Stormwater runoff is one of the main causes of urban waterway pollution nationwide. This runoff collects everything from trash to pet waste to antifreeze and motor oil. Why should we care? These and other highly toxic pollutants eventually make their way to our rivers, lakes, beaches and drinking water supplies.
This pollution source has been labeled, “one of the most significant reasons that water quality standards are not being met nationwide,” according to the Environmental Protection Agency (EPA).
The problem will only get worse as more people flock to cities over the coming decades. In order to reduce the environmental and public health threats posed by polluted stormwater, and to comply with the Clean Water Act, most municipalities are making significant investments in sewer and stormwater infrastructure.
These investments usually involve traditional “gray” or human built solutions to fix and expand existing infrastructure. For the most part, this means expanding and adding to existing cement and pipe systems that convey rainwater away from where it falls.
Not only are the existing systems currently overwhelmed, these solutions tend to be expensive and don’t address the root cause of the problem: impervious spaces in the built environment generate 10 trillion gallons of untreated runoff per year.
The EPA has estimated the price tag for fixing infrastructure across the U.S. in both separate and combined sewer systems, and the expansion of existing systems, is well over $100 billion over the next 20 years.
What is “Green Infrastructure”?
Some cities are embracing “green infrastructure alternatives” to help solve these stormwater problems. These approaches, including green roofs, roadside plantings, and parks, aim to manage stormwater onsite for productive use by mimicking natural hydrologic functions, such as water infiltration into soil and evapotranspiration into the air.
Green infrastructure solutions also yield many important “co-benefits,” including cooling and purifying the air, beautifying neighborhoods, and lowering heating and cooling energy costs, and creating jobs. For a salient example of a green infrastructure project, check out this initiative in Los Angeles being led by Ashoka Fellow Andy Lipkis, founder of TreePeople.
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The Case for Private Investment
Although green infrastructure can be more cost-effective than traditional gray infrastructure, there are significant gaps between funding needs and available government resources.
Thus, in combination with stormwater fee and credit systems that reward investment in retrofits, the use of green infrastructure practices can create tremendous opportunities for private investment to underwrite much of the cost.
Market Potential
The potential market for stormwater retrofit investment is large, and an existing regulatory driver is backing many of these infrastructure investments. For instance, nearly 800 communities across the country have Clean Water Act (CWA) obligations to reduce raw sewage overflows from combined sewer systems, which are triggered by excess stormwater runoff.
Thousands of municipalities also have separate stormwater sewers that are regulated under the CWA. An increasing number of these communities are subject to requirements to reduce polluted runoff from existing developed areas, including by retrofitting impervious areas.
In terms of regulatory incentives for green infrastructure specifically, more than 400 cities, towns, and utility districts nationwide charge property owners stormwater fees based entirely or in part on the amount of impervious surface on their property. This is known as a parcel-based stormwater billing practice.
One way to motivate private property owners to manage much of their own stormwater on site is to develop billing practices that provide them with the opportunity to obtain a credit, or discount, on their stormwater fees by installing stormwater management systems.
Philadelphia has taken a lead on this approach and provides up to a 100 percent credit for non-residential owners who can demonstrate onsite management of the first inch of rainfall over their entire parcel. One report calculated that there is a potential market on the order of $376 million for third-party investments in stormwater retrofits in Philadelphia alone.
The challenge is for the financing mechanisms to support private investment.
Parallels to the Energy Efficiency Finance Sector
The same report analyzed a number of project finance mechanisms that have been designed and deployed in the energy finance sector and are applicable to the financing of private stormwater retrofits, including off-balance sheet “project developer” models.
Instead of traditional asset-backed financing, the authors examined these models under the premise that a portion of future stormwater fee savings could service as a type of cash flow to payback the private investment.
The authors analyzed 27 potential stormwater retrofits on commercial projects under high, medium, and low investment options. What they found is that the high investment option reduced the stormwater fee by the greatest amount but also incurred the highest retrofit costs.
Of the projects analyzed, all but two generated an Internal Rate of Return (IRR) for the property owner that exceeded 13 percent, and one case study showed a projected IRR as high as 132 percent.
The report also highlights challenges that remain to creating a large and liquid market for private investment into stormwater benefits, including relatively high transaction costs, uncertainty regarding long-term trends for municipal stormwater fees and credits, and lack of available collateral.
Ultimately, successful examples of private sector investment in stormwater retrofits are critically needed, as cities nationwide are seeking cost-effective alternatives that leverage private dollars to complement necessary public investments in stormwater infrastructure.
This is the second article in a series on the environment in partnership with Rachel's Network. Here is the first piece.
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Note: This post is not an offer of securities nor a solicitation in any investment.
