Forestalling the Green Chill
by Roger Feldman --
Andrews Kurth, LLP
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:
dependence, direct and indirect, remains a root cause of the fragility
of the American economy and the insecurity of the American consumer.
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.
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:
Creation of new sources of liquidity (which could be utilized in
energy infrastructure P3s).
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.
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
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
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.
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years. In particular, he has analyzed and executed a wide variety and substantial value of project financings. He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration. He is a graduate of Brown University, Yale Law School and Harvard Business School.