Wisconsin Local Governments and School Districts in a New Energy Economy: Budgeting for the Clean Power Plan
For many local government entities and school districts, the cost of energy consumes a large portion of the budget. The Environmental Protection Agency's recent adoption of the Clean Power Plan—which many industry observers describe as the most significant environmental regulations in United States history—has only heightened the concern over energy costs. The Clean Power Plan is essentially an effort by the EPA to mitigate the impacts of climate change and calls for a 32% reduction in carbon dioxide emissions from the power sector by 2030. The transition toward such reductions is scheduled to begin in 2022—only seven years from now. As significant energy users with a small or nonexistent budget for new energy expenses, it is important for public agencies—and their facility managers—to understand how the Clean Power Plan will impact their budgets and what, if anything, they can or should be doing to mitigate or neutralize future increases in energy cost. This Update summarizes some of the likely impacts that the Clean Power Plan will have on local government and school district budgets, and identifies some important measures that they can undertake in order to mitigate or even neutralize those impacts.
How will the Clean Power Plan impact public agencies in Wisconsin?
For Wisconsin, where roughly 62% of the electricity is generated from coal-fired plants, the impact of the Clean Power Plan will likely be significant (some say dramatic) in terms of energy generation, cost and usage. At least one industry analysis predicts that, in the absence of other cost-effective energy generation options, costs of compliance with the Clean Power Plan could result in annual energy cost increases of 17%-30% per year beginning in 2022. Compare this with historical increases over the past 15 years which are more typically in the range of 4% per year. All of this adds up to additional financial strain in an already difficult fiscal environment.
The ultimate impact, however, will depend in substantial part on how Wisconsin crafts its specific plan to achieve the emission reductions goal established for it under the Clean Power Plan. The EPA has granted wide latitude to each state in determining how best to achieve the desired emission reductions. Possibilities identified by the Clean Power Plan include measures to (i) directly reduce carbon dioxide emissions at the source, (ii) increase the power generation load at facilities that utilize natural gas, (iii) reduce electricity usage through energy efficiency equipment and programs, and/or (iv) expand renewable energy production. A well-designed state plan can help moderate the impact on energy rates in the near term and potentially result in lower energy costs in the long-term. Thus, state governments, including their local government constituents, that more proactively plan and position themselves now will be in a far better position to deal with the likely ramifications in the future, and even turn those into opportunities.
As a public sector leader, what can you do now to best adapt to the effects of the Clean Power Plan?
1. What Do We Use and Where Do We Use It? Analyze your energy usage and become an active participant in the state implementation plan process to help craft solutions that can benefit your budget.
Given the importance of the state implementation plans on the ultimate impact of the Clean Power Plan, you should be analyzing your local energy environment (such as your electricity rates and how your electricity is generated) as well as your energy usage. It is important for you to understand what measures would best enable your unit of government to reduce its energy costs and/or usage. The purpose of this exercise is to position yourself to get engaged in the policy formulation process at the state implementation stage and to start a discussion with your peers – there is much more that can be accomplished working together on this initiative than in isolation. With stakeholder input, Wisconsin should be able to design innovative and effective regulatory programs that can help minimize the impact on energy consumers—and even set the stage for new businesses, or even industries, to grow here. However, state implementation plans must be submitted to the EPA as early as September 2016, so there is a limited window for stakeholders to influence the measures adopted in Wisconsin.
2. How Can We Effectively Utilize Existing Incentives and Strategies? Consider on-site renewable energy generation for your facilities to take advantage of current incentives and hedge against future energy cost increases.
Industry analysts predict that renewable energy will continue its growth as a significant part of our national electricity fleet. In 2014, the installed solar capacity grew by 34% from 2013, and installed wind capacity grew by 8%. Wind and solar are proven renewable energy technologies that not only mitigate energy cost risks, but in some cases turn those risks into budgetary advantages. Thus, you should seriously consider incorporating on-site renewable energy generation, such as a rooftop solar energy system, into your facilities. The cost of solar energy systems continues to decline and, at least through the end of 2016, there are advantageous tax incentives that can defray the upfront investment. Even if you have not budgeted for the upfront cost, there are a number of solar developers that offer sophisticated financing approaches that can minimize, and in some cases eliminate, your upfront budgetary burden. Some of the financial strategies and tools that can be utilized to deploy renewable energy include the following:
Tax equity financing to utilize federal and state tax incentives such as the investment tax credit and production tax credit
Renewable energy certificates or RECs which, in some states, are tradable credits created from renewable energy production
Energy performance contracting which require contractors to provide performance guarantees for renewable energy or energy efficiency improvements
Qualified Energy Conservation Bonds to obtain subsidized borrowing rates for projects which either reduce energy consumption or generate renewable energy at publicly owned buildings, or create green energy programs or mass transit programs for the local community.
In many cases, there may be little (if any) upfront investment on the part of the energy consumer. The facility owner simply furnishes the rooftop space and agrees to either lease the solar energy system or purchase the energy generated by the system at a fixed rate over a set duration of time (typically 12-15 years), after which they have the option to take over full ownership of the system. The energy produced by the solar energy system merely supplants the electricity that the public entity would otherwise purchase from the local utility. Properly structured, solar energy systems can result in significant energy cost savings.
We have also represented clients in the food processing and dairy industries in connection with the development, permitting, design, financing, construction and operation of waste-to-energy systems (i.e., anaerobic digesters). Digesters can generate electricity, gas, heat and nutrients for fertilizer from animal, food processing and other waste. While the production of energy or methane gas is an important and useful byproduct from digester operations, the primary economic driver of those projects often tends to involve the costs associated with waste management and/or disposal. We have found that creative solutions involving partnerships between waste producers and those interested in the energy generation or other system outputs results in positive economic gains for all involved.
Incorporating on-site generation can be an effective hedge against future energy cost increases and create significant cost savings that can have positive impacts on your budget. In addition, if Wisconsin ultimately adopts a carbon trading or similar incentive as part of its implementation plan, it may be possible for you to sell RECs generated by your solar energy system, thereby further mitigating potential energy cost increases. However, there is no assurance that the federal tax incentives for solar, which have been key to structuring cost-effective solar projects for government users with private investment, will be extended beyond 2016. Therefore, now is the time to assess the advantages of an on-site solar energy system.
3. How Can We Operate Leaner Now and In the Future? Evaluate energy efficiency upgrades to your facilities and/or operations.
You should also consider undertaking energy efficiency retrofits (such as new HVAC systems, efficient lighting and water efficiency technologies) to reduce your energy usage. These retrofits and upgrades can produce tangible, and oftentimes immediate, budgetary savings. When implementing any such measures, you should be sure to establish a pre-retrofit baseline of your energy usage in order to document and demonstrate efficiency gains as Wisconsin may incorporate rewards or other incentives for such gains into its state implementation plan.
Energy savings performance contracts are proven tools that local governments and school districts across Wisconsin have used to undertake energy efficiency improvements without tying up otherwise constricted capital budgets. As a tool to offset energy costs, solar energy would also be an eligible improvement tool in the toolbox. The process is governed in Wisconsin by Wis. Stat. § 66.0133. This statute requires that the local governmental unit, among other things, work with a "qualified provider" to first obtain a report detailing effects of the "energy conservation measure" under consideration on the local unit of government. While there are shortcuts some energy services contractors may prefer, there are important safeguards and practices the local unit of government should consider when seeking an energy savings performance contract. Chief among them is conducting a thorough request for proposal and contract negotiating process. Energy savings performance contracting may present some different compliance requirements and processes than you are familiar with.
4. Can You Outsmart the Plan? Explore operational efficiencies you could obtain from incorporating "smart" technologies.
Smart technologies will continue to play an important role in facilities operations and there will be opportunities for technology to help in dealing with the ramifications of the Clean Power Plan. Accordingly, you should continually assess how technology or other such resources may help make your operations more efficient or productive, and/or reduce your energy usage and costs.
Other advantageous measures and opportunities will come to light as Wisconsin gets further along in the development of its implementation plan. Thus, even if you decide not to actively participate in the state implementation plan process, it will be critical for you to stay informed of implementation measures and options being considered at the state level.
Debates continue to rage on as to the legality, feasibility and potential effectiveness of the Clean Power Plan. It has survived at least one legal challenge so far, and more have been threatened and filed. Whether you agree with the Clean Power Plan's legality, purpose or approach, it would be an expensive mistake to not plan for its implementation—with a potentially severe impact to your budget. What is more, even without taking into consideration the likely impacts of the Clean Power Plan, the economics for solar in particular make sense now. Consider the measures identified above as part of your solid budgetary planning process. The Clean Power Plan merely amplifies their relative importance in taking control over the mounting challenges to deploying effective government services in an already difficult budgetary environment