Energy Efficiency Financing Update

Commission on the Environment Policy Committee

January 14, 2013

SFEnvironment.orgRich Chien, GreenFinanceSF Program Manager richard.chien@sfgov.org

EE Retrofits: The BenefitsEE Retrofits: The BenefitsOwner

• Reduce energy cost and operating expensesI t ti i (NOI) i b ildi l• Increase net operating income (NOI)  increase building value

• Replace old inefficient equipment and reduce maintenance• Stay ahead of regulation (e.g. phase‐out’s; disclosure mandates)• Attract tenants, get competitive edge and market visibility

Tenant• Lower energy costs = more working capital for businessgy g p• Better work environment, occupant comfort, employee satisfaction 

ContractorI b i t it i f t• Increase business opportunity, new service for customers

Public• Reduce GHGs, improve grid reliability, economic development, jobs, etc. 

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Everyone wins.  But how will we pay for it?

EE Financing Key Issue: RiskEE Financing Key Issue: RiskRisks…

1. Credit o Will the lender get their required return?  o What is the security (collateral) for their loan if the customer defaults? How is it paid/collected?

2. Performanceo Will the project be constructed as desired, on‐time, and on‐budget?o Will owners realize promised energy savings?o How much does it cost to insure or guarantee savings?

3. Asseto How will the retrofit affect the value of the underlying asset? (building)

4. Programmatico Will all parties (i.e. loan originator, administrator, owner, contractor etc.) fulfill their obligations in a timely manner?

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How do we mitigate, share, and/or price these risks?

Additional IssuesAdditional IssuesFinance provider/lender/investor appetite:

• Credit risk issues from slide #2Credit risk issues from slide #2

• Requires upfront investment of financial, time, and human resources

• Is there a market for this?  i.e. can we actually make money here?

• Can loans be marketed and sold to secondary investors?• Can loans be marketed and sold to secondary investors?

• Many experiments going on, but not a lot of transactions/volume/deal flow….yet.y

• Lack of data…

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Property owner demand is still a major issue…

State of the MarketState of the MarketRemember, this is mostly NEW…

• Some precedents:• Some precedents:o Municipal, University, Schools, Hospitals (MUSH) sector

Energy Service Performance Contracts (EPSCs)– Requires creditworthy, long‐term owners who can attract or self‐finance part or all of EE upgrade costs

– Large portfolios provides greater economies of scale

o CommercialOperating/equipment leases

o Residentialo ResidentialFHA Energy Mortgages, Fannie Mae Energy MortgageHELOC’s, bank loans

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Some success…but not the level or scale we need.

A Need for InnovationA Need for InnovationARRA programs: a new foundation

1 PACE: residential and non‐residential1. PACE: residential and non‐residential

2. Loan loss reserve & interest rate buydown programsCHF Rural Counties single family

Los Angeles County LLR‐supported program

Bay Area Multifamily (BAM) Fund

3 CDFI’ dit i i l b k3. CDFI’s, credit unions, regional banks

4. Marketing, outreach and education efforts

• Energy Service Agreements (EE “power purchase agreements”)Energy Service Agreements (EE  power purchase agreements )

• Managed Energy Service Agreements

• Utility on‐bill financing (SCE/SoCalGas)

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y g ( )

PACE: a Path to Scale?PACE: a Path to Scale?Property Assessed Clean Energy (PACE)• Key features: security, repayment mechanism, longer terms, familiar to bondKey features: security, repayment mechanism, longer terms, familiar to bond 

market, solves “split incentive” problem and “holding period" bias.1. Residential programs

Vast majority of programs on hold pending FHFA final rulej y p g p g

Exceptions:   Sonoma County; new Western Riverside Counties program

2. Commercial programsOpen: San Francisco Los Angeles CaliforniaFIRST Sonoma Sacramento DC MNOpen: San Francisco, Los Angeles, CaliforniaFIRST, Sonoma, Sacramento, DC, MN

Coming soon: CT, IL, FL, OH, MI, ME, MS…

• Outstanding questionsl d l? ( bl k d f l )o Capital source model? (public vs. open market vs. private credit facility)

o Lender acknowledgement/consent (see “PACENow Lender Support Study”)o Is there a secondary market for this asset class?

i h i d l ld b bi

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o With consistency and volume, could be big…

PostPost--ARRA: New EffortsARRA: New EffortsCPUC Financing Pilot Programs

• Part of next program portfolio starting Q1 2013Part of next program portfolio, starting Q1 20131. Statewide EE Financing “Hub” 

o Centralize product information, lenders, front‐end/beck‐end functions data tracking etc across multiple IOUsfunctions, data tracking etc. across multiple IOUs

2. Ratepayer funds as credit enhancement for private lenders

• Single‐family residential financingWHEEL (dealer loans sold to secondary investor)o WHEEL (dealer loans sold to secondary investor)

o Loan Loss Reserve for local lenders

• Multifamily financingo On‐bill Repayment (OBR) for master‐metered buildings

• Nonresidentialo On‐bill Repayment (OBR)

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o Energy savings insurance

PostPost--ARRA: New EffortsARRA: New EffortsBayREN (Regional Energy Networks)

• Part of upcoming program portfolio starting Q1 2013• Part of upcoming program portfolio starting Q1 2013

• Nine county ABAG region

• Will likely overlap a great deal with CPUC FinancingWill likely overlap a great deal with CPUC Financing Pilots

• Single family residentialo Loan Loss Reserve w/local financial institutions

• MultifamilyCapital Advance Program (public $ co financed at 0%)o Capital Advance Program (public $ co‐financed at 0%)

• Nonresidentialo Commercial PACE – marketing, education, and outreach

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o Commercial PACE  marketing, education, and outreach

Other Emerging OpportunitiesOther Emerging OpportunitiesProposition 39 (approved in Nov. election)

• “Clean Energy Job Creation Fund”Clean Energy Job Creation Fund

• $2.5 billion generated over five years

• Bills are being written for how the funds should be spentg po K‐12 schoolso Colleges, universitiesJ b t i i d kf d l to Job training and workforce development

o Public‐private partnerships (“PACE”)

AB 1532 (Cap‐and‐Trade revenues) • Funding for local governments to implement greenhouse gas reduction efforts; could include financing programs

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gas reduction efforts; could include financing programs.

GreenFinanceSF: Pier 1 Case StudyGreenFinanceSF: Pier 1 Case Study• Owner: Prologis (with consent of Port of San Francisco)

• Contractor: Johnson Controls Inc. (JCI)

• PACE Bond: $1,400,000– PACE Capital Provider: Clean Fund– Term: 20 years

• Solution considered whole building, i.e. HVAC project benefits all tenant spaces

• PACE financing will be allocated pro rata to 5 subtenants based on building g p gsquare footage

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GreenFinanceSF: Pier 1 Case StudyGreenFinanceSF: Pier 1 Case StudyProject Description

• Retrocommissioning– Optimize EMS  to initiate and shut down as needed– Optimize chilled water set points– Install VFD drives on pumps; shut down when not needed– Optimize HW and CHW supply/return temperatures– Repair air‐side economizers

Li hti d• Lighting upgrade– Upgrade 1,500 fixtures, ballasts and bulbs (interior only)– Install photocells and occupancy sensors– Install LED lighting in selected areas (ex: truss‐mounted flood lights)– Reduce maintenance by installing longer‐life equipmentReduce maintenance by installing longer life equipment

• Solar– Install 200kW rooftop solar array– String inverter design (no ground space/closets required)

j d fProjected Performance• 390,486 kWh annual savings

• 17,580 therms annual savings

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• Projected annual PV production @ 200kW:  245,520 kWh

• Annual estimated cost savings:  ~$98,000

R bl E F di & Fi iRenewable Energy Funding & Financing

Commission on the Environment Policy Committee

J 14 2013January 14, 2013

SFEnvironment.orgDanielle Murray, Renewable Energy Program Manager danielle.murray@sfgov.org

Government Renewable Energy Incentives

• Local Rebate– GoSolarSF

Commercial Solar PV example (10 kW, $6/W)

Depreciation- $14,910 Net cost

$22,770

– GoSolarSF

• State Incentives

GoSolarSF rebate

Federal Tax Credit

- $14,400

Taxes on incentives

State Incentives– California Solar Initiative (CSI)

CSI Incentive -$2,000

rebate- $10,000 $4,080

• Federal Tax Credits– Residential Renewable Energy Tax Credit: 30% installed costgy– Investment Tax Credit (10-30%) & Production Tax Credit (set

rate by technology per kWh produced)A l d D i i (MACRS) & B D i i

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– Accelerated Depreciation (MACRS) & Bonus Depreciation

Solar Financing Options for Businesses & Homeowners

Direct Ownership options:

• Mortgage, Home Equity Loan, Home Equity Line of Credit

• PACE financing (GreenFinanceSF)

Third Party Ownership options:

• Leases Capital lease (lessee/host owns system takes incentives)– Capital lease (lessee/host owns system, takes incentives)

– Operating lease, aka “tax” lease (lessor owns system, passes on incentives to host through lower lease rates)

• Power Purchase Agreements (PPAs)• Power Purchase Agreements (PPAs) – buy the power generated, not the panels– allows non-profits to take advantage of tax-credits

PPA b fi hil d i fi i

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– pre-pay PPAs: get tax benefits, while reducing financing costs

For a comparison of these options, see: www.sfenvironment.org/article/solar/solar-financing-options

Municipal Renewable Energy Financing Options: BondsMunicipal Revenue Bonds – Limited ability to use

• SF Solar Revenue Bond: Props B & H (2001)

US Treasury Department Bonds – We need new allocations!• Clean Renewable Energy Bonds (CREBs)Clean Renewable Energy Bonds (CREBs)• Qualified Energy Conservation Bonds (QECBs)

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Sunset Reservoir 5 MW PV Project – financed with a PPATNDC SWH – financed through MOH Green Retrofit Initiative

Opportunities for CCSF to support private RE project financing

• Feed-In Tariff through CCA programg p g– Guaranteed price & long-term contract enables

private developers to get project financing at lower cost due to lower project risklower cost due to lower project risk.

$50 billion in renewable energy project financing to

• Pension Fund investments– Opportunity to leverage pension fund to invest

p j gbe sought in 2013.

Opportunity to leverage pension fund to invest in cleantech and renewable energy projects

– “Patient capital,” well suited to investments with l b k l k bl

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longer paybacks like renewable energy

Renewable Energy Financing Resources

• SF Environment, Understanding Solar Purchasing Options,www sfenvironment org/article/solar/solar financing optionswww.sfenvironment.org/article/solar/solar-financing-options

• EPA, Clean Energy Financing Programs: A Decision Guide for States and C i i h // / l l li /d / df/Fi i PCommunities,_http://epa.gov/statelocalclimate/documents/pdf/FinancingProgramsResourceGuide.pdf

• NREL, QECB and CREB Primer, www1.eere.energy.gov/wip/pdfs/qecb_creb_primer.pdf

• OECD, The Role of Pension Funds in Financing Green Growth Initiatives, www.oecd.org/insurance/privatepensions/49016671.pdf

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