March 12, 2014
Utah's Clean Fuels and Vehicle Technology Loan Program
Projects have funded an assortment of vehicles and equipment, including refuse trucks, glass recycling trucks, street sweepers, and even aerial truck towers.
Revolving loan fund programs provide low-cost loans for eligible projects. Utah is home to one such program that assists with alternative fuel vehicle, fueling infrastructure, and diesel retrofit projects. The Clean Fuels and Vehicle Technology Grant and Loan Program (CFV Program), under the administration of the Utah Division of Air Quality (DAQ), also provides grants for qualified vehicles, infrastructure, and equipment. As an agency of Utah's Department of Environmental Quality, DAQ considers these projects important to air-quality improvement efforts.
The term "revolving" describes the cyclical flow of funds in a revolving loan fund program. Loan repayments are directed back into a central fund so more loans can be issued. The entity administering the program, often a state agency, acts much like a bank. Loan programs are attractive to states because they leverage existing funds.
A state legislature can establish the central revolving loan fund by law to encourage private or public investment to achieve a specific goal, such as reducing petroleum consumption. The same enabling legislation that created the fund typically sets forth other important provisions related to funding and administration. Initial funding may come from legislative appropriations, deposits from public or private sources, or a combination of the two. Enabling legislation also gives a state agency or department the authority to administer the fund through a revolving loan program.
The Utah Legislature created the Clean Fuels and Vehicle Technology Fund (Fund) in the early 1990s. In addition to legislative appropriations, the Fund later received deposits from utilities as well as a one-time allocation from the state's Petroleum Violation Escrow account. Since its inception, other state entities have administered the Fund, beginning with the Department of Community and Economic Development (DCED) and later the Department of Natural Resources (DNR). DAQ took ownership in 2005, initiated and completed the necessary agency implementing regulations, and began to administer the CFV Program in 2007. DAQ also administers the companion Clean Fuel Vehicle Tax Credit.
The CFV Program provides loans that cover the following costs:
- Vehicle fueling equipment (100% of project cost)
- New original equipment manufacturer (OEM) vehicles (incremental cost)
- Aftermarket vehicle conversions (cost of conversion)
- Verified technology retrofits (equipment cost).
Utah law defines the "clean fuels" that are eligible for loans under the CFV Program: natural gas, electricity, and propane. Hybrid electric vehicles, flexible fuel vehicles, and biofuel dispensing equipment are not eligible for Program loans.
Each year, usually in October, DAQ issues a Request for Applications. Any government, business, or non-profit entity may apply. The selection committee evaluates applications based on project feasibility and practicality, environmental and community benefit, the applicant's creditworthiness, financial need, and available matching funds.
DAQ will approve up to $250,000 in loans each year, awarding between $5,000 and $100,000 per project. Businesses receive loans at the Utah Public Treasurer's Investment Fund interest rate, which has averaged 0.6% over the last year (as of October 2013). Government applicants are eligible for 0% interest rate loans.
Typically, successful loan applicants will receive the notice to proceed in March. A loan recipient has two years to complete the project, including reporting requirements, and after completing the project it may then request the reimbursement. The awardee receives a lump sum loan from the Utah Division of Finance and establishes a payment schedule. Awardees have up to 10 years to repay the loan.
While the Fund was under DNR's oversight, the department audited the loan program. A key reason for this audit was a high rate of loan defaults. DAQ later took DNR's findings into consideration when establishing the CFV Program's regulations, which require that all projects be completed before loans are issued. Although the need for up-front capital has been be a challenge for some loan applicants, the requirement has thus far helped to avoid any loan defaults.
In its earliest days, award recipients used the Fund to pay for many small projects, such as individual taxicab vehicle conversions. To increase the environmental benefits associated with projects, DAQ has leaned more toward larger projects with greater emissions-reduction potential, such as heavy-duty diesel replacement. "Projects have funded an assortment of vehicles and equipment, including refuse trucks, glass recycling trucks, street sweepers, and even aerial truck towers," said Lisa Burr, CFV Program coordinator. The move from quantity of projects to quality of projects also has reduced DAQ's administrative burden, allowing program staff to focus on ensuring successful projects.
Other programmatic adjustments have occurred over the years. DAQ reviews and evaluates the administrative rules every five years to determine if modifications are necessary. For example, DAQ now relies on a selection committee to determine how funds should be awarded rather than allowing the program manager to make these decisions. The committee typically includes at least one member with a financial background.
The CFV Program also has adapted to industry developments. For example, in addition to certain alternative fuels and advanced vehicles, eligible projects now include U.S. Environmental Protection Agency-verified diesel retrofit technologies.
Applicants to date favor the grant side of the CFV Program, so DAQ has not awarded many loans. Typically, applicants will seek grants as a first choice but also apply for and accept the loan award if they are not selected for a grant. Program rules require awardees to complete the project before a loan may be issued. If up-front capital is not available, an awardee will often apply for a loan from another institution at a higher interest rate and pay that back with the CFV Program loan once funds are issued. This initial loan will usually require closing costs and fees.
There are also administrative challenges, stemming in part from the fact that DAQ focuses on air quality and is not set up to be a bank. The Division of Finance, within the Utah Department of Administrative Services, is responsible for issuing CFV Program loans once project requirements are met, and the Division of Finance also receives loan repayments. Coordination between DAQ and the Division of Finance is important to the success of the CFV Program; however, there is not currently a system in place to notify DAQ in the event an awardee defaults on a loan. DAQ is interested in exploring creative ways to leverage resources, possibly by working with the private sector to make loans possible through a financial institution.
Despite taking various approaches since it began, Utah's revolving loan program has remained a consistent source of leveraged funding for clean fuel projects. Through October 2013, the CFV Program has awarded nearly $210,000 in loans for three alternative fueling station projects while under DAQ's administration. Grant funding totals over $1.1 million.
Annually, DAQ receives more grant and loan applications than it is able to fund, highlighting the popularity of the CFV Program. Utah Clean Cities has been an important partner to DAQ, helping to inform industry stakeholders about upcoming solicitations and encouraging qualified entities to apply. According to Ms. Burr, the quality of the applications and proposed projects continues to improve. "The competition for funding has been intensifying every year, making the selection process more of a challenge, but that's a good problem to have." This is a product of an increased awareness of the program, an informative and up-to-date CFV Program website, and the extra steps DAQ takes to provide constructive feedback to applicants.
Because the CFV Program also provides grants, the Fund is being depleted to a certain extent each year. The enabling legislation states that funding may come from any source, including contributions from companies and future appropriations. Air quality continues to be a critical issue in Utah, and legislators are championing improvement programs and initiatives. While additional funding is not a certainty, loan repayments will continue to ensure the revolving fund is available.
Applying Lessons Learned
Utah's CFV Program and the Fund are strong, longstanding examples for other states looking to establish similar revolving loan programs. Several recommendations and considerations based on Utah's experience include:
- Clearly define eligibility criteria, application requirements, selection criteria, and program guidelines. Ensure this information is easy to understand and accessible through a central program website.
- Offer interest rates below those available through other financial institutions.
- When developing program rules, look to other successful state loan programs for inspiration, including those not related to alternative fuels and advanced vehicles. DAQ adapted language based on the Utah's energy efficiency and underground storage tank funds, for example.
- Strive for consistent program application periods from year to year so applicants may plan accordingly. Kim Hugie, owner of CNG America and CFV Program loan recipient, values the predictability and has been able to align his project plans with application timeframes.
- Review and evaluate the program on a regular basis to determine if adjustments are necessary. DAQ used the findings of DNR's audit to improve the CFV Program and significantly reduce the frequency of loan defaults.
- Publicize open application periods through a program website, press releases, partner organizations (e.g., local Clean Cities coalitions), and other channels. Also maintain a database of interested parties and past applicants, and inform contacts of rulemakings, new information, and other notable changes.
- Offer feedback to all applicants, particularly those not selected for funding, to help improve the quality of applications.
For more information about Utah's CFV Program, contact:
Utah Department of Environmental Quality, Division of Air Quality