Financing Energy Efficiency Projects in Michigan

Transcription

1 Wastewater Administrators Conference January 25, 2018 Financing Energy Efficiency Projects in Michigan Andrew Dow, Donohue & Associates 1

2 Funding Mechanism Overview Qualified Energy Conservation Bonds Utility Provider Rebate Programs State Revolving Loan Program Performance Based Contracting Other Options: WIFIA Loans (Nationally Administered) Energy Revolving Loan Fund SAW Grants/Loans 2

3 Acknowledgements City of Battle Creek City of Wyoming Genesee County Drain Commissioner City of Marquette 3

4 4 Qualified Energy Conservation Bonds

5 Qualified Energy Conservation Bonds Format Benefits Administrator Application Low-interest borrowing Access to capital for bigger projects Some of the lowest interest financing available (federally subsidized bonds) Minimizes debt service and revenue requirements Michigan State Treasury Michigan Agency for Energy Annual deadline (varied timing) 2016 May 2017 July 5

6 QECB Background Authorized by Congress in 2008 $3.2 Billion Allocated Nationally Michigan Allocation: $104M $30M in Unused Local Allocations Waived to State Allocation to large local governments in proportion to population 6 Redistribution via Competitive Selection Process Application Evaluation Criteria: Project Development (40%) Alignment with State Priorities (40%) Impact on Community, Region, or State (20%)

7 Case Study: Battle Creek WWTF Design Capacity: 27 mgd Average Flow: 9 mgd Industrial Organic Loadings Kellogg s Post ConAgra Others Project Drivers Energy Conservation Aged Facilities: Outdated Blower Technology Aged Facilities: Manual Aeration Control Process Improvements: Nutrient Deficiency Issues Chemical Savings: Phosphorus Control 7

8 Improvements Implemented Improvement Estimated Construction Estimated Annual Savings Aeration Blowers $2.55M $121,000 Aeration Controls $1.54M $99,000 BPR Modifications $1.58M $110,000 Nutrient Feed Controls 0.365M $68,000 Total $6.04M $398,000 High Efficiency Blowers Advanced Aeration Controls Reduce Facility Energy Use 20% 8

9 QECB Application Key Application Points: 20% Reduction in Energy Green Community Program Local Economy Impacts: Supporting Industrial Activity & Growth Keeping User Rates Low Construction Employment 9 Existing Positive Displacement Blowers Proposed High Speed Turbo Blowers (Photo APG-Neuros, Inc.)

10 Financing Summary Funding strategy primarily bonds, supplemented by utility rebate Mix of QCEB (county and requested state allocation) and significant community match of revenue bonds Funding breakdown proposed in May 2016 application: Project Cost Project Funding Construction Cost: including equipment, materials, and labor $7,634,600 QECB Request Allocation $5,365,636 Design Engineering Services $550,000 County QECB Allocation $1,407,864 Construction Engineering Services $680,000 Consumers Energy Incentive/Rebate $226,500 Legal & Financing Fees $135,400 Local Match Revenue Bonds $2,000,000 Total Project Cost $9,000,000 Total Project Funding $9,000,000 10

11 Actual Cost of Financing $14,000,000 $12,000,000 Attributed Principal: $8.89M QECB Subsidy: $2.66M $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $0 Total Principal (Bond Par Value) Total Debt Service Net Debt Service Year Financing Period

12 12 Utility Rebate Programs

13 Utility Rebate Programs Format Benefits Administrator Grant ( cash incentive ) after project completion Direct monetary award to applicant Applicable to small or large projects Can offset significant portion of smaller project costs Improves effective project payback Energy Provider (e.g., Consumers Energy) Application Rolling Two Steps: Pre-Notification & Final 13

14 Utility Rebate Program Background 14 Stems from state legislation (recently renewed) Programs provided by energy utilities throughout Michigan Customers pay into the program Savings goals determined for electricity and gas categories Example program: Consumers Energy Business Energy Efficiency Solutions Prescriptive and Custom Rebate Incentive Categories Prescriptive: lighting, HVAC, building automation, small motor VFDs Custom: larger scale or more complex energy conservation projects Custom Incentive Simple payback: 1-8 years Capped at 50% of project cost or $1,000,000 $0.10 per annual kwh saved

15 Utility Rebate Program Background Submit Pre- Notification Application Submit Final Application within 60 days of project completion Receive Check 6 to 12 weeks after final approval Project Engineering and Energy Savings Estimate Application Approval & Project Completion Final Approval by Consumers Energy (possible monitoring & verification) From Consumers Energy Custom Incentive Form 15

16 Request for Proposals Program Related Consumers Energy program Competitive bidding process to request customized incentive amounts Intended to enable implementation of large-scale projects that would not otherwise move forward through standard incentives based on: Annual customer caps or project cost-based incentive caps Payback outside acceptable limits Case-specific affordability, scope, and savings considerations Pre-notification required 13-month window to complete projects after incentive is reserved Minimum annual savings of 250,000 kwh Applications due March 2, 2018 Program manager: Jim Coulter 16

17 Case Study: Wyoming CWP Aeration system 3 basins operating 3 MG each 5,100 diffusers in each HP blowers DO and ORP control Electrical Usage $660,000 annual aeration cost (50% of facility electrical usage) Had consistently been using 3 to 4 blowers (at times called to run all 5) 17

18 Wyoming Energy Savings Project Feb 2016 April 2016 Oct 2016 Dec 2016 Jan 2017 Initial Engineering Eval and Diffuser Testing Completed Energy Rebate Pre-Application Submitted Diffuser Final Application Check Replacement & Testing Completed Submitted Awarded 18 Project Expense Project Cost Summary Cost Estimated Savings Payback Rebate Diffuser Replacement $220,000 $138,000 2 years* $110,000 Diffuser Pre-Testing and Post-Testing Evaluation and Engineering Services $16,500 $57,547 Total Spent $294,047 *1.3 years effective payback 50% of eligible project cost (cap) 37% of total project cost

19 Genesee County District 3 WRRF Previously custom incentive rebate: blower upgrades New project: Advanced aeration control system Ammonia monitoring Reduced blower energy use and nitrification tower pumping energy Ammonium Probes Nitrification Towers $39,000 Aeration Basins $29,000 19

20 Genesee County Project Financing Project expenses include: New butterfly valves with electric actuators Ammonia probes Air flow meters Programming and PLC Financed with combination of operating budget and rebate incentive Estimated incentive rebate: $78,000 (pre-notification request) 2018 operating budget expense: $232,000 Requested rebate will be 25% of total anticipated project cost $67,000 annual energy savings -> 5-year payback (3.5 with rebate) 20

21 21 SRF Loans

22 State Revolving Fund Loans Format Benefits Administrator Low-interest borrowing Access to sufficient capital for bigger projects Streamlined, comprehensive project financing Long loan terms at low interest rates Minimizes debt service and revenue requirements Michigan Department of Environmental Quality (MDEQ) Michigan Finance Authority (MFA) Application Annual deadline Project plan submission by July 1 22

23 SRF Features FY 2018 Interest Rates: 2.00% - 20-Year Loan 2.25% - 30-Year Loan Loan term depends on useful life of project assets 6.00% 5.00% Effective Interest Rate 4.00% 3.00% 2.00% 1.00% 0.00% 20-Year SRF Loan Interest Rate Qualified Energy Conservation Bond Typical 20-Year Municipal Bond Yield (Low) Typical 20-Year Municipal Bond Yield (High) 23

24 SRF Scope/History Michigan Projects Funded by Category ( )* Michigan Funding Commitments:* $123 million in 2017 (11 projects) $4.78 billion since inception (1988) One third of project loans went to small communities (< 10,000)* 24 *FY2017 Annual Report of Michigan s State Revolving Fund and Strategic Water Quality Initiatives Fund, Michigan Department of Environmental Quality and Michigan Finance Authority

25 Green Project Reserve Enacted by Congress in 2010 Directs portion of state SRF program funds to Green Projects GPR projects can be eligible for principal forgiveness All or parts of project can qualify Four qualifying categories: Green Infrastructure Water Efficiency Energy Efficiency Environmentally Innovative Categorically Eligible Renewable energy projects (including biogas CHP) Projects achieving 20% reduction in energy consumption Energy management planning 25

26 Case Study: Marquette, MI Sewage Lift Station and Forcemain Upgrades ( ) Upgrades to Four Lift Stations feet of new forcemain Total cost: $3.47M BEFORE AFTER Energy saving components: Aged constant-speed, low-efficiency, oversized pumps CWSRF Loan at 2.5% (first of several for the City) New right-sized pumps with premium efficiency motors and VFDs 26 Improved pipe/ sizing (reduced headloss and pumping energy costs)

27 27 Performance Based Contracting

28 Performance Based Contracting Format Cost sharing or external financing (negotiated payment plan) Benefits Minimizes risk to owner Can be good for projects with tight timeline Administrator Facility owner and solutions implementer Application Not applicable 28

29 Performance-Based Contract Overview Agreement between a business and facility owner based on a specified reduction in operating costs Business makes a performance guarantee Business designs and installs energy efficient solutions Savings used to pay back capital investment ESCO Energy Service Company (common PBC approach for energy savings projects) 29

30 Financial Basics Before Program Term Operating Budget During Program Term Operating Budget After After Program Term Operating Budget Operating Budget Operating Funds Operating Funds Operating Funds Operating Funds Funds Savings Savings Savings Costs -Utilities -O&M -Capital Plan Costs -Utilities -O&M -Capital Plan Investment -Modernization -Energy Retrofits -Upgrades Utility CostsBudget Investment -Lights -Utilities -Modernization -Modernization -Air -O&M Conditioning -Energy Retrofits - -Capital Heating Plan -Upgrades 30

31 Project/Mechanism Drivers Political resistance to bond or rate increases Insufficient capital funds Insufficient borrowing capacity due to debt limits Existing bond covenants Procurement rules/state laws are restrictive Contracting options Client specific constraints/desires 31

32 Procurement Benefits Design/Bid/Build Procurement - Lowest responsive bidder Multiple prime No choice of equipment suppliers Risk - Owner responsible Funding - Many times generated through increased rates or capital reserves Performance Risk - Energy savings not verified or guaranteed ESCO Procurement Best life cycle value Single Prime (turn-key design/build) Choice of equipment suppliers Risk - ESCO responsible Funding - Generated though reallocation of existing operational spending (savings) Performance Risk - Savings guaranteed and verified 32

33 Funding Mechanism Summary Mechanism Format Application Period Qualified Energy Conservation Bonds Utility Rebate State Revolving Fund Performance Based Contracting WIFIA Low-interest borrowing Grant (cash incentive) Low-interest borrowing Cost sharing / external investor Low-interest borrowing, flexible terms Annual Rolling Annual N/A Annual or Semi-Annual Administrator State Treasury Michigan Agency for Energy Energy Provider MDEQ Michigan Finance Authority Facility Owner USEPA Multiple mechanisms can be combined to finance eligible projects 33

34 Wastewater Administrators Conference January 25, 2018 Financing Energy Efficiency Projects in Michigan Andrew Dow, Donohue & Associates 34

35 WIFIA Loan Program Similar to Clean Water and Drinking Water SRF programs in terms of the eligible projects, borrowers, and requirements Intended as alternative (or more likely a supplement) to SRF loans for BIG projects Interest rates are generally not as low as the SRF loan interest rates would be. WIFIA rates must be no less than yield on U.S. Treasury securities of similar maturity Disbursement and repayment schedule is intended to be extremely flexible on projectspecific basis to structure around other debt service and cash flow considerations Minimum project size is $20M in total eligible costs for served population of >25,000 Minimum project size of $5M for small communities WIFIA loan is capped at 49% of the eligible project costs (so it cannot be a stand-alone financing solution) Significant application fees for loan negotiation and execution Multiple projects can be combined and submitted under one WIFIA loan application if the total eligible costs meet the $20M (or $5M) minimum 35

36 Energy Revolving Loan Fund Administrator: Michigan Economic Development Corporation Source/Origin: American Recovery and Reinvestment Act of 2009 Maximum Loan: $2,500,000 Loan-Term: Up to 6 years Interest Rate: 3% (fixed) 36