Navigant Research Blog

The Untapped Potential of Qualified Energy Conservation Bonds

— March 2, 2012

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.


How Not to Build a Nuclear Plant

— January 27, 2012

The Utah state engineer, a man named Kent Jones, has approved the water rights for the proposed Blue Castle nuclear project in Green River, Utah.  The two-reactor plant would be the first nuclear power plant built in the West since the late 1980s.  Jones’ decision has caused outrage among environmental and anti-nuclear groups in the West, and justifiably so.  The Blue Castle project pretty much sums up everything that’s wrong with today’s nuclear power industry.

First, it’s huge: the twin reactors would produce up to 3,000 megawatts (MW) of power.  The future of nuclear power lies in small, modular reactors (SMRs) that are prefabricated, easy to transport, easy to assemble, and easier to win permits for than gargantuan reactors.  Recognizing this, the American Nuclear Society, among other groups, is campaigning for new licensing procedures for SMRs that could avoid the absurdly long lead times facing most nuclear-power projects in the United States (see below).

“Big” means “expensive,” and the Blue Castle project is nothing if not costly.  It will take on the order of $18 billion to complete the project, including $100 million just to shove it through the approval process.  Blue Castle Holdings, needless to say, does not have that kind of cash.  In its water-rights application, the company listed as a primary backer a Wall Street company called LeadDog Capital.  LeadDog, which Blue Castle said was putting up $30 million for the nuclear project, has been accused in a cease-and-desist petition filed by the Securities and Exchange Commission of running a scam operation.  Blue Castle CEO Aaron Tilton, a former Utah state legislator, says that he never “pulled the trigger” on the LeadDog financing and that his company no longer does business with the embattled funder; however Jones, the state engineer, listed the LeadDog funding as primary evidence that Blue Castle “has the financial ability to complete the proposed project.”  In interviews with the Salt Lake City Tribune, Jones admitted that he took Blue Castle’s word for that: “It was just a plan presented by them, and we didn’t do a lot of investigation into the plan, about the validity of the plan.”

Even if the money becomes available, Blue Castle is years, if not decades, away from actually producing power.  Tilton said his company is readying an Early Site Permit to be submitted to the U.S. Nuclear Regulatory Commission (NRC) in 2013.  The application could take three years to be approved.  Then a combined construction and operating license (COL) would be needed, which would add another four years to the process. “The earliest the project could break ground is 2020,” points out Dan Yurman on his nuclear blog, Idaho Samizdat.  Nuclear power that might come online sometime in the mid-2020s is not exactly going to help reduce carbon emissions from coal plants in the short term.

Inevitably, there’s the question of water.  The state specifically approved Blue Castle’s lease of water rights held by Utah’s San Juan and Kane counties.  As with all Western water rights, the San Juan and Kane rights are part of a complicated tangle of competing claims. They are set to expire in 2015 if not put to beneficial use.

“At times, the Blue Castle proposal looks like a water right in search of a project,” remarked High Country News in a 2010 feature on the project.

The design for the reactors at Blue Castle has not been finalized, but they are most likely to be boiling water reactors, which are considered “Generation III+” designs – in other words, hardly a real advance over today’s uranium-fueled light water reactors.  There is no plan in place for where nuclear waste from the plant would go.

Finally, the Blue Castle plant would require the construction of massive transmission lines to carry the power to the coastal cities Southern California, the project’s ultimate customers.  Most of those lines would cross federal lands, requiring yet more permits – and more years to approval.  Yurman calls Blue Castle “a continuation of California’s ‘colonial’ strategy of banning new reactors within its borders while buying nuclear powered electricity from plants in other states.”

As I’ve noted elsewhere, the NRC should not be in the business of sitting for years on grandiose plant proposals, backed by speculative (if not fraudulent) investors, based on obsolete technology, requiring huge amounts of scare water resources and new investment in transmission and distribution facilities.  The U.S. nuclear power industry badly needs to move into the 21st century. With Blue Castle, it’s still pursuing the failed strategies of the 20th.


Smart Energy Investments Paying Off

— January 23, 2012

It’s that time of year when everyone makes their predictions for the year, including Pike Research.  I recently attended the World Resources Institute’s overview of the top Stories to Watch in 2012, which is a little different than the typical year-ahead projections.  WRI is not primarily trying to make predictions; instead, the organization tries to provide a “roadmap” of the top issues or events that are likely to be significant in 2012.  It is worth checking out the full list, but there were two that jumped out as being particularly interesting and relevant to Pike Research’s own predictions on The Year Ahead in Cleantech, outlined in our January webinar.  I’ll examine the first one in today’s blog, and cover the second in my next post.

WRI asked whether 2012 might be the year that investment in renewables surpasses fossil fuel investment.  This idea pivots off of a Bloomberg New Energy Finance report that estimated global investment in renewables in 2010 at $211 billion – and, more importantly, not far off comparable investments in fossil fuels for that year.  The growth trends for renewables vs. fossil fuels were dramatically different, with investments in renewables showing roughly a 30% compound annual growth rate (CAGR) from 2004 to 2010, compared to fossil fuels at around a 7.7% CAGR.  The Bloomberg analysis includes all biomass, geothermal and wind generation projects of more than 1MW; all hydro projects of between 0.5 and 50MW; all solar projects of more than 0.3MW; all marine energy projects; and all biofuel projects with a capacity of 1 million liters or more per year.

It’s interesting is to compare this to Pike Research’s forecasts for revenue from renewables.  Interesting, but somewhat challenging, as Bloomberg looks at a slightly different set of renewables than Pike Research does – for example, Bloomberg includes small hydro, which is a relatively mature market and therefore not part of Pike’s global forecasts for new energy.  Even so, we can expect to see revenues somewhat lagging the investment numbers, as it will typically take several years for investments to bring returns.

Pike Research has projected total 2012 revenue for the Smart Energy sectors that we cover as $298 billion.  If you take out the sectors that are definitely not in Bloomberg’s numbers – energy storage plus energy efficiency applications like combined heat and power (CHP) and fuel cells – you get projected 2012 revenues of around $235 billion.  This is still not apples to apples, but it does suggest that previous years’ investments are showing major returns.

The graph below shows the total projected revenue pie broken out by sector.  Solar is still the biggest revenue generator – not surprising given that it is a comparatively “older” technology that has been seeing major investments for many years.

But it’s also important to note the sheer number of clean energy options not counted in Bloomberg’s investment figure, like energy storage (ESS), CHP, fuel cells, and virtual power plants.  (Bloomberg’s report does reference other sectors but does not focus on them.)  While the traditional “renewable vs fossil fuels” comparison is cleaner to make and easier to explain, it’s important to keep an eye on these other applications and technologies.  They may not be the major revenue generators yet, but they’re all showing serious growth that will have an impact on energy markets.


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