| Power purchase agreements - the driving force behind the commercial solar market |
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As America’s love affair with renewable energy begins to blossom, the ordinary homeowner can legitimately consider installing solar panels on his rooftop to reduce energy costs, and his personal “carbon footprint.”
While many have taken the step or are working energy efficiencies into the design of new homes, most homeowners still fi nd the costs of solar rooftop projects too high to justify the longterm economic and moral benefits. Why, then, have numerous big corporations like Wal-Mart, Kohl’s, Macy’s, Walgreens and Staples embraced solar PV rooftop installations for their retail stores, warehouses and distribution centers? And why have so many municipalities and school districts decided to have solar PV installed on the rooftops of their administrative buildings and schools? What makes solar economical for them? A good part of the answer is the “power purchase agreement.”
From the owner’s perspective, the benefi ts of the PPA model are clear: the owner has no capital outlay for the system; the owner locks in a fi xed rate (or a rate with an inflation or other agreed adjuster) for a defined portion of its power requirements for a long period of time; the owner can look to the service provider to provide all maintenance and operations for the system; and the owner achieves positive “green” public relations. The owner in effect “goes green” with no upfront cost and achieves a long-term hedge against rising energy costs. Many retailers and other owners of suitable buildings have found this combination of benefits quite attractive. And owners with a volume of properties can readily achieve economies of scale by replicating the model over hundreds of properties. Various service providers (or “developers”) have emerged as popular choices for commercial end-users, including companies such as SunEdison and Sun-Power. By focusing on creditworthy enduserswith a large volume of suitable flatroofed properties, such providers achieve volume and economies of scale that allow them to obtain third-party financing for their projects. The PPA serves as the backbone of this financing, constituting a While a single project on a single residential rooftop will not get the attention of financiers, multiple projects aggregated into a single program do find an audience. This is why some developers have sought to enter into PPA contracts with high-quality credits and a high volume of rooftop space. By aggregating many rooftop projects into a single fund, the transaction becomes large enough to justify the resources required to complete it. Better still, the combination of a high volume of transactions and multiple quality credit end-users provides the financiers with a diversification of credit they find attractive. Even in the currently tight credit market, many large national and regional banks have evaluated and financed aggregatefd commercial rooftop PV programs for major developers. Investment in and financing of solar projects (and other renewables) has withstood the pressure of the current credit environment for several reasons. Some investors and banks are under pressure to achieve internal benchmarks for reduction of their “carbon footprint” and investment in renewable energy. Equally important, various federal and state incentives allow these transactions to generate attractive returns. Under the typical PPA, the end-user cedes these incentives to the service provider and/or its financiers. Another reason why this market is thriving: some states now offer outright grants and subsidies for qualified investments. The majority of states have enacted “renewable portfolio standards” (“RPS”) requiring regulated utilities to derive a specified portion of their energy from renewable sources. This has created a market for “renewable energy credits or certificates” (or “RECs”) – commodities that reflect the environmental attributes At the federal level, the owner of a qualifying solar facility is eligible for a 30 percent investment tax credit. The ability of the developer or financier to claim the credit effectively provides another source of cash fl ow from a commercial PV solar project. Without these incentives, financing solar projects might not be feasible. Presently, the 30 percent investment tax credit will expire at the end of 2008, and Congress is under considerable pressure to enact legislation to extend it. The PPA model has found a home in the commercial and municipal sector, which provides a combination of large volume rooftops and creditworthy power-purchasers. For developers, financing from major institutions most Troutman Sanders LLP | http://www.troutman-sanders.com/ |
Unlike homeowners, big box retailers and municipalities are not buying and installing their solar energy panels. Instead, they are merely buying the power generated by the panels. Under the fi nancing model that has emerged as a predominant method for commercial installations, the building owner lays out no capital expenditure for the solar system. Instead, owners agree to purchase the power generated by the system under a long-term “power purchase agreement” or “PPA.” The PPA requifres a service provider to design, procure, install and maintain a solar PV panel system on the owner’s rooftop. The owner agrees to purchase the power generated by the system for a period of years (typically 10 to 25 years) at a scheduled rate that is less than the rate charged by the local utility. Typically, the system will produce 30 to 60 percent of a particular building’s power requirements. Aside from the obligation to purchase the power delivered, the owner is obligated to give the service provider access to the premises for installation and maintenance, and is required to cooperate in obtaining available grants, subsidies, and interconnection with the local utility.