A Flurry Of Green Muni Bonds

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by Tess Olsen-Rong

Green municipal bonds are set to take off in 2015 after a flurry of issuances in the latter half of 2014. With interest rates at an all time low, this is the time to finance the vast backlog of infrastructure upgrades and developments needed – and to green that infrastructure. This, according to the Financial Times, is especially so in the US.

With green muni growth has come a growing diversity in the use of proceeds. Some green municipal bonds are using proceeds for projects where the green credentials are more complex to analyse than say a wind or solar plant. Recent bonds have used proceeds for heat recovery from natural gas generation, biomass power plants, car parks and clean water. Things are getting complicated.

Jefferson County NY $20.1m biomass-to-energy – this really needs feedstock certification

Let’s start with a renewable energy green muni bond issued by Jefferson County in the State of New York. Proceeds from the $20.1m bond will go to a 60 MW capacity biomass power plant. The plant was coal-fired until 2013 when it was converted by ReEnergy Black River LLC. Biomass, like almost all green categories, is not automatically a green project. Unsustainable sourcing of biomass can lead to deforestation and therefore have a negative effect on carbon emissions. Fortunately Jefferson County “primarily burn sustainably harvested biomass residues and other waste fuels” – great! But investors should be looking for accreditation from a suitable feedstock standard to confirm that the issuers’ definition of “sustainably harvested” really does fit the bill. In this case the majority is derived wood with the remaining 20% recovered wood (i.e. chippings).

Another area of concern with biomass is the air pollution generated in the burning process. Jefferson address this in part by committing to reporting on the annual air emissions (and water use) of the plant. Watch out for the public consultation for the Climate Bonds Bioenergy Standard in February that will address these issues.

Mass State College $91.4 … mostly sort of pale green … but a car parking station? Really?

Green munis in Massachusetts were coming thick and fast in 2014 with bonds from Massachusetts state and MIT. Not wanting to miss out on the fun, Massachusetts State College Buildings (MSCB) joined the club with an inaugural $91.4m green bond. The bond is split across multiple tranches with tenor ranging from 2 to 20 years and a credit rating of AA from S&P.

Proceeds will go to the renovation of a campus center, and construction of: a science building, a residential hall, a design-media center and a car park. We have previously discussed the need for green property standard; here the buildings will be Silver LEED rated – a good start.

However, this is the first time we have seen a green bond used for an indoor car park,based on energy efficiency measures. This threw us a bit, especially as LEED certification does not apply for car park structures. The (new) car park will achieve bronze level “Green Garage Certification” under a scheme run by the Green Parking Council we’ve tried to find out what that actually means and are still in the dark. Of course, if the whole parking station was an electric car charging station ….

Hartford County in Connecticut goes for green (water) bonds

Next, water. Florida’s East Central, Spokane and Connecticut all issued green water municipal bonds in the last quarter of 2014. Hartford County in Connecticut also joined the ranks with a $140m bond across 24 tranches with tenor ranging between 1-23 years and AA/Aa2 rating (SP/Moodys).

Proceeds from the bond will go to stormwater projects, pipe repair and replacement, and waste water (pollution) control. Now these are pretty standard project types when it comes to the water bonds we have seen so far. Adaptation to climate change requires water infrastructure to be ready to deal with, for example, bigger surges of stormwater. The treatment of waste water, when there is no energy, is not necessarily green because of the environmental footprint it creates. This is why a thorough second opinion on the green credentials of a water bond is essential. However this is currently missing from the green muni market; Spokane did lead the way with a second opinion; but its review did not cover the green credentials of the bond, only adherence to Green Bond Principles.

In 2015 we need to see a green review for water that takes all these topics into account to provide investors with an insightful analysis of the topics.

Utah power $21.39m – not sure about the gas aspect

Finally, Utah Associated Municipal Power System’s (UAMPS) $21.39m green bond was issued across 20 tranches in November 2014. Tenor ranged from 3 to 20 years across the tranches and achieved an A- rating from S&P.

Alarm bells started ringing when we saw natural gas in the offering document. But our fears were somewhat alleviated because proceeds are not going to gas; instead the bond is funding a project to recycle excess heat energy created by the gas turbine. Once completed the heat recovery power plant will generate up to 7.5 MW and has the potential to remove 737,000 tonnes of CO2 (when replacing gas-fired power generation) over its 30 year life.

When taken in isolation (from the gas turbine) it can be described as a “green” project – but its entire process is depend
ent on gas, where the jury is still well and truly out about what you could call “green”. The project could be compared to a refurbishment or energy efficiency project in a gas power plant which would elongate the life of the gas generator. Hmm … not quite convinced on the green credentials of this one yet, although we do appreciate there’s a complex argument about gas as a transition investment in some countries – but that needs careful analysis as it doesn’t always stack up.

(He amusingly quotes a banker: “The markets are very like sheep – if one sees a rival doing something they immediately look at it and think should we do the same.” That BTW is one of the rationales for promoting a green bonds market.)

Tess Olsen-Rong ia an analyst at the Climate Bonds Initiative, an “investor-focused” not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. Sean Kidney and Beate Sonerud also contributed to this post. 

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