Wednesday, September 21, 2011

An Energy Initiative the Republicans Can’t Block

Consider a situation where you have billionaires, banks, defense contractors, and insurance companies proposing to state and local governments hundreds of millions of dollars worth of activity involving tax breaks and collateralized debt obligations. What could possibly go wrong here? 

Actually—it sounds like a fantastic idea!

There is an article in the New York Times by Justin Gillis titled: Tax Plan to Turn Old Buildings "Green" Finds Favor. The idea is called PACE: Property Assessed Clean Energy. There appear to be a number of initiatives around the country moving in this direction. The one referred to in the article seems to be the brainchild of a group called the Carbon War Room. Richard Branson (billionaire) set up this outfit to search for cost-effective ways to address climate and energy issues.

The focus at this point is on commercial properties. The idea is to allow owners of properties to upgrade their facilities to make them more energy efficient without incurring any upfront costs. The way this works is that a bank provides a loan to cover the cost of upgrades. The city or state agrees to be responsible for collecting payment on the loan through a property tax surcharge that could be spread out over as much as twenty years. A contractor comes in and does the work. When finished, the owner of the building covers his tax surcharge with the savings from the energy bill.

It all hangs together if the energy savings are greater than the project costs.

"Experts point out that, with modern techniques and equipment, a retrofit can typically cut a building’s energy use so much that the project pays for itself in as little as five years. The most famous recent example was the refurbishment of the Empire State Building, which cut energy use by nearly 40 percent, turning it into one of New York’s greenest buildings."

The consortium covered in the article was led by a company called Ygrene Energy Fund which already has exclusive contracts in place with a number of localities around Miami. It is expecting Miami and Sacramento California to jump on board soon. They have assembled a rather impressive team that is looking at as much as $650 million in investments over the next few years.

"Short-term loans provided by Barclays Capital will be used to pay for the upgrades. Contractors will offer a warranty that the utility savings they have promised will actually materialize, and an insurance underwriter, Energi, of Peabody, Mass., will back up that warranty. Those insurance contracts, in turn, will be backed by Hannover Re, one of the world’s largest reinsurance companies."

"As projects are completed, the upgrade loans, typically carrying interest rates of 7 percent, will be bundled into long-term bonds resembling those routinely issued by governmental taxing districts. Barclays will market the bonds. Retirement funds have expressed interest in buying these bonds, which will be repaid by tax surcharges on each property that undergoes a retrofit."

Lockheed Martin is also onboard to participate with its engineering expertise in the larger projects.

With potential energy savings that could exceed cost many times over, there is room for large profits for everyone. Even the environmentalists seem enthralled.

"’It’s a big deal,’ said James D. Marston head of energy programs for the Environmental Defense Fund, a group that has worked with Carbon War Room in developing the approach. Over the long haul, he said, ‘we’re talking about tens of billions of dollars in investments, and energy savings that are 10 times that amount. If you do this correctly, you would be able to shut down a third of the coal plants in the country’."

The concept has acquired wide spread acceptance.

"In the past three years, half the states have passed legislation permitting energy retrofits financed by property-tax surcharges, and hundreds of cities and counties are considering such programs. While the situation poses some risks, and programs aimed specifically at homeowners have run into a snag, many jurisdictions are moving forward with plans to focus on commercial properties."

The author attributes the notion of using this tax surcharge path to finance energy upgrades to Berkeley California. The observation that an idea originating in Berkeley, the liberalist of liberal bastions, is driving the capitalist engine to make large profits—and to make the world a better place to live—is something to savor. Berkeley and Lockheed Martin as collaborators—you gotta like that! I know that is a bit of a stretch, but the thought will help get me through the rest of the day.

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