Module 5: Text Versions
Below are the video text versions for Module 5 of the City and County Solar Photovoltaics Training Program.
Learn the nuances of PV financial models and how they impact your PV procurement process. We'll provide lessons learned from other cities who have successfully issued solar RFPs. We'll help you understand the next steps towards issuing an RFP and provide a solar RFP template.
Jenny Heeter: Hello, this is Jenny Heeter from the National Renewable Energy Laboratory. Welcome to module five of the Cities and Counties solar PV training program: Deciding on a Financing Approach and Beginning PV Procurement.
So far we have covered setting a goal, identifying and screening the sites, steps to a detailed site evaluation, and project financing, policies, and incentives. We also have hosted additional webinars on resiliency and NREL’s System Advisory Model. If you want to review these webinars, they are available on Litmos.
In this module, we will help you decide on a financial model and understand how to move forward with procurement.
By the end of this module, we hope that your city or county will be able to decide whether direct ownership, third-party ownership, or an energy performance contract is the best option for your city or county. We also hope that you'll understand next steps in PV procurement, depending on which method you select.
In this module we will walk through multiple financing options and their associated procurement processes. We will conclude will procurement lessons for local governments and a list of resources.
The public sector, which includes local governments, typically relies on third-party ownership to install PV. GTM research estimated that about 70% of public sector PV was installed via a third-party ownership structure. As you learned in the last module, public sector entities are tax-exempt, which means that they cannot capture the investment tax credit, or ITC, directly. In 2018 the ITC provides a tax credit of 30% of the project cost; this phases down to 10% of the project’s cost in 2022. GTM expects that when the ITC is only providing 10% of the project cost, public sector entities may rely less on third-party owned systems.
Under direct ownership, the PV project is government-owned. Your city typically would hire an engineering, procurement, and construction contractor (or EPC contractor) to develop the project. You may also consider a separate contract for operations and maintenance, if you don’t want to take this on yourself. Cities may not have the cash to purchase a system outright. Cities can fund their PV system via internal or external funding sources. For external funding sources, cities must have available borrowing capacity. To obtain external funding, credit rating is important as it will impact the interest rate you pay. Consult your city advisor and/or bond counsel as needed. Local governments may also wish to include solar in an upcoming planned bond, for example, for a new facility. By including solar in a bond with other projects, administrative costs can be reduced.
The Peralta Community College District, in California, used a general obligation bond (G.O. Bond) for their solar power installation at Laney College. Their G.O. Bond monies could be used for capital improvement project, for example, construction and renovations. Savings from the solar will go back into the general fund, and can support non-capital expenditures. This allows them more flexibility in how they spend their funds. To the right you’ll see a photo of their system; it’s a 231 kW solar array installed on a baseball field house and adjacent parking lot.
Another example of a direct ownership project is in the City of Hutchinson, Minnesota. In this case, the city was able to own the PV system using a high percentage of grant funds to reduce the purchase price. The city received grant funds from their utility, Xcel Energy, that covered ¾ of the cost. The city covered the remaining amount. Ultimately, the city installed a 400 kW system on a closed landfill. The PV system will be directly connected to the city’s wastewater treatment plant.
The procurement pathway for direct ownership can vary depending on how the project will be funded or financed. Once that piece is figured out, the first step is to issue an RFP for an EPC contractor. The EPC contractor will be responsible for building the solar array. Your city could also consider hiring an O&M contractor. Once the RFP responses have been received, the city can evaluate responses, sign contracts, and the EPC contractor can commence construction. Once the array is operational, either the city or the O&M contractor will be responsible for ensuring the system is properly maintained.
Municipal leases are known by many terms, which can be confusing. You may also hear the terms “tax exempt lease” since municipalities are tax exempt, or “tax exempt lease purchase” since these deals, particularly for solar, are usually structured as a “lease-purchase”. That is, the city will purchase the array at the end of the lease term. Municipal leases are another way for cities to own PV, by leasing the system and owning it at the end of the lease term. It is an alternative to traditional debt financing. One of the advantages of a municipal lease is that interest rates are typically lower due to the fact that the interest is tax-exempt. Something to be aware of is that if you do sign an O&M agreement, carefully review it to ensure it does not prevent the interest from being tax-exempt. Cities may find that municipal leasing is a faster process than issuing new debt. This is particularly true if the city has experience with municipal leasing, whether it has been for fleet vehicles or other equipment. Cities may prefer a municipal lease because it is not considered debt, for state purposes. This means that your city should not need voter approval and that the agreement will not be counted as debt on the city’s balance sheet. While the process is fairly quick compared to issuing new debt, for smaller projects, a municipal lease may not make sense. Typically financiers like to see a minimum system size of more than 500 kW. I’ll now turn our presentation over to Chandra Shah, Senior Project Leader at NREL.
Chandra Shah: Hi, this is Chandra. I am going to cover power purchase agreements, or PPAs. PPAs involve third party ownership of the PV array, and this is a very popular method for implementing PV as Jenny mentioned and shown in the GTM research. Under a PPA, the solar developer purchases, installs, owns, operates, and maintains the PV project for the life of the contract. So one of the key benefits of a PPA is that the developer can likely take advantage of federal and or other tax incentives.
For example, on the federal side, there’s the investment tax credit and accelerated depreciation. At the state and local side, there could be solar sales tax or property tax exemptions. Another benefit is that in some markets, it makes sense to sell the solar renewable energy certificates, or SRECs. In certain markets, these SRECs are very valuable. For example, in DC, the current market price is $380.00 per megawatt hour. In Massachusetts, it’s approximately $300.00 per megawatt hour, and in New Jersey, it’s $230.00 per megawatt hour. The tax incentives and SREC sales result in a lower PPA price for the city.
Then the city will simply host the PV project and then purchase the electricity for the life of the contract. PPAs are typically the best option for large PV systems typically greater than 500 kilowatts. This is just a rough rule of thumb. It may be possible to aggregate a number of sites to get to a larger project also. In that case, it’s beneficial to ensure that the sites are relatively close together to keep the O&M costs down. Another concern with PPAs is to make sure they are legal in your state and that you have an authority to do a PPA within your city.
Keep in mind that PPAs involve a long-term contract typically around 20 years. In certain markets, it may be possible to do a shorter term contract if utility rates are very high and or if there are attractive incentives. So here is an example of a PPA that was implemented by Washington, DC’s Department of General Services, or DGS. They implemented approximately 11 megawatts of solar through aggregating 40 properties and this resulted in a 20-year PPA with WGL Energy. They used a wide range of properties in the PPA, including schools, hospitals, recreation centers, and their police training academy. As I mentioned, DC SREC prices are very high right now, and this helped make the PPA very attractive to DGS. They’re expecting to save approximately $25 million in electricity costs over the life of the PPA.
They did have separate rates for rooftop and car port solar projects since the costs of these types of projects are different. As you can imagine, it can be complicated to manage 40 different properties. Sole Systems took on this management as a subcontractor to the PPA, and they were able to complete the project in approximately 18 months. Should you decide to implement a PPA, here is the procurement pathway to follow. First, you develop an issue, an RFP, for developers that offer the PPA option. Then you receive and evaluate the responses, negotiate and sign the contract, and then you can begin construction. Now I will cover energy savings performance contracts, or ESPCs. This is another method to implement solar at your site.
ESPCs are also known by other names such as performance contracting, energy solutions performance contracting, energy service company, or ESCO project. In this presentation, we are using the term ESPC. So within ESPC, this involves a public private partnership within ESCO to implement a variety of energy measures. Typically, energy efficiency and energy management are included in ESPCs, but it also makes sense to consider renewable and PV. One key difference between an ESPC and direct ownership is that there’s a guaranteed savings requirement for ESPC, and measurement and verification is used on an annual basis to ensure that guaranteed savings is met.
Check the applicable ESPC authority for details on the guaranteed savings requirement and the M&V requirements. So if you decide to include PV in an ESPC, the PV could either be a standalone measure, or you can bundle it with other measures. The PV can either be government owned or third party owned. If it’s government owned, keep in mind the tax incentives will not be monetized, and it may be difficult for the government to sell the SRECs.
If it’s third party owned, then this would be like a PPA, and you need to make sure the PPA model is allowable under the applicable state law. Keep in mind that ESCOs typically want large projects in the order of one to one and a half million dollars. So ensure that your total project size will be in that range at a minimum. The graph here shows the cash flows for an ESPC. Before an ESPC, simply pay your utility cost. During an ESPC, you pay your utility cost at a reduced amount, and then you use the savings to make the ESPC payments. There might be a slight amount of savings that remain for the life of the ESPC contract. After the contract is done, the city can enjoy all the savings. So the ability for a city to enter into an ESPC is governed by state laws.
Every state has an ESPC regulation. This state regulation may be further refined by local laws or regulations. It’s very important to review your ESPC state law and applicable regulations very carefully. Some of the considerations include what is the maximum allowable term. Typically, this will be in the range of 15 to 20 years. It could be slightly shorter or longer in some states, and in some states, it might be based on other criteria, such as the typical equipment life. Another important consideration is what type of measures are eligible. And then also whether measures can be bundled with shorter payback items, such as lighting, bundled with longer payback items, such as air conditioning.
It’s also important to understand what financing options are allowable. It’s also important to look at the savings requirement details. You can look at the minimum required savings, and in some cases you may decide to have more stringent requirements. It’s also important to understand what budget categories you can use to make the financing payments as certain budget categories may not be allowed to use for the ESPC payments. And finally, you want to look at any requirements regarding how the procurement must be conducted or if there are any suggested guidelines for how the procurement must be conducted. There also may be available resources that impact how you want to conduct your procurement.
It’s very important to contact your city attorney to interpret the law and regulation. Keep in mind that interpretations could vary, so contact the city attorney that will be approving your project. So ESPCs are going to require some type of financing source. You may be able to use internal funds, or in some cases you’ll want to pursue external funds. Jenny mentioned some of the funding sources that might be allowed. The preferable option depends on what is allowable under the ESPC regulation and other applicable regulations and on local market conditions.
So contact your finance and budget department staff and get their input on what options are available and what best option to pursue. In some cases, the ESCO may assist with financing providing information about the sources that might be available, and in limited cases may actually provide financing. Keep in mind though that cities typically have lower cost financing options available, so it may be beneficial or preferable to have the city obtain the financing to keep the cost down. Should you decide to pursue an ESPC, this is the approach to take. First determine whether your ESPC will involve only PV or PV and efficiency measures. Then decide whether the PV will be owned by the government or third party owned.
Then develop an issue, an RFP, to the ESCO community, receive and evaluate the responses, select the ESCO. The ESCO typically conducts an energy audit and develops a proposal. So you’ll evaluate the proposal, and then if you decide to move forward, arrange for the project financing, sign the contract with the ESCO, and then the ESCO will develop the project, and once the project is operating, you’ll measure and verify the savings every year.
So here is an example of an energy savings performance contract. The city of Lowell, Massachusetts signed a contract with EMERESCO, and this ESPC contract included energy efficiency, energy management, as well as PV. The total agreement was over $20 million with one and a half million dollars in annual savings. The PV total size was almost two megawatts with three rooftop systems at schools, and then a larger 1.5 megawatt system on a landfill. The city is paying a discounted electricity rate for the electricity from these PV systems.
So now we’ve covered the most common methods for implementing PV, and here is a quick reference guide you can use to help you decide which option to pursue. If you have access to cash or low interest debt or you have grant dollars, then you might want to pursue direct ownership. However, if you have little or no upfront capital and your project is large, then you might want to pursue a PPA. PPA is also beneficial if you want to aggregate a number of smaller sites so you have a fairly large project in aggregate. And finally, if you are planning to do some energy efficiency measures and your PV project is going to be small, then ESPC may be the best approach to take. So now we’ll cover some other options for implementing PV.
The method by which local governments implement solar is not always a clear choice. There are some business models that blend elements of the different options. These hybrid approaches, for example, for direct ownership might involve different types of financing sources. For example, they could include grants, bonds, and then other sources of financing. Grant funding could also be used to buy down the cost of the PPA or an ESCP, and as I mentioned, a PPA could be included within an ESPC. Another possibility is to partner with your utility.
Some cities have municipal utilities, and they could consider unique contracting arrangements. If your city is served by investor owned utility, there still may be an opportunity to partner with that utility, but keep in mind regulatory approval is likely to be required, and that’s going to increase the time that it takes to get your project approved and implemented. And then finally, you might want to consider community solar. Some utilities do have these new programs that allow for more than one customer to purchase a share of a PV project. If this is the case, then the city may want to host a project for the utilities community solar program, or they might want to buy shares in a community solar project. If you decide to pursue community solar, make sure that you investigate the program structure carefully and understand criteria such as how the SRECs are treated.
Jenny Heeter: Before issuing an RFP, the first step is to make sure you understand all of the financing options in your area, and have determined what is allowable. Hopefully our resources have helped you in this regard. You'll still want to work with key city staff, such as your city attorney and finance and budget staff. These individuals can help you understand and meet any applicable regulations. You may also have a state energy office that can offer expertise in solar procurement and / or financing. For example, the Colorado Energy Office has an ESPC program for local governments. In June we will be releasing a template RFP that cities and counties can use for their PV procurement. There are also PPA and ESPC templates available from other organizations; the links to those resources are at the end of this module.
In this section we review some regulatory and contracting issues that can occur when local governments are financing or owning PV systems. First, For long-term contracts, such as a PPA or a lease, payments typically require the use of appropriated funds. Thus, if funds are not appropriated, the local government would not be able to make payments. This creates a risk to the PV developer. However, there are ways to mitigate this risk. For example, the first thing to do is to highlights that the risk exists, second, provide steps that both parties will take to minimize this risk and, third, the remedies available to the developer should a non-appropriation event occur. Solar developers have been able to overcome the risks associated with non-appropriation by negotiating in good faith with the hosts and agreeing to mutually acceptable contract terms. Another issue to consider is voter approval. While long-term contracts may be subject to appropriation risks, they typically aren’t considered public debt requiring voter approval. As a result, the developer can obtain financing and the municipality can avoid the cost and uncertainty associated with seeking voter approval. Conversely, if governments do wish to issue general obligation bonds, they typically need to seek voter approval (or have previously approved bonding authority in place) to do so. And while voter approval typically resolves the appropriations issue, there is no guarantee that voters will approve the bond offering that includes funds for the solar project. One final issue to consider is contract terms and the contract length. Depending on the local jurisdiction, restrictions may exist on the maximum length of contracts allowed when contracting for various types of services, including energy-related services. There may be legal limitations with respect to the ability of currently elected officials to enter into contracts that create binding obligations for future elected officials. As a result, it's important to ensure that when considering a PPA, an ESPC, or other long-term contract, what maximum contract length is allowable.
NREL has worked with numerous organizations, including state, local, and federal governments, to support the solar RFP process. Based on this experience as well as examples from recent local government issued PV RPFs, we are providing a solar template RFP in June. This template will cover owned systems as well as third-party systems. From our experience, we have found that RFPs function best when they include using standard metrics, providing specific site information, and are precise where necessary. By requiring respondents to provide responses in standard metrics, proposals can be compared fairly against one another. For example, require respondents to estimate performance of a system using NREL’s PV Watts or System Advisor Model. Another component is making sure you provide sufficient site information. Developers will need to know where you are planning to install, as well as how many square feet or acres, approximately, are available for PV. Many cities choose to provide aerial maps of their sites, outlining the areas available. Finally, be precise where necessary. For example, if you know the city will require a 6-foot security fence around the installation, write that into the RFP. Instead of saying something general about “providing fencing”, note that it must be a 6-foot tall security fence surrounding the installation.