The City is holding a special election on Tuesday, June 14th to consider $2.75 Million in bonds and loans to finance a District Heat system for the state government, city government, schools and portions of the downtown area. This article is an update of my April piece.
To recap, in January of 2010, the United States Department of Energy announced just five grant awards across the county totaling $20 million. The Montpelier District Energy project was the largest award at $8 million – 40% of the entire national funding. This project would upgrade the state’s existing wood fired central heating plant and expand its service area to City Hall, the Police Station, the Fire Station, Union Elementary School and Montpelier High School. The establishment of this heat distribution route would allow private buildings to be served.
Why is the city pursuing this project?
- It reduces toxic air emissions in downtown Montpelier by as much as 11 tons per year. It is consistent with state and local policy to move to cleaner, renewable energy sources.
- It replaces oil as a prime fuel source with locally/regionally produced wood chips keeping that economic activity in the northeast.
- It provides fuel cost stabilization for the state government, city government and school department allowing tax dollars to potentially be redirected toward services or infrastructure rather than to pay rising oil prices.
- It presents an economic development opportunity in downtown Montpelier by providing a cleaner and potentially cheaper source of heat for private building owners.
- The State’s heat plant will be removed from the flood plain and will operate more efficiently, generating an estimated $200,000 in annual fuel savings for state taxpayers.
- Conversion to a district heating system will allow many private oil furnaces to be removed from potential flood areas.
- This is proven technology. The State of Vermont converted their district heat system to wood (primarily) in the early 80’s. After 30 years of operating this system, the State is seeking to upgrade and expand it, not abandon it. Other municipalities such as Jamestown, New York and St. Paul, Minnesota have operated these successfully for years. This is common technology on college campuses around the country.
Will this cost extra tax dollars?
No. The combined bond, wood heat and operating costs will fall within the amount of money that the city and school system are already paying to heat their buildings with oil. As oil prices rise, the opportunity for potential savings may present itself. This is Vermont – we will certainly heat the schools, city hall, fire station and police station over the next 20 years. This is not money available for other public purposes.
Three city buildings (City Hall, Fire Station and Police Station) and two school buildings (Union Elementary School and Montpelier High School) use 100,000 gallons of oil annually. Every dollar in oil price increase costs the community $100,000. Our most recent fuel prices have been $3.70 and $3.35 per gallon representing annual costs of $335,000 to $370,000. The combined District Heat annual costs (bond, fuel and operating) are expected to be between $305,000 and $331,000.
Could this potential bond money be used for something else like roads?
No. The city and schools will continue to pay to heat their buildings over the long haul. We cannot reallocate this money to roads or anything else. This project simply uses annual heating dollars to pay for future annual heating needs.
Is this overextending the city’s bonding capacity?
The city’s professional auditors (both present and prior) as well as the municipal bond bank have indicated that the city’s general fund debt limit is within acceptable levels although at the high end. The key is the ability to pay off the debt. As noted above, the city will be paying this money one way or the other, either for oil heat or for this project.
Where is the total project money coming from?
A total of $19.95 million has been identified from the following sources: The Federal Department of Energy Grant for $8 Million. The Governor proposed and the Vermont Legislature approved $7 million in State Capital funds. The State Department of Buildings and General Services (BGS) has identified $1.2 million in budget funds. The city was awarded a $1 Million grant from the Clean Energy Development Fund (CEDF) for this project. The remaining piece is the City’s $2.75 Million which is comprised of $2.0 Million in general bonds along with a $750,000 CEDF loan at 1% interest for which repayment is deferred until the project achieves positive annual cash flow.
What happens if there are cost overruns?
The heating plant project is the state’s, the distribution system is the city’s. Although the bids will be coordinated, each party is responsible for their portion of the project. Because the funding is established, overruns will, like any other project, require project changes, additional funds or potential cancellation of the project.
How will the system be governed or operated?
The State of Vermont will own and operate the upgraded and expanded central heating plant. The city will purchase bulk heat (hot water) through a master contract. This heat will serve the city and school buildings as well as through resale to private customers. Initial revenues from those sales will be placed in reserve to address future expansion needs and long term system maintenance. It is possible that private system revenues could be used to reduce city heat costs but that scenario is not included in any financial projections.
As a condition of the state’s capital funding, a memorandum of understanding (MOU) must be signed by both parties by June 9th. This item is scheduled for the June 8th City Council meeting. The MOU will outline the basic structure of the City/State agreement and is a precursor to a more comprehensive contract to be signed after bids come in.
Will the system be able to handle both the state and city capacity needs?
As initially constructed, the heat plant will have sufficient capacity to handle state buildings, the five city buildings and initial private buildings while having unused capacity. The city will be acquiring some capacity rights upfront and the contract will address how the city acquires additional capacity as the city user base grows. Revenues from private customers will be used to acquire additional capacity based on user demand.
Is the city capable of managing the system?
The system operates very similarly to our water and sewer systems. Product is delivered through pipes and the city reads the meters, bills and collects. Our recently approved charter change provides the same municipal authority to operate this system as exists with water and sewer. Experience from other district heat systems tells us that the distribution portion is relatively low maintenance. Unlike our water and sewer systems, the state will be assuming the maintenance responsibility for the heat producing end of the system. Additionally, the city will likely be contracting with an experienced district heating entity to assist with the management of this system.
With the water system deficit, why should we believe that the city can run this?
The water system deficit is due almost entirely to the major capital cost of constructing the water treatment plant completed in 2000. This plant was constructed under federal and state order and the city was mandated to follow certain requirements regarding size of the plant. City officials recognized that this would be a problem and successfully negotiated a one-third reduction in the size of the plant. The capital cost for even the smaller plant, however, has proven difficult to overcome. Prior to the plant’s construction, the water fund had carried significant surpluses for many years.
The distribution, maintenance, metering and collection system has operated successfully and is the most similar to the district heat system. Most importantly, the city is entering into this project voluntarily and has had the opportunity to establish financial parameters to avoid a situation like the water plant expense.
What will be the rates for private customers?
The city will establish rates based on bulk cost from the state, operating costs and future reserve needs. The city’s district heat resale price is currently projected at around $29 per MMBTU - equivalent to $2.80 per gallon of oil.
Are there commitments from private customers?
Without an established firm price and finalized route, we do not have firm commitments from private customers. Preliminary interest has been high from private property owners. The project is designed to work financially without any private customers. Those customers are, however, a prime reason to do the project in the first place.
What if something better comes along and we’ve committed to this?
Rapid advancements are being made in energy efficiency. Almost all of them, however, are in the area of electric generation. To generate heat to the temperature that most of us need for homes and offices requires burning something. Those alternatives remain essentially wood or oil. Wood is a renewable resource available regionally. Waiting for an unknown future heat alternative would require the city and private buildings to continue heating with oil. Any change in heat system is a gamble but remaining with the present system is also a gamble on oil prices.
Couldn’t the city and school find easier ways to achieve efficient heating?
If the city’s only goal was to improve its own heat efficiency then we would not run pipes from the state complex to various parts of town. The goal of this system is to not only improve opportunities for the city government but also to enable similar opportunities in downtown.
How will construction of this project affect downtown?
Construction of this project will cause temporary disruption to downtown. Like any major project it will be managed but there is no question that this requires laying pipes underground throughout downtown along the planned route. This does create an opportunity for streets and sidewalks to be repaved and rebuilt.
Is this project on a deadline?
Yes. The federal dollars require that the $8 million in federal money must be matched with $8 million in local funding. The match must be demonstrated by June 21st of this year. The June 14th bond vote represents the last component of the local match. State money serves as a portion of the match but does not meet all the grant requirements because it does not provide funding for the distribution portion of the project, only the heat plant portion.
Why is the bond vote being held now instead of at March town meeting?
The City Council wanted more project information and to be sure that state funding was secured before bringing the proposal to voters.
If the bond passes will the project definitely be built?
Passage of the bond vote would represent a major step toward the project’s success. However the project could still stall if bid prices are too high or there are difficulties in reaching a final contractual agreement with the state administration.
What happens if the bond vote doesn’t pass?
