Qualified Energy Conservation Bonds

Qualified Energy Conservation Bonds are a special type of federally-supported state and municipal bonds that can be used to finance clean energy projects at extremely low interest rates. Funded by the 2009 Recovery Act, QECBs are meant to help local governments invest in their communities, save energy, and create jobs. Under the program, the federal government will repay about 70% of the interest on qualifying bonds. $3.2 billion was dedicated to this little-known program, and over $2.5 remains available. The Applied Solutions QECB Guidebook outlines the program, the requirements for qualifying, and discusses the advantages and obstacles to using QECBs.

Click to download the Applied Solutions QECB Guidebook

To learn if QECBs are right for your community and how you might be able to use them to help jump start clean energy projects, download our Guidebook or contact Applied Solutions economist Jim Barrett. The Applied Solutions QECB Guidebook explains the program in detail and can help you decide if QECBs are right for your community.

IRS Issues Guidance on Qualified Energy Conservation Bonds to Support Local Clean Energy Work
The IRS issued guidance in July 2012 on Qualified Energy Conservation Bonds that might be of interest to our members. As described in the Applied Solutions QECB Guidebook: A Resource for Clean Energy Development, Qualified Energy Conservation Bonds (QECBs) are federally subsidized municipal bonds issued to finance certain projects designed to promote renewable energy and increased energy efficiency. Under the program, local governments are authorized to issue a total of $3.2 billion in QECBs nationally. Governments are allocated access to the program based on a population formula. The amount of the subsidy varies depending on market conditions, but at the time of this writing, the federal government will reimburse interest payments on QECBs at a rate of just over 3%. A local government that can issue bonds with an interest rate of 5%, for example, would thus have net interest costs of less than 2% for QECBs. Many local governments have been able to use QECBs to obtain financing for clean energy projects at net interest rates of less than 1%.

Despite the potentially large interest savings that the QECB program can offer, QECBs have been vastly underutilized, with less than 80% of the available $3.2 billion having been issued to date.
One of the reasons that QECBs have been underused to this extent is that the authorizing legislation was unintentionally vague in several key areas. The IRS guidance just issued addresses two of the most important sources of uncertainty in the law.

20% Energy Reduction Requirement
One of the intended purposes of the QECB program is to help local governments finance energy conservation measures in publicly owned buildings. The program requires that these projects achieve a 20% reduction in energy use in the buildings to which they are applied, but offered no guidance on how to measure the reductions, the what time frame within which the reductions had to be realized, and, in the case of a project that covered multiple buildings, whether the 20% reduction had to be achieved in each separate building or by the project as a whole.

The IRS guidance in July 2012 gave municipalities a wide berth, relying on the standard of "reasonable expectation," to determine whether a project is projected to achieve the 20% reduction requirement. The guidance requires municipalities to use "reasonable and consistent" methods to measure energy consumption before and after the project explains how to select appropriate measurement time frames. Finally, it also explicitly allows projects that cover multiple buildings to average the energy savings across the entire project to meet the 20% requirement.

Green Community Programs
The original regulation contained various restrictions on how QECB proceeds could be used, including, for example, a limitation on what share could be used for private activities. At the same time, it allowed a broad exemption from such limitations for projects that were designated as "Green Community Programs." The law offered no definition of such programs nor did it offer any procedures on how a program could be designated as such.

In its guidance, the IRS adds one key clarification around Green Community Programs. In order to qualify, a Green Community Program must involve either work on a property that is available for general public use or a program that is broadly available to the general public. The guidance cites examples of upgrading streetlights as an example of the former, and a loan program for building retrofits that is "broadly available" to businesses or homeowners.

The guidance contains some other clarifications of a more technical nature and specific examples of tools that may be used for estimating energy savings, and examples of what types of programs qualify for various definitions and why.

The content and analysis provided by Applied Solutions and its staff should not be construed as actionable legal advice.