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Public-Private Partnerships Move Solar Energy Forward
7.15.09
David Kunhardt, Vice President, Partnership Finance, Solar Power Partners Todd Halvorsen, Director, Project and Market Analysis, Solar Power Partners, Inc.
When revenues are lean, public agencies need to control operating expenses and insulate themselves against energy shocks so they can focus on delivering essential services. Schools would rather pay teachers than utilities; water districts would rather deliver water than pay for pumping power. Forward-thinking public agencies, who are also large electricity consumers, want to be part of a solution to global climate change by adopting clean and renewable power. However, the upfront costs required for on-site clean power generation, such as solar energy, can be unpalatable.
According to the Energy Information Agency's (EIA) conservative assumptions, average U.S. retail electricity could increase up to 16 cents per kilowatt hour (kWh) by 2015. These projections underscore the importance of controlling costs for municipalities and public agencies reliant on a tax base, as well as commercial enterprises. Some states have attractive rebates that make solar power viable, and that list of states will grow as retail electricity prices continue to escalate nationwide, according to a recent federal Department of Energy (DOE) analysis.
The good news is that private enterprise is responding to the public sector's need for clean and predictably priced renewable energy. Independent solar power producers are partnering with public entities to help them embrace solar without incurring any capital costs by using solar Power Purchase Agreements (PPA). The majority of public sector solar PV (photovoltaic) capacity added to California's grid between 2008 and 2009 employed a PPA.
With a PPA, large energy consumers realize the savings and create environmental benefits of solar-generated electricity -- without the upfront capital, financial risk or expertise required to own and operate a power plant, because the PPA provider provides all of these. Under this model, independent solar power producers arrange financing, develop, manage and operate solar PV systems on their host partners' grounds or rooftops. In return, host partners buy clean solar energy at a rate similar or lower and more predictable than utilities provide, generally for a 20-year period or longer.
Municipalities and public institutions with their relative stability, long institutional lives, and delivery of critical public services provide an attractive partner for independent solar power producers.
Public-private partnerships can provide clean solar energy with minimal upfront cost to the public host and measurable long-term savings. Institutions and agencies can make them most effective by following a few simple guidelines:
Increase energy efficiency first. Energy efficiency is at least as important to lowering costs and carbon footprints as going solar.
Contract for quality. Hire a private PPA partner who makes a practice of having high-quality equipment and system specifications intended for longevity and maintainability. Check references and experience completing similar projects. It will not be necessary for the public agency to invent energy specifications, because the better PPA companies have already adopted a good book of practice.
Negotiate the price per kilowatt hour (kWh) and the "escalator." The price per kWh is the price paid for the electricity; the escalator is how much that price increases each year of the contract. Cost per DC capacity may be interesting; cost per kilowatt hour of energy offset with solar generation is what will affect the agency's bottom line.
Verify the system. New technologies are enticing; proven systems are bankable. A public agency can (lenders and private investors already do) hire an independent engineer to verify the system design and expected energy output.
Budget energy costs. Dial in the utility and the solar system owner together to best predict system outcomes and total energy costs. Understand this and any formula to buy out the system.
As the economy struggles, the PPA model offers a very promising path forward, delivering great value to the public sector while tapping the ingenuity of private enterprise. Public-private partnerships using a PPA can help municipalities and the nation achieve economic and environmental goals right now as well as in long term. Fortunately, private enterprise is already stepping in to provide these services.
For information on purchasing reprints of this article, contact Tim Tobeck ttobeck@energycentral.com. Copyright 2010 CyberTech, Inc.
Please explain further what you mean by, "host partners buy clean solar energy at a rate similar or lower and more predictable than utilities provide". I have never heard of a PPA for solar power, or any renewable for that matter, that was not substantially higher than the retail rate.
Your advice about determining the cost per kwh rather than cost per kw of capacity is spot on. I would add to that that the user should fully explore and understand how the cost compares with the utility's retail rate, not just under present prices, but also under a wide variety of future scenarios. They should also consider the underlying cost structure of their utility bill. How much is energy? Transmission? Distribution? Administration?
James Carson, http://www.RisQuant.com
David Kunhardt 7.21.09
James, If your reference point is Minnesota or the upper midwest, particularly states that have no other incentive program to support solar, you are most likely to be correct, the amortized cost of solar is too high to be paid off at market reference prices. Falling prices of solar pv panels, plus appropriate local subsidies and somewhat higher energy prices that you will see in CA, HI, Eastern Seaboard states to thank for the intersect that makes solar PPA rates lower than brown power--particularly where there is a time of use meter that can credit the school, hospital, or water district with high retail credit prices of energy from the grid while paying us at a lower rate. Solar Power Partners has 37 systems up and running, and five more nearing completion, with customers who see savings. We also offer fixed escalators at a low level that beats the customer's experience of past rate increases: a hedge against volatility. The host customer only pays for the power generated, and through net metering can drive down their aggregate electric bill noticeably. This is not true everywhere. We hope we can count on respected energy consultants such as yourself to suggest more consistent regulations across the country that capture the true costs of brown power and make clearer the benefits of going solar. Thanks for your commentary. David Kunhardt
James Carson 7.22.09
Fyi, my frame of reference is the wholesale power markets and risk management across the US and Canada, not Minnesota only. RisQuant Energy serves customers in PJM, NY-ISO, ISO-NE in addition to MISO. We will shortly be adding ERCOT & IESO.
I find solar intriguing for two reasons. First and foremost, the energy is produced when needed. A solar system generates 100% on the summer peak hours and days. Frankly, I think it should be considered a capacity resource. Even with large scale adoption, storage is not an important factor. In contrast, wind resources generate most of their energy in the spring and fall during the overnight and minimally during the summer peak hours. More generally, solar produces during the peak hours of the year when the energy is most valuable/expensive. Cloudy days that inhibit solar also tend to be low load/low price days.
Second, especially for PV, the power can be generated and delivered behind the meter. That means that the customer captures not only the energy cost, but also the T&D that is built into their bill. That is a substantial benefit. This benefit is amplified where time of use metering in conjunction with LMP pricing has been adopted in the retail sector.
If you don't already, you may want to consider explicitly incorporating these elements into your analysis. Your point about the importance of PPAs is well taken, but that approach minimizes two key sources of value.
Todd Halvorsen 7.22.09
James, you bring up a very good point regarding understanding one's underlying utility cost structure. Customers should also consider the production profile of the system and what exactly it is offsetting as this is imperative in calculating a valid avoided cost. The avoided cost of energy should be the benchmark, but often times people target their "average cost" of energy or "blended rate" which is not a smart metric under most tariff and net metering structures. Solar Power Partners is completely open book with its Host customers with regard to forecasts and the associated underlying assumptions and are happy to model a variety of present and future scenarios. While certainly not always the case, in California and a number of other emerging markets, year 1 savings can be delivered along with an excellent 20 plus year hedge opportunity.
James Carson 7.23.09
They key is understanding the temporal domain imposed by state regulators. Customers will naturally compare the solar resource against their bill. How will my bill change if I put in your panels? If their bill presents them with a blended rate based on average cost, then that is what they will, and should, use.
If, however, their bill is time of use and LMP driven, then they can and should use that. This second regulatory strategy yields better systemic results in terms of economic efficiency because we see more clearly what generation and transmission resources are being supplanted on the margin. Furthermore, unless there is something I am missing, this substantially increases the value of the solar resource. Which explains why I find it intriguing.
Since 1998, RisQuant Energy has modeled power prices and risk in all time frames from next day through thirty years forward. Given what I know about the markets, I suspect that solar power is significantly undervalued.
Todd Halvorsen 7.31.09
James, it sounds like we are on the same page in thinking distributed solar is undervalued today. Fortunately, some major energy players are beginning to take a more comprehensive view of solar in terms of both generation and transmission benefits and we are confident the trend will continue as more gain confidence in the technology and as costs become increasingly competitive.
In terms of the average or blended rate being the rate one should use to benchmark the value of their solar generation, I believe this is only the case when there are no demand charges i.e. PG&E's A6 tariff or when there is adequate storage associated with the array. Since the sun sets, inverters fail, and clouds happen, it is extremely difficult to forecast demand benefits from solar other than those that are associated with a tariff switch. As you likely know, an increasing number of utilities are creating Distributed Renewable Generation tariffs that customers can choose once they install a qualified generation facility. These tariffs typically have no, or significantly reduced demand charges and time-of-use energy charges with relatively high peak rates. As all the true costs of energy generation and transmission continue to be factored into the equation, the more likely sound and clean distributed generation facilities, such as solar PV arrays, will be valued by energy executives and ratepayers alike.
