Clean Energy Investment Program
Driven to meet ambitious state energy savings targets set in 2007, Massachusetts planned a rapid pace of energy efficiency retrofit projects. However, in the wake of the 2008 national economic downturn, a steep decline in project financing from banks and Energy Service Companies (ESCOs) stranded a three-year pipeline of $237 million in projects. In 2010 Massachusetts responded by creating an innovative financing model called the Clean Energy Investment Program (CEIP). CEIP invests in projects using bond funding which is repaid from the energy savings generated by the projects. The bonds are obtained at the same time as general obligation bonds, however Massachusetts leverages this low-cost financing without hitting the state’s general obligation debt limits.
In April 2007, Executive Order 484 (EO 484) established the Leading by Example program (LBE), setting aggressive targets for reductions in energy use and greenhouse gas emissions, and increases in use of renewable energy across state government operations. EO 484 mandates that state government:
- Reduce energy consumption 20 percent by 2012 and 35 percent by 2020,
- Obtain 15 percent of total electricity from renewable sources by 2012 and 30 percent by 2020, and
- Achieve a 25 percent GHG emission reduction by 2012, 40 percent by 2020, and 80 percent by 2050.
In the wake of the 2008 national economic downturn, the Commonwealth lacked cost-effective and sustainable financing to implement the efficiency retrofits necessary to achieve EO 484 goals. Massachusetts designed the Clean Energy Investment Program (CEIP), a cost-effective financing vehicle that enabled retrofits at the pace needed to support the Order.
In 2008 Massachusetts pulled together five state agencies that could take a multi-disciplinary approach to designing CEIP. The agencies responsible for energy, environment, financing & budget, and facilities designed a financing vehicle that supports EO 484’s strategic energy and environmental goals while working within state budget and operational constraints. The resulting mechanism follows the model of Energy Savings Performance Contracts (ESPC), as illustrated in the graphic below:
Clean Energy Investment Program Model
While the ESPC financing model offers upfront financing that maintains the pace of retrofit projects needed to meet the energy and environmental goals of EO 484, Massachusetts needed to ensure that the financing was cost-effective, flexible, and sustainable over the long term. It also needed to stay within debt ceiling limits. Massachusetts adapted the ESPC model to fit its own needs:
1.Accessed Low-Cost Financing
CEIP uses state bonds to finance state retrofit projects, instead of more expensive options from ESCOs or financial institutions. Massachusetts' favorable bond rating makes this option lowest cost.
2.Designed Non-Debt Funds Flow
Annual project savings are calculated to exceed annual bond payments by at least ten percent and payment amounts are funded directly into CEIP-dedicated accounts at the project host agencies for repayment of the bonds. Once a year in January, the Comptroller moves sufficient funds from agencies that have completed CEIP projects to a dedicated state Treasury account from which it issues an Intergovernmental Exchange Transaction (IET) to make the bond payment. The guaranteed repayment stream renders the bonds self-supporting, and thus the bonds are not considered general obligation and consequently are not subject to state debt ceiling limits.
The Division of Capital Asset Management and Maintenance (DCAMM) works with state agencies and public colleges and universities in Massachusetts to solicit and develop clean energy projects that will help reach state clean energy goals. Although generally all projects larger than $1 million are financed at least partially through CEIP, the state established eligibility criteria to ensure the projects financed are capable of generating savings sufficient to meet the bond payments:
How It Works
Existing state staff manage CEIP’s administration. Three of the original design agencies, DCAMM, the Department of Energy Resources (DOER), and the Executive Office of Administration and Finance (ANF), hold the lead operating roles, with other state staff processing CEIP bonds as needed during the course of the regular bond process:
- Capital budget personnel from the budget office,
- Energy and fiscal staff from DCAMM, and
- The Treasurer’s Office.
The three lead agencies work with project host agencies to identify and mobilize as many effective retrofit projects as possible toward EO 484 goals:
After targeting specific agencies for retrofits, DOER, DCAMM, and ANF work in tandem with the host agencies to develop sound technical and financing scopes of projects:
1. Audit & Project Definition
The project development process kicks off with an initial study of the site to determine the overall potential for efficiency improvements. Then, an investment-grade audit identifies potential energy savings measures, construction costs and timeframes, and the anticipated savings resulting from each measure and the overall project at the host agency.
2. Technical Assistance: Project Technical Scope
DCAMM then works hand-in-hand with the host agency to develop a project that will fit CEIP’s eligibility criteria. A business unit in DCAMM, the Energy Team (E-Team), works with agencies to develop the final project scope, define the fiscal scenarios, and agree on a list of approved measures that will constitute a project that is both technically and financially sound. The E-Team consists of approximately 20 existing staff in DCAMM’s Facilities Management & Maintenance Group. This team of program managers, energy planners, and management analysts consults with state facilities to achieve optimal levels of energy and water efficiency for existing, renovated, and new buildings. DCAMM verifies that the project will achieve savings either through the performance of a contractor and certified by a third party or guaranteed by the contractor and reviewed by DCAMM.
3. Technical Assistance: Project Financing
Once the project technical scope is finalized, DCAMM assembles an appropriate financing package, incorporating utility incentives and/or technology-specific grants when available to make the most cost-effective financing package. DCAMM develops a financial analysis template to ensure project savings are sufficient to cover project and financing costs.
DCAMM meets with the agency to explain the project details and the organization’s responsibility for repayment. All project host agencies using this financing must agree to repay the CEIP bond amount with project savings and include the annual debt service in their operating budget each year until the debt service is fully paid. Host agencies assign fiscal, facilities, administrative, and other personnel as needed if they were working with a traditional ESPC. The host agency must also agree to the accuracy of fiscal analysis provided by DCAMM and their consultants that demonstrate that cost savings are sufficient to pay for project and financing costs, as well as demonstrate an understanding of the CEIP tool. DCAMM conducts the procurement process and selects the contractor.
4. Final Approval & Three-Part Agreement
After the host agency and DCAMM agree, DCAMM submits the final project package to ANF for review and approval using the CEIP Authorization Form. The DCAMM project manager completes the Form with the project description and budget, including sources and uses of funds; construction schedule; estimated annual savings; measurement and verification; and bond repayment schedule.
The analyst at ANF overseeing the host agency reviews the Authorization Form to ensure the project meets all the eligibility criteria. Specifically, the analyst confirms that annual savings will be at least 1.1 times the required debt service and that the annual appropriation of the debt service will be supported in the operating budget in each future fiscal year until the debt service is fully paid. ANF agrees to allocate to a dedicated account funding for the bond repayments and reduces the state energy budget by the amount of those payments to reflect the savings in the state’s energy costs. When ANF notifies DCAMM of project approval, it records the final approved Authorization Form bearing signatures of the host agency Chief Fiscal Officer, the DCAMM Facilities Management and Maintenance group director, and the ANF Budget Analyst.
The final step is a three-part Memorandum of Agreement (MOA) between ANF, DCAMM, and the project host agency. In this agreement, the host agency commits to including the annual debt service in its operating budget each year until the debt service is fully paid. DCAMM verifies that the project savings will be achieved either through the performance of a contractor and certified by a third party or guaranteed by the contractor and reviewed by DCAMM. The third part is ANF’s confirmation that the savings are sufficient to cover debt service by at least 1.1 times and that the annual appropriation of the debt service will be supported in the state’s operating budget in each future fiscal year until the debt service is fully paid.
5. Project Launch & Management
DCAMM oversees all projects from beginning to end, including measurement and verification of savings. ANF works with the host agency to ensure that the funds are available for the debt service each year.
The Leading by Example Program works with all agencies to support and encourage initiation of clean energy projects, including working with DCAMM on statewide efforts to retrofit existing facilities. DCAMM initiates contact with individual agencies to define and develop specific projects. Regular statewide meetings for state facility managers and other LBE participants promote CEIP and energy programs.
A dedicated LBE staff person at DOER and staff at DCAMM’s E-Team collect project data, maintain the LBE and E-Team databases, and analyze project results. The state evaluates CEIP’s success by progress achieved toward EO 484 goals: the number of projects funded, the amount of investment per project, the projected and actual energy savings and GHG emissions reductions, and the projected and actual cost savings.
DCAMM uses its construction agency database to track project progress indicators and develop estimated impacts of all energy projects financed through CEIP. Tools such as the state’s online utility information database, Mass Energy Insight (MEI), and the state’s real-time metering program, Enterprise Energy Management System (EEMS) establish energy baselines and track energy and cost impacts after project implementation.
In four years, CEIP has mobilized 28 projects for more than $136 million across 15 million square feet of state buildings with projected annual savings of $14 million over the life of the measures, which can often equal or sometimes exceed 20 years. These projects represent greater state investment in energy efficiency than in the previous 25 years. The state also has a pipeline of approximately $260 million for 74 ready-to-go energy efficiency projects, which will generate $22 million in annual savings over the terms of the contracts. Massachusetts has maintained the top spot on the ACEEE scorecard for four years running and attributes its success in part to being able to operationalize its energy efficiency policies through CEIP financing. The state plans to make CEIP available to additional state energy retrofit initiatives, such as the Accelerated Energy Program, initiated in 2012 to raise energy efficiency at state facilities that have not seen energy improvements in recent years.
Massachusetts created an innovative financing model called the Clean Energy Investment Program (CEIP) which invests in projects using bond funding that is repaid from the energy savings generated by the projects. This innovative financing model allows capital spending on energy projects that does not impact the state’s debt limits.
Reduce energy use intensity 20 percent by 2012 and 35 percent by 2020 based on 2004 levels
Limited access to cost-effective financing to implement clean energy projects
In 2010, as part of the Commonwealth’s commitment to lead by example, Massachusetts established the Clean Energy Investment Program (CEIP), a low-cost financing mechanism to fund clean energy projects through state bonds with project savings sufficient for repayment. This innovative financing model allows capital spending on energy projects that does not impact the state’s debt limits.
In four years, CEIP has mobilized 28 projects for more than $136 million across 15 million square feet of state buildings with projected annual savings of $14.3 million over the life of the bond terms, which can often equal or sometimes exceed 20 years. These projects represent greater state investment in energy efficiency than in the previous 25 years. The state also has a pipeline of approximately $260 million for 74 ready-to-go energy efficiency projects, which will generate $22 million in annual savings over the terms of the contracts, typically 10-20 years. Massachusetts has maintained the top spot on the ACEEE State Energy Efficiency Scorecard for four years running and attributes its success in part to operationalizing its energy efficiency policies for state facilities via CEIP financing.