Energy Finance Report

Anaerobic Biodigesters Give Universities Food for Thought

Posted by Merrill Kramer on 12/28/15 3:45 PM

Co-author Morgan M. Gerard

Food waste is a major problem in the US. Studies show that around 40% of all food produced in the US gets wasted at some point in the food chain. According to the EPA, food waste is the second largest category of municipal solid waste sent to landfills, accounting for 18% of their waste stream. Left to decompose in landfills, food waste creates methane gas, a lethal greenhouse gas that contributes to climate change and global warming. EPA has found that, pound for pound, the comparative impact of methane gas on climate change is more than 25 times greater than carbon dioxide.

University_Buffet.jpgUniversities are not immune from contributing to the organic waste problem. University meal programs serve buffet-style food to students and don’t want to run the risk of running out of food. The average college student generates 142 pounds of food waste a year, and campuses as a whole throw out a total of 22 million pounds of uneaten food annually. Universities thus are a major contributor of food waste to landfills. Tackling the food waste problem has become increasingly important to colleges. Food waste is one of the least recovered recyclable materials in the US. College programs such as composting, tray-less dining and the Food Recovery Network, where uneaten food is delivered to feed the needy, only begin to solve the problem. Universities are increasingly considering anaerobic digestion as a solution as they expand their green initiatives.

Anaerobic digester systems provide a means for schools to recycle campus waste while satisfying multiple goals of reducing their carbon footprint, lowering their energy costs, reducing use of fossil fuels, capturing an important source of renewable energy, and creating campus laboratories for educating students on socially responsible behavior.

What is Biodigestion?

A biodigester is basically a large, fully enclosed tank into which you collect organic waste. Anaerobic means the absence of oxygen. If you lock anaerobic microbial organisms in a sealed environment without oxygen, but with plenty of food and other organic waste, the microbes produce methane-rich gas through their digestive process. Essentially, it’s the natural process of decomposition technologically revved up to optimal speed and efficiency. The trapped methane gas is then cleaned and used to generate electricity and steam for heating and cooling via a combined heating and power (CHP) or cogeneration system. The biogas also can be directly used to produce steam in boilers for hot water and heating. Leftover organic solid waste can be used as fertilizer, a soil enhancer or be further composted.

Anaerobic digestion is seen as a holistic, albeit more technically complex solution to food waste than University recycling and composting programs. When properly structured, installing a biodigester can also be a money-maker for the University by reducing electric, heating, waste disposal and operating expenses.

Food for Thought

Food_Waste-1.jpgBiodigestion is not entirely new to campuses. A number of Universities have been at the vanguard of installing biodigestion systems as part of their sustainability missions.   In 2011, the University of Wisconsin Oshkosh built the first commercial anaerobic biogas system in the United States. The 370 KW facility converts 10,000 tons of organic waste per year to generate approximately 8 percent of the University’s electricity needs. Michigan State University has developed a $5.1 million biodigester that converts around 10,000 tons annually of organic waste through an approximately 350 KW system that powers ten campus buildings. University of California Davis entered into a third party off balance sheet project finance arrangement to build an $8.6 million biodigester that converts 18,000 tons of organic trash annually into 5.6 million kilowatt-hours to satisfy 4% of the campus’ electricity needs.

Project Financing for Biodigester Projects

Deciding to construct a biodigestion facility involves undertaking a variety of risks, including construction cost overruns, delays, performance risk, technology problems and operating cost overruns. Financial risk is a major consideration. Construction of infrastructure projects requires review and consideration of balance sheet and credit issues. Undertaking large capital expenditures can run afoul of bond indentures and also affect a University’s credit rating. Sustainability programs often find their proposed projects competing with other capital projects. This is frequently an uphill fight as, unlike student housing, library and classroom buildings, owning and operating energy projects is not a core business of the University.

One structuring option that can minimize risks and overcome these political issues is to develop the project through a third party owned, off balance sheet project financing arrangement. Under a project finance structure, the University signs a long term power purchase and waste disposal agreement, or enters into a lease arrangement, with a third party developer that will guarantee the university savings off its energy and waste disposal costs. In exchange, the project sponsor agrees to take on project risks including construction cost overruns, delay damages, under-performance of the facility, and operating and maintenance costs. These risks are not inconsiderable, as biodigester performance depends upon a consistent, stable quality of organic waste and bio-gas production. Importantly, a project finance structure allows a biodigester project to be built and financed off-balance sheet to the University. This allows the University to avoid incurring new debt obligations, using up its balance sheet, violating bond coverage ratios and otherwise running afoul of its bond indentures. It also allows the University to allocate project risks to a third party while guaranteeing savings to the University of energy, waste disposal, operating and maintenance expenses.

An additional benefit of a project finance structure is that it allows a private party to use depreciation and other tax benefits not available to not-for-profit Universities, thereby reducing the overall capital costs of the projects. The resulting savings can be used to fund other sustainability projects, provide scholarships, hire additional professors, or for other worthy undertakings.

Best Practices for Implementing a Biodigester Project

As discussed, a biodigester project can be a complex, risky and costly undertaking. To maximize the value of the project while minimizing its costs and risks, a University first should undertake a preliminary economic, design and engineering study to understand the financial and environmental feasibility of the project, and to ensure it is designed and built to optimize its value to the school. Consideration next should be given to funding and financing issues to understand the project’s budgetary and balance sheet impact on the school, and to justify not just its environmental value, but its economic value to the Administration. Grants and state and federal governmental funding are often available for sustainability and renewable energy projects. Where funding options are limited, or to ensure a project’s long-term benefits to the school, third party project financing structures should be considered either separately or in conjunction with grant money, that can limit both financial and project risks and utilize available tax benefits. Project financing often is the optimal vehicle for allocating risks to parties that are best able to manage those risks. In short, if properly structured to optimize its value and minimize its risks, a biodigester project can be both an economic and environmental proposition for a University.

Topics: Biomass, university renewable energy, university sustainability, Methane, biogas, waste disposal, Energy Project Finance, Green Energy, biodigestor, food waste, waste to energy, Green house gas, Project finance, College campus, Trayless Dining, Composting, energy, Energy Project, biodigester, university energy, clean energy, Climate change, College

2015 Year in Review - Renewable Energy in the U.S.

Posted by Joshua L. Sturtevant on 12/23/15 3:33 PM

2015-_Green.jpgCo-author Morgan M. Gerard

Despite the low price of oil throughout the year, 2015 may have been an inflection point for renewable energy as a competitive generation source in the U.S. Deutsche Bank has noted that renewable sources, like solar, have reached, or will soon reach, grid parity with fossil fuel sources in many states. As non-fossil energy has become more economically viable, the industry has responded by standardizing and streamlining project processes, and by accessing financing vehicles like yieldcos and public bonds. Despite growth, the past year has also been a tumultuous one full of unexpected developments and policy shifts including the COP 21 agreement and the Clean Power Plan (CPP), and the formation of intriguing grassroots coalitions, like the green tea party. All of these developments were, of course, set against the specter of a potential step-down of the Investment Tax Credit (ITC), and its surprising last-minute revival. The following is a breakdown of some of the major developments impacting renewables in 2015.

COP 21

On the world stage, nearly 200 leaders, including representatives from key nations such as the United States, China, Russia and India, adopted an agreement that seeks to reduce global emissions. Expectations were tempered going into the much-anticipated conference with France calling for a binding treaty, and the U.S. balking at an arrangement that would almost certainly be struck down by a Republican-led Congress. In the end, the agreement established a long-term goal of maintaining a temperature rise “well below 2 degrees Celsius.” To achieve this objective, each country must submit emissions targets by 2020 with an ongoing reporting requirement. This victory for climate change advocates may serve as a leading indicator for a growing market for renewables.

The Clean Power Plan

The Clean Power Plan serves as the unofficial, yet primary domestic implementation framework for the COP 21 agreement. The CPP was promulgated by the Environmental Protection Agency (EPA) under its Clean Air Act (CAA) authority to regulate ambient emissions from stationary sources. The final Plan sets a target of a 32 percent decline in carbon dioxide emissions from 2005 levels by 2030, and contemplates a much larger role for renewables in the nation’s energy mix. Under the CPP each state will submit a compliance plan to achieve the emissions targets by retiring coal fired facilities, increasing natural gas as a fuel source and incorporating more renewables.

However, as the year draws to a close, the final disposition of the plan is far from certain. Hours after the regulation was published in the Federal Register, twenty-seven states filed more than 15 separate cases against the EPA, which have been consolidated before the U.S. Court of Appeals for the District of Columbia Circuit. In support of the CPP, 18 states, including New York and California, have sought to defend the EPA.

Before the merits of the case are even addressed, 2016 will see a three-judge panel address a “stay” of the rule, which halts the CPP’s implementation until the litigation is finalized. The parties seeking the stay, including West Virginia, feel that by meeting their prescribed standard they will be irreparably harmed. Renewable energy advocates argue that the granting of the stay could greatly damage the efficacy of the rule and its ability to be implemented in accordance with CPP (and unofficially COP 21) targets.

Solar_Panels_and_Wind_Farm.jpgThe Production and Investment Tax Credits

While the U.S. government has sought to assist the nascent renewables industry through tax credits in recent years, through most of 2015 the long-term status of the Production Tax Credit (PTC) and Investment Tax Credit (ITC) appeared grim. The PTC has been the great driver of the wind industry as it provides 2.3 cents per kilowatt-hour generated by a wind facility. Its expiration in 2014 led to a noticeable drop off in new wind projects. The ITC, which has been the driver of solar and also serves as a potential alternative credit for wind, provides a credit for 30% of the development cost of a renewable project, and is applied as a reduction to the income taxes for that person or company claiming the credit. The ITC was originally slated to be cut from 30% to 10% for non-residential and third-party-owned residential systems, and to zero for host-owned residential systems by the end of 2016.

Congress had been considering a PTC extension, which passed the Senate earlier this year. However, many thought an ITC extension was “off the table,” despite the fact that the reduction in credit value would render solar as unviable in many areas of the country. Thus, the industry was swept by uncertainty throughout the year. After solar businesses spent the past year reconsidering their business models to ease the pain of the step-down and speeding along projects to clear the credit requirements, Congress, to the surprise of industry, authorized the extension of both the PTC and ITC. The ITC will now be in place for an additional five years, including three years at the current value, followed by three years of more graduated step-downs. The impact of the ITC extension is set to be significant, and will likely inject new life into abandoned projects, protect existing jobs, support additional job creation and ensure that the renewables sector remains poised for an upward growth trajectory.

Yieldcos

In addition to using tax equity, larger solar companies have been able to raise public funds through the “yieldco” approach. Yieldcos are dividend growth-oriented companies, typically created by a parent company that bundles renewable and/or conventional long-term contracted operating assets in order to generate predictable cash flows. With about one dozen YieldCos now trading on North American exchanges, the vehicle has seen explosive growth in the last year.

The cost of capital required for energy projects has been reduced via the YieldCo model due to access to cheap corporate debt and as their use of standardized project structures and documents have lowered transaction “soft” costs. YieldCos have created efficient homes for the assets that large companies formerly kept on their balance sheets and have additionally allowed nascent entities to raise relatively cheap capital for acquisitions. They have also facilitated diversification of the renewable energy investor base as typical dividend-focused individual investors have been able to "go green" as an alternative to low yield bonds in a way that has been difficult in a tax credit-driven environment. Arguably, this has lowered return expectations, and therefore the cost of capital, further.

However, despite significant growth in 2015, the future of the YieldCo model is less than certain as the fourth quarter of 2015 saw great variability in YieldCo share prices. The reasons are myriad with theories addressing MLP values, rising interest rates, negative public statements from management teams, a slowing Chinese economy, lower oil prices, capital constraints and YieldCo disassociation from parents entities all being floated as potential reasons for recent losses in shareholder value. While it is important to decouple share price from the ability of a YieldCo to remain in business, lower share prices paired with rising interest rates could hinder the ability of many entities to continue to grow portfolios and dividends at current rates.

Distributed Energy Resources—Grid of the Future Proceedings

ThinkstockPhotos-178976522_1.jpgIn the wake of super-storm Sandy and the ensuing power outage to downtown Manhattan, the New York Public Service Commission (NYPSC) is proactively exploring revamping incumbent utilities to better incorporate Distributed Energy Resources (DERs) to ease the transition toward a more dynamic and robust energy generation and distribution system. DERs present a challenge to the tradition grid system, which only envisions energy flowing in one direction, typically from one large source located far from the end user. The proliferation of DER has caused a grid issue in that energy now flows bi-directionally—from the utility customer’s generating system into the utility.

NYPSC’s Reforming the Energy Vision (REV) docket envisions many user-sited DERs that will sell capacity into the system or to other energy consumers. Utilities will act in a new capacity, Distributed System Platforms (DSPs), as “gatekeepers” to a multi-sided platform market with the utility functioning as the platform provider. The utility will facilitate the transaction between the DER owner/operator and the consumer.

Similarly, California is also experimenting with incorporating and leveraging DER formally within their grid framework. The California Public Utility Commission is in the process of facilitating the utilities to develop distribution resource plans (DRPs) that incorporate DER into utility grid-planning and investment regimes. Currently, the Commissions’ mandate is for the utilities to determine the value of DER to their systems, specify where on their systems DER should be incorporated, and propose demonstration projects.

Solar in the Southeast

Developments in several Southeastern states, such as North Carolina, Georgia, Florida and South Carolina are highlighting changing shifts in attitudes toward solar in previously unfriendly jurisdictions. Policymakers in the Southeast are enabling both increased utility scale solar and the introduction of rooftop generation. For example, the Georgia legislature, thanks in part to a coalition comprised of environmentalists and conservative Republicans known as the green tea party, passed the Solar Power Free-Market Financing Act of 2015. The new law opens up third-party ownership of leased rooftop solar projects up to a maximum of 10 kW generation capacity.

Similarly, in South Carolina, utilities were required to submit their plans to implement the Distributed Energy Resource Program Act (DERPA), which mandates programs to achieve at least 2% renewable energy adoption by 2021, including plans to invest in or procure distributed resources. Earlier this year, Southern Carolina Electric & Gas (SCE&G) and Duke Energy reached separate agreements with state regulators, ratepayers and environmental advocates on programs for meeting this objective. SCE&G committed to invest $37 million to install approximately 84 MW of solar on the state’s electric grid by 2021, including 42 MW of utility-scale solar and 42 MW of residential, commercial-industrial, and community solar. Duke Energy agreed to a $69 million program to place in service 53 MW of utility-scale solar and 53 MW of residential and commercial solar.

Net Metering Debates

Utilities are not all for adapting to new and innovative business models, and in many states are continuing to push back against distributed generation. Net metering, which has incentivized hundreds of distributed energy projects, is a legislative policy that allows generators to sell unused electricity into the utility grid. Once supported by utilities, these policies are becoming more contentious across the country since in cost-of-service versus the rate-of-return regulatory jurisdictions, there is the argument that net metering prevents utilities from recouping their full return on grid investment. Utilities have raised concerns that net metering policies create an inequitable cost-sharing paradigm, whereby customers are paid for over-generation, but do not bear the responsibility or cost for updating and maintaining transmission lines.

For example, contention over net metering in Hawaii brought a regulatory proceeding to halt as the island’s utility maintained that costs are shifted to non-net metering customers. The utility recommended a model for distributed energy resources where owners would be compensated for net-metered electricity at $0.18 per kWh, which lengthens the payback period for solar infrastructure investments. Similarly, the Arizona Public Service Company (APS) established a charge for new rooftop solar panel installations connected to the electric grid through net metering, amounting to $0.70/kW—approximately a monthly charge of $4.90 for most customers.

Regulators and legislators from Nevada and California are considering whether NEM has run its course as a method to encourage solar adoption, or if the policy is a fair method of compensating rooftop generators. Utilities argue, not without merit in some cases, that they are purchasing electricity at a dollar rate greater than what it would take them to generate an equivalent amount of electrons. Moreover, electrons are only part of the story, as utilities still need to provide solar customers with standby power and voltage support to turn on their appliances and open their garage doors. Thus, NEM is heavily tied into the “grid-of-the-future” discussions as utility’s role evolves from vertical integration to DER network operators.

Offshore Wind

One of the drawbacks to renewables increasing their percentage share of the domestic energy mix is that these sources are intermittent with solar PV only generating electrons when the sun shines and wind turbines only turning when the wind blows. However consistent power - base-load - is still required, usually in the form of a fossil-fueled plant, or a nuclear facility. Offshore wind has long been touted as the next big addition to the U.S. energy mix since the wind blows harder and more consistently offshore, which would potentially allow this renewable energy source to replace some portion of base-load. Offshore wind had a rocky start in the United States as these large infrastructure projects face difficult regulatory obstacles, including a maze of permitting and environmental laws and requirements as well as classic NIMBY issues. One prominent example is the first proposed off-the-coast wind farm, Cape Wind, which has faced 14 years of litigation surrounding its development process. However, many are hoping that the start of construction of the Block Island Wind Farm off the coast of Rhode Island will trigger a gale force of offshore wind energy

Looking Ahead to 2016

The year ahead shows promise for the U.S. renewable industry—the COP 21 agreement and CPP set the stage for policies to drive and incentivize renewables, new states are opening as potential markets for both utility scale and residential rooftop solar and grid systems across the country are adapting to incentivize greater DER deployment. The stabilizing extension of the ITC and PTC ensures that these energy sources remain financeable in the New Year, and new financers may feel comfortable entering the market as the industry matures. With these policies in place, the U.S. has the opportunity to deploy more renewable infrastructure to meet stated targets, and those working in the renewable energy industry have cause for cheer this holiday season.

Topics: NY REV, Energy Policy, Energy Finance, Distributed Energy, YieldCo, Solar Energy, Renewable Energy, Wind, COP21, Renewable Energy 2015, Distributed Energy Resources, CPP, Green Tea Party, Net Metering, Net Energy Metering, NEM, DG, Energy Project Finance, Renewable 2015, Green Energy, Green Energy 2015, Solar Energy 2015, DER, Offshore Wind, Clean Power, clean power plan, Georgia Solar, 2015, energy, Wind Energy, Energy Project, Green 2015, California DRP

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