Hello Sunshine

Hello again!

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 Certificates (REC) This one is a little complicated, but I am going to try to simplify it to its most important parts. Renewable Energy Certificates were created as a tool to track and market renewable energy. Energy itself can not be tracked in the same way that we can follow the transfer of something like a house or car. In order to separate non-renewable energy from renewable energy, a market was created where for each MWh of renewable energy generated, a certificate is issued to a generator to certify that the energy is renewable. The certificate represents all of the positive attributes of renewable energy such as reduced greenhouse gases. This certificate is numbered, tracked, and exclusive to only one owner.

The purpose is to certify that the energy is renewable and allows us to say that x% of this facility’s energy used is from renewable sources. This REC has a value and can be sold based on market prices. This allows for those who are unable to generate renewable energy on their own to be able to use “renewable” energy by purchasing RECs.

Now that we’ve covered that, lets talk about some solar ownership options. I am focusing my discussion on the options for a local government since that is the perspective I am coming from. There are three traditional ownership options for a solar system: Direct Ownership, Third Party Ownership, and Community Ownership.

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.).

The third ownership option is community ownership where a group of investors get together and purchase a system, sell the energy generated (or use the energy generated if their community has virtual net metering) and receive benefits based on their ownership share. This is an option commonly used by individuals who can’t install solar –whether due to space or other conditions–but still want to benefit from a solar system. The main benefits of this option is getting solar to people who are not able to install a system at their current business or home. The main drawbacks have to do with the policies and regulations that need to be in place to support the system (like net metering), and organizing the “community” to determine cost structure.

The most common approach for NC seems to be the third party option where a local government provides little to no money upfront and leases space to a private developer. The developer pays a lease fee for the term of the lease and the local government has options to purchase the system after so many years.

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.

The most interesting part of this research has been the creativity that has gone into determining how to finance these deals. Solar energy is a quickly growing industry which has involved a lot of moving parts in terms of government policies concerning solar development and market tools available to finance these types of projects.You also need to have a clear idea of what the goal is when implementing a solar program. If the goal is to achieve sustainability goals, local governments will have to consider the costs of RECs if they are using a third party, since the third party would receive those certificates. If the goal is to reduce energy costs, greater consideration is given to what is a fair amount to lease space for given the expected revenue for the third party organization.

Another interesting facet of solar energy in North Carolina is the incentive to establish public-private partnerships. Given the tax benefits available to private organizations, there is a strong incentive to reduce initial upfront costs by allowing the private organization to build and run the system in the beginning and then allowing the local government to purchase the equipment in the future so that the local government is still able to benefit from collecting and selling this renewable energy.