Clean Energy Financing & Colorado’s Cannabis Industry
By: Ian Ferrell
Tags: Cannabis, Alternative Energy, Colorado, Solar Power, Solar Energy

By Ian Ferrell

Cannabis grow operations utilize 0.6% of Colorado’s total electricity consumption annually, creating interest in alternative options like clean energy solutions and financing.

Cannabis cultivation in Colorado is energy-intensive. Colorado’s cannabis grow operations consume a total of ~300 gigawatt-hours of electricity per year, which is about 0.6% of Colorado’s total electricity consumption.1 In fact, grow operations accounted for around 4% of Denver’s total electricity usage in 2016.2

The total energy costs for indoor cannabis grow operations typically vary between 20–50% of total operating costs.3 Indoor grows annually consume up to ~150 kilowatt-hours of electricity per square foot, which is about 10 times as much as a typical office building in the Southwest.4 Of this annual consumption, approximately 51% percent of a typical indoor cannabis grow’s electricity bill is spent on ventilation, cooling, and dehumidification costs while around 38% is spent on lighting.5

Cannabis production in Colorado continues to expand while market prices continue to steadily fall. From May 2016 to April 2017, cannabis production increased by an average of 3% per month.6 And, from January 1, 2015 to October 1, 2018, the retail price of cannabis decreased by approximately 62% from $2,007/lb to $759/lb.7 As market prices for cannabis continue to decrease, falling profit margins and increasing market competitiveness will result in market consolidation. Cost-effective cannabis grow operations will be more likely to succeed.

As these forces continue to sway Colorado’s cannabis market, several mechanisms for financing energy efficiency and renewable energy improvements may provide circumstances to implement more cost-effective cannabis grow operations. Clean energy financing may present such an occasion.

Clean energy financing allows a property owner to finance the up-front cost of energy and other eligible improvements on a property (e.g. solar power, LED lighting, and energy-efficient HVAC systems) and pay the costs back over time through a voluntary assessment. These assessments attach to the property tax rather than to an individual. It is generally based on an existing structure known as a “land-secured financing district,” often referred to as an assessment district or a local improvement district. In a conventional assessment district, the local government issues bonds to fund projects with a public purpose such as streetlights, sewer systems, or underground utility lines.

The recent extension of this financing model to energy efficiency and renewable energy allows a property owner to implement improvements without a large up-front cash payment. Property owners participating in such a program repay their improvement costs over a set time period — typically 10 to 20 years — through property assessments, which are secured by the property itself and paid as an addition to an owner’s property tax bills.

In such situations, the assessment agreement is tied to the property as opposed to a loan guarantee by the property owner. In turn, the repayment obligation may transfer with property ownership if the new buyer and its lender agree to assume the assessment obligation. This type of arrangement generally does not include a pre-payment penalty.

Clean energy financing allows for secure financing of projects over a longer-term with the intent of making projects more cash flow positive due to the lower periodic payments associated with a long amortization schedule. Such programs seldom require any upfront, out-of-pocket payment, and they remove the requirement that debt be paid at the sale or refinance. This form of financing is meant to encourage energy efficiency and renewable energy without putting a municipality’s general funds at risk while also delivering the opportunity to utilize large sources of private capital. Additionally, a Federal tax credit may be able to offset upfront energy improvement costs.

Clean energy financing may furnish a unique opportunity for Colorado’s cannabis industry. Market players who properly utilize this financing method may be positively rewarded as Colorado’s cannabis cultivation market continues to become more and more competitive. However, in line with the persistent theme of regulatory uncertainty endemic to Colorado’s cannabis industry, questions remain regarding whether cannabis businesses would be allowed to participate in these funding opportunities and whether a finance company would be comfortable implementing such financing. Nonetheless, since clean energy financing does not use federal funds, its associated legislation does contain any prohibition on any particular industry’s qualification, and no comments to the contrary have presented themselves, clean energy financing may in fact provide a distinctive opportunity for market participants within Colorado’s cannabis industry.

1. Kolwey, Neil, “A Budding Opportunity: Energy efficiency best practices for cannabis grow operations”, Southwest Energy Efficiency Project, (Dec. 2017) Available at https://www.swenergy.org/data/sites/1/media/documents/publications/documents/A%20Budding%20Opportunity%20%20Energy%20efficiency%20best%20practices%20for%20cannabis%20grow%20operations.pdf

2. Hood, Grace, “Nearly 4 Percent Of Denver’s Electricity Is Now Devoted To Cannabis”, Colorado Public Radio, (Feb. 19, 2018). Available at https://www.cpr.org/news/story/nearly-4-percent-of-denver-s-electricity-is-now-devoted-to-cannabis

3. “Trends and Observations of Energy Use in the Cannabis Industry,” Jesse Remillard and Nick Collins, ERS, ACEEE Summer Study of Energy Efficiency in Industry, 2017.

4. “A Chronic Problem: Taming Energy Costs and Impacts of Cannabis Cultivation,” KellyCrandall, EQ Research LLC, September 2016, http://eq-research.com/wp-content/uploads/2016/09/A-Chronic-Problem.pdf, p. 5; EIA Commercial Buildings Energy Consumption Survey, Table C20 Electricity consumption and conditional energy intensity by climate region, 2012, https://www.eia.gov/consumption/commercial/data/2012/c&e/cfm/c20.php.

5. Cannabis Environmental Best Management Practices Guide, Denver Public Health & Environment (Oct. 2018). Available at https://www.denvergov.org/content/dam/denvergov/Portals/771/documents/EQ/MJ%20Sustainability/Cannabis_BestManagementPracticesGuide_FINAL.pdf

6. Supra, note 1

7. Current & Prior Average Market Rates (AMR) for Retail Cannabis Excise Tax, Colorado Department of Revenue, (Apr. 2019). Available at https://www.colorado.gov/pacific/sites/default/files/AMR_PriorRates_Apr2019.pdf

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