How CCAs are Leveraging the Power of Green Bonds to Save Customers Millions
Energy affordability is a major concern for California residents. As local, not-for-profit energy providers, CCAs are dedicated to finding every avenue possible to reduce their customers’ bills. Green bond prepayment transactions are one of the newer tools CCAs are using to achieve significant savings for customers.
In 2021, five CCAs — Central Coast Community Energy, Clean Power Alliance, Ava Community Energy, MCE, and Silicon Valley Clean Energy — formed the California Community Choice Financing Authority (CCCFA) to help reduce the amount they pay and charge customers for renewable energy. CCCFA is a conduit issuer of bonds that can secure lower energy contract prices through the use of a special legal framework that applies to public or tax-exempt entities, including CCAs.
CCCFA was the top issuer of green bonds nationally last year, according to Garth Salisbury, chief financial officer & treasurer at Sonoma Clean Power and a former CCCFA board member. To date, CCCFA has issued $23 billion in prepayment bonds on behalf of CCAs, saving participating community choice ratepayers roughly $150 million annually or nearly $4.6 billion over the life of prepaid energy contracts.
“Our mission is to confront the climate crisis by eliminating fossil fuel greenhouse gas emissions,” Salisbury explains. “These bonds are a major part of that effort.”
Green bond proceeds are being used to finance CPA’s energy payments under seven clean energy PPAs including one with Clearway’s Daggett 3 Solar-Plus-Storage project in San Bernardino County (pictured).
Since the 1990s, both the Internal Revenue service (IRS) and U.S. Congress have codified that tax-exempt entities can pay for energy in a unique way. They can prepay, or pay upfront, for a supply of electricity from a taxable entity and fund that prepayment with tax-exempt municipal bonds. Because the bonds that are used to pay for the electricity are tax-exempt and generally have a lower interest rate, entities like CCAs effectively get a discount on energy contracts by paying upfront. The bonds are also non-recourse debt, which means that the CCA is protected from liability if the deal falls through.
Historically, the special framework that allows for this prepayment discount has been used by municipal electric and gas utilities largely for the purchase of natural gas. But now CCCFA is using this unique allowance to assist CCAs in lowering their customers’ costs through green bonds that pay for the purchase and building of clean energy projects.
CCA Green Bonds in the News
California Community Choice Financing Authority recognized as the largest U.S. green municipal issuer of 2023 at the 9th Climate Bonds Awards. Read more here.
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For decades, some towns and cities have been getting a discount on their natural gas supply by locking in long-term contracts with big banks. These prepaid municipal bonds first emerged in the 1990s and are especially popular across the Southeast. They represent more than $80 billion in prepaid natural gas supply and billions of dollars in savings, according to financial analysis commissioned by MCE.
Recently, towns and cities in California have started locking in similar discounts for renewable energy, lowering electricity bills as they work toward state targets for renewable energy. Since 2021, the California Community Choice Financing Authority has issued prepaid renewable bonds totaling nearly $10 billion, according to the authority. Like prepaid gas bonds, they help municipalities save 10% or more on long-term energy contracts.
Communities in Michigan, Minnesota and Vermont have all reached out to learn more, said Garth Salisbury, the Financing Authority’s treasurer. “I think deals are going to get done,” he told Capital & Main.
Read more here.
The structure of a generalized CCA prepayment process which makes use of green bonds.The bonds’ sale provided funds for the prepayment, which was sent to a commodity subsidiary of Goldman Sachs, J Aron & Company, who is responsible for supplying electricity to the CCA over the 30-year term of the bonds.
CCCFA’s bond prepayments have three main parties: a CCA looking to buy electricity, CCCFA facilitating the purchase through bonds, and a taxable entity looking to sell electricity. By way of example, Clean Power Alliance (CPA), California’s largest CCA, worked with CCCFA to complete two prepay bond transactions in 2023, each yielding proceeds of approximately $1 billion. These bonds were underwritten, or purchased directly and then resold to investors, by Goldman Sachs.
The savings come from the fact that the bank is willing to pay for the bonds at their normal taxable borrowing rate. However, the bonds are tax-exempt and have a lower interest rate, so the difference between the normal taxable rate and the lower tax-exempt rate becomes a discount for the CCA of as much as 10 percent, dependent on market conditions at time of issuing the bonds. The bank agrees to the discount because they get other benefits from the agreement, including underwriting fees.
Given the success of the green bond issuances, more CCAs are now giving prepayment transactions a close look. There are 25 CCAs in California, and some who are not currently part of CCCFA have expressed interest in joining and moving forward with additional bond issuances.
Greater demand from community choice energy providers and investors means that more bond issuances are extremely likely in the future, which means even more savings for CCA customers.
For additional details on prepayment green bonds check out this FAQ.
