CREBs—Clean Renewable Energy Bonds—$2.2B of them were allocated as part of the American Recovery and Reinvestment Act of 2009—are a tool for schools and public agencies to fund solar electric and hot water systems on their buildings.  Called “new CREBs”, the borrower pays back only the bond principal, and the bondholder receives federal tax credits in lieu of interest payments.  All in costs are lower than issuing most tax-exempt muni bonds and lower than current power purchase agreement rates as well as continuing to pay for grid power.  Here is the way Santa Clara County compared the options.

Simply put, CREBs are a financing tool to put solar on public schools—a noble intention. 

California government agencies were allocated about $640M of these bonds—Palo Alto Unified School district allocated over $20M, Mt. Diablo USD allocated over $50M, San Diego USD allocated $74M for 111 projects, and LAUSD received over $120M for 90 projects.  These allocations are good for three years.

Problem is, the $1.2B 2005 allocation of “old CREBs” authorized under the Energy Policy Act of 2005 never got much traction—only $50M of them were issued.  A real missed opportunity.

Part of the problem is that CREBs are allocated on a smallest to largest basis, but you needed to aggregate about $10M of CREBs to have the costs of issuance be covered by the two percent cost cap allowed.  The other part of the problem is that public agencies have their credit rating re-examined every time they go back to the market—and risking your agency’s current rating for a small issuance of CREBs could be a bad career move these days.

The bonds yield about 6% pretax—and since they are paid in tax credits, borrows can use 70% of the payment to offset their federal tax liabilities.  To make the bonds attractive, bondholders have been asking for either discounts or interest payments in addition the federal tax credits—these have been averaging about 1 to 1.5% to make them equivalent to munis.  Repayment is established through a sinking fund, and the power savings can be redirected into this interest bearing sinking fund account.  Currently, the tax credit can be stripped by the issuer or holder and sold separately.

I don’t understand why California’s Investor Owned Utilities don’t make a market in these bonds—they have the tax appetite, they have a vested interest in seeing solar distributed generation more widely adopted, they would have first crack at buying the system SRECs to offset their RPS requirements, you have a market size of north of $500M—seventy to a hundred megawatts of solar created—and the halo effect of sponsoring solar on schools would be huge.  They could buy these bond in private placements, so a school district’s credit ratings would not be publicly bandied about.  They seem like the perfect buyer for the school’s new CREBs.

What don’t I get here?