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Grants Aren’t Completely Free Money
• Application for the grant can be expensive – staff time and money
• Applications can take months to process
• Often lots of strings attached
• Often require a percentage match
• Lots of competition
• Difficult to sustain
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Find and Choose Grants
http://water.epa.gov/
grants_funding/
Catalog of Federal Funding
Input:
• Grants
• Local Government
• Wastewater
• Get results in Table Format
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Find and Choose Grants Another way to find EPA Grants
http://water.epa.gov/type/drink/pws/smallsystems/financialhelp.cfm
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Grants.gov
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Grants at the State Level - Examples
• Community Development Block Grant Program http://www.nccommerce.com/communitydevelopment/investment-assistance/grant-categories
• USDA Water and Waste Disposal Loans and Grants http://www.rurdev.usda.gov/nc/wwd.htm
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Grants from Private/Non-Profits
• Trusts and charitable foundations offer some grants, but local governments are not the main target in most cases
• Partnering with a non-profit or community-based group may be an option
• Making the case for cultural significance of your community would be important here (e.g. “environmental justice” issue)
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Grant Writing Tips
• Read the RFP thoroughly to make sure your project is appropriate for the funding
• Follow the suggested RFP outline, if there is one
• Include maps and photos as appropriate
• Include letters of support from partner agencies
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Grant Writing Tips
• Be specific with your work plan and timeline
• Cite measurable goals
• Focus on the results from this funding source and not the work of your program as a whole
• Don’t mention “unfunded mandates”
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Grant Writing Tips
• If you are applying as a group, choose one agency as the lead agency. Pick either the agency with the most work or the agency with the best relationship with the funder.
• Apply on time
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Grant Writing Tips
• Ask the funder any questions you have during the application process. (But, beware: your questions may be published for other applicants to see)
• Look over any sample grant applications
• Focus on your community’s unique needs and assets
• If you are not funded, ask the funders why
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Funding a Plan: Energy Revolving Funds
• Capitalized as a “bank” from which departments and divisions can borrow to fund energy efficiency, renewable energy or energy conservation projects.
• Allows municipalities to provide a continual stream of funds for energy efficiency improvements without tapping into existing capital cycles.
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Don’t Burn your Bridge With a Funder
• If you are funded, report your results thoroughly and on time
• Give the funder recognition:
– Include credit/logos in your reports/publications (with permission)
– Invite funder to relevant events (ribbon-cutting)
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Track Progress and Communicate Success
But not just to get funded again…..
If you don’t know where you’ve been and don’t know where you are going – then you won’t
know when you get there!
(And neither will anyone else!)
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