Manage Energy Uncertainty: Use Quick Financing for Energy Efficiency Projects

By Hatcher, Katy; Dietsche, Tom | Public Management, May 2001 | Go to article overview
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Manage Energy Uncertainty: Use Quick Financing for Energy Efficiency Projects


Hatcher, Katy, Dietsche, Tom, Public Management


Uncertainty, both in electric system reliability and in energy expense, poses special challenges for local governments and the communities they serve. In California, as we have seen, government and business operations have been compromised by blackouts and price spikes. Nationally, rising energy prices have had a notable impact on public and private sector budgets, and states that are deregulating electricity may well face situations like California's. In January 2001, the U.S. Conference of Mayors officially recognized these energy-related concerns by calling for a 10 percent reduction in energy use by American cities and communities.

Fortunately, growing numbers of local governments are finding that large energy savings can be tapped through common-sense equipment upgrades in their facilities. Federal data have shown that government can typically reduce energy use by 33 percent through improvements in lighting, in their building envelopes, and in heating and cooling equipment. For instance, the city of San Diego's Ridgehaven facility, renovated in 1996 using sustainable and healthy building materials and design techniques, now is the most efficient low-rise office building in the region, saving $80,000 per year--a 67 percent reduction in energy use compared with the building's past record.

According to the U.S. Department of Energy, for every dollar spent in local economies, energy efficiency generates 57 to 84 cents more economic activity than does the payment of energy bills. Many cities and counties are combining planning and sustainability activities to balance local growth, energy use, and their goals for a healthy environment. In doing so, they will be fostering local economic development, as well as the health and well-being of their citizens and environment.

Advantages of a Lease/Purchase Approach

Most local-government facility directors know they could benefit from energy performance improvements but wonder how they can finance such measures when the measures have not been included in the capital budget. The answer may lie in a tax-exempt municipal lease/purchase agreement, a financing vehicle exclusively available for city or county energy efficiency projects. These agreements do not require a capital budget appropriation.

Tax-exempt municipal lease/purchase agreements are effective alternatives to traditional debt financing allowing a city or county to pay for energy upgrades by using money that is already in its utility budget. A tax-exempt lease/purchase agreement, also known as a municipal lease, is like an installment-purchase agreement. The government entity owns the equipment after the financing term expires and meanwhile pays interest at lower, tax-exempt rates. Municipal leases can be structured specifically to pay for energy efficiency equipment and to allow city and county agencies to draw savings from future energy bills to pay for new, energy-efficient equipment today.

One great benefit of a lease/purchase agreement is that the lessee's (borrower's) payment obligation usually ends if the lessee fails to appropriate the funds to make the lease payments, an event known as nonappropriation. Because of this provision, neither the lease nor the lease payments are considered debt, and payments can be made from energy savings in the operating budget. Unlike bond issues, tax-exempt lease/purchasing financing vehicles do not require voter approval because they are considered operating rather than capital expenditures, thanks to this nonappropriation language. Lenders, however, will want to know that the assets being financed are of essential use, thus minimizing the risk of nonappropriation.

In fact, many agencies do already lease their equipment. So it may be surprisingly easy to add an energy project to the existing leasing agreement, especially if a master lease is in place with a lending institution.

Boulder's Example

Boulder, Colorado, has used municipal lease financing to reduce energy waste and save money, and savings from energy improvement projects are "rolled over" for future building upgrades.

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