I’ve spent a considerable time over the last few weeks researching solar energy and now I’m going to share some of what I’ve learned. This discussion will focus on the ownership options available and how they affect financing a solar project.
Before discussing some of the intricacies of solar projects, it’s helpful to discuss some of the definitions and terms:
First up is net metering. Net metering is a tool that enables utilities to record not only the amount of energy you use, but also the amount of energy you generate. By tracking both of these things the utility is able to charge you based on net usage (Energy used – energy generated). There is also an additional net metering option called virtual net metering, which actually allows for “tracking” energy so that I could buy into a solar system in another area, but directly receive the energy benefits from my utility. Virtual net metering is far less common.
Power Purchase Agreement (PPA) PPAs are an agreement between two parties where one party agrees to purchase the energy generated by another party at a predetermined rate schedule. In North Carolina, PPAs are restricted so that energy generators may only sell their energy back to the utility. So if I owned an apartment building in Durham and decided to install solar panels on that building I couldn’t enter into a PPA with my tenants and have them purchase energy from me. I would have to enter into a PPA with the utility covering my area.
“Renewable Energy” = Energy generated + Renewable Energy Certificate
Direct ownership provides the highest degree of control since a local government completely owns the system. Maintenance and upkeep costs for a solar system are minimal which is a benefit and local governments have the option of utilizing cheap debt to pay for the system, which is another benefit. The drawbacks of direct ownership are initial costs. Local governments are not able to take advantage of the tax incentives available which help to lower the costs of solar systems and speed up the recovery of initial costs which, while declining, are still an expensive investment.
Third party ownership involves bringing in a private developer who provides the upfront capital to purchase, own, and operate the system. A local government would then enter into a PPA with the developer to purchase energy or the local gov would lease the space used to the developer and the local gov would collect revenues from the lease payments. This option is pretty low risk for the local gov and it eliminates upfront costs while ensuring predictable payments from leasing of space. The drawbacks of this option are the higher return on investment developers are looking for, the inability to use cheap debt to pay for the system, and the third party is entitled to the renewable energy certificates and tax credits. For a local government considering third party options, a great deal of work is needed to determine if such a system would provide appropriate returns for a third party investor, how much control over the system does the local government want, and what are the terms of the agreement (lease payments, can the local government purchase the system after a specific number of years, how long is the agreement\, etc.).
Solar in North Carolina
The News & Observer also put out an article two weeks ago discussing NC’s growth in solar development, which may begin to outpace our current energy infrastructure. In addition, as a result of the growth in solar development some financing options are becoming less advantageous, such as the utility subsidy described in the article, or they are going away– like the NC Solar Tax credit, which provided up to a 30% credit on installation costs and expired at the end of last year.