Financing Green Projects Using Obama $

We know that Solyndra failed but it would be wrong to extrapolate and conclude that public funds shouldn't be used for financing "green infrastructure".   Today, the NY Times has published a green puzzle.  City governments and private firms aren't using the Qualified Energy Conservation Bonds (only 20% of the $ has been used).

Some Facts:


Qualified Energy Conservation Bonds (QECBs) may be issued by state, local and tribal governments to
finance qualified energy conservation projects. A minimum of 70% of a state’s allocation must be used
for governmental purposes, and the remainder  may be used to finance private activity projects.
• Qualified projects are defined broadly (detailed discussion to follow).   Examples of qualified projects
include energy efficiency capital expenditures in public buildings, green communities, renewable energy
production, various research and development, efficiency/energy reduction measures for mass transit,
and energy efficiency education campaigns.
• The United States Treasury (U.S. Treasury) allocated $3.2 billion to states according to population.
There is no statutory deadline for eligible public entities to issue QECBs.
• QECBs were originally structured  as tax credit bonds. However, the March 2010 HIRE Act (H.R. 2847
(Sec. 301)) changed QECBs from tax credit bonds to direct subsidy bonds similar to Build  America
Bonds (BABs).  The QECB issuer pays the investor a taxable coupon and receives a rebate from the
U.S. Treasury.

So, this approach allows the green project to finance itself at a 1% interest rate.   The NY Times has an interesting quote for how this $ could be used.

"Municipalities have found the program difficult to navigate, as it wasn’t always clear how clean energy projects could qualify. For example, localities could sell bonds for projects that reduced energy consumption in public buildings by 20 percent. But some officials were unsure how to calculate the savings, either for individual buildings or the overall group."


This quote surprises me.   Suppose that a building's monthly electricity consumption is X kWh.  Then, the proposed building retrofit would reduce annual consumption by .2*X*12 .  Suppose that electricity is priced at p $ per kWh (so let's ignore an increasing block tariff structure).  Then the annual savings due to this project is .2*X*12*p  .


Suppose that the retrofit costs $F and the interest rate for borrowing this money is 1% and the market rate of interest is 4%.   To keep this algebra simple, let's assume that the building  lives for 2 years and then falls apart.


The city should engage in the green Retrofit if:


.2*X*12*p*1.04 + .2*X*12*p  - (1.01)*F  >  0


Note that I'm solving this at time period 2 so that by doing the retrofit project, you save on electricity bills and you can put that $ in the bank and earn 4% and in time period 2 you save again but you have to pay back the loan amount and the 1% interest.


What is so difficult about calculating this term?   The Government could introduce a calculator to help potential investors decide whether they have an economic incentive to pull the trigger on doing such retrofits using government subsidized $. In the presence of a GHG externality, such subsidies may make sense.  But, there is a puzzle of why City governments can't do this arithmetic.