Projects

1. Energy Products:Michigan’s New Energy Legislation & Financing Opportunities Projects Presented by:Jeff Soles and Kari Costanza

2. MASAFall Conference 2009Energy Projects:Michigan’s Energy Legislation & Financing OptionsPresented by:Kari Costanza and Jeff SolesThrun Law Firm

3. Caution • These slides reflect general legal standards for the related presentation and are not intended as legal advice for specific situations. • Future legal developments may affect these topics. • Use of these materials without the benefit of the oral presentation may be misleading. • This document may not be reproduced or redistributed, in whole or in part, without the express written permission of Thrun Law Firm, P.C.

4. Overview • Introduction: Renewable Energy and Energy Conservation • Michigan’s New Energy Legislation • Performance Contracting and Public-Private Partnerships • Project Funding Options • Grants and Incentives • Traditional Financing Options • Finance Opportunities created by the Economic Stabilization Act of 2008 • Finance Opportunities created by the American Recovery and Reinvestment Act (ARRA) • Pending Legislation, Economic Feasibility and Case Studies

5. Renewable Energy Projects Energy generated from natural resources … such as sunlight, wind, rain, tides and geothermal heat - which are renewable (naturally replenished). ~Wikipedia • Solar- thermal/heat or photovoltaic (PV). • Wind- the conversion of wind energy into electricity using wind turbines. • Geothermal - energy generated from heat stored in the earth or the collection of absorbed heat derived from underground. • Biomass- living and/or recently dead biological material that can be used as fuel or for industrial production. • Biofuel- solid, liquid or gaseous fuel derived from relatively recently dead biological material. • Tidal and Wave - a form of hydropower that converts the energy of tides or waves into electricity. • Hydropower or hydroelectricity - power that is derived from the force or energy of moving water.

6. Energy Efficiency Projects • Building envelope improvements; • Heating and cooling upgrades; • Lighting retrofits; • Installing/upgrading an energy management system; • Motor, pump, or fan replacements; • Removal of asbestos or other hazardous materials; • Domestic water use reductions; and • Upgrading other energy consuming equipment or appliances.

7. Michigan’s Energy Law(2008 PA 295) • On October 6, 2008, Gov. Jennifer Granholm signed the Clean, Renewable and Efficient Energy Act. • Key Provisions: • Renewable portfolio standard (RPS) • Net Metering • Renewable Energy Certificates (RECs)

8. Renewable Portfolio Standard Defined • An RPS is a state regulation that requires the increased production of energy from renewable energy sources. • Places an obligation on electric power provider suppliers. • An electric power provider may generate or purchase a specified percentage of the power from renewable sources. • An RPS guarantees a market for renewable energy.

9. Renewable Portfolio Standards WA: 15% by 2020* ME: 30% by 2000 New RE: 10% by 2017 VT: (1) RE meets any increase in retail sales by 2012; (2) 20% RE & CHP by 2017 MN: 25% by 2025 (Xcel: 30% by 2020) MT: 15% by 2015 • NH: 23.8% by 2025 ND: 10% by 2015 MI: 10% + 1,100 MW by 2015* • MA: 15% by 2020+1% annual increase(Class I Renewables) OR: 25% by 2025(large utilities) 5% - 10% by 2025 (smaller utilities) SD: 10% by 2015 WI: Varies by utility; 10% by 2015 goal • NY: 24% by 2013 RI: 16% by 2020 CT: 23% by 2020 • NV: 25% by 2025* IA: 105 MW • OH: 25% by 2025† • CO: 20% by 2020(IOUs) 10% by 2020 (co-ops & large munis)* • PA: 18% by 2020† IL: 25% by 2025 VA: 15% by 2025* • NJ: 22.5% by 2021 CA: 20% by 2010 UT: 20% by 2025* KS: 20% by 2020 • MD: 20% by 2022 • MO: 15% by 2021 • AZ: 15% by 2025 • DE: 20% by 2019* • NC: 12.5% by 2021(IOUs) 10% by 2018 (co-ops & munis) • DC: 20% by 2020 • NM: 20% by 2020(IOUs) • 10% by 2020 (co-ops) TX: 5,880 MW by 2015 29 states & DChave an RPS 5 states have goals HI: 20% by 2020 State renewable portfolio standard Minimum solar or customer-sited requirement * State renewable portfolio goal Extra credit for solar or customer-sited renewables † Solar water heating eligible Includes separate tier of non-renewable alternative resources Source: www.dsireusa.org/ July 2009

10. Michigan’s RPS • Mandates that 10% of the State of Michigan’s energy come from renewable sources by 2015. • Compliance can be met by purchasing renewable energy credits (RECs). • The compliance period is graduated and begins in 2012: * 20% of total 2015 obligation in 2012 * 33% of total 2015 obligation in 2013 * 50% of total 2015 obligation in 2014 * 100% of total obligation in 2015

11. Net Metering Defined • A method of measuring the difference between the electricity supplied by a utility and the electricity generated by a customer that is fed back into the power grid. • A consumer-based renewable energy incentive. • “True Net Metering” according to the EERE: “By definition, true net metering calls for the utility to purchase power at the retail rate and use one meter.”

12. Net Metering In Michigan… History • The Energy Policy Act of 2005 required utilities to allow customers to connect to the grid. Did not govern the method. • The Michigan Public Service Commission (MPSC) approved a voluntary consensus agreement in 2005 between the MPSC and the state's utilities. • Prior to PA 295 net metering and interconnection was burdensome (long applications, waiting periods, extra fees, redundant safety requirements, etc.). • Result = low participation level.

13. Net Metering Under PA 295 • PA 295 requires statewide uniform interconnection and net metering standards. • Final rules were adopted under MSPC Order U-15787 on May 26, 2009. • Capacity of an individual system is generally limited to that which will meet the customer’s needs. *Pick up MPSC Handout

14. Renewable Energy Certificates • Renewable energy generation has two components: • The electrical energy produced, and • The renewable attributes which are measured by a REC (also known as “green tags”). • RECs are sold on the market to generate additional revenue for a renewable energy project. • In general, one REC is issued for each megawatt-hour (MWh) unit of renewable electricity produced. • The value of a REC is generally higher in “compliance” states (i.e., those with an RPS).

15. RECs under PA 295 • The eligible electric generator shall own the renewable energy credits. • RECs may be sold with or without the associated electricity. • Michigan incentives: solar, produced at peak, using equipment manufactured within Michigan, system constructed using an in-state workforce, and others.

16. Energy Optimization Plans • PA 295 requires utilities to file Renewable Energy and Energy Optimization Plans with the MPSC. • All plans have been filed and approved by the MPSC. • Go to www.michigan.gov/mpsc • Click on “PA 295 Cases” and select your utility company. • May present additional opportunities.

17. Energy Performance Contracts • Authority provided under §380.1274a. • May pay for improvements from the operating funds or from utility savings generated by the project. • May pay for improvements by way of installment purchase agreement or notes (not to exceed 10 years). • May require the contractor to guarantee the savings.

18. Energy Savings Performance Contract • An energy audit is conducted to identify energy-saving opportunities. • The school district issues an RFP to bid the project. • School District contracts with the ESCO: • The performance contract typically includes design, construction, training and savings, monitoring & verification. • The ESCO guarantees that the improvements will generate sufficient energy cost savings to pay for the project. • If savings don't materialize, the ESCO pays the difference.

19. Performance Contracts • Percentage completion payment terms with 10% retainage • Documentation requirements (construction schedule, schedule of values, all design and project documentation, operating manuals, manufacturer warranties, etc.) • Commissioning and Acceptance Testing • Specific on completion/acceptance and correction terms • Address existing equipment removal/ownership • Address training and maintenance procedures • Termination of the service/M&V agreement • Remove unreasonable limitations of liability

20. Performance Contract---Cautions • Scope of Work must be specific. • Documentation must be provided for verification of work. • Formula used for guaranteed savings must be carefully reviewed: • Are the stipulated savings reasonable? • Are stipulated hours of operation reasonable? • Conditions to the guarantee must be carefully reviewed: • Consider standards of comfort ---compliance with ASHRAE Indoor Air Quality Standards. • Consider maintenance requirements

21. Private Partner: Fronts the capital outlay. Owns the renewable energy equipment, the energy generated and the renewable energy certificates (RECs). Utilizes the production tax credit (PTC) and accelerated depreciation benefits to offset a portion of the capital outlay. Public Entity: May agree to purchase the renewable energy generated through a power purchase agreement (usually 20 years or more in length). May simply act as a landlord and collect rent. Developer may require a percentage of the school district’s utility savings. Public-Private Partnershipsfor Renewable Energy

22. Advantages: Involves a “turn-key” method of engaging in a renewable energy project (least amount of effort and risk). Minimal (or zero) capital outlay required. Disadvantages: Lack of control/ownership in project. Post-construction revenue (through net metering and sale of RECs) is realized by private developer. Contract terms are often long-term (20 years or more), one-sided and must be reviewed carefully. Public-Private Partnerships (cont.) Carefully evaluate the economics, as well as the terms and conditions.

23. Project Funding Options • Grants and Incentives • Traditional Financing Options • Finance Opportunities created by the Economic Stabilization Act of 2008 • Finance Opportunities created by the ARRA of 2009

24. Grants and Incentives • Database of State Incentives for Renewable Energy www.dsireusa.org • Michigan Public Service Commission Energy Grants michigan.gov/mpsc/0,1607,7-159-52493---,00.html • Office of Energy Efficiency and Renewable Energy (EERE) www1.eere.energy.gov/financing • Michigan Economic Development Corporation: www.michigan.org/medc • U.S. Department of Energy (ARRA Grants) www.energy.gov/recovery/funding.htm • ARRA for Michigan: www.michigan.gov/recovery • Michigan SAVES atwww.michigansaves.org *Pick up Handout

25. Energy Works • EW was awarded a grant by the Michigan Public Service Commission to implement the “Renewable Schools” program. • Will provide grants to K-12 districts for both renewable energy and energy conservation audits. • Two part application process. Part 1 is currently posted at www.energyworksmichigan.org • Renewable energy grants will require matching contributions. • Thrun Law Firm in partnership with MSBO have been retained as consultants for EW. • Announcements will be forthcoming in October. *Pick up Handout and Application for EW Grant*

26. Energy Efficiency and Conservation Block Grant (EECBG) • $3.2 billion fund established by the ARRA. • The State of Michigan received $76.6 million. • $57.6 million was directly allocated to 69 Michigan communities and tribal governments for local energy efficiency and conservation efforts. • $11.4 million of these EECBG funds will be made available to cities and counties via a solicitation for bids. • School Districts may not directly apply to the state, but may approach its city and/or county to partner on a project. • For more information: www.michigan.gov/recovery

27. Tax Exempt Bonds • May be voted or non-voted. • Issued pursuant to §1351a of the Revised School Code. • Use of proceeds is broad, includes renewable energy and energy conservation improvements. • May not be used for operating expenses, maintenance, most computer media, etc. • ARRA increased bank preference threshold from $10 million per calendar year to $30 million (effective for 2009 and 2010).

28. Energy Bonds • Issued pursuant to the Revised School Code §380.1274a. • Typically issued as a non-voted bond, but may be voted. • Not subject to non-voted bonds debt limits. • Cannot qualify through SLRF unless a voted issue. • More restricted use of Energy Bond proceeds. • Annual reporting in first five years after project completed.

29. Installment Purchase Agreement (IPA) • Entered into pursuant to PA 99 of 1933 • No Treasury approval • May be used for real or personal property for “public purposes” • May be used for land, equipment, buses, copiers, technology • May not exceed useful life of asset (15 year max – 6 year max for buses)

30. Lease Purchase AgreementCautions • Some companies offer prepackaged financing offers for equipment purchases. • Often have interest rates in excess of what a bank would offer. • Often contain terms not in the best interest of the school district or contrary to Michigan law. • School officials should carefully review all terms of a prepackaged lease offer and contact its bond counsel for detailed review.

31. Sinking Funds • Authorized by §1212 of the Revised School Code. • Permitted to levy up to 5 mills for up to 20 years with voter approval. • Treasury guidelines rescinded in 2004. • Review MSBO website for past Treasury determination letters. • May be used for same purposes as voted bonds under §1351a except…

32. Sinking Fund Prohibitions • Technology equipment • Equipment/furnishings • School buses • Maintenance • Routine custodial services • Preventative maintenance • Handyman activities

33. Qualified Zone Academy Bonds • Federally taxable, tax credit bond. • To be eligible, school building must be located within: • Empowerment zone; • Enterprise community; or • Area where 35% of students are eligible for free or reduced cost lunches

34. QZABs (cont.) • Eligible purposes for QZABs: • Rehabilitation or major repair to a public school facility • Acquiring equipment • 10% private entity contribution required. • Effective interest rate generally very low to zero.

35. New Clean Renewable Energy Bonds (New CREBs) • Tax Credit Bond: the bondholder receives an annual tax credit on its federal income taxes in lieu of tax-exempt interest income. • Initially authorized by the Energy Policy Act of 2005. • The purpose is to provide a comparable incentive to the Production Tax Credit (PTC) enjoyed by private entities. • Governed by the IRC.

36. New CREBs (cont.) • In October 2008 Congress created “New CREBs” • Total volume authorized for 2009 was $2.4 billion. • Allocations may be used for projects that generate electricity from a renewable source (i.e. wind, solar, geothermal, biomass, etc.) • Current Status: • 2009 Application deadline was August 4, 2009 • Additional appropriations are expected for 2010 due to the programs popularity and federal agenda to increase the use of renewable energy

37. QECBsQualified Energy Conservation Bonds • New type of tax credit bond. • Created by the Economic Stabilization Act of 2008. • ARRA expanded the program… current national volume cap is $3.2 billion. • State of Michigan received an allocation of $103,780,000. • Large local governments (i.e. population of 100,000 or more) receive a proportionate amount of its State’s allocation.

38. QECBs (cont.) • “Eligible issuers” of QECBs include States, political subdivisions as defined for purposes of IRC §103. • A large local government that has received a volume cap allocation may either issue bonds itself or act as a conduit/beneficiary of proceeds by another eligible issuer. • Must request to issue bonds through your local government (i.e. city, county, etc.)

39. QECB- Eligible Projects “Qualified conservation purposes” includes: • Capital expenditures to reduce energy consumption in publicly-owned buildings by at least 20 percent • Implementing green community programs • Renewable energy projects in rural areas • Demonstration projects (supporting green development) • Research facilities or grants • Public education campaigns to promote energy conservation • And more…

40. Build America Bonds (BABs) • New financing tool for state and local governments created by the ARRA and codified under the IRC. • BABs may be issued for the same purposes for which tax-exempt bonds may be issued. • Designed to allow state and local governments to reach a broader group of investors. • Authorized for 2009 and 2010. • Not subject to a volume cap.

41. Build America Bonds (cont.) Three Types of BABs: • BAB (Tax Credit) - provides a tax credit to the investor equal to 35%. • BAB (Direct Payment) –provides a direct federal subsidy payment to the issuer equal to 35% of the interest payment. • Recovery Zone Economic Development Bonds are a variation of the direct payment BAB, but provide for a larger federal subsidy.

42. QSCBsQualified School Construction Bonds • Federally taxable, tax credit bond. • Permitted uses for QSCBs: • Construction, rehabilitation or repair of public school facility or the acquisition of land to construct such a facility. • Acquisition of equipment for portions of public school facility being constructed, rehabilitated or repaired.

43. QSCBs (cont.) • State of Michigan allocation for 2009 is $296,860,000. • Additional $123,272,000 allocation for Detroit Public Schools. • Allocations to the State of Michigan for 2010 expected to be equal to 2009. • Current Status: • All available funds have been allocated for 2009 and 2010. • “Wait List” of requested allocations exceeds $130 million.

44. Summary of Financing Options • Traditional Funding Mechanisms: • Tax Exempt Bonds • Energy Bonds • Installment Purchase Agreements • Sinking Fund Proceeds • Bonds Created under the Economic Stabilization Act of 2008: • New Clean Renewable Energy Bonds (New CREBs) • Qualified Energy Conservation Bonds (QECBs) • Bonds Created or Continued under the ARRA of 2009: • Qualified School Construction Bonds (QSCBs) • Build America Bonds (BABs) • Qualified Zone Academy Bonds (QZABs)

45. Pending Legislation • Federal: • American Clean Energy and Security Act of 2009 (“Climate Bill”) • Would create a Clean Energy Deployment Administration. • Would provide credit enhancement to state and local governments issuing debt obligations to finance energy conservation and renewable energy projects. • Credit enhancement may include: direct loans, letters of credit, loan guarantees, etc. • Would only provide credit enhancement for taxable debt obligations (i.e. Build America Bonds and tax credit bonds such as CREBs).

46. Pending Legislation (cont.) • Michigan • SB 0046 - A bill providing schools loans for net metering programs. • HB 4242 - A bill providing schools loans for net metering programs. • HB 4243 - A bill creating an alternative energy revolving loan fund for loans to schools.

47. Economic Feasibility • Last 20 years: the cost of technology has dropped 80% and is more efficient & reliable. • Renewable energy projects now make economic sense and can result in significant operational savings. • US wind development grew 32% on 2008 (AWEA). • Solar energy capacity grew by 17% in 2008 (Solar Energy Industries Association (SEIA)).

48. Renewable Energy Cost TrendsWind and Solar PV Source: NREL Energy Analysis Office (www.nrel.gov/analysis/docs/cost_curves_2005.ppt) These graphs are reflections of historical cost trends NOT precise annual historical data. (11/05)

49. Payback Periods Project Cost Variables: • Equipment costs • Installation/labor costs • Average wind speed / solar variation • Local electricity costs • Financing costs Current Average Payback Periods: • Wind- 6 to 10 years* • Solar PV- 15 to 20 years • Solar thermal- 3 to 7 years *Wind projects installed in above average wind zones.

50. Renewable Energy Case Studies • General: • Ashden Awards for Sustainable Energy- www.ashdenawards.org/winners • Greening Schools Project- www.greeningschools.org • Michigan: • U.S. Department of Energy-http://apps1.eere.energy.gov • Wind: • US Dept of Energy (Wind for Schools): www.windpoweringamerica.gov/schools • American Wind Energy Association (AWEA) www.awea.org • Windustry www.windustry.org • Solar: • Bonneville Environmental Foundation- www.solar4rschools.org • Interstate Renewable Energy Council (Schools Going Solar) - www.irecusa.org