Avoiding 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 California, Virginia, and Florida, laying out plans for carbon footprint reductions. The measures to that end include energy-efficient buildings and services, increased use of clean and renewable energy sources, the application of electricity demand response, and other efficiency measures. Many U.S. mayors have collectively gone on record supporting these programs, and several larger cities have voluntarily come together to form the Carbon Disclosure Project.

Tough Times

It’s harder to be green when less funds are available to finance green projects, especially when shifting all carbon mitigation costs to utilities, and requiring them to internalize those costs rather than pass them on to consumers, is less politically palatable.

Will the public sector stick with the status quo and fiscally muddle through (a not indefensible strategy)? Or will it take advantage of the increasingly politically empowered tie between climate change control measures, improved energy efficiency, source diversity, and economic well-being (jobs)? Public-private partnerships are an important tool to be utilized if the latter option is selected. Their effectiveness depends on creatively deploying newly available federal tools.

Last year’s financial services “bailout” bill—H.R. 1424, the Emergency Economic Stabilization Act of 2008, which established the Troubled Assets Relief Program (TARP), Energy Improvement and Extension Act of 2008, and Tax Extenders and Alternative Minimum Tax Relief Act of 2008—contained energy-related measures as well. Although the press labeled the nonfinancial portions of the bill as nothing more than placating “pork” for bill opponents, it also began reporting on the need for channeling funds into “infrastructure,” whose construction could put people back to work and thereby contribute to the reestablishment of economic health (by creating “green jobs”). The bailout bill contained several financial tools that may be utilized in public-private partnerships, but it did not change several basic realities in the energy/carbon sector:

• Direct and indirect dependence on other countries for energy 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 raise energy rates, even though no root technological responses to power plant carbon emissions—most obviously, 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.

Public-Private Partnerships

Though the bailout bill provides expanded incentives for clean energy development through the production tax credit (PTC) 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 depends on the presence of liquidity. The new law does not affect the relative market competitiveness of renewables themselves.

That’s why public-private partnerships (P3s) focused on the low-cost/high-yield creation of energy efficiencies and/or cleantech developments are most important at this time. P3s can potentially extend the value of public credit and provide a platform for near-term private 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 stimulating employment. The nature of these P3s may have to be more innovative than in the past.

Here are the a few basics to provide context for future evaluation of the climate change and renewable energy initiative clearly on the horizon. Potentially important elements in the Energy Improvement and Extension Act of 2008 can be roughly be grouped as follows:

• Creation of new sources of liquidity (which could be utilized in energy infrastructure P3s).
• Support for technologies that reduce a public jurisdiction’s carbon footprint and, probably at the same time, reduce the cost of public facilities’ operation by demonstrable energy or environmental efficiencies.
• Enhancement of the possibility for incorporation of investor-owned public utilities into the needed infrastructure mix.

Two notable provisions that could provide new sources of funding liquidity are clean renewable energy bonds (CREBs) and qualified energy conservation bonds (QECBs), which can motivate an eligible issuer to develop working P3 arrangements with private providers. New CREBs, in the amount of $800 million, may be issued by governmental bodies, public power providers, or cooperative electric companies. The several categories in 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 research and development projects, and specific demonstration projects. 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 that are available to private issuers. CREBs now can potentially facilitate different forms of public-private cooperation.

Issuers of the new $800 million category of QECBs can be state or local governments. Allocations among the states are based on population (as are allocations among local governments). Like CREBs, 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 QECB “qualified conservation purposes” extends in many energy directions beyond public building energy reduction. Also included are 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, 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 Energy Improvement and Extension Act of 2008. 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 offers the public purchaser of the service a more competitive rate. This approach is reflected in the solar technology power purchase agreement 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.)

Funding Cleantech Projects

The Energy Improvement and Extension Act of 2008 also extends investment tax benefits to additional technologies with cleantech applications in innovative arrangements.

One is the Energy Credit for Combined Heat and Power System Property up to a generation capacity of 50 MW (what used to be called “small power production”). Taken together with the numerous existing programs under the Energy Policy Act of 2005 and the 2008 Extension Act for efficient public and commercial buildings, this new credit can provide an impetus for various types of building refurbishment and may complement the introduction of renewables.

A second is the provision of an accelerated recovery period for depreciation of smart meters and smart grid systems. Both technologies are required for the installation of efficient micro grids, which increase energy efficiency and enable expanded demand management. Third-party partnering in this area should be facilitated by these rapid depreciation provisions, which serve to increase return on investment.

Similarly, the Special Depreciation Allowance for Certain Reuse and Recycling Property may improve overall coordination of municipal waste, energy, and environmental requirements. It may be especially useful when combined with a PTC-eligible “trash combustion facility.”

New Direction Needed

If the green chill is to be avoided, it is clearly time to examine how public-private partnerships can be structured to create projects that 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 the time when the P3 development and financing lessons learned in transportation, water, and waste-to-energy sectors can be leveraged to build new energy-efficient and environmentally benign projects.

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 the opportunities together in these new and innovative ways.

—Roger D. Feldman is co-chair of the Clean and Renewable Energy Group at the law firm of Andrews Kurth LLP. He is also a director of the American Council on Renewable Energy and co-chair of that group’s Climate Change Committee.