How to Thrive with Solar PPAs

Nov. 11, 2011

Solar project developers and investors are heading north, in hopes of taking advantage of favorable renewable energy policies and solar power purchase agreements that could create explosive investment conditions in Massachusetts and make it “next New Jersey”

 The implications of these investments go far beyond the state level - you need to know how to spot these conditions for success when PPA’s knock on your facility door.

Solar project developers and investors are heading north, in hopes of taking advantage of favorable renewable energy policies and solar power purchase agreements that could create explosive investment conditions in Massachusetts and make it “next New Jersey”

The implications of these investments go far beyond the state level - you need to know how to spot these conditions for success when PPAs knock on your facility door.

How it Happened - And Why it Will Happen Again

New Jersey was the hot market for distributed generation projects in 2010, driven by the undersupply of Solar Renewable Energy Certificates (“SRECs”) and the high Alternative Compliance Payment (penalty price), which kept prices upwards of $650 per megawatt-hour for several years.  However, after explosive growth, the market for the 2012 energy year (June 2011 through May 2012) is now oversupplied. The ongoing utility SREC programs will drive development through late 2011, although it is not clear whether these programs will be renewed.  SRECs constitute the only state-level incentive in New Jersey, so with a moribund SREC market, project development may tail off for the foreseeable future.  

Building the Perfect PPA

Location is crucial.  The Massachusetts SREC price floor combined with the potential for virtual net metering (VNM) for municipalities, have raised expectations and competition for solar projects.  Developers are optimistic they will find sufficient utility demand to monetize SRECs for multiple-year strips.

VNM allows commercial or municipal entities with multiple office or operation sites to develop a single solar PV project to generate power, which can then be used to offset (ie, net meter) usage at multiple separate sites. VNM has several benefits:

· Sites that are not suitable for solar construction on-site can still benefit from solar installations at other locations;

· Larger solar projects can be developed, enabling lower construction costs through economies of scale than would otherwise be achievable at smaller individual sites;

· Developers can select ground areas enabling the lowest cost of construction, coupled with optimal sunlight levels, maximizing energy produced (kWh) per dollar invested.

This type of consolidated VNM solar project is technically permitted in California, but solar hosts are only given credit for power produced at wholesale (not retail) rates. With California wholesale rates in the range of $.05/kWh, up to at most $.10/kWh, and retail avoided costs of $.15 to $.20+/kwh, this has not been an attractive economic solution.  In California, to make projects economically attractive, businesses or municipalities buying solar power through a PPA typically need to achieve utility savings of close to $.20 per kilowatt-hour.

Massachusetts has conditions that are more favorable to solar PPAs, and you’ll want to be on the lookout for these opportunities everywhere.  Developers and financiers are optimistic about locking in multi-year bilateral SREC contract values at $300 or more.  Combining this fact with the ability to build large ground mount VNM projects, they can potentially sell solar power at less than $.09/kWh. According to the EIA, commercial electricity rates in Massachusetts average over $.09/kWh.

This results in a simple, compelling proposition for municipalities to take to their CAOs, Councils, and other stakeholders: the opportunity to buy power under a solar PPA for less money than they would pay the utility, resulting in immediate savings, and requiring zero out of pocket investment.

Moreover, when municipalities contract with private developers and financiers to buy solar power, rather than constructing solar projects themselves, they realize other savings and benefits:

· No operational or maintenance responsibility for the municipality

· No insurance requirements on the project

· Lock in a predictable price of electricity for up to 20 years

For example, Easthampton, Massachusetts is planning to purchase power from a 2 megawatt solar installation on a capped landfill site. The City would pay $.06 per kilowatt-hour for electricity from the project, generating immediate savings over its 9 cent brown power rate from the utility.

Eric A. Woodroof, Ph.D., is the Chairman of the Board for the Certified Carbon Reduction Manager (CRM) program and he has been a board member of the Certified Energy Manager (CEM) Program since 1999. His clients include government agencies, airports, utilities, cities, universities and foreign governments. Private clients include IBM, Pepsi, GM, Verizon, Hertz, Visteon, JP Morgan-Chase, and Lockheed Martin.

Not all solar projects are the same, and any given project may vary significantly in development cost, solar production, and the cost of power under a PPA to the municipality.  Municipalities should require rigorous utility tariff savings analysis, to ensure they understand the project, select the right size project (not too large), and work with developers and financiers that have experience advising sophisticated clients in multiple markets around the country.  

Municipal entities seeking to go solar should also understand that their ability to enter a solar PPA at an attractive rate will depend on their ability to facilitate the transaction. This may require providing a suitable land area (or the developer may procure land privately, which will come with higher costs).  The city or county will also need to ensure it understands the financial and legal terms of the contract, and that it sets requirements which permit a project to be executed on a reasonable timeframe with limited added costs (such as consulting fees and subcontracting requirements).

Solar PPAs are ultimately dependent on financial market conditions, and the ability of private solar developers and financial companies to raise capital at attractive rates. Every solar project has its own development challenges, costs and complexities, but keeping these under control is critical to getting a project financed and implemented.

Several industry experts contributed to this article.  Ryan Park, James Coombes and Ben Higgins are responsible for project development, finance, and policy at REC Solar, a solar project developer with nationwide experience. REC Solar has implemented solar projects for commercial, utility, municipal and Federal clients. James Coombes can be reached at 888-OK-Solar

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