Third Party Ownership using Power Purchase Agreements

Eshone Energy invites guest writer Christian Paulus to discuss the details and benefits of using third party ownership models using Power Purchase Agreements (PPAs) for Solar Photovoltaic Energy systems for schools and public entities.

Third party ownership models allow schools and public entities to significantly lower the costs of solar photovoltaic (PV Solar) projects by tapping into federal tax incentives, which would not have been available to them otherwise. In addition, they allow spreading the high initial investment costs over the useful life of a system so that no up-front capital is required.  While third party ownership models have been commonplace in the private sector, their benefits are now finding wide acceptance in the public sector as well.  

In the third party ownership model, three parties are involved:
1) Consumer (i.e. schools or other public entities)
2) System owners
3) Utility company

The system owner pays and owns the PV Solar installation. He not only manages the financing, installation and all maintenance work, he also bears the entire investment risk. The school, on the other hand, signs a long-term contract known as a Power Purchase Agreement (PPA) with the system owner.  The school purchases the generated electricity and hosts the system on its facilities, typically as solar roofing on public buildings. 

• If the generated electricity is not sufficient to cover the schools’ electricity demands at a specific time, the schools can buy traditional electricity provided by the utility company.
• But if excess electricity is generated, the school can then feed the excess electricity to the utility power grid for a retail credit under the “net metering” provisions.

The system owner can also sell the “green attributes” of electricity generated using PV Solar technologies to the utility company. These “Solar Renewable Energy Certificate” credits (SRECs) help the utilities meet their compliance goals for their renewable portfolio standards. For the system owners, this provides an additional revenue stream to further lower the costs of the solar system.

 

There are significant benefits, but also some disadvantages associated with the third party ownership models and PPAs. The benefits include:

• Ability to tap into Federal Investment Tax Credits (ITC’s): The “Energy Improvement and Extension Act of 2008”, signed into law on October 3, 2008, includes an 8-year extension of the 30% residential and business Investment Tax Credit for solar systems. Since schools and public entities do not pay taxes, they can not benefit from this significant incentive. However, third party ownership models introduce a tax paying entity, allowing solar schools to tap into the federal investment tax credits and thus significantly reducing the costs of PV Solar Systems.
• Ability to tap into Federal Modified Accelerated Cost Recovery System (MACRS) and Bonus Depreciation:  The IRS allows businesses a 5-year accelerated depreciation of eligible assets such as PV Solar Systems, reducing the taxable income. If certain criteria are met, the Energy Improvement and Extension Act of 2008 also provides a bonus depreciation.
• No or low up-front costs:  The initial investment costs for PV Solar Systems can be substantial. In third party ownership models the system owner covers the investments so that schools have no or low up front costs.
• Stable and predictable electricity prices for 20 to 25 years:  In the first year of the PPA, solar schools typically pay an electricity price to system owner, which is below the current electricity retail price. This price then increases annually based on a set percentage, since average residential electricity prices have been increasing close to 5% over the last five years. The benefit for schools is to have predictable energy prices, which will not change with volatile energy markets.  
• Operation and maintenance responsibility is handled by the system owner:  The system owner’s qualified resources operate and maintain the PV Solar system, removing this burden from the schools.
• Buyout option provides ownership potentia:  There can be the option for the school to buy out the system from the system owner. In order to maximize the economic benefit, this would typically be done after six years, once the federal tax incentives are exhausted. 
• Risk avoidance:  Schools have no responsibility if the Solar Energy System does not perform and does not generate the expected electricity. However, in this case, schools would need to purchase more electricity from the utility company to cover the shortfall.

While the benefits are significant, there are a few disadvantages to consider:

• Ownership of the “clean” energy attributes:  If the school sells ownership of the Solar Renewable Energy Certificate credits (SRECs) to create an additional revenue stream, it is not accurate any more to claim “green” energy generation, as this attribute has been transferred to the buyer of the SREC. Public statements and advertisement have to be drafted carefully, but it still would be possible to claim that a “PV Solar System is being hosted”.
• Access to facility:  Ongoing site access is necessary to maintain the installed solar panels. However, in some cases, some government staff may not be comfortable with a third party accessing the facility.
• Transaction costs and contractual issues:  There are transaction costs caused by drafting the PPA, since lawyers with specialized skill sets are necessary. 
• Contractual issues:  Contractual issues can occur since most local and state governments approve funding for operating obligations on a yearly basis rather than for the full duration of the long-term PPA. However, those concerns can be addressed through specific contractual clauses (e.g. non-appropriation and non-substitution clauses).

Third party ownership models, in conjunction with PPAs, are finding widespread acceptance at schools because they’re discovering the benefits outweigh the disadvantages and allows schools to reach their Renewable Energies goals.

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