Why the Forest Resilience Bond is a win for utilities

On Friday, April 2, 2021, the Environmental Protection Agency’s (EPA) Water Infrastructure and Resiliency Finance Center released a report entitled “The Forest Resilience Bond: Structural Design and Contribution to Water Management in Collaborative Forest Restoration Partnerships”, which outlines the mechanics and motivation behind Blue Forest’s Yuba Project Forest Resilience Bond (FRB).

Why is the EPA interested in the Forest Resilience Bond? As the sector’s main regulator, the EPA has a vested interest in helping utilities protect their water resources. Yuba Water Agency, a wholesale agricultural water supplier, hydroelectric utility, and flood risk reduction agency, contributed funding over time to repay a portion of the FRB investment. There are several reasons the FRB was a win for Yuba Water that are applicable to utilities across the Western U.S.

Achieving a return on investment

Through scientific and economic analyses with utilities, Blue Forest and the World Resources Institute (WRI) can evaluate the benefits that a utility can expect from a forest restoration project and how much those benefits are worth to the utility’s bottom line operations. This analysis can provide confidence that the utility will see a positive return on investment from the FRB project. Informed by such analysis, the utility can choose how those expected benefits can justify or motivate their participation in the FRB financing contracts.

The structure of FRB repayment can be flexible to accomodate utility budgeting and variable revenue forecasts. Utilities may choose to repay the FRB through a simple cost-share mechanism. Alternatively, a utility may choose to have a variable payment based on measured outcomes, for example, paying a higher or lower amount depending on project performance.  Monitoring is incorporated into the FRB contract from the outset, an additional advantage of FRB participation. This measurement and evaluation work verifies that the utility is seeing the benefits they expected. Moreover, it provides an opportunity for the utility to gain access to new information about their headwaters that can be useful beyond the FRB project alone.

Yuba Water was motivated to commit to repaying the Yuba Project FRB to protect their source watershed from severe wildfire while also gaining water supply enhancement benefits. To quantify these project outcomes and benefits, Blue Forest and WRI worked in tandem with Yuba Water, the Sierra Nevada Research Institute at UC Merced, and the Natural Capital Project at Stanford to evaluate the economic benefits of the project to the water agency. This analysis demonstrated that participation in the FRB project would be a good business decision for Yuba Water, and provided the information needed for the water agency to move forward with the FRB in their watershed.

Yuba Water’s contract stipulates that they contribute fixed cost-share payments annually to the Yuba Project FRB regardless of project outcomes. This way, the utility pays over time as benefits accrue. However, Yuba Water was also interested in monitoring the water enhancement outcomes of the forest restoration work. Each year, the utility receives a detailed analysis of the reduced vegetation water demand resulting in additional water supply, providing valuable information for planning and resource management.

Easing barriers to collaboration

While many utilities recognize the source water protection and natural infrastructure benefits of forest restoration, it can be challenging to figure out how to motivate investments on public land, which can cover a substantial area of upper watersheds. Part of this stems from the challenge of connecting and collaborating with other federal, state, and local groups with whom utilities might not traditionally communicate and who have different priorities. The FRB is structured such that multiple parties can strategically cost-share in environmental restoration in a way that meets each individual organization’s goals and constraints for a specific project of interest.

In the case where projects are on land managed by the U.S. Forest Service, utilities do not need to hold cooperative agreements with the U.S. Forest Service to participate in the FRB, though existing partnerships or agreements are welcome. This structure eliminates a barrier that utilities might face when evaluating how they can participate in upper watershed restoration.

Additionally, the cross-sector and cross-boundary relationships developed through an FRB project can lead to long-term collaborative efforts. In the case of the Yuba Project, the FRB helped to catalyze a new forest collaborative: the North Yuba Forest Partnership. A forest restoration collaborative is a partnership among some combination of federal, state, tribal, and local organizations with a common interest in protecting and restoring forest lands. The individual parties may not have a direct economic interest, but directly benefit from public goods associated with these lands and their productive management. The North Yuba Forest Partnership is a collaboration of nine organizations that is poised to expand forest restoration investment for the entire watershed.

Offloading project and financial management

Through a FRB, many of the project and financial management responsibilities are transferred from the stakeholders and beneficiaries, like utilities, onto Blue Forest and our partners. Shifting management responsibilities can make FRB participation easy for busy, resource-constrained utilities.

Cooperative agreements allow local and national partners of the U.S. Forest Service to manage projects on the ground. The FRB leverages this opportunity of transferring contracting responsibility to an implementation partner. As investor capital is provided to the implementation partner upfront, the restoration work can be implemented more quickly and with greater flexibility than with a traditional implementation process. FRB funds are immediately available to pay contractors, even if project funding streams are not immediately available as is the case with reimbursable grant funding. This structure can support more local contractors, provide longer term contracts, and allow local money to stay in the local economy. This also enhances financial flexibility for the implementation partner—an especially advantageous benefit for groups implementing projects supported in part by reimbursable public grants that require grantees to complete on-the-ground work before receiving funds.

In the Yuba Project, the National Forest Foundation was chosen by the U.S. Forest Service as the FRB implementation partner. By shifting project management responsibility to the National Forest Foundation, and because of the advantages of having up-front capital to pay contractors on time, the Yuba Project implementation time is being reduced from over ten years to completion in just four years. This means a restored forest and protected watershed are realized sooner. As we learned in the 2020 fire season, rapidly protecting western forests is imperative.

As the lead non-profit project developer, Blue Forest manages stakeholder communication, individual contract development, financing, and coordination with a trusted implementation partner. Blue Forest also sets up the FRB legal entity for each project and manages the flow of funds between investor lenders, beneficiaries, and the implementation partner. The contracts that were developed for the Yuba Project can be replicated and modified for future projects, saving time and money in future project development. Additionally, the Memorandum of Understanding between Blue Forest and the US Forest Service enables this model to be replicated across regions.

The potential to scale

The success of the Yuba Project has led to a second, scaled restoration effort the Yuba II project which will launch in 2021. The first FRB was such a win for Yuba Water that the agency has committed over $6 million to the project. Yuba Water got a return on their investment, forged valuable new partnerships, and was able to do so without the traditional heavy project management lift. This type of scaling demonstrates the potential for the FRB to transform forest restoration and headwaters management for utilities.

____

Kim Quesnel, PhD is a Senior Project Scientist at Blue Forest. She works to advance Blue Forest’s research program while providing scientific support to projects and developing science communication tools. She is also responsible for project development, currently focusing on the Pacific Northwest.