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UPDATED Financing Energy Conservation for New Jersey Local Governments and School Districts

Introduction

For most New Jersey districts and municipalities, energy projects involve conservation retrofits to infrastructure and other energy delivery systems, and/or the installation of photovoltaic panels on school facilities.  Most of the State’s incentives for renewable energy are geared towards solar and include one small remaining rebate program and a robust energy credit program based on Solar Renewable Energy Certificates (SRECS).   Subsidies for energy conservation are provided through the New Jersey Clean Energy Program (NJCEP) and include cost-sharing for energy audits, design and technical assistance, and financial incentives for the purchase of energy efficient equipment.  Generally speaking, NJBOES are most likely to finance either energy conservation or generation projects through the issuance of debt, Power Purchase Agreement (PPAS) or 15 year energy leases.  Both subsidies and financing options are presented below.

Subsidies for Renewable Energy

The New Jersey Board of Public Utilities (NJBPU) began subsidizing solar projects through a system of generous rebates paid upfront to system owners.  The initial program was phased out as of 2008 however, and the current REIP (Renewable Energy Incentive Program) offers rebates to small systems only – $.75/watt up to a 30 kW system.  The SREC program is a more substantive subsidy, available to all sized systems. An SREC is generated per each megawatt-hour of energy produced from photovoltaic systems, and are publicly sold by the on-site energy producer. The value of an SREC is driven by the price of the Solar Alternative Compliance Payment (SACP), a penalty imposed on electric utilities by the NJBPU for not reaching renewable energy generation targets.  Initially, the SACP penalty was set at $711 in 2008-2009 with a built in annual decrease such that the SACP in 2015-2016 was scheduled at $594.  This market based system for SREC values was enhanced in January 2010 by the “Solar Energy Advancement and Fair Competition Act” which includes an escalation clause which provides that the Renewable Portfolio Standards, or the State’s renewable energy generation goals which determine the SACP value will increase by 20% if  (1) the number of SRECS generated meets or exceeds the demand for 3 consecutive reporting years, starting in 2013; and (2) the average SREC price for all SRECS purchased by entities with Renewable Portfolio Standards obligations decreases in the same 3 consecutive years.   SRECS are only granted for 15 years once a project has been put into operation.  (Thereafter, it may be possible to generate Class I Renewable Energy Credits from solar photovoltaic systems, but the value of such credits is currently difficult to predict) How a NJBOE actually sells its SRECS has been an evolving process, with some NJBOES using aggregators, some signing multi-year SREC purchase contracts and some using on-line auctions that conform to bidding laws and provides greater flexibility as to SREC revenue streams.

Subsidies for Energy Conservation Projects

NJBPU offers a myriad of subsidies for energy conservation, with program standards and incentive levels often changing in reaction to how well BPU believes its energy goals are being met, funding incentives (including ARRA), and change in program administrators.  Many NJBOES have taken part in the Municipal Energy Audit Program which now provides a 75% subsidy against the cost of the audit, with the remaining 25% to be paid if the net cost of installing the recommended measures exceeds the remaining cost of the audit.  An initial energy audit is the first step to the implementation of a 15 year energy lease as discussed below.   Other NJBPU energy conservation incentives are administered through the NJ SmartStart Building Program and include design and technical assistance, rebates for qualifying equipment and projects, and subsidies for direct install energy-related upgrades.

Financing Options – Debt Issuance

A Board of Education’s first option for financing energy production and conservation projects is the traditional one –through referendum approved debt financing.  The advantages of this approach include, if solar photovoltaic is included, the offset of debt service by 100% of the electrical savings generated by the solar arrays, debt service aid from the State (although the State is currently much delayed in releasing approved projects for debt service aid, and has in fact, pro-rated that aid by 15% for 2010-11), and the revenue earned by the sale of SRECS, which is applicable for 15 years.  A solar photovoltaic system typically provides 25-70% of a facility’s electrical needs, depending on the size of the array.  Even when based on conservative assumptions as to electrical savings, SREC revenues and debt service aid, for many school facility solar projects, the revenues more than make up for the cost of the financing.  As a result, a number of NJBOES have combined solar projects with other energy conservation projects or roof work.  The former also provide positive cash savings against the cost of debt service and the financing cost for roof work can often be substantially offset by solar revenue.  Additionally, there is a federal program entitled the Clean Renewable Energy Bond program (“CREB”) which has allocated $800 Million in low interest loans to local governments and school districts.  Essentially, NJBOES which are recipients of CREB allotments, issue bonds as they normally would, but the interest is subsidized by the federal government at about 80% of what would normally be paid.  The program was not re-authorized this year, but it is possible an extension of the existing program may be legislated or a distribution of prior allotments not used, be made.

A New Jersey municipality need not obtain voter approval for debt issuance but the same cash flows as discussed above would apply to mitigate debt service expense.

Financing Options – PPA

A PPA is a contractual arrangement in which a BOE/municipality leases space to a commercial entity which installs and operates solar renewable energy equipment on such space (usually roof), selling the electricity produced to the school district at a pre-set rate.   The contract is typically for a 15 year period, after which the government entity has the option of purchasing the equipment at fair market value.  The 15 year term matches the SREC revenue duration, and is the maximum period under NJ law for which a PPA can be signed. A BOE does not need to go through the referendum process, and neither a BOE or municipality need finance the equipment, or shoulder SREC risk, but achieve much less in energy savings then through direct ownership of the solar equipment - depending on the size of the system, electrical savings may end up being only about 3% of the total electrical bill for the facility (as based on a solar array providing 25% of a facility’s energy needs). Additionally the government entity is likely to give up all if not most of future SREC revenues.

PPAS are relatively new and the bidding process is evolving.  There are certain minimum size requirements in order to solicit PPA investor interest (an 800kW to 1mW is likely a baseline) although some government entities have participated in county-wide PPAS with smaller systems. Although roof work has been included in a number of the initial advertised PPA bids; in fact, actual roof work included in PPA agreements in the NJ public sector has been minimal.  Again, a baseline for system size would be applicable and the ratio of roof to solar costs most likely could not be more than 20%/80% or the cost of the roof work should at least equal the kW capacity of the solar equipment. 

Currently the federal government offers a 30% cash rebate against the cost of the project to tax-paying entities; this will revert to a 30% tax credit on 1/1/2011 which will require PPA entities to procure new types of investors. It is possible this will have a chilling effect on PPA investment, and by extension, on the discounts offered to solar electricity generators.

Financing Options - 15 Year Energy Savings Improvement Program

An ESIP is based on a performance structure under which facility improvements are made to generate energy savings. Said savings must be sufficient to pay the financing costs of the improvements, which will initially be funded either through a 15 year lease or refunding bond series (no referendum required for the latter, but debt service aid will not be provided.)  Solar photovoltaic equipment may be included in an energy lease, and the reduced energy costs counted as part of the overall energy savings.  Working SREC savings into the mix is still being vetted by NJBPU but may require that the partner to the performance contract, typically an Energy Savings Company (“ESCO”) provide a guarantee for some minimal level for SREC values.

Energy leases have a number of upfront requirements including the conduct of an initial energy audit, the development of an RFP for an ESIP performance contract if the ESCO option is utilized, the development of an Energy Savings Plan, and verification of projected savings and commissioning of equipment.  It is not likely that an energy lease can be structured for solar arrays only.  Other energy conservation improvements would be needed in order for annual savings to exceed annual financing costs.