November 22, 2013
In April 2012, the Chicago City Council approved an ordinance establishing the Chicago Infrastructure Trust, a nonprofit corporation to fund infrastructure enhancements via alternative public-private financing sources. The Trust identified energy efficiency retrofitting of public buildings as its first major priority, and on November 12, 2013, it approved up to $30 million in financing for Retrofit One, a plan to retrofit 75 public buildings. The Trust selected Piper Jaffray & Co. to negotiate and manage the financial terms with the potential investor. The Retrofit One project must be approved by the Chicago City Council before its implementation.
The Trust will most likely fund the improvements through an "energy savings agreement." Under this financing structure, a private investor would commit a $25 million funding stream to pay for upfront energy efficiency updates. The City would repay this loan via energy cost savings over a 20-year period. The City will not be required to repay the loan if energy savings are not realized. The liability to achieve the savings will fall on the energy performance contractors who install the upgrades. This provision is designed to lower the financial risk to the City, guarantee energy savings, and achieve a return on investment for the private lender.
GO TO 2040 identifies energy conservation and energy demand reduction as critical regional priorities and calls for the implementation of alternative financing to help drive retrofit work. CMAP recently completed a $25 million grant program to implement Energy Impact Illinois, a three-year energy efficiency program that, in part, tested different financial models for retrofit funding. The program initially launched with a $9 million loan to retrofit large commercial buildings. There was little demand for this financing option, however, and the funds were ultimately converted to rebates for over 6,000 single- and multi-family homeowners.
The lessons learned from Energy Impact Illinois can be applied by the Chicago Infrastructure Trust as it negotiates a financial contract for Retrofit One. For example, the required return on investment may limit the scope of the retrofit work to "low-hanging fruit" options, such as lighting upgrades, rather than more significant upgrades like boiler replacements. While energy savings will still be achieved, optimal energy savings potential may not be realized if private investors avoid upgrades with higher cost/longer payback terms and instead focus on projects with only the highest rate of return.
These types of agreements are complicated, non-traditional financing options that warrant thorough consideration and analysis before adoption. Beyond the real need to reduce energy consumption in public buildings, a significant gap exists between public funding and private sector capital that is available to make the necessary upgrades. If this model is successfully implemented, it could open up future opportunities in a building sector that has largely been untouched by energy efficiency upgrades.