Using Finance to Lower Costs

EBCE is using energy “prepayment bonds,” an innovative public finance strategy, to save millions of dollars for customers.

The cost of wind and solar power generation has come down in recent years, helping EBCE deliver on its promise of cleaner energy at an affordable price. But EBCE is getting further cost reductions by using financing strategies that could save millions of dollars a year.

The key is “prepayment bonds” — using municipal bonds to pre-pay for power contracts, and using its tax-exempt status to get lower interest rates.

EBCE has just executed it’s first energy pre-pay transaction, and expects to see savings of over two million dollars per year.

The standard way of buying power is to sign a power purchase agreement (PPA) with a power generator, then pay it off monthly using revenues from ratepayers, kind of like paying rent.

The prepayment method is more like getting a mortgage to buy a house.

First, a tax-exempt entity like EBCE works with a bond underwriter and prepay energy supplier, in this case Morgan Stanley. The two parties sign a 30-year PPA, where Morgan Stanley buys from various power generators and EBCE takes delivery of the electricity.

To raise money to pre-pay for the power, EBCE issues bonds through a public bond issuance “conduit.” EBCE and three other CCAs recently created the California Community Choice Financing Authority (CCCFA), a joint powers authority that serves as a low-cost conduit for issuing bonds.

Once the bonds are sold, EBCE uses the revenues to pay for 30 years of power up front. Thanks to EBCE’s status as a tax exempt public entity, interest rates for the bonds are lower than those for taxable bonds.

“Private for-profit entities such as IOUs cannot do this,” says EBCE’s Chief Operating Officer Howard Chang. “So it gives us a structural advantage for achieving efficient and effective procurement costs and getting the best discount for our customers.”

To cut legal and financial fees, EBCE is going in on the deal with Silicon Valley Clean Energy (SVCE), a CCA in San Mateo county, who are getting similar savings from their contract.

More savings comes from the CCCFA, which EBCE formed with Central Coast Community Energy, MCE, and Silicon Valley Clean Energy.

“The CCCFA was set up specifically to issue bonds for pre-pay transactions,” says Chang. “Using the CCCFA we cut the transaction cost from issuing bonds from about $250,000 each time down to the administrative cost of running the CCCFA, like in the tens-of-thousands range.”

The pre-pay strategy was approved (PDF) by the EBCE board in July, and the bonds were issued in September. Because it is intended to pay for renewable energy, it was designated as a “green bond,” attracting investors seeking to make environmental, social, and corporate governance (ESG) investments.

Prepayment transactions have been used in the United States for the last 30 years, according to the American Public Power Association. Over 90 municipal prepayment transactions totaling over $50 billion have been completed in the U.S., with over 95 percent of them for natural gas contracts.

Other public power utilities in California have used the pre-pay approach, including the municipal utilities in Sacramento and Los Angeles. MCE is pursuing a similar strategy.

CCAs are also collaborating through California Community Power (CC Power), which facilitates joint procurements to get better deals for members. CC Power has ten CCA members so far, representing over 3 million customers across more than 145 municipalities spanning from Humboldt County to Santa Barbara County.