There are dozens of ways to finance energy efficiency in a way that benefits all parties involved – building owners, energy service companies/energy efficiency service providers, and financiers. One of the largest untapped programs in the U.S. is the Qualified Energy Conservation Bond (QECB) program, which provides public sector entities with a low- or no-cost debt instrument to pay for energy efficiency and renewable energy projects in state, municipal, and tribal facilities.
In 2008, Congress passed the Energy Improvement and Extension Act, which authorized the use of qualified tax credit bonds to serve energy efficiency and renewable energy projects and set a bond volume limitation of $800 million, to be doled out to the 50 states. The American Recovery & Reinvestment Act (2009) expanded the bond volume cap to $3.2 billion. Using these funds, government agencies can issue bonds to private investors to finance energy efficiency and renewable projects. The “interest” on those bonds is paid from the U.S. Treasury, either through federal tax credits to the financiers or through cash subsidies from the Treasury that bond issuers use to pay off interest owed. The allowed bond volume is allocated to individual states, large municipalities, and tribal governments based on population.
The project provides a net benefit to government agencies as well as to financiers. Government agencies benefit because the QECB program increases the amount of agency debt that can be financed through federal tax credit bonds, which are used for a range of other government investments such as public schools and forestry projects, which are among the lowest-capital tools available to fund improvements. It also saves government agencies on energy costs. Financiers benefit from the low-risk returns provided by the bonds.
However, the path to adoption of QECBs has been slower than one might expect. Just over $500 million of projects have been funded over the last four years – less than one-fifth of the total program allowance. Only about 21 states have even initiated QECB-funded projects. Of the five largest states, only California and Illinois have made significant inroads toward deploying QECB-financed projects. A few states, such as Kentucky and Kansas, however, have nearly exhausted their limits.
The QECB program can be applied in other ways to fund not only public buildings but also privately-owned buildings. For example, the city of Boulder, CO financed its ClimateSmart Property Assessed Clean Energy (PACE) financing program through QECBs. In addition, some government agencies have paid for the administration costs of QECB programs through other sources, such as the Department of Energy’s Energy Efficiency and Conservation Block Grants (EECBG), another provision of the stimulus package, thereby facilitating the deployment of QECBs in constrained state budgets.
Although uptake of QECBs has been slow to date, expect continued growth of QECB-financed projects in the next few years. The program will not sunset under current federal law, and there is no shortage of energy efficiency investment opportunities in state and local government buildings.
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