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23 Oct 2020

Your city can hit its climate targets, even with falling tax revenue

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Dr. Karthik Balakrishnan

President and Co-Founder

COVID has had a major impact on our communities. Over 300,000 people in the United States are dead, businesses are closed, tourism is almost non-existent, and there is record unemployment. There’s a potential eviction crisis looming and many homeowners are unable to pay property taxes. Despite efforts by businesses and governments to reopen, demand is still weak. The result is a massive loss of municipal tax revenue being felt nationwide.

At the same time, jurisdictions trying to preserve the wellbeing of their citizens face higher costs. Residents need more social services including unemployment support and food banks. Hospitals in COVID hotspots face mounting financial pressures. Schools are spending precious resources adapting to distance learning and purchasing equipment. There may be additional costs for rent stabilization and small business grants and loans. These impacts won’t end with the pandemic either. The long term health impacts are still unknown, and there could be a lasting impact on medical and accessibility costs.

In total, a drop in state budgets of up to 10% in FY2020 and up to 30% in FY2021 is possible, and the pain at the municipal level is likely to be felt unevenly.

Climate change isn’t on pause just because the world is dealing with COVID. The aggressive IPCC targets are unchanged and must be hit if there’s any chance of avoiding increasingly catastrophic climate changes. While there was a 17% global reduction in emissions and a dramatic improvement in air and water quality around the world when lockdowns first started in March and April, the improvements were short-lived and emissions bounced back rapidly.

Bonds and a variety of project finance structures can be useful for very large and expensive projects such as buying a fleet of electric buses or constructing new schools, subways, and airports. As tax revenue decreases or becomes more volatile, many jurisdictions will find it harder to issue bonds, and their high origination costs make them unsuitable for the smaller-ticket projects which encompass many energy and sustainability upgrades. The traditional way to fund these smaller upgrades is to use a small portion of the of the general fund each year to pick away at the backlog, gradually reducing the energy OpEx budget and reallocating this budget to a mix of operational needs (salaries, supplies, etc), debt servicing, and other obligations.

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Traditionally, money is spent once on an energy upgrade and the budget is immediately reallocated

How do we reconcile the tension between the urgency of climate change and the budget impacts of COVID? It may be tempting for many to defer energy and sustainability upgrades until the economy recovers, freeing up the general fund for social services for residents. But since climate change isn’t on pause, a different path is needed.

Over the next several posts, we’ll explore new ways to leverage both public and private funds including Savings Recycling and Savings Performance Contracts. We’ll start with Savings Recycling.

Savings Recycling is an option that is especially useful when budget cuts are needed. It allows jurisdictions to magnify the number of upgrades that can be done with a restricted amount of money. A one-time allocation of money from the general fund is put towards a repeatable energy upgrade. “Repeatable” means that similar work such as lighting or HVAC upgrades need to be performed in several places in the jurisdiction. The first year, the budget is deployed into the subset of locations with the highest savings potential. The savings are carefully tracked and set aside. Instead of putting the money back into the general fund, the unspent (saved) funds are redeployed into similar upgrades in other locations. After a predetermined number of years, the savings are harvested and the total annual savings from all the accumulated upgrades are redistributed into other parts of the budget.

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In Savings Recycling, savings from energy upgrades are used to make new upgrades before being harvested

Let’s look at an example of a school district that wants to replace aging fluorescent bulbs inside its school buildings with more energy efficient LEDs that fit into existing receptacles using a small retrofit adapter. They pay $0.15/kWh for electricity and they pay $100/hr fully loaded for skilled labor. Note the numbers below are for illustrative purposes only and will vary by project, jurisdiction, and technology selected:

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This school district has $100,000 available, far short of the nearly $350,000 of parts and labor needed to upgrade 5000 lights across the district. They turn to Savings Recycling to make a comprehensive upgrade possible and overcome the barrier of available funding.

The first year, the district uses the entire $100,000 budget and upgrades as many lights as possible. They concentrate on the highest usage classrooms, offices, and other parts of the school to maximize the energy savings.

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While the initial investment allows for just 1500 lights upgraded in the first year, reinvesting the savings of about $10 per light year after year into additional upgrades makes it possible for the district to hit its efficiency targets without allocating any additional budget to these upgrades. Half the lights are upgraded within 5 years, and the entire upgrade project is complete in 10 years, all from the operational savings of the successive accumulation of upgrades.

The longer that Savings Recycling is practiced, the bigger the savings harvested for other parts of the district budget. While the 30-year savings from performing a single $100,000 upgrade is just over $300,000 (or about a 3% annualized return), performing Savings Recycling for 10 years leads to nearly $800,000 of savings (or about a 7% annualized return) over the same 30-year period. Ultimately, the district must decide how long it can wait to capture the savings for other parts of its budget. The longer the savings are recycled, the greater the total savings.

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Savings Recycling is not only useful as a way to stretch facilities budgets and generate savings for operational expenses. In this particular example, the annualized returns for 10 years of Savings Recycling exceeds the returns targets for many pension funds including CALPERS. Given the twin threats of climate change and mounting pension liabilities, Savings Recycling can be a way for jurisdictions to diversify their investment portfolios, put money to work in their own communities, and meet climate goals, all with a single investment.

Savings Recycling won’t fall into place without some supporting work, however:

Analytical Tools. It’s important for the jurisdiction to adopt several analytical and monitoring tools as part of the upgrade process. Each location must be properly modeled to understand the costs and savings from switching from old to new technologies. This will also help prioritize rollout.

Performance Monitoring. The upgrades must be monitored in near-real-time, allowing for the savings to be accurately accounted for. This also enables closing the modeling loop, taking performance data from deployed upgrades and revising estimates for the performance of future estimates, giving clarity to financial stakeholders on the expected return.

Careful Accounting and Organizational Buy-In. Savings must be carefully accounted for.   There must be organizational buy-in and agreement on the Recycling Period, to ensure that savings are recycled into upgrades as planned, and the impacts of any changes to the original plan are fully understood by all stakeholders.

ACTUAL can provide the support needed to make a Savings Recycling program pay off for your community - contact us to learn more.

About Actual: Actual gives infrastructure originators, investors, and other stakeholders confidence as they model and track the cost, impact, and outcomes of sustainable and net-zero infrastructure projects. Visit www.actualhq.com or contact us to learn more about how our digital-twin based models can help unlock new savings and revenue streams for your projects.

Follow Actual on Twitter and visit our blog to learn more about our other projects and perspectives.

Illustration by Stefan Gustafsson.

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