Author Archives: Brad Copithorne

Combining Solar And PACE In Connecticut: A Potential Game Changer For Commercial Properties

In my last post about Connecticut’s clean energy finance efforts, I alluded to an important innovation in their Property Assessed Clean Energy (“PACE”) financing program for commercial properties.  PACE programs have been in place for several years, and the basic concept is that property owners are able to pay back clean energy financing through their property tax bill over time.  Rates tend to be low because property taxes are almost always paid back and the PACE assessment will survive foreclosures.

To date, PACE transactions have generally been structured as a set of fixed payments to finance retrofits managed by the property owner.  Functionally, these transactions have been quite similar to loans.  In the solar industry, however, the vast majority of financings have been structured as leases or power purchase agreements (PPAs) in order to fully capture the tax benefits associated with solar investments.  This has generally resulted in fairly low use of PACE by solar installers and limited installations of solar on commercial properties.  (Most commercial properties have large mortgages and are not good candidates for additional financing unless PACE or On-Bill Repayment (OBR) can be used to improve credit quality.  The exceptions are buildings that are owned or occupied by very high quality credits, such as a large corporation or city.)

Connecticut is breaking new ground by allowing leases and PPAs to participate.  The lease or PPA payments would simply become part of the property tax bill.  If necessary, true-up mechanisms could be used to adjust payments and ensure that customers are not overbilled.  Additionally, we understand that this flexibility will likely be available for innovative energy efficiency financing for commercial properties.  EDF has long advocated for this type of flexibility (and we see this as a major benefit of OBR), but – to date – PACE programs have not incorporated this feature.

Hats off to Connecticut for once again showing us how to get things done!

Posted in On-bill repayment, Utility Business Models | Tagged , , , | 1 Response, comments now closed

Financing Clean Energy: Innovations From The Nutmeg State

Connecticut’s Clean Energy Finance and Investment Authority (“CEFIA”) was created in 2011 to help the state increase public and private investment in clean energy solutions that are cheaper and more reliable than traditional solutions.  I had the chance last week to catch up with Bryan Garcia, CEFIA’s CEO, and his impressive team.  I found three of their initiatives to be particularly innovative and impactful.

  • Commercial PACE (C-PACE) – Property Assessed Clean Energy (PACE) is an innovative, market-based approach that helps alleviate the steep, upfront costs that property owners generally incur for energy improvements by using loans that are seamlessly repaid through an additional charge on their property tax bills. While many jurisdictions have implemented PACE programs, CEFIA has had a particularly hands-on approach of working with property owners, contractors, lenders and mortgage holders to reach agreement on transactions that meet the needs of each party.  This strategy appears to be paying off as CEFIA has received 190 applications since the program was launched in April 2013.  Additionally, the Connecticut program appears to be the first PACE program that supports commercial solar installations with the lowest-cost financing structures such as leases and power purchase agreements.  I believe this could be a game changer for installing solar projects and plan to write about this in greater detail in a blog post coming soon. Read More »

Posted in Energy Efficiency, On-bill repayment | Tagged , , , , | 7 Responses, comments now closed

On-Bill Repayment in California: Two Steps Forward, One Step Back

This commentary originally appeared on EDF's California Dream 2.0 Blog

Last week, the California Public Utilities Commission (“CPUC”) issued a proposed decision with the final implementation rules to create the nation’s first On-Bill Repayment (“OBR”) program for commercial properties.  If properly constructed, the program is expected to allow building owners to finance clean energy retrofits with third party capital and repay the obligation through their utility bills.

The good news is the CPUC’s proposed decision contains the vast majority of the program elements necessary to create a flourishing financing market for energy efficiency and renewable projects.  The CPUC ordered robust disclosure to tenants and property owners of any OBR obligation in place, required a centralized program administrator to reduce expenses for market participants, required an equitable share of partial payments between the utility and the lender and agreed that nonpayment of an OBR obligation will result in the same collection procedures from the utility as nonpayment of an electricity charge.

Unfortunately, constructing a successful financing program is much like building a boat.  A boat with 90% of its hull in place will not travel very far.  The proposed decision appears to also have a potentially fatal flaw.  The CPUC has required all subsequent owners and tenants of a property to provide consent to ‘accepting’ the OBR obligation, but does not specifically state what will happen if the consent is not given.

OBR can work for lenders when it significantly reduces risk and simplifies the underwriting decision.  ‘If the lights are still on, then the lender is getting paid’ is a simple rule that will provide significant comfort to ratings agencies and credit committees.  Downtown office buildings and suburban shopping malls are foreclosed on a regular basis, but in almost all cases the lights stay on.  If an OBR obligation is sure to be paid — even after a foreclosure — the availability of investment and cost of financing will improve dramatically. Read More »

Posted in California, Energy Efficiency, On-bill repayment, Renewable Energy, Utility Business Models | 2 Responses, comments now closed

Hannon Armstrong Raises Capital For Clean Energy Finance

Late last week, I had the chance to peruse Hannon Armstrong’s SEC filing for their upcoming Initial Public Offering (IPO), which is expected to start trading next week on April 18th.  The company is in the business of financing energy efficiency and other clean energy projects, and hopes to raise as much as $245 million.

Since 2000, Hannon Armstrong has provided or arranged over $3.9 billion of debt and equity financing deals for around 450 sustainable infrastructure projects.  To date, most of these assets have been sold to other investors.  Out of the $3.9 billion in financing deals they have arranged, Hannon Armstrong currently holds less than $200 million of these obligations on its balance sheet.  The company plans to use the IPO proceeds to increase its investments, and has already identified $110 million of financing opportunities that can be closed within 45 days of the IPO.  Additionally, the firm has secured $400 million of credit capacity from Bank of America to finance projects.

Our understanding is that the majority of the company’s projects are energy efficiency retrofits for the federal government or municipal properties, universities, schools or hospitals – often referred to collectively as the MUSH market.  These properties tend to be attractive to lenders because the owners generally have high credit quality and the buildings are not generally mortgaged.  Read More »

Posted in Energy Efficiency, On-bill repayment | Tagged , | 1 Response, comments now closed

Solar Market Needs New Investors To Continue Growth

The recent headlines for solar power have been encouraging.  According to the Solar Energy Industries Association (SEIA), the cost to install solar is declining as panel prices fell by 41% in the fourth quarter of 2012 versus the previous year.  This helped US solar installations to grow by around 75% in 2012, from 1,855 megawatts (MW) in 2011 to 3,300 MW.  (For comparison, the average coal plant in the US has a capacity of about 650 MW).  Even better, they forecast that installations will continue to climb to an estimated 9,000 MW in 2016.

Unfortunately, lack of investment capital may be a barrier to realizing this vision.  If we do not have enough funding, these projects will never be built.  Bloomberg New Energy Finance forecasts that the industry will need $3.1 billion of equity investment in 2013, compared to $1.8 billion in 2012.  Environmental Defense Fund (EDF) is committed to helping expand the roster of investors in solar projects, as investing in these projects is often not only highly profitable but also a major contribution to the sustainability of our planet.

Large investors have developed two strategies to invest in solar projects.  The traditional method is to make investments in large, utility scale projects.  More recently, residential solar developers have created funds for investors to take stakes in a large number of residential and small commercial projects.  The latter strategy has made ‘no-money down’ solar available for homeowners who do not have the upfront capital to purchase solar systems, which can cost up to $15,000 or more.

Unfortunately, these investment strategies can be quite complex and are generally attractive only for corporations and certain wealthy individuals. To understand why, we need to explore the tax incentives for solar investors.  The federal government provides tax breaks for solar investors to accelerate deals, develop a robust market that is expected to lower costs over time and allow investors to capture part of the societal benefit of avoiding development of more fossil fuel power plants.  EDF believes that this is a very good idea. Read More »

Posted in On-bill repayment | Tagged | 3 Responses, comments now closed

Chasing Green: Going Solar By Paying Your Utility Bill

This commentary was originally posted on our EDF Voices blog.

Source: SolarPowerForYou/Flickr

So far, my experience is that environmentalists and business executives often speak different languages. Take the basic idea of sustainability. To an environmentalist, sustainability, as applied to a business, refers to the amount of environmental damage it will cause over time. To a business person, the term refers to the ability of the business to generate profits and so sustain itself.

In other words, there is a profound difference between the "green" that environmentalists are focused on and the "green" that businesses must generate to survive.

At EDF, I am trying to bring those two camps together. Broadly defined, my work involves creating opportunities for companies to make profits by selling products that benefit the environment, usually by reducing carbon emissions. My belief is that, with the right incentives and market structures, the profit motive can be a powerful force for change. Green companies that hire workers also create new advocates for environmental policy.

A study by McKinsey, the big consulting outfit, has shown that there are potentially hundreds of billions of dollars in energy efficiency investments that could yield annual returns of 7% to 20%. At a time of historically low yields on fixed income investments, like bonds, those are pretty good numbers.

Mostly, I focus on increasing investment in energy efficiency and renewable generation projects for homes, offices and other commercial properties. In many cases we can lower a building’s utility bills, including financing costs, while also reducing carbon emissions.

Take investments in solar technologies. I am lucky enough to have pretty good credit and was able to get a solar installer to finance a rooftop installation that provided my wife and I with immediate savings. Unfortunately, many homeowners do not currently qualify for financing. So EDF is working to decrease financing costs and increase availability of capital for such projects through a program called On-Bill Repayment (“OBR”).

OBR can help a building owner finance, say, a rooftop solar array, with money put up by an third part investor, and then repay that loan through his or her monthly utility bill. The costs of the loan are reduced because the loan is part of the legally binding rate tariff for the property, and will remain in place even after a foreclosure.

Once we have OBR in place, far more homeowners should be able to finance the upfront cost of installing energy efficiency or solar projects that lower their bills. This creates jobs, saves money and is good for the planet. What’s not to like?

Take California. The state is expected to initiate an OBR program for commercial properties in about 4-6 months. EDF’s economists estimate that this program over the next 12 years will lead to about $7 billion in third-party clean energy investment, create 50,000 job-years that cannot be exported. Over the same period, OBR will the cut carbon emissions by 10.3 million tons, the equivalent to replacing 180,000 gasoline cars for 12 years with solar-powered electric vehicles. And the environmental benefit will continue to grow as we add residential customers and expand to other states.

OBR is just one way in which business and the environment can coexist. In future blog posts, I will look at other ways to achieve the same end.

Posted in Energy Efficiency, On-bill repayment | Tagged , | Comments closed

Clean Energy Market Poised For Rapid Growth In California

Environmentalists and other policy makers have long touted the economic benefits of investing in energy efficiency and renewable projects.  For California, that vision is on course to being realized.

Yesterday, EDF, Citi and Wilson Sonsini held Innovations in Energy Efficiency Finance II, a sequel to the successful conference we hosted in 2011.  That year, we discussed several interesting ideas about how we might finance projects.  Yesterday we heard from sector leaders on how those ideas are being implemented in California and beyond.

Citi and EDF conceived of this event as an opportunity to bring the energy efficiency and renewable industries together to discuss these opportunities and to build momentum for increased transaction flow.  Judging by the makeup of the audience, I think we succeeded.  I attend quite a few conferences to discuss energy efficiency and most of them are dominated by fellow public policy types.  Yesterday, however, was a different story.  Of the 185 attendees, over 2/3 were representing private sector companies in the clean energy or financing business.

As former Governor of Colorado, Bill Ritter noted, “California continues to take bold steps toward clean energy and provide the private sector with clear opportunities to invest in energy efficiency and renewables, critical components of our nation’s economic growth. A key part of achieving our clean energy potential, and creating jobs in America, is ensuring access to quality financing for homes and businesses that want to participate in the new energy economy.”

Read More »

Posted in California, Energy Efficiency, On-bill repayment, Renewable Energy | Tagged , , | 2 Responses, comments now closed

A Tale Of Two IPOs

This morning two energy initial public offerings (IPOs) made their debut.  One of them was green and one of them was brown.  Unfortunately, the mainstream media missed the boat by characterizing the brown company as successful and the green one as a miss. We don’t see it that way.

The brown company is PBF Energy, a Blackstone-backed rollup of three refiners that were divested by Valero and Sunoco.  The company, like many refiners, is having its day in the sun as refining margins are currently wide due to technical market issues relating to the relative prices of Brent and WTI crudes.  The bottom line, however, is that demand for gasoline and diesel is unlikely to grow as CAFE fuel economy standards continue to tighten.

The second company, SolarCity, has been posting over 100% annual growth in solar installations since 2009.  Additionally, the company has been a leader in residential energy efficiency and EV charging stations, and has even begun to roll out a residential energy storage solution.

Unfortunately, SolarCity’s business model requires some complex accounting that ultimately hurt their valuation.  The vast majority of their solar photovoltaic (PV) installations are executed as leases or similar structures to take advantage of various tax incentives.  This reduces the accountants’ formulation of revenue, and also makes the business unprofitable.  As an example, imagine a solar company can construct a solar system for $16k and sell it for $20k, with $3k of overhead.  They would result in $20k of revenue, $4k of gross profit and $1k of net income.  Do that enough times and you have a pretty good business.

As a lease, however, they only recognize revenue as it is received through annual lease payments, which might be around $1500.  Assuming the $3k of overhead remains, then the company would post a loss of $1500 in year one.  Economically, this might be the same or better business, but through the eyes of an accountant, this is a harder pill to swallow as the profits must be realized over the long term of the lease.

SolarCity is a new concept for the public market: it is essentially the first high-growth cleantech company that relies on an equipment leasing model. Despite projected revenue growth, the solar IPO struggled to generate demand due to this complex accounting and priced well below the expected range. On the other hand, PBF priced at the middle of its range, and sold more shares than originally expected. Longer term, however, my money would be on the company with the meteoric growth rate.  So far today, the market seems to agree.  SolarCity is up 48% from its pricing while PBF Energy has gained less than 1%.

Posted in General | Tagged , , | Comments closed

On-Bill Repayment Bill Introduced In California

This commentary was originally posted on the EDF California Dream 2.0 Blog.

Yesterday, California Senator Kevin de León introduced a bill, SB 37, which would create the first On-Bill Repayment (OBR) program entirely financed by private capital. OBR allows property owners to finance energy efficiency and renewable generation upgrades and repay the obligations through their utility bills.

Senator De León said that “every Californian should be able to participate in the clean energy economy, and OBR helps us achieve this goal.” He believes that “OBR will lower utility bills, reduce pollution from dirty energy, and put thousands of Californians back to work. I am proud to be working with a broad coalition dedicated to moving this bill forward."

This bill will authorize the California Public Utilities Commission (CPUC) to extend their groundbreaking commercial OBR program to residential properties. (The commercial program is expected to be effective by the end of March and was recently profiled in the New York Times.)  We expect the residential program to provide retrofit capital to consumers that might not otherwise have access to low-cost funding for retrofits. These retrofits are expected to save money for consumers after financing costs and in many cases allow for more comfortable, healthier homes.

EDF is committed to working with consumer groups to make sure that this bill includes appropriate consumer protections. We will also be working to expand a coalition of supporters from the environmental, labor, business and financial communities.

Posted in California, Energy Efficiency, On-bill repayment | Comments closed

On-Bill Repayment Approved By California Public Utilities Commission

This commentary was originally posted on the EDF California Dream 2.0 Blog.

Last week the California Public Utilities Commission (CPUC) approved energy efficiency programs and budgets that include an innovative On-Bill Repayment (OBR) program. The OBR program will allow commercial property owners to finance energy efficiency or renewable generation upgrades for their buildings and repay the obligation through the utility bill. The program is ‘open-source’ and is designed to allow a wide variety of contractors, solar installers, and energy efficiency project developers to work with a range of financial institutions to design offerings that best meet the needs of their customers.

The CPUC approval was highlighted today in the New York Times.

In the decision, the CPUC reiterated their intention to have the OBR program operational by March 2013. We understand that some of the utilities have expressed concern that this timeline is aggressive, but were pleased that the CPUC decision noted that the utilities have been aware of this timeline since the original CPUC decision last May.

A predictable timeline for OBR implementation is critical as EDF is working closely with multiple market participants to create a pipeline of projects that can be executed as soon as the program is operational. A successful launch will allow us to demonstrate to other states that OBR can create private investment and new jobs at no cost to ratepayers or taxpayers. We believe that this is a message that will resonate across the political spectrum.

Posted in Energy Efficiency, On-bill repayment | Tagged , | 2 Responses, comments now closed