Forestalling the Green Chill
Public-private partnerships are a key to preventing a chill from settling
over the green ambitions of the newly capital-strapped state and municipal
public sectors. The past decade has seen an increasing number of “green”
program announcements from cities like Chicago and New York, and states like
Virginia and Florida, laying out plans for carbon footprint reduction, which
include energy efficient buildings and services, increased use of clean and
renewable energy sources, application of electricity demand response, and
other efficiency measures, and even carbon cap and trade programs in states
like California (which in turn will require cities to develop responsive
initiatives). The US mayors have collectively gone on record on the matter
and, toward that end, several of the larger cities have voluntarily formed
the Carbon Disclosure Project.
But it’s harder to be green when there are less funds available to finance
doing so, especially when the political prospect of shifting all carbon
mitigation costs to utilities, and requiring them to internalize these costs
rather than pass them on to consumers, is reduced. Will the public sector
stick with the status quo and fiscally muddle through (a not indefensible
strategy)? Or will the increasingly politically-empowered tie between
climate change control measures, improved energy efficiency, source
diversity, and economic well being (jobs) swerve the course? Public-private
partnerships are an important tool to be utilized if the latter course is to
be executed. Their effectiveness depends on creatively deploying new
available Federal tools based on prior lessons learned.
The “bailout” bill contained energy-related as well as its much heralded
financial assistance measures. While the press labeled the non-financial
portions of the bill as nothing more than placating “pork,” for bill
opponents, at the same time it began gurgling that what was necessary for
the country was a channeling of funds into “infrastructure” whose
construction could put people back to work, and thereby contribute to the
reestablishment of economic health (“green jobs”). The bailout bill
contained several financial tools which may be utilized in public-private
partnerships, to be discussed briefly below.
Not to say that the bailout bill changed certain basic realities in the
energy/carbon sector:
* Foreign energy dependence, direct and indirect, remains a root cause of
the fragility of the American economy and the insecurity of the American
consumer.
* The introduction of carbon emissions reduction policy initiatives will
still have the effect of raising energy rates, even though no root
technological responses to power plant carbon emissions, e.g. carbon capture
and sequestration, have been perfected.
* The repercussions of the financial crisis at the state and local level for
funding infrastructure support was not addressed.
While the new law provides a new expanded source of clean energy development
impetus through production tax credit extension for wind and certain other
resources, and the investment tax credit, notably for solar, it is important
to recognize that the functioning of these mechanisms depend on the presence
of liquidity to utilize them. The new law does not affect the relative
market competitiveness of renewables themselves.
That’s why public-private partnerships--“P3s”--civic and financial
unions--focused on synthesizing low cost/high yield creation of energy
efficiencies and/or cleantech developments, are most important. Potentially
P3s can extend the value of public credit and provide a platform for
near-term private current capital investments. They can help forestall the
green chill by being at once supportive of energy security goals,
facilitating response to public climate change concerns, and providing a
funded energy/environment stimulus for recovery, thereby facilitating
employment. The nature of these P3s may have to be more innovative than in
the past.
To gain a partial understanding why this is the case, and to provide a
context for future evaluation of the climate change and renewable energy
initiative clearly on the horizon, certain potentially important elements in
the Energy Improvement and Extension Act of 2008, are flagged below which
can roughly be grouped as follows:
1. Creation of new sources of liquidity (which could be utilized in energy
infrastructure P3s).
2. Support for technologies which serve to reduce a public jurisdiction’s
carbon footprint and, probably at the same time, will reduce the cost of
public facilities’ operation by demonstrable energy or environmental
efficiencies.
3. Enhancement of the possibility for incorporation of investor-owned public
utilities into the needed infrastructure mix.
Two notable provisions potentially providing new sources of funding
liquidity are CREBs and QECBs, enabling the eligible issuer to develop
working P3 arrangements with private providers. New “Clean Renewable Energy
Bonds” (§ 107) (“CREBs”), in the amount of $800 million, may be issued by
governmental bodies, public power providers, or cooperative electric
companies. The several categories for which these bonds may be put to work
include: capital expenditures for energy use reduction and rural development
involving electricity from renewable energy resources, support of a range of
cleantech R&D, and specific “demonstration projects” for these purposes, as
well as the other pre-existing eligible purposes for (“old” CREBs) bonds,
which are reauthorized for another year. The proceeds must be expended
within three years, with limited exceptions. At least 70% of the proceeds of
such bonds may not be used for private activity bonds.
The original policy purpose of CREBs bonds was to enable the classes of
authorized issuers, including public entities, to have the equivalent of tax
incentives which are available to private issuers. CREBs now provide a
potential predicate for a different forms of public-private cooperation.
Issuers of the new $800 million category of “Qualified Energy Conservation
Bonds,” (“QECBs”) can be state or local governments. Allocations among the
states are based on population (as are allocations among local governments).
Like CREBs bonds, they can be issued without discount and interest cost to
the issuer, and credits can be stripped from the ownership of the bonds, as
“stripping of interest coupons” from tax exempt bonds. The eligible sweep of
“qualified conservation purposes” of QECBs extends in many energy directions
beyond public building energy reduction, including implementing green
community programs, development involving the production of electricity from
renewable energy sources, and research grants and commercialized
demonstration projects for specified technologies. Like the new CREBs bonds,
the QECBs are classified as “qualified tax credit bonds,” of which not more
than 30% of the allocation under these bonds may be for private activity
purposes.
Sources of indirect funding are presented by the tax provisions of the Act.
Public-private partnerships have, of course, created arrangements whereby a
private company acquires the assets and secures the debt it issues to do so,
with revenues from the provision of service payments by the public to the
private provider. This enables the private provider to utilize the private
tax benefits, and offer the public purchaser of the service a more
competitive rate. This approach is reflected in the solar technology PPA
model, which made transactions possible where, up until now, economics did
not render them feasible. The investment tax credit for solar energy
property has been extended for eight years.
The Energy Improvement and Extension Act of 2008 also extends investment tax
benefits to additional technologies susceptible of cleantech applications in
innovative arrangements. One is the limited renaissance of what used to be
called “small power production” in the form of an Energy Credit for Combined
Heat and Power System Property (§ 103(c)) up to a capacity of 50 megawatts,
among other enumerated efficiency requirements. Taken together with the
plethora of existing 2005 Energy Policy Act and 2008 Energy Improvement and
Extension Act programs for efficient public and commercial buildings, this
can provide an impetus for various types of building refurbishment, and may
complement the introduction of renewables.
A second is the provision of the accelerated recovery period for
depreciation of smart meters and smart grid systems (§ 306). These classes
of property are intrinsic to the realization of the possibilities of
efficient micro grids, a municipal tool long under consideration, which
serve to increase energy efficiency and provide for expanded demand
management. Third party partnering in this area should be facilitated by
these rapid depreciation provisions which serve to increase equity ROI. The
Special Depreciation Allowance for Certain Reuse & Recycling Property (§308)
similarly may be relevant to the improved overall coordination of municipal
waste, energy, and environmental requirements, especially when combined with
the expansion of production tax credits eligible “trash combustion facility”
to those that “use” rather than “burn,” which results in the inclusion of
municipal solid waste gasification/power production as tax credit qualified
facilities.
The Energy Improvement and Extension Act of 2008 has also revised the Tax
Code to expand the investment tax credit, for periods after February 13,
2008, in certain classes of renewables (like solar). Under the new Code,
investor-owned public utilities may qualify for the credit. Activity by
investor-owned utilities in areas where they previously have been customers
of suppliers or participants in regulatory programs, and not participants in
public-private ventures, may be expected to increase.
If the green chill is to be avoided it is clearly timely to examine how
public-private partnerships can be structured to create projects which
tangibly address the practical service delivery goals of public bodies, and
enable them to respond to increased pressure to achieve improved carbon
footprints. Now is a time when the P3 development and financing lessons
already learned in transportation, water, and waste-to-energy need to not
only be reviewed and mimicked, but ruefully examined and consciously
improved upon. The tools exist for governments, and private providers are
prepared to sustain public services in a “green” mode; the challenge is for
the public and private sectors to grasp them together in new innovative
ways.
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