Financial Analysis of the Business Case for an Affordability Environmental Impact Bond

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Public water utilities are challenged with maintaining affordable rate structures while facing increasingly strict regulatory requirements and rising operational, maintenance, and energy costs. Increased costs may be passed through to water rate payers through higher water bills that can create issues of water affordability for low-income customers and negative financial and reputational impacts for water utilities if bills remain unpaid.

Environmental Impact Bonds (EIBs) are highly regarded by impact investors due to innovative built-in outcome metrics that provide social and environmental benefits and financial returns. The Nicholas Institute of Environmental Policy Solutions (NIEPS) and outcome-based capital firm Quantified Ventures are investigating the structure and deployment of an Affordability Environmental Impact Bond (Affordability-EIB) that could both lower the burden of water bills on low-income customers through water affordability programs, and attract investors interested in green capital and social outcomes. Affordability outcomes of an Affordability-EIB bond would be evaluated using metrics of household affordability created by the Water Policy team at NIEPS.

Energy costs contribute up to 40% of the operating costs of water utilities and present an opportunity for a water utility to monetize cost savings through investment in energy efficiency technologies. A financial model was developed to evaluate the business case and potential cost savings at water and wastewater treatment plants from accelerating energy efficiency system upgrades funded by an Affordability-EIB. The model incorporates financial, operational, and environmental variables and analyzes cost of the accelerated system upgrades to costs of a base case with and without a future upgrade. Annual cost savings, cumulative savings over the evaluation period, discounted annual cost savings, and the net present value of cost savings are calculated for four financial settings:

• Annual cost without the cost of debt service • Annual costs with the cost of debt service • Capitalization of the social cost of carbon • Annual costs with the cost of debt service and capitalization of the social cost of carbon.

Observed capital costs, and electricity use and price from an aeration system upgrade at the North Toronto Wastewater Treatment Plan were input in the Affordability-EIB model to evaluate cost savings from an accelerated system upgrade. The accelerated system upgrade modeled on the Toronto case study did not demonstrate a positive business case when compared to a base case without a system upgrade because the cost of debt service was greater than electricity cost savings. The accelerated system upgrade did demonstrate a positive business case when compared to a base case with a future system upgrade. A Monte Carlo outcome probability simulation for the NPV of net cost savings with the cost of debt service comparing the accelerated system upgrade to the base case with future upgrade was performed. The simulation determined that operational variables, particularly electricity reduction from the accelerated system upgrade, contributed most to the variance of NPV of cost savings.

The simplified Affordability-EIB model is limited by its inability to incorporate factors including the complicated nature of water and wastewater systems, operations and maintenance costs, electricity demand, and complex utility billing structures. The biggest limitation of the model is the engrained assumption that water utilities are rationally economic actors. Instead, water utilities make decisions to meet regulatory compliance and ensure customer health instead of prioritizing maximum operational and economic efficiency.

The positive business case for investment in energy efficiency technologies through an Affordability-EIB would be strengthened by sourcing and evaluating case studies across a variety of energy efficiency technologies and water systems to demonstrate positive cost savings and identify further sensitives within the model. Notwithstanding, the considerable number of financial, operational, and environmental variables within the Affordability-EIB model make it a flexible tool to demonstrate how positive net cost savings can be generated through accelerated system modernization while incorporating municipal and investor preferences through an Affordability-EIB.





Braun, Amanda (2022). Financial Analysis of the Business Case for an Affordability Environmental Impact Bond. Master's project, Duke University. Retrieved from

Dukes student scholarship is made available to the public using a Creative Commons Attribution / Non-commercial / No derivative (CC-BY-NC-ND) license.