Tools for Overcoming Financing Obstacles for Geothermal Installations Colorado Geothermal Working...

Tools for Overcoming Financing Obstacles for Geothermal

Installations

Colorado Geothermal Working Group

9-4-11

Paul Bony

Director of Residential Market Development

Overview

This presentation will cover the existing and exciting new financing tools that will support greater adoption of Geothermal Heat Pumps.

In 30 minuets!

Geothermal Market Barriers

High(er) Cost of Installation (almost gone)Lack of HVAC Dealer Interest (going fast)Lack of HVAC Dealer Expertise (easy fix)Limited Consumer Education (getting better)

No Viable Long Term Financing– Even though Geo systems provide

consumers with significant positive cash flows in today’s market….they cost (a lot) more than CFL light bulbs.


Consumers are suffering from “cash separation anxiety”


Unlike consumer goods financing, efficiency financing must (and can) provide the borrower with a positive cash flow from energy savings after the monthly payments.

The trick in today’s economy is to tie the loan to the structure, not the owner/occupant.


GeoExchange $23,100 4 Windows $ 1,600 Attic Insulation $ 900 Marathon Water Heater $ 700 Air Sealing $ 250 10 CFLs $ 45

Total $26,595 Annual Savings $2,255 Simple Payback 11.8 years Net cash flow (30 yr./6%) $28/mo. Comfort Beyond imagination

Before tax credits!

$24,000

$24,516

$27,637

$47,100

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000

Aggregate 30 Year System Operating Cost Comparison of Heat Pump Operating and GeoLoop System Financing Costs versus

Natural Gas/AC Operating Cost Source USDA RUS

Natural gas system 360 month financing of geothermal loop

60 month financing of geo loop Cash purchase of geothermal loop

Before tax credits!

Geothermal Heat PumpResidential Tax Incentives

Federal Income Tax Credit:

30% of total GHP system cost No cap on maximum credit Can be used to offset AMT tax Can be combined with other tax credits Can be used in more than one year

Eligibility:

Home must be located in the U.S. Includes houses, cooperatives, condos, mobile homes Does not have to be your main home GHP must meet Energy Star requirements Placed in service before 2017

The Elegance of Financing

“The government should not be in the business of picking winners and losers in the market."– House Budget Committeeman Chairman

Paul Ryan (R-Wis.) panel's Fiscal Year 2012 Budget Resolution: "The Path to Prosperity: Restoring America's Promise.

The Geothermal Market

Why Pennsylvania?

House Bill 2200 (2008) requires utilities to reduce consumer electric consumption by at least 3 percent and Peak demand by at least 4.5 percent from June 2009 levels by May 2013,

HOUSE BILL No. 738 (2009) – Allows consumers to deduct the retail purchase price of a geothermal energy system for non-business from their annual personal income tax, up to 10% or $2,500.

HOUSE BILL No. 2109 (2009) - Prevents geothermal heating systems from being taxed as property value for ten years.

Why Pennsylvania?

HOUSE BILL No. 790 (2009) – Provided home purchase grant of up to $5,000 for energy and water conservation including Geo systems.

HOUSE BILL No. 2291 (2010) - Allocated funds for installing geothermal systems in numerous public facilities.

HOUSE BILL No. 2457 (2010) - Exempts Geothermal Heat Pumps from sales tax.

Why Pennsylvania?

Keystone HELP energy efficiency loans for GHPS– 2 Loan options for up to 100% of the costs of

equipment and installation of Closed Loop Geothermal Heat Pump Systems that meet Energy Star Tier 2 qualification standards.

Why Pennsylvania?

Qualifying Geo financing Option 1:– 4.99% Unsecured Keystone HELP Loan for

up to $15,000 with a term of up to ten years. – Plus an optional additional Tax Credit

Anticipation Loan in an amount equal to their expected 30% tax credit, maximum, $10,000. Keystone HELP will make the first 12 monthly payments on this optional additional Tax Credit Anticipation Loan

Why Pennsylvania?

Or a secured Keystone HELP Loan for up to $35,000 with rates as low as 2.875%. – where the qualifying Geothermal Heat Pump

System is installed as part of a comprehensive "Whole House" improvement project with additional improvements recommended by a Certified BPI/RESNET Energy Audit

State Efficiency Financing

Keystone HELP energy efficiency loans for GHPS– 2 Loan options for up to 100% of the costs of

equipment and installation of Closed Loop Geothermal Heat Pump Systems that meet Energy Star Tier 2 qualification standards.

Colorado

Green Colorado Credit Reserve (GCCR) – A loan loss reserve that was created by the

Governor’s Energy Office to leverage private lenders to make small commercial loans up to $100,000 for capital improvements to promote energy efficiency retrofits in buildings. The GCCR is offered through the Colorado Housing Finance Authority (CHFA)

Colorado

Direct Lending Revolving Loan Program (RLP) – Created to provide access to capital where the GEO

identifies finance gaps in the market. Loans under the RLP will be larger than the loans under the GCCR program, with a minimum loan of $100,000.

– Provides financing for eligible and extraordinary projects that promote energy efficiency including

– Large-scale retrofits of buildings, ranging from commercial, multifamily, non-profit, industrial and other applications.

Geothermal Heat PumpBusiness Tax Incentives

Federal Income Tax Credit:

10% of total GHP system cost No cap on maximum credit Can be used to offset AMT tax Can be used in combination with subsidized financing Can be used in more than one year

Accelerated Depreciation:

5 year MACR depreciation for entire GHP system

Eligibility:

Building located in the U.S. Original use begins with taxpayer Placed in service before 2017 Can be used by regulated utilities Must be claimed by the owner of the property (effects non-taxable)

Geothermal HVAC Cost: 300,000$ 50 tons at $6000 per tonConventional HVAC Cost: 125,000$ 50 tons at $2500 per ton

Additional Cost: 175,000$

Income Tax Rate: 35%Energy Credit: 10%Utility Rebate 15,000$ 50 tons

Annual Energy Cost Savings: 20,000$ $1 per sq ft per yearEnergy Inflation: 3%

Example Commercial GHP EconomicsExample Commercial GHP Economics

Example Commercial GHP EconomicsExample Commercial GHP Economics

Added Cash Energy Credit Depreciation Energy Annual Cumulative

Year Outlay Tax Benefit Tax Benefit Cost Saved Cash Flow Cash Flow

2009 (160,000)$ 30,000$ 52,369$ 20,000$ (57,631)$ (57,631)$

2010 18,953$ 20,600$ 39,553$ (18,079)$

2011 11,372$

21,218$ 32,590$ 14,511$

2012 6,823$ 21,855$ 28,677$ 43,188$

2013 5,456$ 22,510$ 27,967$ 71,155$

2014 4,778$ 23,185$ 27,964$ 99,118$

2015 -$ 23,881$ 23,881$ 122,999$

2016 -$ 24,597$ 24,597$ 147,597$

2017 -$ 25,335$ 25,335$ 172,932$

2018 -$ 26,095$ 26,095$ 199,028$

2019 -$ 26,878$ 26,878$ 225,906$

Simple Payback: 1.5 yr

IRR: 57%Depreciation reduces 7 yr payback to 1.5 yrs!

Commercial Leasing

GEOSmart Financing Solutions – By the Electric and Gas Industry Association•Delivers Wide range of lease financing options to meet Commercial energy efficiency needs•Typically 12-72 months (However can be longer under special conditions) • Master lease agreements • Flexible payment schedules •Total solution financing - equipment, installation and services

Commercial Leasing

$1 Purchase Option Lease Example

For customers looking for “straight” financing Customer at lease end - purchase for $1 Fixed rate financing Spreads payments out over time Common for long-term equipment Customized repayment schedules Treated as an asset

Commercial Leasing

Step 1 $750,000 Equipment Purchase

Step 2 84 monthly payments @ $10,923.94

Step 3 Purchase for $1 Ownership

Commercial GHP EconomicsCommercial GHP Economics

For not-for-profits and commercial building owners with out a “tax appetite”, several financing companies have come to the geo market to finance either loops or loops and equipment.

They can “harvest the tax credits and depreciation.

Utility Financing Programs

“That’s Why I Never Walk in Front”

Utility Marketing Manager

CEO

Directors

Energy Costs are rising, what can I do? I don’t want a 2nd mortgage…

But saving money every month would be nice…

Utility Program Evolution- $$


On bill financing Midwest Energy

– Hays Kansas co-op puts

up the efficiency funding No up-front capital is required for qualifying investments. Monthly How$mart® surcharge covers the cost of

qualifying improvements. The surcharge is always less than the projected savings.

The How$mart® surcharge is tied to the location. If you move or sell the property, the next customer pays the surcharge.


On bill “collection”– Clean Energy Works Portland pilot

– surcharge is again tied to the location/meter. If the customer moves or sells the property, the next customer pays the surcharge.

– Funding is supported by for profit and not-for-profit entities looking for stable and secured returns

– 3 utility partners provide collection services for a small administrative fee. They don’t have to be the banker.

– Institutions love secured stable returns with an environmental benefit.


Now expanded to Clean Energy Works Oregon Have obtained an additional $20 million via

ARRA funding.Goal of 6,000 home retrofits by 2011Using utility partners for on-bill collection


Electric Cooperatives of South Carolina in partnership with the Environmental and Energy Study Institute pilot effort– On bill financing – Goal improve 225,000 homes by 2021 and Serve as a

model for the Rural Star Department of Agriculture Rural Utility Service loan program (now before congress)

– Requires positive cash flow from the measures installed


HR-4785 (Rural Star) introduced 3-10-10 This bill (now incorporated in the Climate Bill) will create a

$4.9 billion consumer loan program administered by the nation's rural electric cooperatives.

The cooperatives would borrow the funds at 0% interest Then make the money available at no more than 3% for up to

10 years for energy efficiency upgrades. Enabling the co-ops to combine 35 year loop financing with 10

year GSHP equipment retrofits and home efficiency improvements

Consumers get a 30% tax credit on the GSHP Equipment

Oak Ridge National Labs – U.S. DOEDecember 2008

The primary GHP market failure is the expectation that building owners should finance the ‘GHP infrastructure,’ or outside-the-building …ground heat exchanger. GHP infrastructure will outlive the building and many generations of heat pumps, and is akin to utility infrastructure (poles and wires, and underground natural gas piping).

Oak Ridge National Labs – U.S. DOEDecember 2008

This begs the question: “Why do we expect building owners to finance GHP infrastructure on their own credit, but not other utility infrastructure?”

The Ground Loop “Utility”

H.R. 2419Food and Energy Security Act of 2007

(Engrossed Amendment as Agreed to by Senate)– SEC. 6108. ELECTRIC LOANS TO RURAL

ELECTRIC COOPERATIVES.– “The committee notes that assistance is authorized

for renewable energy including geothermal ground loops”

– 35 year funds at around 4%


The Utility Loop Concept Utility owns and recovers the cost of the loop, interest

expense, program costs, and profit or operating margin.

– Utility installs or contracts out loop construction. • Controls system design and installation quality

– Utilities gets improved load factor & incremental kWh revenue.• System load factor is even better with load control.

– Future carbon credits may stay with the utility

Consumers Get: – Lower total energy bills.– Utility grade service and reliability– Reduced or no incremental cost for participating


Delta-Montrose Electric AssociationThe Wyandotte, Michigan City Council recently

approved the creation of a geothermal utility. The general manager of Wyandotte Municipal

Colorado law allows Independent Loop Companies

New Public Energy Policy

Colorado

The Colorado General Assembly passed a law (HB 1037) in 2007 requiring the investor-owned electric and gas utilities to adopt demand-side management (DSM) programs which provide financial incentives for their customers to purchase more efficient equipment and processes, and to engage in demand response.

Electricity Savings GoalsHB 1037 required the PUC to adopt electricity savings goals for the state's two investor-owned utilities of at least 5% of the utility's 2006 peak demand and electricity sales by 2018. The PUC extended electricity sales reduction goals through 2020 as shown below. The percentages displayed in the table refer to the required savings over the projected electricity needs for that year.


We need to take a new approach to Renewable / Efficiency Portfolio Standards– If the goal is to save emissions

“RPS/EPS” requirements need to be based on Btu’s saved not just kWh

Carbon lives in the combined electric and hydrocarbon fuel stream.


ProPublica, Jan. 25, 2011 Natural gas advocates assert that it produces 50 percent less

greenhouse gases than coal, based on emissions from the furnace or generator exhaust. They don’t account for the methane emitted when gas is extracted and piped to power plants and other customers.

The EPA has doubled its previous estimates for the amount of methane gas that leaks from gas wells to end use. Some gas-field emissions estimates have jumped by several hundred percent with Methane emissions from the hydraulic fracturing of shale gas now 9,000 times higher than previously reported.


When all these emissions are counted, gas may be as little as 25 percent cleaner than coal, or perhaps even less.


New Concept – Clean Energy Standards– Requires utilities to produce a % of their

energy from “clean” sources, with a deadline.– A good CES policy allows all sources

including efficiency to compete in an open market based on the cost of the energy saved/produced.

– This will level the playing field for efficiency vs. high cost solar/wind and keep rates lower

Thank You For Your Attention!Questions?

Paul Bony

[email protected]

970-249-8476

If you ever need a hand you can reach me at:

Special thanks to the GEO for sponsoring this event and TriState for hosting it!

Tools for Overcoming Financing Obstacles for Geothermal Installations Colorado Geothermal Working...

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