Paying for Boreholes & Building Retrofits with Revenue Bonds
Massachusetts gas utilities currently spend $1 billion per year installing new gas pipes. Under the new 2024 Climate Law, these utilities will be encouraged to redirect some of the money to installing geothermal networks in order to reduce emissions and stranded assets.
To further enable this clean energy infrastructure, Black Swan Lab is proposing that the Commonwealth allocate $30 million of revenue bonds to drilling boreholes under state and municipal property near where a utility plans to install a geothermal network.
Troy NY’s geothermal network
The city is installing boreholes under one of its parking lots to sell thermal energy to National Grid's geothermal network.
Each local utility can then operate the distribution system and bill its customers the way it normally does, while paying the state for the thermal energy the boreholes deliver. This ongoing revenue can repay the bond over time. In the end, everything from the infrastructure to the cost of the capital is funded by the ratepayers through their energy bills.
And that cost of capital over time adds up. Massachusetts gas utilities currently pay a weighted average cost of capital of approximately 8.5% per year. If the boreholes for a street cost $10 million, the infrastructure’s weighted average cost of capital over 35 years of depreciation would total an additional $20 million—more than the original cost of the infrastructure.
A state revenue bond has an interest rate of only 4.5% and a payback period of generally 20 years. Given this lower rate, a state authority could issue bonds for roughly twice as much money as a gas utility and after 30 years, the total payback, with interest, would be the same. This means, in the case of Eversource’s TEN installation in Framingham, the state authority could have paid for BOTH boreholes and retrofits for the same ultimate cost as Eversource paying only for the boreholes
After all, if you’re issuing bonds for boreholes, then it makes sense to pay for the local retrofits in the buildings also, since that way you’ll have more customers connected to the system to pay for the bonds.
Below is the legislative text for a special revenue bond allocation of $30 million to be part of the Environmental Bond Bill. This one-time allocation enables a state authority to pilot this financing method. If it’s successful, it could be enacted widely, helping the Commonwealth move toward clean local energy at speed and scale, and in an equitable manner, without raising taxes or energy bill surcharges.
Process
The local utility installing a TEN’s distribution system requests that the state authority install boreholes.
The utility signs an energy agreement with the authority, stipulating the price paid per energy unit delivered over the lifetime of the infrastructure.
The authority, with the oversight of the Department of Public Utilities, issues bonds.
The authority pays for the boreholes (installed on land owned or leased by the state), and gives the remaining funds to Mass Save for the local building retrofits.
Long-term Revenue
Since boreholes and thermal pipes have a hard warranty of 50 years and most bonds are for 30 years or less, the state will continue to receive revenue long after the bond period is over.
Interest Rates
While interest rates change over time, American utilities’ weighted average cost of capital in inflation-adjusted dollars has stayed at close to 10% for the last 20 years, while long-term government bonds have stayed under 6%.
Reducing Expensive Electric Upgrades
Geothermal networks reduce winter electric peak load by up to 70% compared to buildings on air source heat pumps. Thus installations can be sited to reduce the need for additional expensive electric substations and local grid upgrades.
Reliability
Unlike wind or solar power, geothermal networks deliver non-intermittent renewable energy. And because the infrastructure is below ground, it is protected from severe weather events, which in turn would protect the state’s investment.
Draft Legislative Language for the Bond Bill Line Item
For the Thermal Transition Fund established in section 2GGGGGGG of chapter 29…$30,000,000
SECTION X. Chapter 29 of the General Laws, as appearing in the 2020 Official Edition, is hereby amended by inserting after section 2FFFFFFF the following section:
Section 2GGGGGGG. There is hereby established a separate fund to be known as the Thermal Transition Fund, which shall be administered by the executive director of the Massachusetts Water Resources Authority, without liability on the part of the Authority beyond the amount credited to and earned by the fund.
Monies credited to the fund shall be expended, without further appropriation, by the executive director of the Authority for (i) the installation of thermal infrastructure, such as boreholes or heat exchangers, needed to access thermal energy located in the ground, water, sea or waste water on real property owned or leased by the commonwealth, (ii) for the retrofits needed to connect local buildings to the thermal network with the owners’ permission, and (iii) for debt service on debt obligations issued by the commonwealth for the fund; provided further, that the Authority shall install such thermal infrastructure for the purpose of providing and selling energy to a thermal network, including one owned by a gas company as defined in section 1 of chapter 164, in furtherance of the commonwealth’s obligation to meet the statewide greenhouse gas emissions limits and sublimits established pursuant to chapter 21N; provided further, that the installation, operation and maintenance of boreholes owned by the Authority shall be performed in accordance with relevant guidelines, orders, or regulations issued by the department of public utilities; provided further, that the building retrofits needed to connect to the thermal network occur only with the consent of the building owner and under the oversight of the administrators of the program established in section 21 of chapter 25; provided further, that, prior to installing the infrastructure, the department of public utilities shall oversee the setting of the price over the expected lifetime of the infrastructure for any energy sold by the commonwealth as the owner of the thermal infrastructure to the thermal distribution network, including a thermal network operated by a gas company; and provided further, that payments received for any energy sold by the commonwealth as the owner of the thermal infrastructure, including a thermal network operated by a gas company, shall be deposited into the fund.
The fund shall be credited with: (i) any appropriations, bond proceeds or other monies authorized by the general court and specifically designated to be credited thereto; (ii) funds from public and private sources and other gifts, grants and donations; (iii) any income derived from the investment of amounts credited to the fund; and (iv) payments received for any energy sold by the Authority as the owner of the thermal infrastructure to a thermal network operated by a gas company. All amounts credited to the fund shall be held in trust and used solely for activities and expenditures consistent with the public purpose of the fund and the ordinary and necessary expenses of administration and operation associated with the fund. All available monies in the fund that are unexpended at the end of each fiscal year shall not revert to the General Fund, shall be available for expenditure in the subsequent fiscal year, and shall not be subject to section 5C.
