Berkeley businesses could be in store for a green revolution if a novel clean energy bond comes to fruition.
On Tuesday, the City Council will consider a proposal to spend $52,500 for part of the start-up costs towards generating a bond fund valued at around $50 million for clean energy and solar projects for Berkeley and Oakland businesses.
“It looks like a giant win-win for everybody,” said Mayor Tom Bates, who hopes that the bond could foster green energy use, while bolstering Berkeley businesses that supply the technology.
However, clean energy bonds do not have a track record of success, and even the plan’s architect acknowledges that there is no guarantee it can line up interested companies, financiers and vendors for the offering, and even if it does, a sudden jump in interest rates or drop in utility prices could undermine the plan.
Berkeley energy officer Neal De Snoo estimates that if the program is successful Berkeley businesses could add 10 megawatts of clean energy generation, equivalent to the amount of energy needed to power 3,000 homes.
If the council approves the item, Berkeley won’t allocate the money until Oakland approves $97,500 towards the plan. Oakland Finance Director Bill Nolan said his city was behind Berkeley and that he was still learning about the project.
Under a financing plan devised by Berkeley-based environmental consulting firm Power Factors Inc., neither city would be on the hook for the bond.
Power Factors is planning to use the allocations from Berkeley and Oakland to help coalesce businesses interested in clean energy projects and financial institutions willing to back the bond. If the project fails, Berkeley would only stand to lose its initial $52,000, said John Schultheis, of Power Factors. Schultheis estimated the project will cost $450,000 to develop, with Power Factors responsible for raising the remainder of the costs not supplied by Berkeley and Oakland.
Most Berkeley businesses have not converted to environmentally efficient technologies, De Snoo said, because they are hesitant to pay for the overhead costs. If the bond proposal proved successful bondholders would pay for the energy efficient projects up front, while the companies would pay them back over the term of the bond, he said.
Also because the fund would bundle between 50 and 100 clean energy projects, De Snoo anticipates that companies would receive discounted prices from vendors and contractors.
Projects planned for the bond include a combined heat and power system which uses natural gas more efficiently to provide both heat and electricity, efficient lighting and solar power. If the scheme proves successful, De Snoo said, it could be expanded to include homeowners.
Power Factors’ Schultheis said he has spoken to about 10 interested businesses. If the project goes as planned, he anticipates floating the bond in about 15 months.
Power Factors, a clean energy consulting firm led by a team of entrepreneurs with a financial stake in solar energy company Solaria, stands to make money in consulting fees to other cities if the bond proves successful.
Three other jurisdictions—San Francisco, Oahu, and New Mexico—have been involved with clean energy bonds to so far unspectacular results. San Francisco’s $100 million energy bond approved by voters in 2001 has not been funded because of problems with the city’s Hetch Hetchy water district, which was to back the bonds through water revenues. The water district didn’t have a business plan for investors to feel comfortable financing the bonds, said J.P. Ross, deputy director of Vote Solar, a San Francisco-based clean energy group that backed the ballot.
In Oahu, Hawaii’s biggest Island, Ross said the newly elected mayor of Honolulu opposed the bond and has held it up. “It’s pivotal to have a leader in place to make things happen,” he said. “Our champion in Hawaii went out with the old mayor.”
The New Mexico bond, passed by the state legislature in March, is too recent to have had tangible results.
According to Brian Siu, an energy policy analysis with the clean energy advocate Apollo Alliance, the bonds are currently in a test phase. “The success and failures in the next few years will determine their relevance,” he said.
Schultheis said it was unfair to compare the bond fund envisioned by Power Factors to those approved elsewhere. For one thing, he said, while those bonds were backed with public money and were intended for energy improvements at public buildings, Power Factors intends to back its bonds with private money for improvements to private businesses.
“If we did everything we could to city buildings in Berkeley and Oakland, that’s just a drop in the bucket given the opportunities to reduce energy usage in those cities,” he said.
Without public backing, Power Factors has to employ a variety of financing mechanisms, and Schultheis acknowledges he doesn’t know what entity will back the offering. To lure investors, Power Factors is counting on using bond insurance as well as letters of credit from banks to guarantee the offering in case businesses go bankrupt or equipment fails.
As extra insurance to bondholders, businesses that sign up for the projects will be charged an exit fee if they break the terms of the agreement, Schultheis said. Also for solar projects the bond will bundle available federal and state tax credits to lure private investors looking to write off tax liabilities.
Insured bonds are a growing part of the bond market, according to Steve Zimmermann, managing director for Standard & Poor’s Western Region. He said the rating agencies grade the bonds based on the rating of either the insurer or the bank providing letters of credit. Most bond insurers are rated AAA, he added, and charge fees to back lower rated offerings.
Because of the elaborate financing plan, the bond will be more expensive for borrowers than if it had been backed by the city. To make the project feasible, Schultheis said Power Factors has to round up at least $50 million worth of projects before going to investors.
De Snoo said Power Factors first broached the idea to city officials last year at a meeting of the Sustainable Business Working Group, convened by Mayor Bates.
“So far it’s checked out,” Bates said, explaining why the city is considering spending $52,000 to launch the plan. “We’re encouraged by what we’ve seen, but we still plan to proceed with a lot of caution.”
Schultheis said the bond would only fund proven technologies and not include Solaria products, which he said were too experimental for bondholders to be comfortable with them.
For businesses, the chief risk, besides equipment failure, is if PG&E lowers prices. The bond will be structured so that the annual payment participating businesses make to bondholders is roughly equal to or less than the savings they would realize under current energy prices. If energy prices drop, which historically has not been the case, so does the financial incentives for businesses.
Another potential risk is if interest rates rise dramatically over the next year while the bond is being prepared. Higher interest rates means higher costs for interested companies, he said. “Anything that increases the cost of finance is not good.”