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Developing a Business Case for Renewable Energy at Airports (2016)

Chapter: Chapter 8 - Funding a Renewable Energy Project

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Suggested Citation:"Chapter 8 - Funding a Renewable Energy Project." National Academies of Sciences, Engineering, and Medicine. 2016. Developing a Business Case for Renewable Energy at Airports. Washington, DC: The National Academies Press. doi: 10.17226/22081.
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Suggested Citation:"Chapter 8 - Funding a Renewable Energy Project." National Academies of Sciences, Engineering, and Medicine. 2016. Developing a Business Case for Renewable Energy at Airports. Washington, DC: The National Academies Press. doi: 10.17226/22081.
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Suggested Citation:"Chapter 8 - Funding a Renewable Energy Project." National Academies of Sciences, Engineering, and Medicine. 2016. Developing a Business Case for Renewable Energy at Airports. Washington, DC: The National Academies Press. doi: 10.17226/22081.
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Suggested Citation:"Chapter 8 - Funding a Renewable Energy Project." National Academies of Sciences, Engineering, and Medicine. 2016. Developing a Business Case for Renewable Energy at Airports. Washington, DC: The National Academies Press. doi: 10.17226/22081.
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Suggested Citation:"Chapter 8 - Funding a Renewable Energy Project." National Academies of Sciences, Engineering, and Medicine. 2016. Developing a Business Case for Renewable Energy at Airports. Washington, DC: The National Academies Press. doi: 10.17226/22081.
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Suggested Citation:"Chapter 8 - Funding a Renewable Energy Project." National Academies of Sciences, Engineering, and Medicine. 2016. Developing a Business Case for Renewable Energy at Airports. Washington, DC: The National Academies Press. doi: 10.17226/22081.
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84 The financing options available to the sponsors of renewable energy projects at airports include those that are traditionally available to airports as well as those that are available to government entities. Based on an analysis of the potential funding sources for renewable energy projects, the options discussed below were found to have the greatest potential for use by airports. These options should be investigated by the airport during the planning stages of the project to determine what combination of sources best suits the project’s needs and fits within the airport’s financial structure. 8.1 Airport Funding Options There are a number of opportunities for capital funding available for renewable energy proj- ects at airports. These range from federal government incentives to local and state incentives. Currently, most federal incentives for renewable energy projects are part of the federal Internal Revenue Code; so public entities such as airports that have no tax liability are not eligible recipi- ents. These tax incentives (30% investment tax credit and accelerated depreciation) can reduce the installed project costs by well over 40% for a private owner. The ability of private owners to access tax incentives is one reason for the frequency of private ownership of renewable energy projects on public lands and buildings. In addition to federal incentives, there may also be state and local incentives available to airports. Some states have developed databases of incentive programs for renewable energy. Incentive pro- grams change frequently—so airports should regularly examine the programs in their areas. Airports can also employ funding mechanisms typically used for capital improvements on an airport: FAA’s AIP funding (primarily discretionary funds), PFCs, and revenue bonds. Each of these programs has specific requirements and processes. 8.1.1 Airport Improvement Program AIP provides grants to eligible projects at airports in the National Plan of Integrated Airport Systems (NPIAS) for the purpose of planning and improving public-use airports. Funds from these grants are divided into two separate categories, entitlement grant funds and discretionary grant funds. Projects eligible to receive funding under AIP generally include those that enhance airport safety, capacity, security, and environmental concerns. Each type requires the airport to contribute local funds to match a portion of the federal contribution. The current version of FAA Order 5100.38, Airport Improvement Program Handbook, provides guidance on all aspects of AIP. 8.1.1.1 Entitlement Funds AIP entitlement funds are grant funds awarded by the FAA and apportioned based on enplanements and PFC authorizations. These are generally required to be used on projects with Funding a Renewable Energy Project C H A P T E R 8

Funding a Renewable Energy Project 85 the highest priorities to support airport operations, safety, and security. It is unlikely that an air- port would use entitlements to fund a renewable energy project. Rather, entitlements would be applied to higher priority projects such as runway or taxiway construction. 8.1.1.2 Discretionary Funds AIP discretionary funds are grants awarded by the FAA based on a ranking of eligible projects, prioritizing those that best carry out the purpose of the AIP. Highest priority is given to safety, security, reconstruction, capacity, and standards. Airport projects compete for funds against other projects in the same FAA region. Under current FAA priorities, it is unlikely that a renew- able energy project would be rated high enough to receive AIP discretionary funding. A search of FAA grant awards showed that no solar projects were funded in 2013 or 2014, two were funded in 2012, and three were funded in 2011. 8.1.2 Passenger Facility Charges PFCs are funds collected by airlines on passenger tickets for use of the airport. Funds are com- mitted to projects that have been approved by the FAA after consultation with the airlines and the completion of the public comment period. Typically, PFCs are used to pay debt service and financing costs associated with bond issues. PFCs can be combined with federal grant funds to meet the non-federal share of AIP-funded projects. Projects funded with PFCs must preserve or enhance safety, security, or capacity of the national air transportation system; reduce noise or mitigate noise impacts resulting from an airport; or present opportunities to enhance com- petition between or among carriers. Medium and large hub airports that impose PFCs face a reduction in their AIP apportionment funds. As an example, airports that integrate solar projects with terminal or infrastructure develop- ment may be eligible to fund the solar elements of the renewable energy project with PFCs. The use of PFCs to fund stand-alone solar projects is less certain but may be clarified with the anticipated FAA guidance on Section 512 projects or new FAA reauthorization legislation. 8.1.3 Section 512 Section 512 of the FAA Modernization and Reform Act of 2012 added a program that encour- aged public-use airport sponsors to assess the airport’s energy requirements so that the airport could increase the energy efficiency of its power sources. The legislation made these specific types of projects eligible for AIP, but not for any special set-aside funding, particularly the noise and environmental set-aside funding, which had been used to fund renewable energy projects under VALE. Energy efficiency projects include those relating to heating and cooling, base load, back- up power and power for on-road airport vehicles, and ground support equipment as well as solar PV projects. Under Section 512, the secretary of transportation may award grants to perform energy assessments. Such energy assessments must be completed before the FAA issues a grant to fund other, specific projects that the legislation made AIP eligible. The FAA has prepared a Draft Interim Guidance on Energy Efficiency dated August 7, 2012; however, the FAA is in the process of preparing updated guidance for this program. Until the new guidance is published, the FAA Office of Airports must be contacted for guidance on applicability and the funding process. The airport’s regular federal share applies to these grants. 8.1.4 VALE The VALE Program is designed to reduce all sources of airport ground emissions and is one of the noise and environmental set-asides in AIP. Through VALE, airport sponsors can use AIP funds and PFCs to finance low emission vehicles, refueling and recharging stations, gate electrification,

86 Developing a Business Case for Renewable Energy at Airports and other airport air quality improvements. VALE funds were available to airport solar projects until recently; however, the FAA has determined that use of VALE for solar is no longer within the intent of the program but could be funded under Section 512. VALE funding had been used for other renewable energy technologies such as geothermal at Portland, Maine; Duluth, Minnesota; and most recently at South Bend Regional Airport in Indiana. 8.1.5 Bonds and Loans CREB (Clean Renewable Energy Bond). Qualified tax credit bonds authorized by the Energy Tax Incentive Act of 2005 and allocated under Section 54c of the Internal Revenue Code allow projects to be financed and for the federal government to pay the interest after project completion. Bonds are subsidized by the U.S. Treasury, which provides a credit of 70% of the full allowable interest rate. The amount of funding available through CREBs changes annually, based on congres- sional allocation. These funds require the approved project sponsor to issue bonds for the project. QECB (Qualified Energy Conservation Bond). Qualified tax credit bonds that enable state or local governments to borrow money at attractive rates to fund energy conservation projects. Bonds are subsidized by the U.S Treasury which provides a credit of 70% of the full allowable interest rate. Funding through QECBs is dependent on congressional allocation, and can change annually. For example, Congress allocated $3.2 billion for 2015. Based on the guidance provided by the DOE,36 both bond programs have the same term limits, bond rates, and assurances. These are as follows: • Coupon rates are negotiated with the buyer like any other bond program. • The bond term limits are set by the U.S. Treasury Department on a monthly basis. Also, the Treasury Department has a maximum coupon rate that is eligible for tax credit. This is called the tax credit rate and is also set on a monthly basis (to see the current prevailing rates go to https://www.treasurydirect.gov/GA-SL/SLGS/selectQTCDate.htm). • Issuer sells taxable bonds and pays a taxable coupon semi-annually to the investor. • All bond proceeds generally must be spent within 3 years or used to redeem bonds at the end of that 3-year period. Issuers must have a binding commitment with a third party to spend at least 10% of the bond proceeds within 6 months of the issuance date. • Only 2% of the bond proceeds can be used toward cost of issuance. If issuance costs are higher, the balance of these costs must be funded from other sources. • Davis-Bacon prevailing wage laws do not apply to issuer employees but do apply to contracted labor. 8.1.6 Utility Rebates and Incentives The DOE offers rebates and incentives for renewable and efficient energy development to businesses and individuals. State and local governments may also offer utility related rebates and incentives. Sponsors can find details on the specific rebates and incentives that are available in their area by visiting the DOE’s Database of State Incentives for Renewable Energy (DSIRE). The rebates and incentives change frequently, so airports should investigate opportunities early in the planning stages and verify that these options are still available as project planning proceeds. 8.1.7 Renewable Energy Certificates RECs are tradable commodities that indicate that a renewable energy generator has produced electricity. The REC is a way for regulatory entities to track buying and selling of renewable

Funding a Renewable Energy Project 87 energy and credit the consumer of the green power. RECs are most often sold on a per megawatt- hour (MWh) basis, typically through a multi-year contract. The REC purchase is a paper trans- action meaning that the buyer and seller of the RECs have no physical connection (e.g., a Tech company in California can buy RECs from a wind farm in the Midwest). Airports that capitalize, construct, own, and operate renewable energy facilities create RECs as the electricity is generated. The airport can hold and retire the REC and credibly claim that it uses green energy to power the airport. Or it can sell the REC to obtain additional revenue to help pay off its initial project investment with the buyer of the REC claiming the renewable energy purchase. The value of the REC will vary based on the REC market. 8.2 Private Partner Funding Options Third party owned projects are particularly attractive in states where there is a strong solar power market and private entities are actively looking for development sites and green power purchasers. In these situations, development companies profit from renewable energy develop- ments primarily due to the ability to monetize the federal ITC, which is currently equal to 30% of the project installation cost, and state incentives for renewable energy, which direct utilities to purchase green power at a premium price. 8.2.1 Tax Credits Tax credits have been a fundamental public policy tool to incentivize many types of private sector activities that governments have sought to encourage. Congress approves tax credits for specific business sectors as part of budget authorizations, and the IRS administers the programs and provides policy guidance on the implementation of programs. The ITC applies a tax credit as a percentage of the investment value or cost to construct a solar power facility. Authorization of tax credits by Congress has been unpredictable. It has allowed tax credit programs to expire and then be renewed for short-periods of time. This uncertainty has made it difficult for private investors to rely on the availability of the tax credits on a project-by-project basis, which has caused inefficiencies. However, Congress extended the ITC for 8 years in 2008, providing a relatively stable funding platform for investors to work from. Unfortunately, the stable period will soon change when, after December 31, 2016, the tax credit will be reduced from 30% to 10%. Therefore, private developers are accelerating efforts to develop and put into service new renewable energy facilities before the value of the tax credit decreases. Broad-scale tax credits applicable for airport renewable energy projects from state and local entities are rare, though the interpretation of some tax laws like real estate taxes will likely have some impact on the financial costs of developing renewable energy. As an example, solar projects constructed on-site are exempt by Wisconsin state law from property tax. 8.2.2 Accelerated Depreciation Accelerated depreciation is one of several methods used by companies to defer corporate income taxes by reducing taxable income by depreciating a fixed asset. It allows the owner of a renewable energy project, provided it is not a public entity, to take deductions in the early years of the life of the project. A straight-line depreciation method allows for the deductions to be spread evenly over the life of a project. The advantage of the accelerated depreciation allows for the owner to deduct far more in the first years after the commencement of the project, thereby reducing taxable income, which could allow the owner to purchase more assets.

88 Developing a Business Case for Renewable Energy at Airports 8.2.3 Debt and Equity Debt is the amount of money borrowed from one party by another party usually to allow the borrower the ability to purchase a commodity. Many companies or individuals use debt to pur- chase products or services such as renewable energy. Typically the lender has an arrangement with the borrower that it has to be paid back at a later date, with interest. Equity is the ownership of an asset after all the debts of that asset are paid off. As an example, a house with no outstanding debt would be considered equity. Partial equity would be the value of the asset minus the debt or amount owed. 8.2.4 Power Purchase Agreements A PPA is a contract between a buyer and seller of energy that obligates the parties to deliver and pay for energy at a pre-determined price and term. PPA is a critical aspect of project financing because it guarantees a long-term revenue stream during facility operation, which assures that investors will receive a return on their investment based on the established PPA price of electricity. 8.3 Business Structure Renewable energy projects have different business structures depending on ownership. There are three primary ownership scenarios for renewable energy projects at airports. They are air- port-owned, third party owned with airport as host, and third party owned with airport as power purchaser. Other lesser arrangements are airport-owned with an equipment lease, utility owned with airport as host, and tenant owned. Each type of ownership has different cost metrics that affect the business structure of the project, in this case a renewable energy project. There are a number of variables that must be considered when evaluating financing alternatives for a renewable energy project and determining if a project at an airport is financially feasible. Unlike airports, which are public entities, private development companies profit from renewable energy developments primarily due to the ability to monetize (1) the federal ITC, which is currently equal to 30% of the project installation cost and (2) state incentives for renewable energy, which direct utilities to purchase green power at a premium price. However, airports have access to grants, AIP funds, PFCs, and other grant/loan programs that may not be available to a private developer, which may subsidize a large portion of the renew- able energy project cost and make airport-owned projects financially attractive. Government legislation has developed public policy programs to incentivize solar and other renewable energy technologies due to their broad long-term technological, environmental, and social benefits. Successful financing options are closely aligned with maximizing public policy incentives to reduce the cost and increase the value of renewable electricity. Such programs are structured differently to benefit government and private owners. 8.3.1 Airport-Owned In the airport-owned scenario, the airport funds, constructs, owns, and operates the renewable energy power facility. The facility generates electricity on-site, behind-the-meter, and directly feeds electricity consumption at the airport. At times when the system generates more electricity than the building can consume, the excess electricity is sold back to the utility. At times when the building consumes more electricity than the system can produce, the airport purchases the additional required electricity from the utility. The meter records the amount of electricity drawn from the grid and credits back excess electricity sold to the utility. The amount of electricity that

Funding a Renewable Energy Project 89 can be sold and the value of that electricity (e.g., wholesale, retail rate) vary among states. How- ever, the difference between what is bought and sold is the airport’s electricity bill (which could be a liability or an asset). The airport invests in the facility and recoups its investment through savings in energy bills due to the value of renewable electricity. Benefits are accrued over time through the value of avoided cost that would otherwise be paid through purchasing electricity from the utility. Savings can be added over time to determine the time required to pay back the investment in the system. As owner of the renewable energy facility, the airport would also create RECs, which are a tradable commodity and may provide the airport additional revenue to improve system payback. 8.3.2 Third Party Owned In a third party owned project, the airport leases out property (land or building) to a private developer who constructs, owns, and operates the facility under a long-term lease agreement. These arrangements are economical to all parties because the third party as a private, tax paying entity can monetize the tax incentives (whereas a government owner can’t), reduce the project cost, and pass the savings on to all participants. The third party requires a site and a power purchaser. The airport may act as the host only and receive an annual lease payment. To keep project costs down, the third party will look for inexpensive land with low lease rates, and thus where the airport does act only as host, the lease payment will be for land that has little market value and no other use. Alternatively, the airport can also act as the power customer by executing a PPA to purchase the electricity at a mutually agreed upon price. The PPA is a critical aspect of project financing because it guarantees a long- term revenue stream during facility operation, which assures that investors will receive a return on their investment based on the established PPA price of electricity. In the scenario where the airport buys the power, it executes a land lease for a nominal cost and earns a financial benefit through an electricity price agreed to in the PPA that serves its long-term business interests. Third parties may have an interest in developing renewable energy projects at airports because airports are a creditworthy, long-term purchaser of energy.

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TRB's Airport Cooperative Research Program (ACRP) Report 151: Developing a Business Case for Renewable Energy at Airports provides instructions and tools to evaluate proposed renewable energy projects and their alternatives. The guidance may assist airports with making informed energy decisions that maximize financial, self-sustainability, environmental, and social benefits.

In addition to the report, a decision-making matrix contains criteria that can be used to evaluate a renewable energy project with a system for weighting each factor based on an airport’s particular objectives. A sample request for proposals and a sample power purchase agreement are provided for project implementation.

Spreadsheet Disclaimer - This software is offered as is, without warranty or promise of support of any kind either expressed or implied. Under no circumstance will the National Academy of Sciences, Engineering, and Medicine or the Transportation Research Board (collectively "TRB") be liable for any loss or damage caused by the installation or operation of this product. TRB makes no representation or warranty of any kind, expressed or implied, in fact or in law, including without limitation, the warranty of merchantability or the warranty of fitness for a particular purpose, and shall not in any case be liable for any consequential or special damages.

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