Chapter 10 Project Finance for Small-Scale Installations
C. Net-Metering and Net Billing
Net-metering generally provides for the customer to “net” its metered purchases of energy from the utility against generation it sells to the utility from its on-site genera- tor. This means that the meter can literally spin backwards, with credits often carried forward and applied to future months’ bills. Net-metering credit reflects a bundled retail rate that includes both the facilities used to serve the load plus the energy. Net metering does not necessarily reflect time of day differentials in pricing and costs. As a result, utilities might sell low and buy high in a netting arrangement. In addition, because the retail rate includes the utility’s delivery services and facilities (as well as energy), there is a concern that net-metering results in an overpayment to the customer unless there are other benefits associated with the generation. Thus, while some form of net-metering is available in forty-two states 30 plus the District of Columbia, it is usually limited to small installations and often available only for generation from renewable resources, such as wind or solar.
On the other hand, a utility might offer customers the option of “net-billing,” where the utility provides the customer with a credit for the wholesale value of the energy the customer “sells” to the grid. This enables the customer to readily dispose of small amounts of power without incurring the burden of negotiating the wholesale markets.
VII. POLICY GOALS FAVORING CERTAIN TYPES OF GENERATION
As discussed above, federal and state policies might favor the installation of certain types of generation. In particular, renewable energy resources, such as wind and solar, are encouraged through tax incentives as well as through the adoption of renewable portfolio standard (RPS) requirements for utilities. In addition, the Energy Independence and Security Act of 2007 (EISA) 31 included several provisions that encourage the
30 See DSIRE, http://www.dsireusa.org/summarytables/rrpre.cfm (for a listing and link to the state and utility provisions for net metering.
31 Pub. L. No. 110-140, 121 Stat. 1492 (2007).
development of CHP, particularly in the context of applications that recover “waste heat” from industrial processes. Subsequently, the Emergency Economic Stabilization Act of 2008 32 extended a 10 percent investment tax credit to new CHP installations. 33 Several states include CHP within the types of generation that may be used to satisfy all or a portion of a renewable portfolio standard.
EISA directed the EPA to create a registry of sites throughout the United States where a significant quantity of heat is generated and released into the atmosphere.
Based upon this registry, subsidies are offered for capturing the heat for use in connec- tion with the generation of electricity or other use. 34 This appears to be intended to encourage CHP systems in a so-called “bottoming” application, where the heat from a manufacturing process is used to fuel the generator. As of the date of this writing, EPA has not yet published the registry.
Over the years, the EPA has been particularly active in encouraging the develop- ment of CHP facilities. In 2001, EPA established the Combined Heat and Power Partnership “to encourage cost-effective CHP projects in the United States. The CHP Partnership is a voluntary program that promotes high-efficiency CHP technology, thereby reducing pollution created by less-efficient, large-scale utilities.” 35 The CHP Partnership provides information and tools for evaluating the potential viability of CHP installations.
VIII. CONCLUSION
Tax and other incentives play a key role in the structures used to own and finance dis- tributed generation. The increasing use of renewable portfolio standards for utilities enhances the business case for development of distributed renewable generation, as does net-metering where it is available. At the same time, there is growing consumer demand for “green” energy sources. Federal and state regulation of the electric indus- try continues to evolve. In the context of distributed generation, the impact of utility laws and tariffs must be clearly understood.
The challenge for project finance is finding sufficient value to sustain the invest- ment. Value may come in the form of tax incentives, sales of excess power, or other- wise. Each project will have a different mix and the impact of regulation may vary from one project to the next. In the case of distributed renewable generation or CHP, capturing the incentives will certainly be an important part of the value equation.
32 Pub. L. No. 110-343, 122 Stat. 3765 (2008).
33 See Chapters 26 and 27.
34 EISA, § 451.
35 Information about the Combined Heat and Power Partnership can be found on the EPA Web site at http://www.epa.gov/CHP/index.html .
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Energy Savings Performance Contracts
Legal and Financial Considerations
Craig A. Hart , Kenji Watanabe , William Hughes , and Patrick Duggan *
Energy efficiency is often the first step in a strategy to reduce greenhouse gas emissions for any organization, and it is one of the methods that pays for itself. Energy efficiency in build- ings is particularly important, since buildings can represent as much as 72 percent of a large city’s electricity consumption and 39 percent of its carbon dioxide (CO 2 ) emissions. 1
Energy savings performance contracting offers an innovative approach to financing and implementing energy efficiency programs in existing buildings, power generation and manufacturing, and other sectors. Under an energy savings performance contract approach, a building owner or facility operator enters into an energy savings perfor- mance contract (ESPC) with an energy service company (ESCO). Pursuant to the ESPC, the ESCO agrees to design and implement energy efficiency upgrades for the client and to guarantee that the upgrades will result in savings in the client’s future energy costs. The client can then leverage the future savings to procure financing for the cost of the upgrades. While ESPCs can provide access to financing and a “guaran- tee” of savings, they may be more costly when compared to other design, construction, and financing options. Additionally, ESPCs present legal issues that must be carefully negotiated to properly allocate risks and responsibilities, and to achieve the goals of the contract.
* The authors would like to thank Urban Ziegler of RETScreen International Division and Galindo-Lozano of General Physics Corporation for their comments on earlier drafts of this chapter, and Patrick Greissing and Ryan Burruss of Alston & Bird for their assistance in researching and editing this chapter.
1 These percentages are based on energy consumption and carbon dioxide emissions in the United States. USGBC, Green Building Research, http://www.usgbc.org/Displaypage.
aspx?CMSPageID=1718 .
THE CONCEPT OF ENERGY SAVINGS PERFORMANCE CONTRACTING
This chapter is organized in five sections. Section I describes the concept of energy service performance contracting. Section II summarizes the growth of the ESCO industry in major markets. Section III provides guidance on negotiating ESPCs for all phases of the transaction. Section IV evaluates ESPC financing options. Section V identifies common areas for disputes to arise under ESPCs and how to avoid them.
I. THE CONCEPT OF ENERGY SAVINGS PERFORMANCE CONTRACTING
The principle objective of an ESPC is to achieve savings on future energy costs, and to finance the capital expenditures necessary to produce those savings. There are a wide variety of options for structuring an ESPC, including many different financing arrange- ments, but the basic arrangement is nearly universal. A property owner or other client engages an ESCO to upgrade a building or industrial facility in order to make it more energy efficient. The ESCO designs the energy saving upgrades and estimates the amount of energy the upgrades will save. Based on these projections, the ESCO “guar- antees” a specific amount of annual energy savings over a period of time (typically ten to fifteen years) and agrees to reimburse the client for any deficit between guaranteed and actual savings. Based on the guarantee of cost savings in future years, a third-party financial institution provides the client with up-front capital to complete the upgrades.
The annual cost to repay the loan will be, if the projected savings are achieved, less than or equal to the energy savings.
The most common benefits of an ESPC are access to financing that may otherwise be unavailable to a facility owner, and reduction of risk associated with energy costs if the guarantee is properly negotiated. However, the cost of an ESPC may be signifi- cantly higher than a standard design/build contract because the ESCO assumes the risk of underperformance of the facility over an extended period under the guarantee. The ESCO effectively provides insurance to the facility owner, the risk premium for which will be reflected in the cost of the ESPC. Also, the continuing relationship between the client and the ESCO, and between the client and the lender, introduce legal issues that must be carefully negotiated in order to achieve the goals of the contract.
ESCOs use a wide variety of methods to achieve energy savings. For example, in the case of buildings, at their simplest level these steps may consist of conducting training programs to build awareness of energy usage and to change the behavior of building occupants. An ESCO may also reset existing control systems for heating, ventilating, and air conditioning (HVAC) and lighting to conserve energy. Intermediate steps include designing and installing new building control systems, motion triggers for lighting systems, or shading systems to reduce air conditioning costs. More elabo- rate steps may comprise replacing or retrofitting major mechanical equipment such as boilers or chillers, or modifying the building envelope. Recently, it has become common for ESCOs to utilize renewable energy measures where appropriate, such as installing solar energy receptors or photovoltaic arrays on buildings.