To: Board of Supervisors
Department or Agency Name(s): County Administrator’s Office, Public Infrastructure
Staff Name and Phone Number: Barbara Lee: (707) 565-2510
Vote Requirement: 4/5th
Supervisorial District(s): Countywide
Title:
Title
1:45 P.M. Financing for Energy Upgrades
End
Recommended Action:
Recommended action
A) Receive final Investment Grade Audit and Energy Conservation Assessment of County facilities,
B) Approve recommended near-term County facilities energy upgrades totaling $28,863,439.
C) Direct Staff to initiate process of issuance of the Certificate of Participation via Public Sale for public hearing, and delegate authority to:
i) The Auditor-Controller-Treasurer-Tax Collector to negotiate and execute an agreement with KNN Public Finance, LLC, for municipal financing advisory services in an amount not to exceed $125,000, in form approved by County Counsel;
ii) The Auditor-Controller-Treasurer-Tax Collector to negotiate and execute agreements with specialized debt issuance and public sale services providers as required for the Certificate of Participation financing, in form approved by County Counsel and subject to availability of funding therefor; and
iii) County Counsel to award, negotiate, and execute special bond counsel legal services with Jones Hall, APLC, in an amount not to exceed $100,000. (4/5th Vote Required)
D) Determine and find that the proposed energy services, facilities, and measures are categorically exempt under the California Environmental Quality Act (CEQA).
end
Executive Summary:
Consistent with the County of Sonoma’s 2021-2026 Strategic Climate Action & Resiliency and Resilient Infrastructure goals and objectives, which include investing in electric power resiliency projects at County facilities, the former General Services staff requested and received Board delegated authority to enter into the $275,000 work order agreement with the PG&E Sustainable Solutions Turnkey (SST) Program to identify potential cost-effective energy upgrades. A summary of the preliminary findings was presented to the Board on December 11, 2023. The final investment grade audit report and an Energy Conservation Assessment was received on March 15, 2024, and is presented to your Board today, for consideration and direction.
Not including facilities/systems contained in the preliminary new County Center project scope, staff selected buildings were reviewed within the Investment Grade Audits, which identified upgrades within 9 scopes of work equivalent to a $37 million investment that can produce 18.3 million lbs. of municipal GHG reductions. Of this total, staff is recommending upgrades within 5 scopes of work equivalent to $28.9 million investment that will reduce 14.6 million lbs. over the life of the project. Achieving these reductions requires $2.4 million/year in debt payment over 20 years, yields an estimated annual average energy operational savings of $2.6 million/year over the life of the loan. The baseline cost savings, future cost increase avoidance, and $4.5 million available incentive supports a 13-year investment payback.
Under the SST contract, if the county decides to not implement any upgrades, the previously approved cost for the audits, the Investment Grade Audit Report, and the Energy Conservation Assessment Report ($275,000) would be due to PG&E’s and general fund contingencies will be needed.
Staff has organized the Investment Grade Audit upgrades completed for 66 county owned facilities, as listed below. The Sonoma Public Infrastructure (SPi) team will be responsible for overseeing the project contract, which is expected to take place over a period of 24-months. SPi’s efforts are projected to cost about 10% of the total project package selected.
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STAFF RECOMMENDED Near-Term Reduced Package |
Expanded Scope |
Lowest Cost |
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5 Projects = $28.9M Cost |
7 Projects = $37M Cost |
4 Projects = $17.4M Cost |
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$4.5M Grants/Incentives |
$4.5M Grants/Incentives |
$1.24M Grants/Incentives |
|
$2.6M/yr. energy cost savings and future cost increase avoidance |
$2.6M/yr. energy cost savings and future cost increase avoidance |
$1.5M/yr. energy cost savings and future cost increase avoidance |
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13-year Payback |
15-year Payback |
13-year Payback |
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$51.1M total 20-Year Lease |
$52.2M total 20-Year Lease |
$28.6M total 20-Year Lease |
|
$2.5M annual debt |
$2.6M annual debt |
$1.5M annual debt |
|
20-year @ ~3-4% Financing |
20-year @ ~3-4% Financing |
20-year @ ~3-4% Financing |
|
14.6M lbs. CO2 Reduction |
18.3M lbs. CO2 Reduction |
8.3M lbs. CO2 Reduction |
|
$0 General Fund Needed |
$8M General Fund Needed |
$0.7M General Needed |
Additional Mid-term Energy Upgrades totaling about $81 million and longer-term improvements of over $95 million were identified. However, although they can result in significant GHG emissions reductions, these do not pay for themselves in utility cost savings, future cost increase avoidance or are associated with aged and uncertain life cycles. Staff will incorporate them into the Climate and Resilience Comprehensive Action Plan as appropriate.
The County’s Debt Advisory Committee (DAC) met on March 20, 2024. They outlined two financing mechanisms: Certificate of Participation (COP) and Tax-Exempt Equipment Lease Purchase Agreement (TELPA). The Debt Advisory Committee recommends using COPs which can be secured with existing building assets to be identified at the time the COP is issued. The last county public sale COP debt issuance was in 2003 to refinance the Main Adult Detention Facility (MADF) Improvements and Juvenile Justice Center Project issued in 2003. On May 1, 2024, the County of Santa Barbara secured a Certificate of Participation at a borrowing rate of 3.4%. A public consolidated public hearing will be required when your Board considers the financing package. Government Code Sections 4217.10 to 4217.18 allows public agencies to develop energy conservation, cogeneration, and alternate energy supply sources at their facilities if the governing body determines, in a public hearing, that it is in the best interests of the agency, and if certain findings are made. The GC 4217 public hearings will be held when staff returns to the Board with project financing recommendations at a later date.
In this item the Board is also asked to determine find that the proposed energy services, facilities, and measures are categorically exempt under the California Environmental Quality Act (CEQA).
Discussion:
The Board of Supervisors’ 5-Year Strategic Plan includes a target to make Sonoma County carbon neutral by 2030, including making county operations carbon free, zero waste, and resilient. In July 2021, the County of Sonoma contracted with Pacific Gas and Electric Company (PG&E) for its Sustainable Solutions Turnkey (SST) program, which among other things uses Willdan (PG&E’s energy services contractor), to conduct energy usage audits of county facilities. This audit rigorously evaluates energy infrastructure at county buildings and results in an Investment Grade Audit and an Energy Conservation Assessment of upgrades to enhance energy efficiency, reduce utility costs, and improve resilience in line with the County’s Strategic Plan objectives.
Under the SST program, PG&E (and its subcontractor Willdan) and county staff conducted a preliminary assessment of 96 county facilities. After considering factors such as future facility use and building lifespan, the project team (including CARD and SPI Facility Operations) selected 66 buildings for detailed Investment Grade Audits (IGAs). The attached Staff Report (Attachment 1) discusses the energy and cost analyses and findings. The detailed IGA and Energy Conservation Assessment (Attachments 2 and 3) informed the development of the recommendations summarized below. As it will cost over $204M to meet Strategic Pillar goals to be carbon free by 2030, staff is recommending a phased approach to meeting this goal.
Near-Term Energy Upgrades:
These energy upgrades pay for themselves over time, annual and can be implemented over the next 24 months following approval. While the reduction in emissions that result from the implementation of these upgrades is far less than those shown in the mid and long-term energy upgrades to be considered in the Climate Resiliency Comprehensive Action Plan (CR-CAP), GHG emissions are not the focus of this near-term phase. The Near-Term collection aims to reduce current utility costs and avert future cost escalation while electrifying and modernizing county owned equipment. The mid and long-term collections of upgrades, informed by the Energy Conservation Assessment, will more deeply address reduction of GHG emissions, though they will not pay for themselves in the same fashion as these recommended upgrades. These later ones will be considered as part of the CR-CAP. The near-term upgrades are organized as: Recommended Reduced Cost Package, Expanded Scope Package, Lowest Cost Package, and No Energy Upgrades Alternative.
Recommended Near-Term Reduced Cost Package:
A comprehensive array of upgrades was identified during the Investment Grade Audits, including HVAC upgrades, HVAC building management control systems, and replacing transformers at the North County Detention Facility as discussed below. However, staff recommends opting for a reduced-cost package, allowing the county to minimize expenses on immediate energy upgrades by excluding HVAC upgrades and HVAC building management control systems and the transformer updates. Although implementing these upgrades would positively impact the county's deferred maintenance, support the SPI Capital Improvement Plan, and reduce greenhouse gas emissions, they require a significant investment and have a lengthy payback period. Considering financing costs with capitalized interest, Sonoma Public Infrastructure overhead costs, anticipated operation and maintenance impacts, investment tax credits, and incentives, the total expenses for the reduced-cost package amount to $53,271,093 if financed at the highest evaluated borrowing rate of 3.95%. Nonetheless, if financed at the most recently observed borrowing rate of 3.4% as of May 1, 2024, total costs would be $50,625,737. The recommended package of energy upgrades would not require a capital contribution to meet Government Code 4217 and represent a 2.67% annual reduction of annual county operational greenhouse gas emissions below 2019 levels.
Recommended Upgrades include:
• LED lighting and controls retrofit - Fluorescent lighting upgraded across 51 buildings.
• Water Conservation - Replace a mixture of fixtures, aerators, retrofit flush timing using the existing system at the Main Adult Detention Facility, and one Ozone generator for the laundry at North County Detention Facility. This scope includes 50 buildings.
• Water heating systems - Install incentivized heat pump water heaters at 3 separate facilities.
• Solar PV - 2.1-Megawatt DC System Size at the County Admin Center. Sized to offset approximately 25% of current administration center site electricity usage.
• 2.1 MW Carport Solar PV - installed at the County Administration Center in parking areas to remain and not impacted by New County Campus plans.
• Battery Energy Storage Systems - 1 Tesla Megapack at the abandoned County Admin Center central mechanical plant. 1,927kWh energy storage capacity. Battery bank to be located at the Los Guilicos Campus, tied to existing Solar PV System. 516kWh energy storage capacity.
Expanded Scope Alternative:
This is the most comprehensive group of upgrades identified during the Investment Grade Audits that would meet the requirements of Government Code 4217 by paying for themselves with avoided costs over the life of the equipment resulting in substantial utility cost savings ($66,917,590) and the reduction of GHG emissions. This scope represents a 3.37% reduction of county operational greenhouse gas emissions below 2019 levels.
Lowest Cost Alternative
The lowest cost alternative excludes HVAC upgrades at the Juvenile Justice Center, HVAC controls upgrades, and the solar PV system, significantly reducing project costs while retaining the battery energy storage system for load capacity shifting. Compared to the previous alternative, this alternative has a lower overall cost with a reduced decarbonization benefit and the lowest overall utility savings. A further analysis of this alternative can be found in the staff report.
No Energy Upgrades Alternative
If none of the energy upgrades are pursued at this time, the county will incur costs for certain essential equipment and systems regardless of SST program participation, these include planned Capital Improvement Plan projects, end-of-life equipment replacements, ongoing utility bill expenditures, and unrealized cost savings or future cost increase avoidance.
Also, under the SST contract, if the county declines to implement any upgrades, that cost ($275,000) is due and payable upon delivery of the IGAs and reports; in this case, a general fund contingency will be requested. A further analysis of this alternative can be found in the staff report.
Mid-term Energy Upgrades: The construction cost of all the Mid-term Energy Upgrades is $81,344,673. These are identified facility improvements that do not pay for themselves in utility cost savings, future cost increase avoidance but will result in significantly more GHG emissions savings than the previously recommended upgrades and can be phased in by 2030. Staff recommends incorporating these measures into the CR-CAP and developing a funding strategy for their implementation. A further analysis of this mid-term decarbonization strategy can be found in the staff report.
Long-term Energy Upgrades: An additional package of energy upgrades that are necessary to achieve carbon free facilities have significant uncertainties due to the age and expected life of the buildings and/or equipment, as well as technical and logistical challenges that will require additional time and analysis to resolve. Accordingly, staff recommends they be considered over a longer implementation horizon. A further analysis of these long-term energy upgrades can be found in the staff report.
Staff Financing Recommendations
The recommended option and alternatives were presented to the Debt Advisory Committee on March 20, 2024, when the Investment Grade Audit report and the pricing for the upgrades were received from PG&E and Willdan.
The Debt Advisory Committee recommended financing through a Certificate of Participation (COP) via public sale coordinated through the County's Debt Advisor, KNN. A COP uses a tax-exempt lease structure to finance the construction and improvements of public infrastructure. Another potential benefit of using this financing mechanism is that there may be an option to leave the proceeds in the treasury pool until they are needed for the project as the funds are issued in a lump sum once the financing process is complete. This would to some extent offset total project costs. The highest borrowing rate that the project could tolerate before requiring a capital contribution is 4.22%. The borrowing rate scenario analyzed is 3.95%.
Due to the highly specialized nature and timing requirements of Certificate of Participation financings, the County Counsel has determined the County has neither the capacity nor the expertise to provide the legal services needed for the recommended project financing plan. Therefore, the services of outside legal counsel are needed.
On April 26, 2024, County Counsel issued a Request for Proposals for qualified municipal finance law firms. Proposals were received from four firms: Anzel Galvan LLP; Jones Hall APLC; Orrick, Herrington & Sutcliffe LLP; and Norton Rose Fulbright US LLP.
Proposals were evaluated by a select panel with staff representation from ACTTC. Evaluations were based upon (1) the thoroughness of the proposal; (2) each firm’s qualifications and ability to perform the services requested; (3) fees and costs; (4) ability to meet the aggressive financing schedule, including early delivery of initial financing instrument drafts; and (5) whether all or only partial services could be provided. The evaluation panel consulted with outside municipal financial advisor KNN regarding the proposals.
Based on the proposals received and the established evaluation criteria, Jones Hall APLC was selected as the preferred firm to enter into a Legal Services Agreement to support the recommended Certificate of Participation public sale financing. Staff recommends the Board authorize the County Counsel to enter into a Legal Services Agreement with Jones Hall APLC for legal services in support of the financing plan, for a not-to-exceed amount of $100,000.
If this funding mechanism is approved, a county-owned facility would need to be identified and encumbered as an asset. This financing mechanism was recommended instead of a Tax-exempt Equipment Lease Purchase Agreement because the borrowing rate for the Certificate is close to 100 basis points (a full percentage point) lower. If financed at the highest evaluated borrowing rate of 3.95% the financing costs would be $16,211,056 over the 20-year life of the Certificate, including $2,886,334 for Public Infrastructure project oversight, and capitalized interest of $2,533,202. For the purposes of the analysis, staff evaluated a maximum cost of $500,000 for the Debt Advisor, Bond Counsel, and related debt issuance services, and $50,000 for in-house Counsel and finance staff; these costs are also included in the total financing cost.
The costs of issuing the COP (estimated at $500,000 in aggregate) and the outstanding fees for the energy audits and conservation recommendations ($275,000) will be paid out of the proceeds of the COP upon closing. The estimated costs of $500,000 for preparing the COP are contingent upon the COP closing except for an estimated $104,000, which includes: (1) fees to outside counsel, which accrue based on defined work milestones, and would not exceed $54,000; (2) up to $10,000 for the preliminary Title search; and (3) the rating agency fees (estimated at $40,000) which would be payable once rating agencies have been engaged. In addition, KNN has provided services under their existing contract with the County and the County is obligated to pay for those costs (approximately $7,500, based on hourly rates and expenses) whether the project moves forward or not. In addition, the outstanding fees for the energy audits and recommendations ($275,000) have already been incurred under the Master Agreement with PG&E approved in 2021 and will be due in full if no project is implemented. Because no funding source for this amount was identified when the Master Services Agreement was approved, staff will look to utilize General Fund Contingencies for these expenditures. Should your Board elect not to go forward with changes at this time, staff will make necessary budget adjustments and pay expenditures during the Fiscal Year 2023-24 year-end close process.
The projected utility cost savings, and future cost increase avoidance including incentives over the life of the project are $66,483,746. The calculation is based on reductions of 4.8 million kWh of electricity, 28.6 thousand therms of natural gas, and 10.8 million gallons of water use each year and assume a 4.75% increase in electricity rates and a 3% increase in water and sewer rates. These rates are conservative compared to the observed energy rate increase of approximately 7.31% for the last 10 years. With financing costs, Sonoma Public Infrastructure overhead costs, expected operation and maintenance costs, investment tax credits, and incentives, the total costs for the reduced cost alternative amount to $53,271,093 if financed at the highest evaluated borrowing rate of 3.95%; however, total costs would be $50,625,737 if financed at the most recently demonstrated borrowing rate of 3.4% as of May 1, 2024. If energy and water rates did not increase at all over the life of the project, lifetime savings would be $35,243,099, or $39,756,853 including incentives.
Given the difficulty in accurately predicting borrowing rates prior to completing the financing process, staff has compiled the table within the financing recommendations section of the staff report to illustrate a range of project costs associated with the latest known borrowing rate (3.4%), as of May 1, 2024, in comparison to the highest evaluated borrowing rate (3.95%) (See attachment 1).
Approval for issuing debt, if staff is directed to pursue, will require a later Board date with full disclosures and cost actions.
Impact of Delay
Energy upgrade projects are required to conform with Government Code 4217, discussed below. Several elements of the project are time dependent and delays in approval of the project or financing increase project costs and may affect compliance with Government Code 4217. Key risk areas are: (1) the impact of new building code requirements; (2) the expiration of not-to-exceed pricing on lighting, water systems and conservation measures; and (3) the expiration of not-to-exceed pricing on the solar PV and battery storage scopes of work.
1. New Code Requirements: Under the new CALGreen building codes, effective July 1, 2024, new installations of solar PV in carports are required to be “electric vehicle-ready" by including infrastructure to support future installation of electric vehicle charging. This requirement applies to carport solar installations with permit applications submitted July 1, 2024 or later. Compliance with this requirement would add roughly $3 million in project costs. With this added cost, the project would still meet the requirements of Government Code 4217.13 if the COP is issued at a borrowing rate of 3.58% or less. At any borrowing rate greater than 3.58% the County would have to make a capital contribution from the General Fund or the project would not comply with Government Code 4217.13.
2. Not-to-exceed pricing for the project scopes of lighting, hot water systems, and water conservation measures expires on August 31, 2024. To lock in that pricing, the County must commit to and demonstrate funding. The COP will take a minimum of three months to prepare and secure, so a delay in project approval after May 31, 2024, will likely result in cost increases; extending pricing from June 14th to August 31st resulted in cost increases of approximately $630,000.
3. Not-to-exceed pricing for the solar PV installations and battery storage systems expires on December 31, 2024, and would be subject to potential but unknown increases after that time.
Required Public Hearings & Findings
The SST program allows the county to purchase and install energy upgrades through a streamlined contracting process. To contract using the SST program for the proposed energy services and installation of conservation measures, a public hearing must be conducted in accordance with Government Code Sections 4217.12 et seq, and your Board must find that the value of the energy savings over the life of the upgrades will exceed the cost of the upgrades, and that proceeding with the upgrades is in the best interests of the county. Additionally, approval of related facility financing agreements requires a public hearing, as per Government Code Sections 4217.13 et seq, and your Board must find that the costs of the financing will be covered by the savings for energy that would otherwise be purchased. Please refer
to attachment 8 for the analysis supporting these findings. Notices for these hearings were published on 4/29/2024. These hearings may be consolidated into a single session and will be deferred to coincide with the hearing under Government Code Section 53635.7. Government Code Section 53635.7 requires the Board to discuss, consider, and deliberate upon, as a separate item of business on the agenda, all borrowings of $100,000 or more. This hearing has to happen at the time the Board approves the specific financing documents, term, and borrowing rate, for the issuance of the COP and will be scheduled at that time.
Environmental Analysis
The Project for the recommended near-term upgrade package has been reviewed and analyzed for environmental impacts by Permit Sonoma staff. The Project consists of upgrades to and within existing county building facilities, with little to no change or expansion of use of the Facilities. The solar and battery storage improvement option would consist of an accessory structure to the existing parking lot and other existing site conditions. The Project accordingly is categorically exempt under the California Environmental Quality Act (CEQA), including pursuant to CEQA Guidelines 15303 (minor, new, limited construction, or equipment) and 15311 (accessory structures to existing facilities)
Strategic Plan:
This item directly supports the County’s Five-year Strategic Plan and is aligned with the following pillar, goal, and objective.
Pillar: Climate Action and Resiliency
Goal: Goal 3: Make all County facilities carbon free, zero waste and resilient
Objective: Objective 1: Design or retrofit County facilities to be carbon neutral, zero waste and incorporate resilient construction techniques and materials.
Pillar: Resilient Infrastructure
Goal: Goal 2: Invest in the community to enhance resiliency and become carbon neutral by 2030
Objective: Objective 2: Invest in electric power resiliency projects at County facilities, including Veteran’s Buildings, used for evacuation sites, warming/cooling centers, or as alternate work facilities for delivery of critical services.
Pillar: Organizational Excellence
Goal: Goal 1: Strengthen operational effectiveness, fiscal reliability, and accountability
Objective: Objective 1: Align the Board of Supervisor’s strategic priorities, policy, and operational goals with funding and resources.
Pillar: Organizational Excellence
Goal: Goal 4: Seek out grant funding to enhance programs and improve infrastructure
Objective: Objective 1: Secure a total of $60 million in grant funding by 2026 for strategic priorities, including technology tools, climate resiliency, and other capital projects.
Racial Equity:
Was this item identified as an opportunity to apply the Racial Equity Toolkit?
No
Prior Board Actions:
12/11/2023 Climate Resilience Comprehensive Action Plan Workshop
10/3/2023 Financing package for Energy Upgrades at the Santa Rosa Veterans Memorial Building
8/29/2023 Climate Action and Resiliency Workshop
8/22/2023 Upgrades to the Santa Rosa Veterans Memorial Building Using the PG&E SST Program
2/01/2022 Board Update: Legislative Affairs, Strategic Plan and Climate Action & Resiliency
4/20/2021 Update on the County Participation in PG&E Sustainable Solutions Program Energy Services and Self Generation Programs
6/09/2020 Application for the Self Generation Incentive Program and Payment of the Application Deposit
Fiscal Summary
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Expenditures |
FY23-24 Adopted |
FY24-25 Projected |
FY25-26 Projected |
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Budgeted Expenses |
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Additional Appropriation Requested |
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Total Expenditures |
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General Fund/WA GF |
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State/Federal |
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Fees/Other |
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Use of Fund Balance |
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General Fund Contingencies |
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Total Sources |
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Narrative Explanation of Fiscal Impacts:
There are no fiscal impacts associated with accepting the Energy Audit and approving the list of projects to be implemented once the financing has been secured. The Certificates of Participation issuance action will include the final calculated investment and financing costs as well as the current utility operational costs that will be reduced after upgrades are installed, and which will provide the funding source to cover annual debt payment, Public Infrastructure installation costs, municipal advisory and legal bond counsel services, and the operations and maintenance associated with the new upgraded systems.
The costs of issuing the COP (estimated at $500,000 in aggregate) and the outstanding fees for the energy audits and conservation recommendations ($275,000) will be paid out of the proceeds of the COP upon closing. The estimated costs of $500,000 for preparing the COP are contingent upon the COP closing except for an estimated $104,000, which includes: (1) fees to outside counsel, which accrue based on defined work milestones, and would not exceed $54,000; (2) up to $10,000 for the preliminary Title search; and (3) the rating agency fees (estimated at $40,000) which would be payable once rating agencies have been engaged. In addition, KNN has provided services under their existing contract with the County and the County is obligated to pay for those costs (approximately $7,500, based on hourly rates and expenses) whether the project moves forward or not. In addition, the outstanding fees for the energy audits and recommendations ($275,000) have already been incurred under the Master Agreement with PG&E approved in 2021 and will be due in full if no project is implemented. Because no funding source for this amount was identified when the Master Services Agreement was approved, staff will look to utilize General Fund Contingencies for these expenditures. Should your Board elect not to go forward with changes at this time, staff will make necessary budget adjustments and pay expenditures during the Fiscal Year 2023-24 year-end close process.
Narrative Explanation of Staffing Impacts (If Required):
NA
Attachments:
1. Staff Report
2. Investment Grade Audit Report-without appendices
3. Energy Conservation Assessment-without appendices
4. Energy Conservation Tables
5. Government Code 4217 Analysis
6. Financing Alternatives
7. Proposed Energy Conservation Measures -Benefits & Risks
8. Staff Presentation
Related Items “On File” with the Clerk of the Board:
PowerPoint Energy Conservation Tables
PowerPoint Staff Presentation
Investment Grade Audit Report-with appendices
Energy Conservation Assessment-with appendices