In November 2012, California voters approved Proposition 39, which is anticipated to generate approximately $1 billion per year in corporate tax revenue, with approximately half of this revenue over the first five years dedicated to energy efficiency and advanced energy projects in schools and public buildings.

Building on principles previously articulated, AEE today released a white paper outlining three options to attract and leverage outside capital to expand total energy savings. These options, developed in consultation with California advanced energy business and financial leaders, incorporate innovative financing mechanisms to stretch resources available to generate energy savings from $2.6 billion over five years to more than $10.5 billion over 30 years.

With over 1,000 school districts in California, a five-year program to expend $2.6 billion in Prop 39 revenues will leave policy makers with the difficult choice of either facilitating small efficiency upgrades in large numbers of schools, or deeper more capital intensive efficiency upgrades in a substantially smaller number of schools. Additionally, energy upgrades are needed at numerous public facilities beyond K-14 schools.  If Prop 39 funds are deployed solely as grants, without the benefit of leveraging, many cost-effective retrofit opportunities will go unrealized. A leveraging strategy significantly grows the pool of available funding, thereby enabling deeper retrofits and more projects in a greater number of districts, as well as opening the program up to other public facilities.  

Leveraging Prop 39 revenues can transform Prop 39 from a one-time opportunity to an ongoing source of funding to support energy efficiency projects in California over the long term, with the ultimate goal of having private capital supplant public funding.
AEE’s approach follows these principles:

• Prop 39 implementation should follow a phased-in approach, shifting from grants and technical assistance in the early years to financing mechanisms to extend the duration and impact of the program in later years.
• All elements of Prop 39 should seek to attract and leverage outside capital; this includes the grant-funding elements, by requiring applicants to leverage available dollars in the form of utility rebates, local bond revenues, public or private loans, or other sources.
• Entities with experience dealing with private markets should oversee the finance elements of Prop 39 implementation. The State Treasurer’s office currently administers a number of programs that deal directly with private markets. At the same time, other state entities may be better positioned to interact with school districts and other applicants, allowing the Treasurer’s office to focus on the finance-related elements of program implementation.
• Prop 39 implementation should seek to align existing and forthcoming California energy finance programs, serving as a bridge to a more comprehensive approach to financing advanced energy in California.
  
  

The white paper released today includes three different strategies for maximizing leveraging opportunities utilizing Prop 39 funding.

• Option A would allocate 40% of total Prop 39 revenues to attract and leverage private capital, including a $1 billion revolving loan fund, the creation of an innovative Interest Rate Offset Grant (IROG), and loan pooling through the Treasurer’s office. The total program value equals $10.5 billion over 30 years.
• Option B would allocate 25% of total Prop 39 revenues towards finance mechanisms, including a $500 million revolving loan fund. The total capital available under this option would equal between $3.7 billion – $6.5 billion depending on whether the IROG and loan pooling mechanisms are incorporated.
• Option C would reserve 10% of Prop 39 revenues toward credit enhancements to spur participation by private sector lenders, with total capital equaling $6 billion
  
  

In all cases, the bulk of available funds are dedicated to direct grants, with disbursement more heavily weighted toward early delivery to readily qualified projects.  This schedule recognizes that complex and more expensive projects that require sophisticated audits and planning, as well as the additional funds available because of leveraging, may take longer to properly analyze and subsequently work their way through the queue. 

With over $1 billion already being spent by utilities and state agencies on energy efficiency, a simple Prop 39 grant program – even where the grants are leveraged with outside funds on a project-by-project basis – misses a unique opportunity to produce a transformative impact.  By dedicating a significant portion of Prop 39 revenues to finance mechanisms that spur greater private capital participation in California energy efficiency programs and advanced energy projects, state policymakers can increase the total funds available and extend Prop 39’s duration and effectiveness well beyond the five-year timeframe contained in the initiative.