Qualified Energy Conservation Bond (QECB) Update

What Are QECBs?
QECBs were authorized by Congress in the 2008 Energy Improvement and Extension Act. The original legislation authorized just $800 million of QECBs nationwide. In the American Recovery and Reinvestment Act of 2009 (ARRA), Congress increased to $3.2 billion the total face amount (“allocation”) of QECBs that states, territories, large local governments, and tribal governments could issue to finance renewable energy and energy efficiency projects.

The legislation required that each state “shall” suballocate a portion of these allocations to large local governments (those with a population of 100,000 or more). The legislation also allowed such counties, municipalities, or tribes to issue bonds up to the amount of their respective suballocations or waive their suballocations and return them to the states.

How Can QECBs Be Used?
QECBs may only be issued for qualified conservation purposes as defined in Section 54D of the U.S. Internal Revenue Code including capital expenditures:

  1. To reduce energy consumption in publicly owned buildings by at least 20%
  2. To implement green community programs (including the use of grants, loans, or other repayment mechanisms to implement such programs)1
  3. For rural development (including the production of renewable energy)
  4. For certain renewable energy facilities (such as wind, solar, and biomass)2
  5. For certain mass commuting projects

By the end of 2014, QECBs had been authorized in most states. QECBs have been issued to support at least 187 projects in 36 states totaling just over $1 billion, or 34% of the $3.2 billion in allocations provided by ARRA.

2014 QECB Update
Last year saw its fair share of QECB news. During 2014, total known QECBs crossed the billion-dollar mark. The state of Florida authorized issuance of its $190 million allocation. The second half of the year saw the first two known issuances in the state of Texas. North Carolina embarked on an innovative partnership with its Agricultural Finance Authority to utilize QECBs for a Green Community Program to support solar generation on agricultural lands. Finally, Bainbridge Island, Washington, has plans to utilize the bonds for a new construction project under the Kitsap County Green Community Program. If completed, it would be the first known use of QECBs for new construction. In addition, sequestration cuts were extended.

Newly Identified Issuances
Since the Energy Programs Consortium (EPC) released its December 2013 QECB memo3, the total number of known QECB issuances has increased to 187 projects in 36 states, up from 163 projects in 32 states. The increased figure reflects both new issuances and previously unknown issuances: an increase in known projects of 17 new QECB issuances and 10 previously unknown issuances (and the removal of 3 issuances that failed to close). New issuances reported in 2014 include the following:

  • Nebraska Utilities Corporation, $5.5 million, February 6, 2012, peak demand reduction projects
  • Nebraska Utilities Corporation, $6.5 million, February 11, 2014, central renewable energy system for Nebraska Innovation Campus
  • Washington State Housing Finance Commission, $1.15 million, March 6, 2014, energy efficiency upgrades to Town & Country Market (part of Kitsap County Green Community Initiative)
  • Illinois Central College/Tazewell County, $1.3 million, March 13, 2014, sustainability center
  • University of Nebraska, $4.3 million, April 1, 2014, energy monitoring system for university medical center
  • City of Trussville, Alabama, $2.5 million, April 20, 2014, energy-efficient upgrades to lighting at city sports facilities
  • South Carolina SAVES/Randolph Trucking, $2 million, May 24, 2014, replace truck fleet with energy-efficient gas-compressed vehicles (part of South Carolina SAVES Green Community Program)
  • Montgomery County Commission, Alabama, $4.4 million, June 30, 2014, energy efficiency improvements to youth detention facility
  • Monroe County, Michigan, $10.5 million, June 6, 2014, sewer improvements
  • State of Oregon, $2.1 million, June 26, 2014, various energy improvement, conservation, and renewable energy projects within the state
  • City of Houston, Texas, $9 million, July 2014, energy efficiency retrofit for libraries and city facilities
  • Hamshire-Fannet Independent School District, Texas, $2.6 million, July 2014, infrastructure service contract for schools
  • Missouri Clean Energy District, Missouri, $571,430, November 6, 2014, PACE financing/energy efficiency improvements to condominium complex
  • Village of Bensenville, Illinois, $6.8 million, November 18, 2014, energy efficiency improvements to police station

Taking into account all of these issuances, total known QECB issuances have now reached $1.08 billion. This figure represents an increase of $95.7 million (9.8%) since the publication of the December 2013 version of the EPC paper. Due to the addition of new and previously unknown issuances, known state utilization rates increased in 15 states: Alabama, California, Colorado, Georgia, Illinois, Massachusetts, Michigan, Missouri, Nebraska, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, and Washington.

Some states, such as Kansas and Colorado, have utilized almost all of their allocations, with additional states (Alabama, California, Kentucky, Montana, and Nebraska) close behind. California and Colorado are among the states that have had success combining the state-level allocation with allocations waived back to the state by large local governments, and then conducting a competitive process to reallocate the bonds. By doing so, both states have almost completely exhausted all of the bonds available at the state level.

Sequester Update
On October 9, 2014, the Internal Revenue Service announced4 that effective October 1, 2014, QECB subsidy payments processed in FY2015 would be reduced by 7.3% because of sequestration. QECB sequestration was originally set to expire at the end of FY2021 but has since been extended twice, first through FY2023 and then, under legislation passed in February 2014, through FY2024. The sequestration reduction rate will be applied unless and until a law is enacted that cancels or otherwise impacts the sequester, at which time the sequestration reduction rate is subject to change.

1 If QECBs are used to provide funding for loans, grants, or other repayment mechanisms related to green community programs, they are not treated as private activity bonds. See 26 USC 54D(e)(4). To operate a green community program as an energy efficiency loan program, the issuing government might partner with a lender that in turn makes loans to homeowners. See Department of Energy Technical Assistance Program. (2010, September 22). Taking advantage of Qualified Energy Conservation Bonds. Alternatively, the issuing government might use QECB proceeds to make loans directly to homeowners. See, for example, St. Louis County Saves, www.stlouiscountysaves.com
2 Other qualified purposes include geothermal, small irrigation power facilities, landfill gas facilities, trash-to-energy facilities, hydropower facilities, marine and hydrokinetic renewable energy facilities, research activities, demonstration projects, and public education campaigns.
3 Energy Programs Consortium. (2014, June). Qualified Energy Conservation Bonds. www.energyprograms.org/wp-content/uploads/2014/06/QECB_Paper_June_2014.pdf
4 U.S. Internal Revenue Service. (2015, January 5). Update: Effect of sequestration on state and local government filers of Form 8038-CP. Retrieved from www.irs.gov/Tax-Exempt-Bonds/Update-Effect-of-Sequestration-on-State-&-Local-Government-Filers-of-Form-8038CP-FY2015. This announcement was made based on a report from the White House Office of Management and Budget issued on March 10, 2014, OMB report to the Congress on the Joint Committee Reductions for fiscal year 2015, retrieved from www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/sequestration_order_report_march2014.pdf

About the EPC QECB Project:
The authors of this article work with the National Association of State Energy Officials and the DOE to provide information on QECBs, track issuances, and provide technical assistance to issuers. EPC also publishes a twice-yearly QECB paper; the most recent version (December 2014) can be found on EPC’s website at www.energyprograms.org/2014/12/qecb-papers.