Qualified Energy Conservation Bonds

Advantages

  • Provides substantial amount of cheap capital that can be infused into existing or new programs
  • Allows qualified state, local, and tribal governments to issue debt at extremely low rates
  • Engages private investors

Disdvantages

  • Issuance process requires an investment of time on the part of the issuer
  • Issuance costs may be high relative to the amount of capital raised for issuers with small QECB allocations
  • State/local government may be averse to taking on debt

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A Qualified Energy Conservation Bond (QECB) is a bond that enables qualified state, tribal, and local government issuers to borrow money at attractive rates to fund energy conservation projects (it is important to note that QECBs are not grants). A QECB is among the lowest-cost public financing tools because the U.S. Department of Treasury subsidizes the issuer's borrowing costs.

Like Build America Bonds, QECBs are taxable bonds—meaning that investors must pay federal taxes on QECB interest they receive. Issuers may choose between structuring QECBs as tax credit bonds (bond investors receive federal tax credits in lieu of interest payments) or as direct subsidy bonds (bond issuers receive cash rebates from the U.S. Treasury to subsidize their net interest payments). Both tax credit and direct payment bonds subsidize borrowing costs—most QECBs are expected to be issued as direct subsidy bonds due to the current lack of investor appetite for tax credit bonds.

QECB proceeds can be used to fund capital expenditures on a variety of projects including:

  • Reducing energy consumption in publicly owned buildings
  • Implementing green community programs (including loans, grants, or other repayment mechanisms) such as efficient street lighting replacements and loan programs for residential energy efficiency improvements
  • Developing rural capacity, specifically involving the production of electricity from renewable energy resources
  • Supporting energy-related research facilities, research grants and research
  • Implementing mass commuting and related facilities that reduce energy consumption and pollution
  • Designing/running demonstration projects to promote the commercialization of energy-related technologies and processes
  • Launching public education campaigns to promote energy efficiency

The U.S. Congress authorized $3.2 billion of QECB issuance capacity, which has been allocated to states, local governments, and tribal governments based upon population. Processes for notifying state authorities of intention to issue QECBs (and deadlines for doing so) vary.

A QECB issuance takes several months to structure, market, price, and close. Qualified issuers should select eligible projects and consult their bond counsel for more information on the QECB opportunity.

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