2016 Government Practice Seminar Solar Power Purchase Agreements 9:00 a.m. 9:45 a.m. Presented by Rachel Rowley BrownWinick 666 Grand Avenue,Suite 2000 Des Moines, IA 50309-2510 Telephone: 515-242-2417 Facsimile: 515-323-8517 FRIDAY, MAY 20, 2016
POWER PURCHASE AGREEMENTS FOR STATE AND LOCAL GOVERNMENTS Rachel Rowley BrownWinick 666 Grand Avenue, Suite 2000 Des Moines, IA 50309-2510 Telephone: 515-242-2417 Facsimile: 515-323-8517 E-mail: rowley@brownwinick.com What is a PPA? A Power Purchase Agreement (PPA) is an agreement between two parties, one which generates electricity and one who purchases the energy. It is a common mechanism by which government entities finance a solar energy project with a third party. PPA v. Lease Third-party financing of solar energy occurs through two models: Power Purchase Agreements Solar Leases Lease Model Consumer will sign a contract with an installer/developer and pay for the solar energy system over a period of years or decades. Consumer does not pay for the power produced. 1
PPA v. Lease, cont d. PPA Model An installer/developer builds a solar energy system on a consumer s property at no cost. The solar energy system offsets the consumer s electric utility bill, and the developer sells the power generated to the consumer at a fixed rate, typically lower than the local utility. Some states do not allow PPAs and therefore, customers have to finance solar via a lease. Iowa Supreme Court recently found PPAs are allowed. SZ Enterprises v. IUB, No. 13-0642, decided July 11, 2014. Overview of PPA Financing Advantages of PPA No/low up-front costs Ability for governmental entity to enjoy lower electricity prices thanks to savings passed on from federal tax incentives. A predictable cost of electricity over 15-25 years. No need to deal with complex system design and permitting process. No operating and maintenance responsibilities. 2
PPA Checklist 1. Project Planning for Solar PV with PPA Financing Identify potential locations Online tools help Google Earth, In My Backyard Issue a Request for Proposal (RFP) May want to aggregate multiple smaller sites Contract Development Issues include: REC sales, insurance, easements necessary to build solar arrays, liability, production guarantees Permitting and Rebate Processing System owner usually files permits and rebates Government agency should note filing deadlines for state-level incentives Database of State Incentives for Renewables and Efficiency www.dsireusa.org Project design, Procurement, Construction, Commissioning The developer will complete a detailed design based on the term sheet. The commissioning step certifies interconnection with the utility and permits system startup. The PPA should establish firm realistic developer responsibilities and damages for failure to perform. 3
2. Financial and Contractual Considerations Estimating System Size First step for determining the financial feasibility of a PPA is to estimate the appropriate size of the solar PV system. In My Backyard is free tool to help make this assessment www.nrel.gov/eis/imby/ Estimates system size, annual electricity generated, and monetary value of the electricity generated PPA Pricing Key advantage predictable cost of electricity over life of a 15-25 year contract Most common PPA pricing scenarios: fixed price and fixed escalator Fixed price: electricity sold to government agency at fixed rate over the life of the contract. (It is possible for PPA price to be higher than the utility rate at beginning.) Source NREL Fixed-Escalator: electricity produced by the system is sold to the government agency at a price that increases at a predetermined rate, usually 2-5%. Source NREL Price Based on Utility Rate: electricity price is based on the utility rate with a predetermined discount. This is not common. It is complicated to structure and undermines the price-predictability advantage of PPA. 4
Prepay: Some government agencies like to prepay for a portion of the power to be generated or make investments to lower the cost of the installed system. This can reduce cost of electricity agreed to in the PPA and takes advantage of governmental entities' ability to issue tax-exempt debt. 3. Interconnection and Net Metering Interconnection Federal policy requires utilities accept interconnection from solar power stations, but each utility s process varies. The system owner and the utility will enter into an interconnection agreement. Agreement provides for conditions (stand-by charges), equipment, and processes. Interstate Renewable Energy Council has report on state specific interconnection standards: www.irecusa.org/index.php?id=86 Net metering Policy allows solar-system owner to receive credit on electricity bill for surplus solar electricity sent back to the utility Electricity meter spins backwards States differ on net metering Iowa allows net metering: 199 IAC 15.11(5) provides that each utility shall offer to provide net metering. However, utilities have filed tariffs that limit the ability to net metering. These tariffs are currently being litigated. 5
Benefits of net metering for the consumer: Represents the full retail value of electricity delivered Allows to put excess electricity back into the electric grid and retrieve it later, free of charge more cost effective Captures energy generated and consumed provides annual performance data 4. Federal Tax Incentives for the System Owner It is important for the System Owner to take advantage of federal and state tax incentives that the government entity cannot. Two most significant tax benefits: Investment Tax Credit (ITC) offers tax-paying entities a 30% tax credit on total cost of solar system. Accelerated Depreciation accounting practice used to allocate the cost of wear and tear on a piece of equipment over time in this case more quickly. The IRS allows a 5 year accelerated cost recovery for solar arrays. 5. Renewable Energy Certificates Iowa has implemented renewable portfolio standard policies (RPS) Utilities prove RPS compliance using renewable energy certificates (RECs) RECs can be traded separately from the electricity. PPAs are normally structured so that the RECs remain with the system owner. Important if consumer does not buy the RECs, consumer cannot say that it is hosting a renewable energy project; may only say that it is powered by renewable energy. 6
6. Insurance Many governmental entities may self-insure However, interconnection rules may require additional coverage Cost of insurance can increase energy pricing by 5-10% Generally, insurance is responsibility of system owner. However, if system owner covers insurance cost, cost will be factored into the PPA It may be cheaper for the government entity to purchase insurance directly and name the system owner as an additional insured party Standard Terms of PPAs License The consumer will grant the system owner a license to use property for installing, operating and maintaining solar facility. Purchase of Solar Facility The PPA may give the consumer the option to purchase the solar facility at the end of the initial term of the PPA. Purchase of Delivered Energy The PPA will require the consumer to purchase all the generated energy at a set price. Some PPAs will make the price conditioned upon the system owner s approval of eligibility for receipt of Iowa Renewable Energy Credits or Iowa Renewable Energy Tax Credits. Standard Terms of PPAs, cont d. Renewable Energy Credits/ Tax Credits The parties will expressly provide who gets title and rights for renewable energy credits and renewable energy tax credits. Seller s Obligations Seller s obligations normally include design and construction of the solar facility, obtaining any applicable permits, maintenance and repair of solar facility, production guarantees, and minimize any unavailability of the solar power. 7
Sample Terms of PPAs, cont d Consumer s Obligations Consumer s obligations include the payment of taxes, obtain approvals for interconnection with the utility, and assist the system owner in obtaining the applicable tax and energy credits. Sample PPAs Government Level State County City Name Caltrans District 10 Solar Project Boulder County Solar Project Denver Airport Solar Project Consumer California Dept. of Transportation Boulder County Denver International Airport Utility Pacific Gas & Electric Xcel Energy Xcel Energy Size (DC) 248 kw 615 kw 2,000 kw Annual Production 347,407 kwh 869,100 kwh 3,000,000 kwh Type 123 kw rooftop, 125 kw carport 570 kw rooftop, 45 kw ground Ground-mount, single-axis tracking Area 22,200 sq ft 8 county buildings 7.5 acres Developer Sun Edison, LLC Bella Energy World Water & Solar Technologies Owner Sun Edison, LLC Rockwell Financial MMA Renewable Ventures PPA Terms 20 yrs, 5.5% discount from utility rates 20 yrs, fixed price6.5 cent/kwh for first 7 years, renegotiate price and buyout option at beginning of year 8 25 years, fixed-price 6 cents/kwh for first 5 years, buyout option at beginning of year 6 or price increases to 10.5 cents/kwh Website: www.brownwinick.com Toll Free Phone Number: 1-888-282-3515 OFFICE LOCATIONS: 666 Grand Avenue, Suite 2000 Des Moines, Iowa 50309-2510 Telephone: (515) 242-2400 Facsimile: (515) 283-0231 616 Franklin Place Pella, Iowa 50219 Telephone: (641) 628-4513 Facsimile: (641) 628-8494 DISCLAIMER: No oral or written statement made by BrownWinick attorneys should be interpreted by the recipient as suggesting a need to obtain legal counsel from BrownWinick or any other firm, nor as suggesting a need to take legal action. Do not attempt to solve individual problems upon the basis of general information provided by any BrownWinick attorney, as slight changes in fact situations may cause a material change in legal result. 8