Power Purchase Agreements (PPAs) have played a key role in the traditional energy generation industry and have been adopted by the renewable energy industry as a means of financing high up front project costs.
While I applaud early pioneers in the solar industry for using PPAs, below are 4 reasons why I do not believe it is the best approach for widespread distributed solar project development.
1. Size – PPA providers generally want sizable projects. Most providers are looking for projects of over 1 megawatt (MW) and will only go as small as 250 kilowatts (kWs). This eliminates many projects from finding reliable sources of capital. There are many buildings, especially in urban settings, that have sizable rooftops with Southern exposure, but don't meet the minimum size requirements of PPA providers.
2. Credit – PPA providers also look for investment grade bond-rated hosts/power purchasers. This is great if your company is Walmart or another Fortune 500 company. The problem is that many viable host companies may have a desire to go solar and the ability to pay, but are passed over by PPA providers because they don't meet their stringent and inflexible credit requirements.
3. Time – PPAs for photovoltaic projects are generally 15 to 25 year agreements (but typically 20 years). This means the PPA providers will generally only look to building owners but not tenants as potential customers, since most leases are for less than 20 years. Commercial leases vary but typically are divided into 5 year increments with extensions, in some cases beginning with a 10 year initial term. This eliminates many potential hosts even though the lease term may extend multiple times for well over 20 years.
4. Legal Costs – PPAs are generally lengthy complex multiple agreement documents that require significant drafting time, negotiating and legal review. This discourages many hosts from taking on the hassle and expense of moving forward with a PPA.
PPA providers typically must be assured that the host will occupy the location for 20 years and operate under an agreement to buy all power produced by the system. As much as I can understand this quest for contractual certainty, I don't fully agree with this strategy which eliminates so many projects from being viable. Coming from a real estate background, I have little doubt that in most cases, if one user vacates another tenant will replace them (and the power company is often required to purchase the energy at a wholesale rate until the power would be purchased by a new occupant). Real estate has historically used vacancy factors in its financial underwriting, even when well known national or international investment-grade tenants are occupying space. Why can't a similar factor apply to PPAs? I believe that more attention must be given to solving landlord tenant issues to make solar a more attractive option.
In conclusion, there are many eligible hosts who are ready, willing and able to join the renewable energy revolution and do their part in helping our environment. However, the barriers to entry are just too high. PPA providers, banks and other sources of capital need to either become more flexible in their underwriting or consider offering alternatives to the PPA to open up the market to the masses in the business world.
As an alternative to PPAs, solar financing can work and can be cash neutral or cash positive under a lease structure or utilize other financial tools. We need to make this work for every business willing to make this commitment with solar being a viable option on a mass scale.
It doesn't matter if you have the best project in the world. Without answering the following 3 questions, your renewable energy or energy efficiency project probably won't get funding.
1. What is your previous experience with a renewable energy or energy efficiency project?
Lenders and equity investors don't want to put money into your first project, or your second, or third most likely. I know it is a chicken and egg problem, but it is true. A proven track record helps tremendously in opening up financing options. If you don’t have experience with a project that is successful, your best option may be to partner with someone who does.
2. What is the project?
This may seem like a loaded question, but at the end of the day all this comes down to is have you crossed your t’s and dotted your i’s. Outline your project in black and white. Lending and equity institutions are in the business of minimizing risk and are interested in projects that are clearly explained in detail. In addition, they want proven technology and like to do business with organized and experienced developers.
The more proof the project is going to be viable, the better. Creating a project plan that includes any of the following, is helpful: site control agreement, a power purchase agreement (PPA), an interconnect agreement, permits, contracts, warranty information, etc.
3. What is the repayment plan?
A famous movie line once said “show me the money”. This is the golden rule for any equity or debt provider. What is their exit strategy? Investors want a credible plan for repayment. Whatever the method of repayment, a repayment plan should be well documented through spreadsheets, contracts and include any other relevant supporting information. This should also include providing collateral.
If the project goes bad, how are the lenders/investors being repaid? The financial strength of the developer or borrower will be important. Be prepared to provide full financial information including a balance sheet, income statements and tax returns.
Combined heat and power (CHP) technologies (also known as cogeneration) simultaneously produces both electricity and heat from a single fuel such as natural gas, biomass, biogas, coal, waste heat or oil that is strategically placed at or near a facility/consumer to supply onsite energy needs. Heat that normally would be wasted in electricity generation is recovered and used, thereby increasing the overall efficiency.
Interest in CHP technologies has grown over the past decade as consumers and providers seek to reduce energy costs while improving service and reliability.
According to the United States Clean Heat and Power Administration (USCHPA), CHP systems:
- produce almost 8% of U.S. electric power;
- save building and industry owners over $5 billion per year in energy costs;
- decrease energy use by almost 1.3 trillion BTUs/year;
- reduce NOx emissions by 0.4 million tons/year;
- reduce SO2 emissions by over 0.9 million tons/year; and,
- prevent release of over 35 million metric tons of carbon equivalent into the atmosphere.
As an efficient, clean, and reliable source of energy, CHP is designed to:
- meet the thermal and electrical base loads of a facility;
- greatly increase a facility's operational efficiency;
- decrease energy costs;
- reduce the emissions of greenhouse gases; and,
- help fight climate change.
CHP can be modified depending on the end user's needs. The EPA has said that CHP technology exists in a wide variety of energy-intensive facilities nationwide, including:
- industrial manufacturers - chemical, refining, ethanol, pulp and paper, food processing, glass manufacturing
- institutions - colleges and universities, hospitals, prisons, military bases
- commercial buildings - hotels and casinos, airports, high-tech campuses, large office buildings, nursing homes
- municipal - district energy systems, wastewater treatment facilities, K-12 schools
- residential - multi-family housing, planned communities
CHP is efficient, reliable, helping the environment, and makes good economic sense.
Nine solutions to financing a renewable energy or energy efficiency project:
1. Power Purchase Agreement
A contract between two parties that enables a company (the seller) to install and own a renewable energy system on a client's (the buyer) site. The client agrees to pay for the energy as it is produced at a rate agreed upon in the contract for a set period of time instead of making a large investment upfront.
2. State and Municipal Revolving Loan Funds
A state or municipal pool of funds that capitalize a loan fund managed by the state or municipal government; loan repayments recapitalize the fund to allow additional lending on an ongoing basis.
3. Third Party Loans
A loan program administered by a third party such as a financial institution that is targeted at energy efficiency or renewable energy improvements. This can be a bank or a private investment group.
4. On-Bill Repayment
Clean energy improvements are repaid as part of the utility bill; this can be a personal or business loan, or it can be attached to the meter so that repayment transfers with tenancy.
5. Energy Savings Performance Contracting (ESPC)
An ESPC is a partnership between an energy services company (ESCO) and its customer formed for the purpose of financing and implementing cost-saving energy-efficiency improvements. The ESCO pays the up front cost of purchasing and installing new equipment, and the customer repays the ESCO over the life of the contract from the cost savings resulting from the project. The original capital used to finance the needed upgrades is typically secured from municipal leases, bonds, revolving loan programs, etc.
6. Property-Assessed Clean Energy (PACE)
Allows clean energy improvements to be repaid via an assessment on the property tax bill; the repayment obligation and savings transfer with ownership.
7. Energy Efficient Mortgages (EEM)
A mortgage that credits a home's energy efficiency in the mortgage itself. EEMs give borrowers the opportunity to finance cost-effective, energy-saving measures as part of a single mortgage and stretch debt-to-income qualifying ratios on loans thereby allowing borrowers to qualify for a larger loan amount and a better, more energy-efficient home.
8. FHA Power Saver (PowerSaver)
This is a new mortgage insurance product from the Federal Housing Administration (FHA) that will help lenders offer credit-worthy borrowers low-cost loans to make energy-saving improvements to their homes. This program supports loan amounts up to $25,000 for terms as long as 20 years.
9. Qualified Energy Conservation Bond (QECB)
A tax credit bond used to fund energy conservation projects. It is a bond that a borrower pays back the principal on the bond and the bondholder receives federal tax credits in lieu of traditional bond interest payments.
Greenavise worked with Skyline Innovations to install a Solar Thermal hot water system on one of its client’s 45 unit apartment building. “With no capital outlay and monthly savings, this project is a win-win for everyone. These are the kinds of solutions Greenavise brings to our clients,” said Mr. Friedman CEO of Greenavise. Green DC Daily
l-r: M. Healy/Skyline, S. Friedman/Greenavise, Counselmember M. Cheh, Counselmember J. Graham and G. Stackman General Counsel/Greenavise.
By assessing, managing and implementing sustainability policies and strategies, Greenavise Consulting improves our client’s Triple Bottom Line.
Triple Bottom Line measures an organization’s economic, ecological and social impact. In practical terms, Triple Bottom Line accounting means expanding the traditional reporting framework to take into account ecological and social performance in addition to financial performance.
Greenavise, a Montgomery County Certified Green Businesses, was part of a Montgomery County RideOn bus ad campaign encouraging businesses to go green.
Greenavise was recognized as a Montgomery County Certified Green Business. The program is a voluntary program designed to help businesses go above and beyond basic green measures to reduce their ecological footprint. As a certified green business, Greenavise is part indicates that you are part of an innovative leadership movement to green your business operations and help transition to a sustainable future.
From the left: Montgomery County Council President Nancy Floreen, Co-founder and CEO of Greenavise Scott Friedman, Co-founder and General Counsel of Greenavise Garrett Stackman and Montgomery County Executive Isiah Leggett.