Bonds are one of the most common forms of financing used by state and local governments, because they are a low-cost source of capital available to most entities. State and local officials may consider using bonds for a variety of clean energy purposes, including:
- Financing a specific set of energy upgrades in their own facilities (can be combined with an energy savings performance contract)
- Capitalizing finance programs (e.g., revolving loan fund) for public sector energy upgrades
- In some cases, financing projects and capitalizing programs that support the private sector.
In general, standalone bond financing for small clean energy projects (i.e., less than $5 million) is uncommon because of the high transaction costs associated with bond issuance. However, this does not mean that bond financing is limited to large projects, as smaller projects are often "wrapped" into larger bond issuances, or, as noted above, a bond could be issued to capitalize a loan pool for smaller projects.
Bonds are long-term debt obligations that are sold in the public market, placed with investors by an investment banking firm, or purchased directly by a bank. The issuer (e.g., state or local government) is then required to make scheduled interest payments at specific periods at an agreed-upon rate, and to return the principal on the date the issue matures (or incrementally throughout the life of the bond).
A variety of bonds are available to state and local governments for clean energy initiatives. State and local bonds—often also referred to as municipal or public bonds—are the most traditional, and can be used with varying tax liability and forms of security (e.g., general obligation versus revenue). State and local energy officials may also wish to partner with state-chartered bond authorities, such as housing finance authorities, who can provide tax-exempt bond financing to nonprofits and industry. The following table provides an overview of these options:
Summary of Bonding Tools Available for Financing Energy Projects
|Type of Bond||Private Use Allowed?||Allocation Process||Expiration Date|
|Public Bonds||Yes||Varies by state and locality||Ongoing issuances|
|Qualified Energy Conservation Bonds*||N/A||N/A||Eliminated beginning in 2018|
|New Clean Renewable Energy Bonds*||N/A||N/A||Eliminated beginning in 2018|
|Tax-Exempt Bond Financing for Nonprofit Organizations and Industries||Yes||Varies by state and locality|
* Qualified Energy Conservation Bonds and New Clean Renewable Energy Bonds issued on or before December 31, 2017, and consistent with the Internal Revenue Code, will continue to receive tax credit or direct payment benefits, as applicable to a given bond issuance.
- Flexible capital for funding a range of clean energy projects
- Lowest cost debt due to robust security and tax exempt interest
- Increased revenue for school district (in most cases because taxpayers repay debt)
- Long terms (20-30 years)
- Voter approval required (in most cases)
- Counts against statutory debt limit restrictions
- High fixed issuance costs, including obtaining a legal opinion, setting up a trustee, and retaining accounting services
- Long development time (~9 months+) to prepare package of funding requests and gain voter support