Plugged In: The Energy as a Service Model

Alan Bond: Hello and welcome to BLX on compliance I’m Alan Bond, your host. Today I’m joined by Chas Cardall, and Matt Neuringer for Plugged In: The Energy as a Service Model. Happy to have you here with me today, Chas and Matt.

Chas Cardall: Good to be here.

Matthew Neuringer: (inaudible)

Alan Bond: All right. So today we’re going to give a very high-level overview of Energy as a Service, or EAAS transactions. EAAS is a financing model that sits at the intersection of public finance, energy, and public-private partnerships. It’s a somewhat complex financing model and definitely something we won’t be able to cover in all of its detail today, but we do want to introduce the concept and talk about some of the key benefits of this model. So, Chas, why don’t you get us started with an overview of what Energy as a Service is?

Chas Cardall: Certainly. So, I—I was kind of thinking about this. Maybe there’s two ways to kind of get into it and look at it. One way to talk about it is to say it’s—it’s sort of a specialized version of a tax-exempt public-private partnership deal. Maybe a different way, if—if those words don’t mean a lot, to you, maybe a different way of thinking about it is: it’s kind of a complicated version of a conduit 501c3 financing with a few additional parties. But let me try to break that apart a little bit. So, maybe starting with, who are the parties?

Let’s—let’s say that we have an Energy as a Service deal that’s benefiting a hospital. So, we’ll kind of start with—with the hospital. It could be any other 501c3 or governmental entity, but let’s just say it’s a hospital. So, we have a hospital. There will be an issuer of the bonds, conduit issuer. There will be a non-profit corporation that is not the hospital—that’ll be the conduit borrower—and then there will be a party in sort of the project company or developer-type role. And when you think about how those parties fit together: bonds get issued, money gets loaned to this non-profit borrower, and the borrower is using the proceeds to pay for energy improvements. Typically, a combination of some sort of energy generation and probably energy savings, energy efficiency. And the way that the, sort of, dollars flow in terms of the bonds being paid, is, the hospital, in my example, would enter into a, I’ll call it a design-build, kind of operate and maintain type of agreement. The operate and maintain often is not that significant in these transactions, but a—a design-build type arrangement, with that nonprofit borrower, and then that nonprofit borrower enters into an agreement that is almost a mirror image to that sort of first design-build agreement, but does that with the project company.

And all of that then describes the assets to be financed, the obligation of the hospital to pay, the obligations of, kind of, the parties downstream, really, kind of the project company to deliver those assets and to make sure they’re operating correctly. And usually, but, but not always, wrapped around all of this is some sort of a guarantee by the project company to guarantee a certain amount of energy savings or efficiency. And in some cases, maybe even in, kind of, many cases, those guaranteed savings end up being sufficient, assuming that they arise, end up being sufficient to pay what is effectively the debt service on the bonds to kind of cover the hospital’s cost of paying for everything. So just in a, in kind of a rough sense, you have this, you know, conduit bond transaction with kind of a hospital at, at sort of one side paying, but not really being a direct obligor on the bonds, and a, a project company delivering a lot of assets, according to a fixed schedule with certain risk-sharing and so forth, and often guaranteeing sort of the overall economic result. Let me—let me stop there. I think that’s a reasonable, kind of short description.

Alan Bond: And can I say, it seems like a complex version of an already-complex transaction, which is sort of that P3 model. Is that …

Chas Cardall: Yes. I think the big advantage, and Matt may end up talking about this a little bit in his part, I think the big advantage is we’ve now done a number of these, and we’ve been able to sort of streamline the documentation and talk in a much more efficient way about, sort of, where the issues are that people care about and that kind of stuff.

So, there’s complexity, for sure. A lot of documentation, for sure. But, the sort of comfort nature with all of that has gotten much greater over the last couple of years.

Matthew Neuringer: I’d echo that, you know, completely. And, you know, I think just to kind of show you how sort of simplified the structure’s gotten, because I’d be, you know, really committing malpractice if I didn’t show you a structure chart on a webinar like this. But, you know, it’s really quite straightforward at this point. The only distinction really is that there’s now a nonprofit in place of a for-profit developer, and then you have this qualified management agreement. And so, this structure now has been deployed on over $4.5 billion worth of energy improvements across 15 transactions with about another dozen that are in the pipeline right now. So, there are many agencies and nonprofits that pioneered it for the benefit of the market today that’s able to transact with this structure in, call it two to three months, whereas originally it might have taken six to nine months.

Alan Bond: Yeah. All right, so now that we sort of have a clear understanding of the concept, Matt, can you maybe lead us off in the discussion of why the EAAS model can be especially attractive to universities, hospitals, and municipalities, and maybe talk about a couple of the key benefits of these transactions?

Matt Neuringer: Yeah, for sure. And I think a lot of people hear the word energy and they think electrons. And really actually, what we’re talking—you’d be surprised to learn that actually what we’re talking about is hot and chilled water, electricity, steam, heating and ventilation systems—really not the exciting, you know, major power plant projects that you’d imagine. You know, it can include cogeneration, which includes everything I just described, plus power. And then it also includes a whole smattering of other what are called energy conservation measures or facility improvement measures, where these energy-developers go to any type of entity that has thousands, or hundreds of thousands, of square feet of buildings that they’re operating and says, “Well you could improve your lighting over here. You could improve your energy efficiency by replacing these different components of your building envelope. There’s a building automation system that you can use to help streamline the way that you consume power.” And when they take the totality of the improvements to their central plant, for using chilled water, heating and steam, plus all these other improvements, they come up with a guaranteed savings. And they say to this, “I’m going to run as a healthcare provider, a municipality, university,” those are the—it’s called the “mush market,” so, the municipality, universities, schools, hospitals, ’“Hey, it’s going to cost you $400 million to do this at 15 different campuses and buildings. But over 30 years, we’re going to be able to reduce your energy consumption by such an amount that it’ll pay for not only all of the capital costs, but also the debt service and our operations and maintenance costs over that time period.” And that is the art and the science in the magic of these structures. And by using this tax-exempt financing approach, we’re able to reduce the cost of capital, therefore drive more energy savings, which then in return creates what’s called an accretive scope. So that as you lower the cost of the capital and invest more in savings, you then can invest further in additional savings.

So, what we saw for the first transaction ’we were working on with this, they went from a $230 million project to—in one state—to a $500 million project across 3 states. And it was largely because of the fact that we were able to deploy this innovative financing solution to reduce the cost of the capital.

Alan Bond: It seems like guaranteed savings is the—those are the, sort of, big catch-words there that sort of should draw people in, right?

Matt Neuringer: Yeah. It’s guaranteed savings…

Chas Cardall: And I will say-I’m sorry. Go ahead.

Matt Neuringer: Yeah. Guaranteed savings as well as transferring the risk of operating and maintaining energy assets to a company, an enterprise, that their sole expertise and purpose for being is energy efficiency and energy improvements and energy delivery, and allowing a health system to focus exclusively on their patient care, and a university to focus exclusively on delivering excellent services for their students and an educational experience.

So, it’s unlocking opportunity time and cost for these organizations to focus on what they’re really good at.

Alan Bond: Let me ask one question to both of you guys as we wrap up. You mention multiple campuses, but also beneficial for a single campus, correct? I mean, it’s, you know—

Matt Neuringer: Absolutely. I mean we’re doing—I mean we’ve done these transactions for $30 million single-campus project to a $1 billion, multi-state, 40 different campus, project. It’s very modular. And as Chas mentioned before, the democratization of the documentation and making it a lot simpler, which Orrick has been able to do, will make this accessible to frankly anybody in the market whose got buildings that need improvements on energy.

Chas Cardall: Right. That’s the goal for sure.

Alan Bond: Alright. So, to wrap things up today, let’s just—let’s stress that we’re only scratching the surface here in terms of the concepts and considerations with respect to this model. You know, it can be a powerful way to, like Matt just said, unlock energy savings, manage cost, and advance sustainability goals, but with a lot of careful analysis and considerations.

If you’d like to learn more about this financing model, we encourage you to watch a recording of an earlier Orrick webinar where the team does a much deeper dive on the topic. That recording will be linked here at the end of the video and also on the On-Compliance homepage in today’s video description.

So, Matt and Chas, thank you for being with me today. It was a pleasure talking with you.

Chas Cardall: Good to see you. Take care.

Matt Neuringer: Thanks.

Alan Bond: All right. The BLX and Orrick Post-Issuance Compliance workshop will be coming up on November 19 and 20. This hybrid workshop will have a live-stream option as well as an in-person option at Andaz Scottsdale and we hope you will consider joining us. For more information and to register, please visit the BLX website and be sure to follow us on LinkedIn at BLX Group. And we will be back again soon with another BLX On-Compliance. Thank you.