Project Selection Policy
From Common Energy UVic
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[edit] Research Brief for Common Energy Climate Trust (CECT) Integrative Project Group: Policy Regarding Project Selection Criteria
How do we develop policy that will guide the development and decisions of the Common Energy Climate Trust and that will enable a board to make effective decisions governing the allocation of funding? How can other higher education institutions that have developed similar projects inform the policy of CECT?
Common Energy Climate Trust is in the early stages of project development, and as such has the opportunity to develop policy that will enable the best possible use of the Trust’s financial and human resources. There are many different policy decisions to be made in the development of this fund, including policy regarding governance and employment, funding sources and funding allocation. This brief will focus on options for funding allocation policy. A successful funding allocation policy will facilitate innovative technologies in the region, provide an overall return on investment to allow for the fund to grow, minimize the work required for employees and board members, be transparent and accessible to potential recipients, fund a range of projects, and provide security in the form of low-risk investments. Considerations for the policy include the pay-back period required for the investment, type of projects, and what fund money can be used for. Many other institutions have developed similar projects, and CECT is in a position to draw on their experience in designing policy for Common Energy’s revolving fund, while creating a fund that suits UVic’s unique situation. (Due to the high amount of information required to make these decisions, an appendix is included with a number of tables that are essential for the discussion. If your time is limited, refer to the appendix.)
[edit] Pay-Back Period
Many loan funds develop policy to govern the selection of projects based on the amount of time it takes for a return on investment.[1] This is used in tandem with policy regarding project types and interest rates to ensure that projects fall within the mandate of CECT, while providing a quantifiable, secure return on investment.[1] The purpose of developing policy regarding pay-back periods is to allow the fund to be replenished within an agreed-upon time frame so that more investments are possible, and to reduce investment in projects with extremely long pay-back periods. Policy of this type also minimizes the investment in high-risk low-return projects. Different policy options for determining policy regarding length of pay-back are summarized in Table 1: Pay-Back Period Policy Options for CECT Projects.
The structure of a revolving fund has the potential to limit its possible projects to those that offer a return on investment in the form of savings. Certain projects naturally fit into this structure, such as energy-saving technologies and infrastructure. Other projects do not, such as composting bins, or education. The latter are still important, worthwhile investments that provide a return in the form of social-welfare, and/or decreased environmental footprint. Finding a method by which to include these projects in the investment portfolio requires a creative approach to accounting and traditional economic structures.
[edit] Project Type Selection
Common Energy Climate Trust will provide an opportunity for many different projects to become financially viable. Deciding whether or not to invest in controversial projects such as biodiesel initiatives is a major policy consideration for CECT. Another issue here is whether or not CECT will fund projects that do not address climate change, and whether or not to fund projects that are inherently unsustainable (socially or ecologically) but result in a decrease in emissions. See Table 2: A Summary of Policy Decisions for Five Different American Schools for a summary of how other universities have determined what project types to invest in based on their particular mandate. Once CECT has developed a mandate, the CECT Project Group will be able to develop policy regarding which types of projects to fund.
[edit] Funds for Projects
Once a project is determined to meet the above criteria, where the funds will go needs to be determined.[1] The fund may go towards education, staff, consultation, capital costs or even investment in mutual funds.[1] Whether or not CECT decides to fund all of these costs to a project should depend upon their return on investment, their value to the project and the policy decisions made by the CECT project group.
The revolving fund should, in the least, cover materials and construction costs, along with professional work, and design. This will enable to projects to foster regional economic growth in sustainable sectors. While employment and education may be secondary to the initial capital costs, they constitute an important part of the project itself. Education and publicity provide an opportunity for word of the fund to reach the greater community, and for the general public to be made aware of sustainability projects. If CECT were to fund staff for their projects, it would provide valuable training and expertise that can be used on other projects, whether these are funded by the trust or not. It also creates a job market where people can use their skills to create a future that encompasses their values. Table 3: Summary of Project Funding Options provides a synopsis of funding options for CECT.
[edit] Other Schools
A number of higher education institutions have chosen to implement a revolving fund to encourage sustainable development on their campuses and in the communities in which they are embedded. These institutions have taken different approaches to the policy questions posed in this brief. Their decisions were based on the governing institutions of their school, the size of the fund, and in particular, the basic goals of their trust. A summary of the different policies adopted by six different American schools is available in Table 2: A Summary of Policy Decisions for Five Different American Schools. CECT should consider the decisions and the workings of other schools in choosing the structure of our loan fund.
[edit] Recommendation: Project Bundling
As set out above, a strong policy will encompass a range of values, and support the board in making equitable decisions that will facilitate the funding for a range of project types. Project bundling Table 1: Pay-Back Period Policy Options for CECT Projects will enable CECT to achieve the goals set out above, while CECT remains fluid in the application of the policy, and flexible to future economic, environmental and social conditions. The essence of the Project Bundling Model is that projects are selected together as a ‘bundle’ instead of individually, thus providing the opportunity to fund a variety of projects, with variable rates of return on investment, and various sustainability benefits.
Project bundling allows for project with variable rates of return on investment to be included. This could mean structuring it so that for projects where a shorter payback is possible a lower interest rate is given, while projects with a longer pay-back period have higher interest rates. For example, 10% if paid back in 0-5 years, 25% if returned in 5-10 years, and 30% if returned in 10-25 years, adjusted for inflation. To ensure a range of returns on investment, this requires project-bundling. It also means that projects with little or no return on investment can be included alongside projects with a high return on investment.
A second benefit of project bundling is that a “bundle” is chosen to have a range of project types with a range of benefits to society. This means that CECT won’t have a year where all of the projects are solar hot water, instead CECT will support projects that provide a range of services and solutions to sustainability problems. It also means that the Trust can include projects that pose solutions to a variety of sustainability issues rather than simply looking at one problem, while at the same time funding projects that provide a decrease in emissions. It may be structured so that each bundle is required to include projects that address water, food, and energy issues for example, or that a certain net decrease in emissions is required.
The Project Bundling approach provides a piece of the solution to the question of what the funds are permitted to be used towards. It gives CECT the option to require that a certain percentage of the funds from a project bundle be put towards capital, design and professional costs, while a remaining percentage may go towards secondary directives such as staff, education and publicity.
Project Bundling does not give solutions on value-based policy which directs what types of projects should be included, nor does it give direction on exact interest rates, or what percentage of the fund should be put towards primary directives and secondary directives. These decisions need to be made through open debate and dialouge within the CECT project group, however, Table 2: A Summary of Policy Decisions for Five Different American Schools provides a synopsis of how other schools have tackled this problem. An important starting point for CECT is to create a mandate, which will guide a policy discussion.
[edit] Actions
- CECT should create a mandate and goals document that will guide the policy discussions for the CECT Project Group
- Discuss whether or not CECT would like to include projects that have sustainability benefits other than emissions reduction, and whether CECT will include projects that create emissions reduction, but have other adverse effects on society or the environment.
- Decide what policy to adopt on pay-back time, and what types of projects will be considered for funding.
- Discuss in particular, the project bundling model and whether or not this is the model that the CECT project group will support.
[edit] Appendix
Table 1: Pay-Back Period Policy Options for CECT Projects
Table 2: A Summary of Policy Decisions for Five Different American Schools
Table 3: Summary of Project Funding Options
[edit] References
[1]Dieblt, Asa and Herder-Thomas, Timothy. "Creating a Campus Sustainability Revolving Loan Fund." Association for Advancement of Sustainability in Higher Education. April 2007
