# Presentation: 728419

## Solar Photovoltaic Financing: Deployment on Public Property by State and Local Governments

**Karlynn S. Cory, Jason Coughlin and  Charles Coggeshall**
**Strategic Energy Analysis and Applications Center**
**National Renewable Energy Laboratory**
**NREL Energy Analysis Seminar Series**
**June 3, 2008**

## Overview

_**Focus**_**: deployment **
**for use by***** ***
**state/local government**

**Overview**

- Electricity and renewable energy certificate (REC) revenues
- State and local incentives
- Federal incentives
- Third-Party Ownership
- Insurance

- _Source_: SunPower - Alameda County

- The opportunity for state/local public-sector photovoltaics (PV)

## Why PV in the public sector?

**Why PV in the public sector?**

- Reduce current utility electricity bills
- Add predictability to future electricity expenses
- Reduce greenhouse gas emissions
- Meet renewable energy mandates/targets
- As a model for others to deploy solar
- Local workforce development
- Emergency power benefits on critical infrastructure

- _Source_: SunPower – Thousand Oaks, CA
- water treatment plant

## State/Local Government: the Solar PV Opportunity

- U.S. state and local government-owned buildings in 2003: **574,000**
- 12% of all nonresidential buildings
- Electricity consumed in 2003: **178 billion kWh**
- The opportunity
- If 1% of their total demand was met with on-site solar PV, **1,450 MW** of capacity would be needed.
- This is approx. **10 times** the annual U.S. grid-tied PV capacity installed in 2007 of 150 MW-dc.

- _Source_: EIA 2003 Commercial Buildings Energy Consumption Survey, table C-13
- “U.S. Solar Industry Year in Review: 2007,” Solar Energy Industry Association and Prometheus Institute,
-  released April 21, 2008, at http://www.seia.org/Year_in_Review_2007.pdf

## State and local government deployment sites

**State and local government deployment sites**

- Government building roof tops
- Water treatment plants
- Airports
- Ports
- Conference centers

- Parking
- Shading for top level of a garage
- Shading for flat lots
- Bus stops
- Schools/Universities
- Electricity savings
- PV as a teaching tool

## Solar Resources

- Source: NREL

## Leading states for solar (MW per year)

-  Solar Energy Industry Association & Prometheus Institute  http://www.seia.org/Year_in_Review_2007_lr.pdf

**Leading states for solar (MW per year)**

|   | 2005 | 2006 | 2007 |  06-07 |
| --- | --- | --- | --- | --- |
| State |   |   |   |   |
| California | 52 | 71 | 87 | 23% |
| New Jersey | 5.5 | 18 | 17 | -6% |
| Nevada | 0.5 | 2.6 | 15 | 477% |
| Colorado | 0.2 | 0.9 | 12 | 1233% |
| New York | 1.4 | 2.7 | 4.4 | 63% |
| Hawaii | n/a | n/a | 2.4 | n/a |
| Arizona | 1.5 | 2.1 | 2.1 | 0% |
| Connecticut | 0.2 | 0.5 | 1.8 | 260% |
| Massachusetts | 0.6 | 1.5 | 1.4 | -7% |
| Oregon  | 0.4 | 0.5 | 1.1 | 120% |
| Others | 0.7 | 1.5 | 4.4 | 193% |
| Total  | 64 | 102 | 150 | 47% |

##  PV Financing Puzzle  

**Subsidies**

**Tax Credits & Exemptions**

**Net metering**

**Interconnection**

**RECs**

**Cash/Financing**

**Renewable Portfolio Standard**

**Rebates**

**Cost of electricity/payback**

## Balancing Costs and Revenues

**Balancing Costs and Revenues**

_**Finance**_
- Equity &/or Debt

**Revenues**

## U.S. Grid Parity: 2010 – 2015 expected

**U.S. Grid Parity: 2010 – 2015 expected**

- Sources:
- Robert Margolis (NREL) and DOE Solar America Initiative

## State Renewable Portfolio Standards (RPS)

**26 States**
** ****+ DC**

## Solar/DG Provisions in State RPS Policies

- Source: DSIRE (May 2008)

## Solar/DG Provisions in State RPS Policies

- Source: DSIRE (May 2008) and LBNL

- _If met:_ 7,500 MW of
- additional solar
- capacity by 2025

## Renewable Energy Certificates (RECs)

- Commonly used for mandatory and voluntary markets
- Not allowed for RPS compliance in AZ, CA, HI and IA
- A REC represents the non-electrical attributes of 1 MWh of renewable energy generation
- Has value separate from commodity electricity
- RECs can be critical to getting projects financed

## REC Market Value Factors

- Compliance vs. voluntary market
- Regional Issues
- Quality of resource
- Incremental cost of development above energy market
- REC supply-demand balance
- Long-term policy stability/uncertainty
- Other market rules/conditions (e.g. technology, price cap)

**Sources: Evolution Markets, NREL, Xcel, NJ Clean Energy Program**
** Not counting biomass        ** NJ and CO only*

**2009 NJ SREC cap:**
**$711/MWh**

## Solar REC Revenues Can Be Critical

- Solar REC revenues higher in states with RPS solar set-aside
- CO ~40% of total cash flow
- NJ ~50% of installation costs
- RECs can be 40-80% of total project revenue stream
- REC revenues expected to be increasingly important as state incentives ramp down (e.g. CA, NJ)

**Source:** “Selling Solar with RECS,”**  **Presentation by 3 Phases Energy Services, January 31, 2007, California Solar Forum

## To Sell RECs or Not?

- Selling RECs generated by an on-site facility can help re-coup the project costs
- However, once you sell a REC you sell the right to claim using green power
- Can still claim the system is hosted on-site
- Can also purchase (cheaper) replacement RECs
- Most states do not allow double counting
- NREL recently completed a report that examined interactions between voluntary and compliance markets: _[http://www.nrel.gov/docs/fy08osti/42096.pdf](http://www.nrel.gov/docs/fy08osti/42096.pdf)__ _

## State – Public Benefit Funds for RE

- Source: www.DSIREusa.org –updated Feb. 2008

## State – Significant Solar PV Incentives

| State | Utility | Incentive | Maximum |
| --- | --- | --- | --- |
| CA | California Solar Initiative | $1.55/W PGE (step 5)
$1.55/W SCE (step 5)
$1.9/W CCSE (step 4) | $3.2 billion total; incentive ramps down as cumulative state MW targets are met (currently ahead of schedule) |
| CO | Xcel | $4.50/W (small)
$2/W + $115/MWh (med)
REC auctions: $205-265/MWh (est.) | 0.5 kW – 10 kW PV systems (small)
10 kW – 100 kW PV systems (med.)
100kW – 2 MW/project on customer site; 20 year contract; Round 3 closed: 04/08 |
| CT | a/CL&P, UI
b/ RE fund | a/ $5/WDC 
b/ 1 kW public PV system | a/ <10 kW, $50k each ($11.5 MM total)
b/ 20% RE electricity, plus residential & business sign-ups |
| NJ | PSE&G | $475/MWh set as REC price floor | 15-yr loan repaid with SRECs. Max capacity of 9MW for munis / non-profits |
| NY | NYSERDA | $5/W for 1st 25kW, then
$4/W for balance | 50 kW/site, 100 kW/ municipal government |
| OH | Energy Fund | Starting at $3.50/W, decreasing to $1.50/W | Rebate depends on system size and is capped at 75 kW for nonresidential |

- Source: SEIA, Xcel, DSIRE

## State Net Metering

- Source: DSIRE – May 2008

## State Net Metering

**State Net Metering**

- 1 MW

- 1 MW

- 2 MW

- 80 MW, including
- solar thermal electric

- 2 MW

- 1.6 MW

- 2 MW

- 2 MW

- 2 MW

- 2 MW

- 2 MW

**NO LIMIT**

- 5 MW

- 2 MW

- Source: DSIRE – May 2008

## State Tax Incentives

- State incentives
- Investment tax credits
- Production tax credits
- Income tax credits
- Property and sales tax exemptions
- _Example_: OR Business Energy Tax Credit
- State income tax credit up to 50% of installed cost
- Tax credits can be sold by public entities

## State & Local – General Obligation Bonds

- General Obligation Bond Mechanism
- Repayment secured by issuer’s taxing authority
- Require voter approval
- Total debt obligations are limited
- Example: Honolulu
- Issued $7.85MM solar general obligation bonds in FY05
- _For_: Solar parking lot lights, energy retrofits, and LED streetlamp
- Example: New Mexico Finance Authority (NMFA)
- Approval to issue $20MM general obligation bonds (none yet)
- _For_: Loans to state agencies, universities, and public schools to implement EE and RE
- 90% of the energy savings expected to fund debt service

## Energy Revenue Bond Mechanism
Issued by “special authority”
Designated for a specific purpose (e.g. toll roads, bridge)
Repayment supported by project revenues (e.g. tolls, usage fees) 
Example: San Francisco
Proposition B passed for $100 million of revenue bonds for RE
Proposition H passed for additional revenue bonds with greater flexibility as to the issuer and the amount. 
Not yet issued
Example: Delaware’s Sustainable Energy Utility 
Special purpose, tax-exempt bonds up to $30 million
For energy efficiency, weatherization, and distributed RE
Energy savings are expected to generate funds for repayment

- Issued by “special authority”
- Designated for a specific purpose (e.g. toll roads, bridge)
- Repayment supported by project revenues (e.g. tolls, usage fees)
- Example: San Francisco
- Proposition B passed for $100 million of revenue bonds for RE
- Proposition H passed for additional revenue bonds with greater flexibility as to the issuer and the amount.
- Not yet issued
- Example: Delaware’s Sustainable Energy Utility
- Special purpose, tax-exempt bonds up to $30 million
- For energy efficiency, weatherization, and distributed RE
- Energy savings are expected to generate funds for repayment

**State & Local – ****Energy Revenue Bonds**

## Federal Incentives – CREBs, orClean Renewable Energy Bonds

- CREBs
- Apply to the IRS for an allocation
- Federal tax credit to bond owner in lieu of interest payment from bond issuer
- May be more attractive than tax-exempt municipal bonds
- Issuer only pays back bond principal (for most part)
- Total allocation of $1.2 B
- Up to 62.5% for public sector projects (rest: coops)
- _Round 1_: 401 of 610 public sector PV projects
- _Round 2_: $262MM for public-sector PV projects
- Additional rounds possible

## CREBs Challenges

- Not truly equivalent to interest-free bond
- Assumes bond issuer is equiv. to AA corporate
- Public entities with weaker credit must either
- Make supplemental interest payments, or
- Sell the bond at a discount
- Transaction costs are high
- Allocations made from smallest to largest projects
- _Solution_: MA bundled 12 projects (1MW)
- First principal payment due in December of the year the CREB is issued

## Federal Incentives – Renewable Energy Production Incentive (REPI)

- Authorized under EPAct 1992
- Amended under EPAct 2005
- Program funding is uncertain
- Subject to annual congressional appropriations
- To date, have been unable to meet the total requests each year.
- Uncertainty means that REPIs are not bankable in project financing

## Federal Tax Incentives 

- Investment Tax Credit (ITC)
- Upfront tax credit for solar, fuel cells, geothermal and mictroturbines
- 30% credit for solar through 12/31/08
- Residential: up to $2,000
- Commercial: no cap
- Reverts to 10% for solar if not reauthorized
- Modified Accelerated Cost Recovery System (MACRS)
- Accelerated depreciation of assets over 5 years
- In addition to ITC for solar
- 2008 Bonus depreciation (50% in year 1)

## The Third-Party Ownership/PPA Model

- Public-sector “hosts”, but does not own PV
- Signs a long-term power purchase agreement (PPA)
- Third-party owns the system and benefits from tax incentives; passes benefit on to public sector host in PPA contract.

- -Pre-determined electricity price for 20-25 years
- hedge vs. volatility, fossil prices
- -No upfront outlay of capital
- -No O&M responsibilities
- -Path to ownership
- if included as option in PPA

- Benefits

## Public PV Third-Party Ownership PPA Examples

**Public PV Third-Party Ownership ****PPA Examples**

- Third-party ownership grew from 10% in 2006 to 50% in 2007 for comm. and industrial sectors
- Denver International Airport, CO
- 25-year contract for 2 MW of solar PV
- Option to buy the system in year 6 (at market value)
- Port of Oakland, CA
- 756 kW ground-mounted system
- Driver: “clean and predictably priced electricity”
- San Diego Alvarado Water Treatment Plant
- 1 MW of solar PV
- Covers 20% of plant’s power needs

- _Sources:_ Greentech Media, Denver Post, Port of Oakland,
- City of San Diego

## Caveats with Third-Party Ownership

- Truth in advertising: green power claims
- Legality concerns – compete with utility monopoly?
- Leased buildings – will landlord allow?
- Delayed ownership
- Legal transaction costs
- Access to site is critical

## Solar Financing Challenges-1

**Solar Financing Challenges-1**

- Up-Front System Cost
- Federal - 30% ITC Expiration on 12/31/08
- Will it be reauthorized before it expires?
- _Effect:_ Solar ITC will revert to 10%, putting many PV projects in jeopardy
- State Incentives Changing
- _Challenge_: States ramping down up-front rebates in lieu of:
- Production-based incentives (CA), or
- To rely on the SREC market (NJ)

## Solar Financing Challenges-2

**Solar Financing Challenges-2**

- Net metering and interconnection issues
- Not consistently applied nationwide
- _Challenge_: Critical for solar projects
- On-site REC tracking and verification
- Separate meter usually required to create RECs
- Smaller systems may use engineering estimates
- REC Price Uncertainty
- _Cause:_ RPS policy changes, regional disparities, uncertain eligibility of DG generators, lack of RPS enforcement/penalty
- _Effect:_ Long-term REC value questioned; little/no REC forward market has developed

## Insurance Issues for Public PV

- State and local govts typically self-insure
- Utility interconnection agreements may require additional insurance (varies by state)
- Potentially significant additional cost to the project
- _Solution_: State-wide public group policy (Massachusetts)
- Group public projects together
- Secure umbrella insurance policy
- Reduced incremental cost/project

## Conclusions

- Solar PV can make sense, even in states without great solar resources
- Policies and incentives are key
- Renewable energy valuation depends on:
- Regional electricity revenues
- Value of federal, state, local and utility incentives
- Ability to secure REC revenues to cover incremental costs
- Better if RPS solar set-aside
- Third-party ownership with PPA is emerging as a dominant model for financing
- Challenges with CREBs implementation
- Easier than successfully issuing bonds
- Insurance is important issue to consider

## Thank you for your attention!

**Thank you for your attention!**

**Karlynn Cory, NREL**
**1617 Cole Blvd., MS 302**
**Golden, CO 80401-3393**
**(303) 384-7464**
**Karlynn_cory@nrel.gov**

**Full report: http://www.nrel.gov/docs/fy08osti/43115.pdf**

## Two Models for Third-Party Ownership

**Sale-Leaseback**
- Tax equity investor buys the PV system and leases it to the third-party PPA provider/developer
- In turn, the third-party PPA provider signs the contract with the state or local government agency
- After tax benefits are exhausted, developer provider usually purchases the system; can have PPA option for host to purchase the system
**Partnership-Flip**
- Developer partners with the tax-equity investor as an LLC or special purpose entity to install and operate the PV system
- This entity then enters into a PPA with the public-sector host,
- After tax benefits are exhausted, ownership transfers to the developer; can have PPA option for host ownership