Financing Renewable Energy Projects on State and Local Government Property with Clean Renewable Energy Bonds
Feature article in the May-June 2009 edition of the State Energy Program's bimonthly newsletter, Conservation Update.
by Claire Kreycik, Energy Analyst, National Renewable Energy Laboratory
When the City of Denver's water department, Denver Water, was evaluating options for financing the capital investment in two hydroelectric projects, it decided to investigate the use of a Clean Renewable Energy Bond (CREB). After applying and receiving an allocation, Denver Water issued two CREBs totaling $1.8 million, which were sold to Bank of America. The bond was structured such that Denver Water pays only a 0.75% interest rate over a 15-year term. CREBS, with their low-interest financing, may appeal to other state and local governments that want to implement their own renewable energy projects.
The process of applying for and issuing such bonds, however, requires a commitment of time and staff. Here we present a general overview; summaries of the process, tax credits, and potential challenges; and more about Denver Water's experience with CREBs.
- Process: Applying for and Issuing CREBs
- Tax Credit Rates and Implications for CREB Issuers
- Experience with CREBs
Overview
The Internal Revenue Service (IRS) is accepting applications for new CREBs allocations until August 4, 2009.
CREBs are designed to be interest free; the federal government extends a tax credit to investors in lieu of interest payments from the issuer. In reality, local governments that use CREBs often must pay an interest coupon to investors or sell the bond at a discount to par, but this interest rate can be significantly lower than the interest paid on traditional tax-exempt municipal bonds.
The Energy Improvement and Extension Act of 2008 extended the CREB program and changed some program rules. The American Recovery and Reinvestment Act of 2009 expanded funding to $2.4 billion of new allocations. Of this amount, $800 million is available for state, local, and tribal governments; $800 million for public power providers; and $800 million for electric cooperatives (co-ops).
The 7.6-megawatt Gross Hydroelectric Project, located about 30 miles northwest of Denver, is owned by Denver Water, which used CREBs to finance final-stage construction costs.
Credit: Denver Water
The Internal Revenue Service (IRS) is accepting applications for new CREBs allocations until August 4, 2009.
The CREB program was created under the Energy Tax Incentives Act of 2005, which added Section 54 to the Internal Revenue Code. $1.2 billion was distributed in the first two rounds. The table below shows the distribution of allocations by project type and issuer. In the first round, the IRS received 743 CREB applications totaling $2.1 billion in allocation requests. The size of allocations ranged from $23,000 to $3.2 million for government projects, and $120,000 to $31 million for co-op projects. In the second round, the IRS received 395 CREB applications totaling $898 million in allocation requests. Of the approved projects, government projects ranged in size from $15,000 to $2.95 million; and co-op projects ranged in size from $30,000 to $30 million.
The CREBs program has significant potential for financing public sector renewable energy projects. To be sure, some aspects can be challenging: there are tight deadlines for spending the proceeds and reimbursing projects costs. If more than one project is being developed, transaction costs could be an issue−unless the projects are bundled together and only one bond is issued. The key is to be proactive and meet all of the application and issuance requirements. In this way, CREBs can provide attractive, low-cost financing for deploying projects that will generate clean, reliable, and affordable energy to help our nation become more energy independent.
| Approved Projects | Round 1 | Round 2 | Total | ||
|---|---|---|---|---|---|
| Cooperatives | Governments | Cooperatives | Governments | ||
| Solar | 33 | 401 | 1 | 138 | 573 |
| Wind | 13 | 99 | 14 | 88 | 214 |
| Landfill gas | 13 | 23 | 4 | 41 | 81 |
| Open-loop biomass | 12 | 1 | 1 | 1 | 15 |
| Closed-loop biomass | 0 | 0 | 0 | 3 | 3 |
| Hydropower | 6 | 8 | 6 | 12 | 32 |
| Trash Combustion | 0 | 0 | 0 | 3 | 3 |
| Refined Coal | 1 | 0 | 0 | 0 | 1 |
| Total | 78 | 532 | 26 | 286 | 922 |
This article is based on a brief that will be published by DOE's National Renewable Energy Laboratory titled Financing Public Sector Projects with Clean Renewable Energy Bonds.
For background information, read an article published in the May–June 2008 edition of Conservation Update titled States Explore Financing Options for Solar Photovoltaics, which in turn, was based on an NREL technical report written by K. Cory, J. Coughlin, and C. Coggeshall and titled "Solar Photovoltaic Financing: Deployment on Public Property by State and Local Governments" and published in May 2008 (PDF 1.1 MB). Download Adobe Reader.