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Regulators in emerging markets sometimes struggle with how to let utilities handle concessionary financing (e.g., grants and low-interest loans). Regulators allow utilities to place their capital investment amounts in what is called the “rate base” or “regulatory asset base (RAB).” Utilities are then allowed to earn an appropriate return on these investments. Customers pay for that return on capital through the tariff. The investment principal is also returned to the utilities through repaid depreciation, which also comes from customers through the tariff (called the return of capital).
But, when a utility receives a grant or low interest loan, should ratepayers be forced to pay the utilities a return on money the utilities did not invest? Further, should the utilities receive that money back through a depreciation allowance when it was not their investment in the first place? After all, the grant or low-cost loan is usually being offered specifically to keep the tariff as low as possible.
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Energy efficiency (EE) has a central role in addressing climate change. Strengthening energy efficiencies at organizational and entity levels can not only bring significant carbon reductions, but investments in this area can also bring substantial cost savings to businesses and government operations. A 2015 Rockefeller Foundation report calculated that there is room for at least $279 billion in building retrofits in the United States, which could “yield more than $1 trillion of energy savings over 10 years” [1]. The Report further states that this level of energy efficiency savings would reduce U.S. emissions by nearly 10%. By 2020, according to the EIA, over 500 electric utilities had initiated EE programs resulting in annual consumption savings of 28.2 billion kWh–roughly split between residential and commercial customers. On the commercial side, investments can be large, and sometimes difficult to finance. While some states have provided financing options, there are limits to available capital. In this environment, several modalities have emerged to accelerate capital availability; one interesting avenue is a Green Revolving Fund (GRF).
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Richard Swanson, Ph.D.Asset valuation and project finance expert, specializing in financial and economic analysis of civil infrastructure assets. Archives
June 2022
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