More than three years after the project was proposed, installation of the first elements of the solar rooftop began last week. By next spring, the solar array is expected to provide up to 17% of the Salt Palace’s power while serving as a green calling card for energy-conscious conventioneers.
“We wanted to do a solar project that was substantial,” said Salt Lake County chief financial officer Darrin Casper. “Now that we’ve closed on it and the panels are being installed, we’re thrilled.”
On the way to the roof, financial advisors, attorneys and Salt Lake County officials took a long detour through a collapsing financial market and a labyrinth of state and federal laws that turned the $7 million project into one of the most challenging some had ever seen.
“It was an extremely creative effort on a small deal, and the persistence was incredible,” said Alan Westenskow, vice president for Salt Lake County’s financial advisor, Zions Bank. “This was like the second or third iteration after this almost died. The people involved had some vision, and they really stuck to it.”
Among those who refused to give up were Salt Lake County Mayor Peter Carroon, CFO Casper and former chief administrator Doug Wilmore.
“One of our goals was to be the greenest county in the nation,” Casper said. “We’re taking this seriously. Our county has some problems with air quality.”
Salt Lake County stuck with the plan after the financial markets collapsed in 2008 and key private partner NexGen backed out after the financial structure appeared unworkable.
CarbonFree Technology has since replaced NexGen as the owner and operator of the array. Colorado’s Bella Energy, a solar engineering firm, stayed in the game and is now installing the panels as CarbonFree’s partner.
“There’s a considerable amount of sweat equity that went into this project,” said Andrew McKenna, co-founder of Bella Energy. “It took 14 months to get the final financing done.”
In addition to the engineering work, Darin Lowder and other attorneys from Ballard Spahr worked long hours dealing with the intricacies of the tax structure, requiring numerous meetings with the Internal Revenue Service and the U.S. Treasury Department, Westenskow said.
“If everyone had known in advance how much work this was going to take, I’m not sure whether we would have done it,” Westenskow said. “We blazed a trail on this. The point is that we’ve proved it can be done.”
What made the deal so complex was the combination of private partners with a county government and a nonprofit corporation that had to qualify for federal tax credits to make the financing work. Working against the incentives was Utah’s low-cost power and the weak state mandates for renewable energy.
“Like it or not, because the incentives are heavily geared toward tax breaks, it puts municipalities at a disadvantage, so you have to develop this rather complex structure,” McKenna said.
To use the federal tax incentives, the county had to create a for-profit status for the project. By financing a portion of the project, JPMorgan Chase Bank represented the for-profit investor in exchange for tax credits under the qualified energy conservation bond, or QECB, program.
The convention center was identified simply as the host that leased its rooftop, while the county was the purchaser of the power from the special-purpose provider.
Salt Lake County was then able to use a leveraged new markets tax-credit structure that provides about $1 million in net tax-credit equity to the project. A $1.9 million QECB provides borrowing at 2.25% for 17 years.
The deal also includes $1.82 million of federal grants and earmarks for renewable energy projects, and a nearly $2 million cash grant in lieu of investment tax-credits for a renewable energy system.
The incentives and grants saved the county nearly $4.8 million while providing the low interest rate of 2.25% on the $1.9 million bond, Westenskow said.
County officials believe it is the first financing structure that uses all of these types of incentives in one financing.
The county closed on the financing in August, more than three years after the deal was proposed.
It was proposed before federal legislation even authorized QECBs, according to Casper.
“It was just another low-cost source of capital,” he said.
QECBs were provided in 2009 when Congress allocated $3.2 billion for states, large local governments and tribal governments to issue tax-credit debt to finance renewable energy and efficiency projects. The total allocation was divided among issuers based on population. Utah provided nearly $6.5 million of its $28.4 million allocation to Salt Lake County.
Nationwide, at least 83 projects totaling over $545 million have been funded with QECBs in 21 states to date, according to the Energy Programs Consortium. Some states, like Kansas and Kentucky, have exhausted or nearly exhausted their allocations, while others still have millions of dollars to spend. Additional issuance is being planned in 20 states. The authority to issue the bonds does not sunset under current federal law.
The issuer sells taxable QECBs to investors and the bond proceeds are used to fund a qualified project. Issuers can choose to issue taxable bonds with a tax credit to the holders of the bonds or elect to receive a direct cash payment from the Treasury.
The financial crisis sharply reduced the taxable income of banks and financial institutions, the largest tax equity investors in renewable energy.
Of the approximately 22 investors that had previously participated in wind tax-equity transactions, only a few remained active by the end of 2008, according to Standard & Poor’s.
“This made tax equity scarce and much more expensive for renewable projects, with internal rates of return increasing to 12% or more in 2008 and 2009 from 6% to 7% in 2007,” according to a report on renewable energy financing S&P published in September.
The American Recovery and Reinvestment Act in 2008 also introduced the 1603 cash grant that allowed project developers to monetize renewable energy investments in the form of direct cash grants worth up to 30% of a project’s capital cost.
One of the definitions of a qualifying project is one that provides a savings on energy cost of 20% or more. Given Utah’s low average rate of 6.8 cents per kilowatt hour, less than half of California’s 14.4 cents, that would prove challenging.
Another complication was reaching agreement with investor-owned Rocky Mountain Power, which had to accept a for-profit competitor in the heart of its service area. Rocky Mountain Power has its own green energy initiatives.
While Westenskow concedes that his company did not make money on the deal, he said the knowledge acquired in working out the structure can be scaled up to larger projects in the future.
“Until you go through and live this stuff, it’s hard to see what will work in this market and what won’t,” he said.
Their massive roofs make convention centers logical candidates for solar. But for other municipalities seeking to follow the Salt Palace roadmap, shifting incentives and uncertainty cloud the future.
“The headwinds come from the expiration of a number of popular incentives — the U.S. Department of Energy loan guarantee program in September 2011, the U.S. Treasury cash grant for investment tax credits in December 2011, and production tax credits for wind power projects at the end of 2012,” S&P analyst Swaminathan Venkataraman wrote. “We expect that this will force renewable energy developers to seek new sources of tax-friendly, competitive financing.”