by Greg Montgomery CleanSource Capital

Qualified Energy Conservation Bonds (QECBs) are an underutilized financing tool available from the federal government to provide subsidized financing for a broad range of “energy conservation purposes,” including energy efficiency, water conservation, renewable energy, and alternative fuels. A total of $3.2 billion in QECBs have been authorized by Congress since 2009 that in turn have been allocated to the 50 states based on population, with the larger states such as California and Texas receiving the largest allocations ($381 million and $252 million, respectively) and the smaller states receiving the smallest (Wyoming with $5 million and Vermont $6 million). Each state then suballocated portions of its total allocation to counties and cities with populations in excess of 100,000 based on the proportion that that local government’s population represents to the state’s total population, with the state retaining the balance of the allocation. As a result of this allocation process, QECBs are scattered across the country in various pockets at the state and local government levels, in various-sized allocations from tens of millions of dollars to as small as $1 million or less.

The subsidy afforded by the QECBs is made available in the form of a direct payment from the U.S. Treasury calculated as the lesser of the actual interest rate on the financing or 70% of the qualified tax credit rate published by the IRS as of the date of the financing and fixed over the life of the financing. The subsidy is paid in accordance with the debt service schedule fixed at the time of the financing. Currently, this direct payment equates to approximately 3% based on the current published tax credit rate. So for qualifying projects in states or locales with available QECB allocations, the total cost of funding could be substantially reduced over the life of the projects through the subsidy payments offsetting the otherwise applicable interest cost.

Yet, to date, of the $3.2 billion in QECBs authorized, only approximately $1 billion have been used, leaving over $2 billion in subsidized financing available. The reasons for this underutilization are believed to be threefold: the issuance constraints, given the relatively small size of the pockets of allocations; the perceived hurdles for using QECBs under the QECB rules; and state and local governments’ reluctance to issue QECBs and take on additional debt coming out of the economic recession. Establishing a Green Community Program (GCP) to deploy available QECB allocations can address each of these issues.

GCPs were authorized in the QECB legislation specifically to enable a state or local government to allocate its QECBs for use in funding a loan program that could then use the proceeds from the QECBs to make loans for implementing the broad scope of “energy conservation purposes” mentioned above. This has been the case with the St. Louis County SAVES program, which is a GCP implemented using QECBs at the county level, and with South Carolina SAVES, which is a GCP implemented at the state level. By aggregating the allocations into a GCP, economies of scale are obtained that enable cost-effective issuance through standard documentation and procedures that overcome the hurdle of the disaggregated allocations. And through the use of a GCP, some of the hurdles under the rules are removed, such as the need for a 20% savings test in public buildings or the private activity bond limitation of 30%; neither rule applies when a project is funded through a GCP, so that projects in public buildings may proceed without the rigors of testing, and up to 100% of the GCP’s funding could be used for private projects if warranted. And finally, by using a conduit issuance structure in conjunction with the GCP funding, the general obligation or credit of the state or local government is not at risk, as each project is underwritten and the credit stands on its own in the case of private projects. GCPs were specifically authorized to provide broad flexibility and discretion on the part of the allocating state or local government in using its QECB allocations to address these issues and more.

Establishing a GCP, either at the local government level or at the state level depending upon where the allocation is available, is an effective way to use remaining QECB allocations in a cost-efficient, expeditious manner, for both public and private projects that further the energy efficiency goals of a jurisdiction without exposing its credit or general obligation.

About CleanSource Capital

CleanSource Capital, LLC, based in Charlotte, North Carolina, is the sister company of Abundant Power Group, LLC () and was formed to administer and grow Abundant’s SAVES platform using QECBs. For more information about establishing a Green Community Program to use available QECBs for funding projects, please contact Greg Montgomery at (704) 271-9889 or gmontgomery@abundantpower.com.