Municipal bond-financed prepayment transactions are quickly becoming a top strategy for public power utilities to pay for their power supply needs. At the end of 2025, these financing structures were among the top 10 in the Bloomberg Municipal Bond Index. A record $580 billion in municipal bonds was issued in 2025, and many of the major issuances of the new money bonds in the electric sector were for prepays. In the first half of 2025, of just over $9 billion in power-related new money bond issuances, about $7 billion were for prepays.
What Are Prepayment Bonds?
Prepay municipal bonds are used to provide the upfront capital for prepay transactions, which in turn secure a long-term supply of electricity or natural gas. The transactions make financial sense because the bonds are exempt from tax and so are issued at a lower rate of interest than taxable debt. These cost savings are generally passed on to customers. Prepay transactions have been around for decades but are growing in volume and complexity.
Parties to these transactions include:
- The customer, which is the public power utility that ultimately receives electric power or natural gas from the supplier.
- The issuer, generally a “joint powers authority,” which is a financing authority that issues the bonds and manages the deal structure.
- The supplier, which is a power developer, generator, or natural gas supplier.
- The bank, which takes receipt of the bond proceeds in exchange for making payments to the supplier.
- The investor, which buys the bonds and provides capital for the transaction.
In a simpler variation, a public power utility is the issuer instead of a joint powers authority.
Prepay bonds specifically fund the purchase of energy commodities like natural gas or electricity, not power infrastructure. The condition of prepay bonds is that the ultimate consumer of the product must be customers of a municipal utility, according to Peter Thompson, executive vice president and chief operating officer of Energy Southeast, a joint action agency based in Montgomery, Alabama.
Prepayment bonds allow municipal utilities to achieve discounted rates on a long-term energy supply. The bonds include final maturities that typically are 30 years, with shorter tenders often between five and 20 years. The shorter tenders optimize borrowing costs, while the longer maturity improves the bond’s market discount tax treatment, according to Sterling Capital.
Utilities can alternatively secure power supply via power purchase agreements. What’s different with prepay transactions is that they allow a utility to lock in a supply while taking advantage of the tax-exempt benefit of municipal bonds.
“Utilities have achieved the best economics they could through PPAs, but there are greater discounts and savings on energy itself through prepay bonds,” said Fred Clark, president and CEO of Energy Southeast.
An issue drawing attention is that while prepay transactions can help public power utilities achieve discounts on power supply costs, the other parties also derive benefit from the transaction. For example, under a prepay transaction, a bank typically obtains bond proceeds from the issuer in exchange for making prepayment payments to the supplier. These payments are generally equal to the amount the bank would have to pay if it — and not the issuer — had borrowed the money, i.e., its discount rate. The value to the issuer is that for the price of paying off their tax-exempt interest, the bank is making payments to the supplier equal to what would be a taxable interest rate. The advantage to the bank is that it is not limited in how it invests the bond proceeds and so can achieve a rate of return higher than its discount rate. A 2022 article in Forbes about prepaid bonds noted how the large financial firms involved in brokering the issuances benefit from the tax-exempt status of the bonds.
The Rise of Prepay
One of the biggest issuers of prepay bonds in recent years is the Southeast Energy Authority. (Note: SEA and Energy Southeast are different entities). According to its website, from 2021 until October 2024, SEA executed eight prepayments totaling $4.71 billion. In 2025, it was involved with some record-setting deals with public power entities, including a $675 million transaction that involved multiple utilities across the U.S. and a nearly $2.7 billion transaction involving Salt River Project in Arizona.
Other large deals include a nearly $1 billion transaction that the New York Power Authority established with the New York Energy Finance Development Corporation. The largest issuer in 2025 was the California Community Choice Financing Authority, which leveraged deals for community choice aggregators in the state.
The rise in prepay bonds is driven by growing energy demand, favorable interest rates, and trends in power generation.
“As costs go up, due to increases in demand and loads, utilities are searching for ways to save money and reduce costs,” Clark said.
Additionally, interest rates have been high over the past 10 years, a key component to gaining the benefits of prepay bonds. When interest rates are low, the savings aren’t as significant.
“When you bring a deal to market, the market moves constantly, and the difference between taxable and tax-exempt is different every day,” Thompson said.
“That’s what makes this unique; it’s something you already will buy,” said Brian Stubbert, assistant general manager of financial services and chief financial officer at Turlock Irrigation District in California. “If you buy natural gas or renewables, you already have these expenditures, and it's a way of helping ratepayers receive the benefits of transactions you will enter into anyway.”
Prepay bonds first hit the market in the 1990s, leveraged primarily to finance natural gas purchases. In 2003, the IRS issued guidance allowing prepay bonds to be used for electricity as well, including renewables. That guidance opened the door to utilities in states like California that are moving away from fossil fuels and relying more heavily on electricity.
In those states, uncertainty existed about whether natural gas would be permitted in the future, so those utilities were hesitant to participate in the long-term contracts required by prepay structures. The guidance assured utilities they can purchase natural gas, electricity, or a combination of both using prepay structures.
Randy Howard, general manager of the Northern California Power Agency, noted how he had been involved in some of the largest prepay transactions at their inception near the turn of the 21st century, when he was with the Southern California Public Power Agency and Los Angeles Department of Water and Power.
At that time, he said, the strategy to use prepay bonds stemmed from public power being blocked from direct access to tax credits on renewable projects.
“We had owned hydro, we had owned coal, we owned gas plants, but we really weren't owning a lot of renewable facilities. Yet, our ratepayers were seeing substantial benefit on some of these facilities that we had owned almost 100 years,” he said, noting that the true value related to these assets was from the land they sat on, the interconnection to the grid, and the resources produced.
Howard said that the prepays allowed utilities to manage the risk upfront and offered an opportunity to own the assets later, a benefit both to the more nascent solar industry and to the utility being able to continue to deliver value to its community.
“So, we prepay, and if something were to happen with the developer or the project, we had great step-in provisions where we could take it over, but we also had buyout options associated with that transaction. It reduced our cost up front for the resource, but it also secured some risk elements that we could better manage.”
Compared with doing power purchase agreements, Howard said prepay arrangements have some higher upfront risk, but can provide better negotiating opportunities than a PPA without a prepay provision.
While he acknowledged that the market has evolved since some of the early deals, Howard said he “would never do a prepay on a renewable project that the agency had no interest in eventually stepping into” or operating directly under a default scenario.
Saving Today, Funding Projects Tomorrow
TID, a public power utility in Turlock, California, sought the expertise of a financial advisor when it began looking into prepay arrangements, both to help navigate the nuances of prepay bonds and to determine whether they were the right approach for the utility.
TID finished its first deal in early 2025, achieving savings of $93.3 million on its natural gas purchases over 10 years. After 10 years, additional bonds will be issued to achieve additional savings, and the utility will have the option to convert from natural gas to electric and renewable energy.
Though the arrangement is a 30-year contract, it’s common for the bond length to be less, with additional bonds negotiated at market rate.
The second deal began in February 2026, with TID achieving savings of $48 million associated with its renewable energy purchases over eight years. Similar to the first deal, additional bonds will be issued after eight years. It includes two existing PPAs, one for wind and one for solar. For both transactions, TID worked with Goldman Sachs.
Goldman Sachs noted that gas prepay bonds surpassed $31 billion in 2025, a record year. It gave two primary reasons for increasing utility interest in the mechanism: lower borrowing costs and rising energy prices. Still, the terms that will be most favorable to both utilities and the financial institutions involved in the issuance can change quickly.
“When you go to market, you look at what duration investors will invest and what time period gives the best savings,” Stubbert said. “We had an eight- and 10-year option on the first deal, and the 10-year gave the best savings. I wanted that again for the second deal, but people were looking for six to eight years at that time.”
TID plans to use the savings from both transactions to offset future rate increases and pay for the construction of large capital projects planned over the next five to 10 years, like new substations and increased capacity at existing substations, additional transmission and distribution lines, new transformers, and upgrades to generation facilities.
“Anybody who can use these should really strongly look into them,” Stubbert said. “The biggest advice I can give is to start the process and don't drag your feet. In a time when costs are going up, it’s a good feeling to provide real savings to ratepayers.”
Achieving Deeper Savings
Energy Southeast began leveraging prepay bonds approximately eight years ago after being approached by Morgan Stanley, which demonstrated the regulatory requirements for prepayment.
It decided to wrap existing PPAs into prepay arrangements, resulting in $2 billion in bonds and $100 million in savings over the first seven years of the deal, which was $14.5 million annually. Those savings proved the worth of prepay to Energy Southeast, and it continued partnering with public power utilities on prepay deals.
It recently worked with Morgan Stanley to underwrite $1 billion in bonds for CPS Energy in Texas, which leveraged the deal to access additional solar and other renewables for its power supply. The proceeds were given to Energy Southeast, which prepaid for the power. CPS Energy will purchase the power from Energy Southeast over the next 30 years.
The prepay structure is allowing CPS Energy to save 8% on the power it would otherwise have purchased directly from the developer through a PPA. Energy Southeast also recently worked with Florida Municipal Power Agency and Riviera Utilities in Alabama to enter existing PPAs into a prepay arrangement with Goldman Sachs as the underwriter.
It includes four components rolled into one prepay arrangement to create a $430 million deal. Transactions of all sizes can enter prepay arrangements.
“At different times, the market takes different-size deals better. It might be a market that can take a lot of prepay debt, or it might be a time when smaller deals are better,” Clark said. “We can put a number of deals into one transaction.”
Howard sees some similarities between the renewable project prepays he has been involved with and some of the natural gas prepays occurring today but sees the latter as more of an exercise in arbitrage and price hedging than a means to buy out a resource. He credited Energy Southeast for developing a model that makes it easier for public power utilities to get involved in prepay transactions.
However, Howard sees prepays as mostly being valuable for larger projects.
“It's a little costly to put together, so you really want a large enough project to ensure that you're going to optimize the benefits,” he said, explaining why the transactions are often connected to larger utilities or joint action agencies.
Getting Leadership on Board
Since many utilities are new to prepayment bond arrangements, the biggest hurdle to entry often is education.
“Each utility has to get its governing body to approve the contract, and that's the hardest lift,” Thompson said. “It’s a 30-year contract, which sounds scary. You can do shorter structures, but 30 years creates more savings.”
Prepay bonds are considered nonrecourse debt. The utility pledges to purchase a commodity it would purchase regardless of financing structure, and it doesn’t impact revenue or require a rate raise. If the counterparty doesn’t deliver the agreed-on power, the utility isn’t on the hook to pay it. In traditional bond arrangements, the utility pledges revenue. If it can’t make a payment with a traditional bond, it is required to raise rates until it can make the payment, according to Stubbert.
TID held workshops for its board members about prepay bonds. Board members asked questions to understand the structure and potential risks and requested that independent counsel evaluate the risks. TID worked with auditors to better understand how prepay would be treated in its financial statements.
“The one disadvantage is the psychological impact of adding that much debt onto our books. Over the two deals, approximately $1.7 billion in principal was added to our consolidated balance sheet, which is more than three times that of our traditional bond debt,” Stubbert said. “So the Board wanted to understand the type of transaction and the impact it would have on TID.”
Another hesitation in entering these arrangements is estimating the load over such a long period of time. There’s no risk of financial loss if significant load changes occur due to protection mechanisms in the arrangement, but the utility won’t achieve the savings expected.
“The risk is if you have a large customer that leaves, or if a lot more customers install solar or other behind-the-meter generation, and then your load drops,” Stubbert said. “It’s not a loss, but you don't get the savings.”
TID managed this risk by purchasing power under a prepay arrangement that is below the threshold of what it estimated the load to be over the 30-year period.
Stubbert encouraged public power utilities to look into whether prepay structures make sense for their energy purchases.
“Talk to a utility that has done prepay and start gathering information to see if it's right for your utility,” Stubbert said. “This is a mechanism other industries don't have; Let's use all the tools in our toolbelt to lower costs.”
