Siemens Transportation Systems Plant, Sacramento, CA- Siemens Transportation Systems, the largest manufacturer of light rail vehicles in North American obtains clean solar energy from over 1.1megawatts of solar panels through a Power Purchase Agreement.

Solar PPAs for distributed (local) energy generation have been used for years by corporations such as Fedex, WalMart and Macy’s and institutions such as the University of California, US Post Office, San Jose Unified School District and Los Angeles Unified School District.

The PPA market is expanding as it offers electricity users a low cost way to obtain clean solar energy while offering investors reliable cash flow opportunities.

PPA Benefits:

• Capital Conservation- no upfront cash investment.
• Financial Savings- power can be purchased at prices lower than utility.
• Economic Optimization- economics create the most productive solar installation.
• Utility Rate Hedge- Predictable Energy Costs.
• Limited Operational Risk- Operations and Maintenance handled by professionals.
• Contract End Options- Flexible programs at contract term.
• Minimal Performance Risk- The PPA provider assumes solar equipment production risk.

PPA Challenges:

• Complex Negotiations- transaction structuring requires larger system size.
• RECs* or No RECs- Green Policy Goals and Financial Objectives may conflict.
• Reliance on Outside Support- The need to rely on a supporting outside firm (seller) for servicing and maintaining equipment on host property.
• Long Term Commitment- Constraints placed on property where solar is installed.
• Space Availability- PPA systems must have adequate space to be cost effective.
  *RECs = Renewable Energy Credits (environmental attributes)

Key PPA Terms

When considering a PPA the following key terms will usually need to be considered:

Pricing Structure/Cost of Power- There are two primary pricing structures in today’s PPA market:

• Base Rate Plus Escalator or Traditional PPA- The PPA agreement starts at a base rate per kWh -- which rises annually at a predetermined percentage rate. Historically, electricity rates have risen from 4-7% over the last 30 years. As an example, data published by the CPUC shows a historical average California small commercial electricity rate increase of 6.01% from 1970 to 2009. Depending on the escalator rate, these agreements can save substantial amounts over anticipated utility rates.

• Avoided Cost or Utility Discount- some PPA firms offer a rate set at a predetermined discount to a specified utility rate. This pricing structure assures the Host that solar electricity will never cost more than power from the utility.PPA Term or Length: 15-20-25 years- Determined by system cost and efforts to keep pricing competitive with Grid- Typically, shorter terms require higher PPA rates. Longer terms are typically required to allow pricing that is competitive to the Grid. PPA End of Term Options- Properly engineered and maintained solar equipment is designed to last up to 40 or more years. Even though PPA agreements typically end at 20 or 25 years, the equipment is likely to have many years of functional life after. Therefore, at the end of the PPA three options are possible:
• Renew- The PPA agreement can be renewed- usually at attractive electric rates.
• Purchase- The equipment may be purchased at fair market value.
• Remove- Typically, PPA firms will remove the equipment without cost to the Host.

Project: Diocese of San Jose
Site: Holy Spirit
Location: San Jose
Size: 886 kW DC

Early Termination Options- IRS tax penalties (tax incentive recapture rules) discourage termination prior to six years. Long-term financing agreements are usually subject to penalties for early termination. Such penalties will vary by transaction.

Government/Utility Incentives- Solar incentives are provided by federal, state and local authorities. In addition, utilities frequently provide incentives for solar installation. Solar PPA terms will be dependent on the specific incentives available at the time of installation.

Environmental Attributes/Renewable Energy Credits (RECs)- There is a premium for green energy in the market. Unless contractually set, however, REC values are hard to determine. Many energy experts expect REC values to grow with rising concern and legislation relating to carbon pollution and energy security. Current investors will demand a premium to allow REC values to be held by the Host.

Solar Financing Alternatives

Solar Transaction	Financing Options to Source Solar Power
	Purchase	Borrow	Solar Lease	PPA/SSA
Description	Pay Cash directly to install solar equipment	Borrow Money to install solar equipment	Obtain Solar Lease for equipment	Purchase electricity from equipment installed by PPA provider
Ownership	Direct Ownership	Direct Ownership with security to lender	Equipment owned by lessor	Equipment owned by PPA provider
Incentives	Owner keeps incentives- Non-Profits unable to use ITC	Owner keeps incentives Non-Profits unable to use ITC	Lessor may keep incentives, depending on contract	PPA provider keeps incentives
Non-Profit Federal Tax Incentive Considerations*	Non-Profit unable to monetize Federal Tax Incentives	Non-Profit unable to monetize Federal Tax Incentives	Lessor monetizes Federal Tax Incentives to benefit Non-Profit	IPP monetizes Federal Tax Incentives to benefit Non-Profit
Development Terms	Construction progress payments and full payment due on system commissioning	Construction progress payments and full payment due on system commissioning	Lessor arranges construction financing and full payment at system commissioning	PPA provider arranges construction financing and full a payment at commissioning
Payment Terms	Construction progress payments and full payment due on system commissioning	Interest payments on Construction financing and principal and interest payments on loan terms	Construction financing loan terms and fixed lease payments on equipment financing. Balloon payment to allow refinancing possible	Two options: Base rate plus annual escalator; or Fixed discount from specified utility rate
Typical Length	N/A	5-10-15 years	5-10-15 years	15-20-25 years
Design Liability	Host	Host	Lessor	PPA Provider
Performance Risk	Host	Host	Host	PPA Provider

* Fully monetized federal tax Incentives represent up to 60% of total installed system cost.

FAQ
Who can qualify for a PPA?

• PPAs are long-term agreements. Typical PPAs last from 15-25 years. Given the long-term nature of a PPA, it stands to reason that PPA qualifications include: 1) Long Building Lifetimes (15-25 years); 2) Credit Worthiness and 3) Long Term Lease or Property Ownership. The most common real estate scenario for PPAs is an owner occupied building.

What organizations use PPAs?

• Many leading businesses, including Siemens, FEDEX, Google, Walmart, and Kohl's, and institutions such as the University of California, Los Angeles Unified School Districts and San Jose Unified School District, among others, have used PPAs to install clean solar energy generating equipment. It is projected that over 80% of non-residential solar facilities installed going forward will be done using PPAs.

How much do PPAs cost?

• Solar electric generating equipment is expensive. With federal and state incentives, however, solar is becoming competitive with the most expensive peak electric rates. Photon will analyze your current electricity usage and cost. In many cases, we can provide solar energy at a price that will reduce the total cost of electric energy at your facility. Net Metering makes it possible to get credit for excess solar power generated, enabling customers to drive their remaining grid bills to zero.

Who is responsible for vandalism?

• Although the system is owned by a third party, the host maintains control of the property where the solar energy generation equipment is installed. Therefore, most PPA arrangements are similar to leasing arrangements. The host is responsible to protect and insure the equipment against fire and vandalism risks. Think of the solar system as any other part of the facility. Who, for example, is responsible for the window glass on your property?

Who is responsible for liability in a PPA agreement?

• The PPA firm is responsible to install a system in compliance with all applicable laws and regulations, including building and electrical codes. Both PPA firm and Host are responsible to maintain Public Liability and Property Insurance for protection and indemnification against potential claims

What savings are possible from using a PPA?

• Potential saving depend on the type of PPA and structure.
• Whether or not savings are possible is dependent on:
  
  • Proper Engineering (Solar specification and placement)
  • The cost of installing solar
  • The competitive grid cost of electricity
  • Structure of financial terms
  • Federal/State/Utility incentive programs

Is an RFP the best way to obtain a solar PPA?
Request for Proposals, or RFPs, are sometimes used by organizations to solicit proposals for a PPA. Many organizations, however, have found that RFPs frequently do not result in successful PPA agreements. Organizations that use the RFP process often discover that the winning bidder was unable to deliver the promised system because of inadequate design and cost analysis.

The RFP procurement process works best in the Design-Bid-Build construction model. Design-Bid-Build is where a project is predefined (designed) then bid through RFP. The best bid in response to the RFP is selected to build the project. This method can be effective when the host wants to purchase a specific system but usually doesn't work for a PPA.

Cost-effective PPAs require the system be precisely tuned to account for site specific conditions, utility rates and electricity usage. The cost of upfront analysis and engineering required to properly design and tune a system to provide a reasonable bid is prohibitive for most institutional/commercial PPAs. Consequently, an RFP usually cannot produce proposals with adequate information to make a fully informed decision. In addition, solar PPA RFP's tend to attract inexperienced vendors with a limited understanding and ability to determine the optimum PPA system configuration.

Successful PPAs result from where qualified experienced developers are given detailed electricity consumption, utility rate and building site information. This allows qualified developers to design and build a cost-effective system tailored to the specific needs of the site.

To obtain a cost effective PPA prospective hosts should evaluate different PPA providers and their proposed electricity costs. PPA providers should be selected based on their ability to structure and define a reasonable pricing arrangement as well as their experience and expertise

What’s the difference between installing Solar directly vs using a PPA?
Self-Install/Own- Organizations that choose to install solar equipment on their own face the following process:

• Competitive Solicitation and Evaluation
• System Design& Engineering
• Project Finance/Internal Finance
• Site Specific Agreements, including:
  
  • Equipment Acquisition (Solar Panels, Inverters, structures, etc.)
  • Government Incentive Application
• Utility & Environmental Permits
• Installation Services
• System Construction

PPA Model- Organizations using the PPA Business model:

• Sign a PPA (and related documentation)
• Pay monthly/quarterly for solar electricity

What are the problems from installing solar on your own?

• Hefty upfront costs
• Maintenance of unfamiliar electrical equipment and adding trained staff to budget
• How to select the best system- How to properly configure a system for optimal performance and longevity
• Performance and Production Risk- Who guarantees system performance
• How will the system interact with Host physical property? What problems come from putting solar on a roof?

What’s involved to obtain permitting approvals.

• How will the solar equipment work with the Host's existing electrical systems? How will the system interface with the local utility?

Are electric prices certain to go up? Isn't it possible that electric prices might come down in the future?
Why is there an escalator to electric prices?

• No one has a perfect crystal ball. The major California Investor Owned utilities, however, have already applied for rate increases of as much as 10% in the coming years. Electricity prices are likely to rise for many reasons, including:
  
  • Rising fuel costs- despite volatile energy pricing in 2008, the long term prognosis for energy prices is up. Even during the last 30 years when oil and natural gas prices were moderate for most of the time, electric prices have risen in California approx 6.0%/year.
  • Renewable Source Requirements- Proposed California legislation requires utilities to source at least 30% of their power from renewable sources by 2020. Renewable energy and the systems to deliver it will cost more than existing delivery systems.
  • Load Growth- substantial investment in systems and facilities to reinforce existing infrastructure and accommodate load growth is needed.
  • Aging Distribution Infrastructure- capital investment to replace aging distribution infrastructure and business systems is required.
  • Rising Operational Expenses- system operation and maintenance costs are increasing.
  • Staff Turnover- rising recruiting and training costs necessitated by aging workface nearing retirement (PG&E, SCI & SDG&E).

Why do PPAs include price escalation terms?

• Solar equipment is expensive Solar electrcity agreements typically include price escalation terms for 4 reasons:
  
  • Customer Demand- Customers want to save money from year 1. To accomplish this electricity prices are set low and allowed to escalate over the term of the agreement;
  • Money Market Investor Requirements- Investors have market rate opportunities- these transaction are structured to provide a market attractive return;
  • Rising Operations & Maintenance Costs- the equipment must be maintained to provide ongoing power; and
  • Accounting & Billing Costs- The services needed to process the ongoing transactions are likely to increase over time.

What is Net Metering?

• Net Metering is the process when an electricity user (commercial, institutional or consumer) is both connected to the grid and to an alternate electricity source such as a solar generating equipment. If the alternate electricity source creates more electricity than is needed by the user, excess power flows to the utility grid. The user is credited for the power flowing to the grid, which in effect, causes the electric meter to "run backwards".

Authors:

Reid Rutherford
Reid Rutherford is the CEO of Photon Energy Group based in Silicon Valley. Photon’s mission is to make solar electricity a cost effective option for corporations, schools and institutions. Previously, Mr. Rutherford was the founder of eFinance Corporation, a pioneer of online credit delivery services. Mr. Rutherford also founded Concord Growth Corporation which grew to be one of the largest independent California commercial finance companies and was sold to Bay View Capital (US Bank).

Dustin Keele
Mr. Keele is the Executive Vice President of Photon Energy Group and is responsible for marketing and systems development. He is a developer of Photon’s market leading Solar Economic Analysis software. Mr. Keele’s software makes possible the evaluation of the financial impact of a solar system based on system output and utility rates. Mr. Keele is also an award winning software systems developer. Prior to joining Photon, Mr. Keele managed distributed commercial real estate portfolios as a national corporate services broker.

Photon Energy Group, Inc.
Photon is a solar developer and integrator that serves financial institutions, business corporations, public schools and non-profit organizations and specializes in evaluating the lifetime financial impact of installing solar equipment. In addition, Photon has helped structure financing and manages development of solar facilities in California and the U.S. West. Photon’s mission is to provide the information that will make possible “Clean Energy, Clear Savings.”


Resources

California Solar Center
The Customer's Guide to Solar Power Purchase Agreements
http://www.californiasolarcenter.org/sppa.html

DSIRE- State Incentives Database
http://www.dsireusa.org

SEPA: Solar Electric Power Association
http://www.solarelectricpower.org

IREC: Interstate Renewable Energy Council
http://www.irecusa.org

SEIA: Solar Energy Industries Association
http://www.seia.org

Lawrence Berkeley Laboratory
Financing Non-Residential Photovoltaic Projects
http://eetd.lbl.gov/EA/EMP/reports/lbnl-1410e.pdf

VOTE SOLAR
http://www.votesolar.org

SOLAR TECH
http://solartech.org