2020 TECHNICAL WEBINAR SERIES...2020/09/23  · This webinar will explore the future of...

2020 TECHNICAL WEBINAR SERIES

SPEAKERS: Erik Makinson, Resource Synergy

Justin Fallstrom, McKinstry

MODERATOR: Victoria Hardy, South Seattle College

www.TheBOC.info

Financing Energy Efficiency Projects

September 23, 2020 11:00am Pacific Time

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This presentation is intended for use by the Smart Buildings Center, the Northwest Energy Efficiency Council and its programs. No copy or use of this presentation should occur without the permission of SBC/NEEC and its speakers.

Introducing our Moderator

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Victoria Hardy,South Seattle College

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Learning Objectives

After today’s webinar, you will be able to:

• Explain PACE (property assessed clean energy) financing options, requirements and benefits

• Discuss energy savings financing and procurement models• Describe a successful micro-grid Power Purchase Agreement (PPA)

case study

Introducing our First Speaker

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Erik Makinson, Resource Synergy

PACE Financing

When PACE Financing Makes Sense

• Capital Project

• PACE-enabled state• Commercial

• Residential

• Cash not otherwise available

• Private ownership of property (including non-profit)

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What is PACE?

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• Property-based debt financing• Energy efficiency • Renewable energyIn some markets, can also include:• Water efficiency• Safe drinking water• Fire, flood, seismic hardening

• Acts like an Assessment• Funds repaid over a long time-horizon• Assessment Lien resides with the building, not the owner• Non-accelerating – only past payments due at

foreclosure.

Makes cash available NOW for deep energy efficiency/renewables

projects

Where is PACE Available?

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Who Can Use C-PACE?

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Only in R-PACE Jurisdictions

How it works

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1) Project improvements identified (energy, seismic, fire, water)

2) Projects include both retrofits and new construction3) Project Costs Verified and Improvements certified by

a qualified professional4) Property Owner and PACE Capital Provider reach

mutual terms for financing, including interest rate, term, etc.

5) Property owner (or project manager) chooses contractors, uses a PACE Capital Provider to fund the improvements

6) Repayment maximum term = weighted average of useful life of improvements (15-30 years)

7) County files assessment8) Collection/payment handled either by county

or lender

Benefits to Property Owners

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• 100% Financing: No out of pocket payment for improvements.

Includes development costs.

• Cash-Flow Positive: Energy savings > Payments, immediately

improving net operating income (NOI)

• Increases Property Values: Increase in NOI = Increase in

property value

• Long Term Financing: Amortization up to 30 years

• Enables DEEP Retrofits: Overcomes payback hurdles that have

historically led to harvesting only low-hanging fruit

Benefits to Property Owners

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• Overcomes Split Incentive: Can debt service will flow through to

tenants some lease structures

• Increases Marketability: Projects may enhance building comfort

and aesthetics, attracting tenants and buyers

• Transferability: Voluntary assessment is tied to the building,

transfers with ownership

• No Impact to Debt-to-Equity Ratio: Does not impede the owner’s

ability to borrow additional funds

• Seismic and Fire Retrofits: Distributes expense over long term

Nation-Wide Impact

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Estimated impact of $7 billion in over 280,000 PACE industry funded projects

Equivalent to taking 1.6 million cars off the road for a year or planting 122 million trees!

More information…

Resource Synergy

Erik Makinson

erik@resource-synergy.com

PACE Nation

https://pacenation.org/

C-PACE Alliance (association of commercial lenders)https://www.c-pacealliance.com/

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Introducing our Second Speaker

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Justin Fallstrom, McKinstry

Innovative EE Financing Methods

Market Financial Trends

State and Local

Funding is

Shrinking

Deferred

Maintenance

Liabilities

increasing

Reduced

Revenue from

COVID-19

Impacts

Debt Capacity

Limitations

• Funding energy improvement projects is challenging with traditional methods

• Emerging contracting paths as alternatives more prevalent

• Clean energy initiatives creating more demand for renewables and the burning of fossil fuels is becoming obsolete

• Private Capital Attractiveness

• Flood of Capital in the markets and low interest rates

Impacts

• Energy saving improvements abound

•Occupant comfort and safety may dictate short term decisions

• Calculating paybacks can be challenging

•Getting attention of decision makers is difficult

• Cost savings often does not go to who funds the work

• Public solutions don’t necessarily work with private owners

• Funding & financing is always short

• Procurement is not clear

Common Needs & Struggles

• Capital

• Use of existing operating money to fund improvements

• Set asides of internal “Green Funds” are becoming common

•Utility Programs

• Vary with locality and service provided

• Rebates for work completed

• On-bill financing for work funded by utility and paid back over time

• Loan

• Borrowing against future energy savings due to improvements pay for loan

Traditional Financing Methods

Traditional: Capital

PROS CONS

✓ Predictable timing

✓ Approval process is clear

✓ Often available annually

✓ Allows for pre-planning

✓ Usually require short paybacks

✓ Easy to deprioritize

✓ Often smaller projects

✓ Energy savings opportunities often delayed

• Examples:

• Steam traps

• Equipment replacement

• Piecemeal lighting

Traditional: Utility Programs

PROS CONS

✓ Energy advisors often available

✓ Clear approval process

✓ Whole building “Pay for Performance”

✓ Custom project available

✓ Financing may be available

✓ Interim funding required

✓ Program may not fit the needs of the facility

✓ Geared toward shortest payback scope

✓ Often leaves the deep retrofit work undone

• Examples:

• Lighting

• Controls

• Kitchen Equipment

• VFDs

• Major Equipment

Traditional: Loans

PROS CONS

✓ Involves ownership/leadership approval

✓ Able to accomplish larger upgrades

✓ Ongoing confirmation of savings required

✓ Can save substantially on energy consumption

✓ Involves ownership/leadership approval

✓ Takes time to set up

✓ Must be able to take on debt

✓ Cost benefit may not align with who pays the

utility bill

• Examples:

• Whole building lighting

• Building envelope

• System replacement

• Mechanical insulation

• Perform in house

• Traditional – Design-Bid-Build

•Design-Build

• Energy Savings Performance Contracting (ESPC) – Provides guaranteed outcome

Traditional Procurement Methods

Traditional: In-House

PROS CONS

✓ Risk held by building operations team

✓ Delays to implementation mean lost energy

savings

✓ Other priorities can override the project

✓ No guaranteed outcome

✓ No verification of savings

✓ No fees or project management cost

✓ Good for small, single scope projects

✓ Direct coordination with utility

✓ Pride in delivery

✓ Probably the lowest price

Traditional: Design-Bid-Build

PROS CONS

✓ Get the lowest price contractor

✓ Subject to high volume of Change Orders

✓ Requires in-house capital; impacts debt

capacity

✓ Owner holds all the risk of design, build,

operations, and performance

✓ Valid only for single project

✓ High internal costs – procurement selections

for programming, design, construction

✓ Known procurement model

✓ Ability to separately select Architect/Engineer team

✓ Purchasing Departments ability to quantify “Value” $

✓ Validation of initial lowest priced contractor via

competitive bidding in the market

Traditional: Design-Build

PROS CONS

✓ Requires in-house capital; impacts debt

capacity

✓ Owner must create performance criteria to

achieve outcome-based project

✓ Many traditional design-build contractors do

not understand energy savings and M&V

✓ Single project selection – must re-select for

each project

✓ Must have internal competency to manage

✓ Known procurement model and enabling legislation

in most States under “Alternative Procurement”

✓ Single point of responsibility for project delivery

✓ Construction-grade cost estimates and budgets

✓ Time compression – delivery is streamlined and

often faster

✓ Reduced cost of implementation

Traditional: Energy Savings Performance Contracting (ESPC)

PROS CONS

✓ Traditional approach requires in-house

capital or willingness to take a loan; impacts

debt capacity

✓ Legislation typically has payback constraints

✓ Not all Energy Service Companies are created

equal – requires scrutiny during procurement

to go beyond the “Presentation”

✓ Owner typically holds operational risk

✓ Lots of acronyms

✓ Enabling legislation in most States under “Alternative

Procurement”

✓ Single point of responsibility for project delivery –

development, design, build, Measurement &

Verification (M&V)

✓ Strong industry association - NAESCO

✓ Energy Service Companies (ESCO) well-versed in

energy scope development and M&V

✓ Selection for multiple phases – flexibility to add scope

✓ Lots of acronyms

• Energy as a Service (EaaS)

• Energy Efficiency as a Service (EEaaS)

• Public Private Partnerships (PPP)

• Power Purchase Agreements (PPA)

Emerging Financing & Procurement Methods

“As a Service” Contracting Vehicles

PROS CONS

✓ Owner does not own systems or equipment

during the term of the contract; flexibility

can be low.

✓ Could be a conflict with State laws.

✓ Shared Savings agreements may

disincentivize facilities staff

✓ Embedded “cost of capital” not transparent

✓ Need to specify Building Functional

Performance Requirements

✓ Can be used for Energy or Energy Efficiency

✓ Varies state to state; can be procured through ESPC

legislation, services, PPA, Cooperative Purchasing

✓ Single point of responsibility for project delivery –

development, design, build, O&M, M&V

✓ Selection for multiple phases – flexibility to add scope

✓ Assets owned by 3rd Party, no impact on debt capacity

or balance sheet; Capture of tax credits/depreciation

✓ Can define fixed payments OR shared savings

EEaaS Contract Structure

Investor

Provides funds for Project

OWNER

Pays EEaaS Developer a regular service charge for

realized energy savings [could pay utility bills]

EEaaS DeveloperOwns and maintains

equipment

Contractor or ESCODesign, install,

monitor performance

Energy Efficiency

Service Agreement

Public Private Partnerships (PPP)

PROS CONS

✓ Owner does not own systems or equipment

during the term of the contract; flexibility is

lower.

✓ Important to specify building functional

performance requirements and tenant

expectations

✓ Embedded “cost of capital” not transparent

✓ Must Re-select partner for future projects or

phases

✓ Generally applicable to New Buildings or District

Energy Plants

✓ Procurement: Service or Space Lease with possible

future ownership

✓ Single point of responsibility for project delivery –

development, design, build, O&M, M&V

✓ Project owned by 3rd Party, no impact on debt capacity

or balance sheet; Capture of tax credits/depreciation

✓ No stranded assets after contract expires

• Risk Tolerance

• Offload Design and Build Risk (Change orders)

• Offload Performance risk

• Offload Operational and Obsolescence risk

• Cost of Capital

• Legalities of jurisdiction

• Tax implications and benefits

•Ability to sustain savings from the investment

Overall Considerations

Considerations

Transparent

Complete

Reliable

Value

Risk

Resilience

• Power Purchase Agreements (PPA)

Emerging Financing & Procurement Methods

The Power Purchase Agreement and Star Island NH…

Victoria Hardy, RCFM

Background Review:

◼ Star Island (10 miles out from the coast of NH)

◼ 37 buildings, 40 acres, 400 years of history

◼ National Historic District

◼ Independent services: power plant, wastewater treatment plant, reverse osmosis plant for water generation

◼ 4,000 overnight guests and 10,000 day visitors in season

◼ 125 employees in season

Significant Long-term Issue Emerges…

◼ Total dependency on diesel for power generation

◼ Costs of diesel rising substantially each year

◼ Single source vendor not cooperative

Challenge One…

◼ Costs of energy very high…5X landside costs…

◼ Diesel + transportation + EPA approved storage

◼ Total season use of 154,000 kWh

◼ Island cost at 0.74 cents kWh

◼ Mainland costs at 0.14 cents kWh

Challenge Two…

◼ Vendor is sole supplier of diesel north of Boston

◼ Surcharges frequent and arbitrary: weather, time of day for delivery, day of the week

◼ Unwilling to do advance purchase contracts at lower rates

◼ Charges maximum market rate

Challenge Three…

◼ Increased regulatory scrutiny after 2007 closure for code violations…

◼ EPA orders secondary storage tank rebuilt at costs of more than $100,000…

◼ Significant challenges on project including hiring a landing craft to deliver cement trucks to island…

Solution to these Challenges…

◼ CEO works with CFE and COO to develop long-term alternative energy plan for the island…which includes a number of small steps (website)…

◼ First big step is execution of comprehensive study to determine best source of energy; wind, solar, or tidal…

◼ Study definitively recommends Solar and the development of a Power Purchase Agreement…

Power Purchase Agreements…

◼ Innovative financing mechanism that uses tax credits not utilized by NGOs or government agencies

◼ Investor captures tax credits and builds/operates system charging SIC a rate 50% below current costs

◼ At termination of agreement, solar installation reverts to SIC ownership

PPA Part Two…

◼ Vendor accrues significant tax credits for investment (currently 30% of the capital costs of the project)

◼ SIC eventually will own a fully functional solar installation with trained staff and infrastructure improvements

Benefits of a Solar PPA…

◼ Institution receives renewable energy benefits today; does not have to wait on financing

◼ No “payback period”

◼ Reliable, non-explosive, and warranted technology

◼ Vastly improved quality of electricity on island

◼ No noise pollution or risk of spill

More Benefits of a Solar PPA…

◼ Increases in generator efficiency when load demands back-up power

◼ Inverter adjusts power factor to closer to unity; ultimately reduces power need on island

◼ System more closely matches need and demand on island

The Results…

◼ Used tools of transformative leadership to transcend the issues…

◼ Approval led to issuance of RFP for Solar PPA in October 2012…

Goals for New System

◼ Reduce or eliminate reliance on fossil fuel for electricity generation, hot water and steam

◼ Reduce electricity costs; stabilize costs for the future

◼ Reduce or eliminate noise, air pollution, fuel handling, and fuel storage risks

◼ Reduce or eliminate capital costs for generation equipment

Goals for New System (cont.)

◼ Reduce maintenance and repair requirements, increase system reliability

◼ Seamlessly accommodate daily and seasonal fluctuations in demand

◼ Provide lower cost, reliable, “clean” inverted AC power supply

◼ System design and location to present lowest possible visual and environmental impact

Most Important Goal!

Reduce overall long term costs for electricity through third party financing and Power Purchase Agreement…

Key Required Elements of the PPA

◼ Fixed kWh rate for fifteen years minimum, based on actual power consumed

◼ Specified buy-out option for 5% of initial capital outlay

◼ Maintenance, monitoring and adjustment included in kWh rate

◼ Minimum 25 year life span with warranty

◼ Insurance coverage for catastrophic events

◼ Pay for removal if no buy out at end of contract

◼ SIC retains legal priority in default or bankruptcy

Major Qualifications…

Evidence of ability to procure financing for project; demonstrate long-term corporate viability; demonstrate evidence of long-term capital reserves to fund project over the 15 year life span…

Results…

◼ Nine vendors responded to initial call for interest

◼ Four vendors submitted complete bid packets by the deadline

◼ NH, NJ, CO, and VT companies

◼ Intensive review/interview process results in selection of New Hampshire company

The Winner is…

◼ Revolution Energy in partnership with Ayer Electric, both local New Hampshire companies win the bid…

◼ RE had local school district experience; and supported by the New Hampshire Charitable Foundation…

◼ What happens next?

Financing Crisis…

◼ Revolution Energy, despite massive efforts, is unable to secure an investor or bank financing for the project by the deadline of April 1, 2014

◼ Ayer Electric takes the lead on the project!

◼ Project began August, 2014 with completion in November 2014

◼ Changeover occurred in Spring of 2015

Results…

◼ Largest microgrid in New England

◼ Established prototype for island communities up and down the coast

◼ Solar array generates up to 70% of operational needs during high season and 100% in shoulder and off seasons

◼ Back-up generator operations provide heat for hot water

Green Gosport Initiative…

◼ https://starisland.org/the-island/green/

The island kingdom…

Speaker Contact Info

Victoria Hardy, Victoria.Hardy@seattlecolleges.edu

Erik Makinson, erik@resource-synergy.com

Justin Fallstrom, justinf@mckinstry.com

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time for … Q&A

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Washington & Oregon

• Smart Buildings Center - http://www.smartbuildingscenter.org/tool-library/

Idaho• University of Idaho – Integrated Design Lab - http://www.idlboise.com/content/tool-loan-library-free-resource-idaho-power-company-customers

California

• Pacific Gas & Electric - http://www.pge.com/pec/tll/

• Sonoma County - http://sonomacounty.ca.gov/General-Services/Energy-and-Sustainability/Tool-Lending-Library/

• Southern California Edison - https://www.sce.com/business/consulting-services/energy-education-centers

• San Diego Gas & Electric - https://www.sdge.com/energy-innovation-center/tool-and-book-lending-library

New York

• CUNY Building Performance Lab - http://www.cunybpl.org

Tool Lending Library Locations

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www.theboc.info877-850-4793 (toll free)

bocinfo@theboc.info

BOC National Partner Network

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Take the webinar quiz:

➢Earn 1.5 points today towards the maintenance of your BOC credential *

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➢October 21st: Technical Aspects of Renewables & Storage

➢This webinar will explore the future of grid-interactive efficient buildings and the strategic integration of renewables, storage, and building load flexibility solutions.

Remaining 2020 Technical Webinar

Stay tuned for the 2021 Webinar Series Announcement!