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Posts Tagged ‘Bid Evaluation’

Power Purchase Agreements (PPAs) are appealing to cities and towns for several reasons, and frequently because they require no upfront investment by the community. Rather, cost to the community (in addition to non-price factors) is the per kilowatt-hour (kWh) rate for electricity generated by the renewable energy system –the PPA rate. Different developers may propose significantly different PPA rates when responding to the same solicitation. However, PPA rates proposed that are noticeably lower than other bids received may be too good to be true. Inappropriate pricing can compromise the economic viability of these projects and increase risk to the community.

This diagram shows the relationship between parties in a typical, community-scale solar PPA in Massachusetts. Not all PPAs are structured in this manner.

When considering PPA price proposals, it is important to consider both the cost in cents per kilowatt-hour and how financeable the project is at the given PPA rate. PPA projects with PPA rate that is too low may suffer from significant delays as the developer seeks financing from financing parties looking for some return on their investment. Such delays and false starts waste the significant time investments that proponents make to introduce renewable generation in their communities.  In addition to lost momentum, incentives and other benefits (e.g., 30% U.S. Treasury Grant) that may be critical to a project’s economics may expire while the developer seeks financing.  Ultimately, if the developer is unable to secure financing, the project will likely fall apart.

 When examining PPA rates in cents per kilowatt-hour, bid evaluation teams should weigh the benefits of low PPA rates with potential risks:

  • Extremely low PPA rates and subsequent narrow margins can prevent conservative lenders from investing in the project.
  • In contract years 11 and beyond, the PPA rate should be high enough to fund operations and maintenance costs. That is, the PPA provider should have a financial incentive to continue to operate and maintain your system. PPA rates less than $0.02/kWh in years 11-20 should be considered cautiously.  If your community entered into such a contract, and the PPA provider abandoned the system, would your community be able to fund maintenance or decommissioning costs?

Low PPA rates may be workable in the context of large projects that will generate significant revenue for the developer, for example, through solar electricity sales to the community and SRECs. However, small and moderately sized projects –especially those with relatively high installed costs (e.g., lengthy interconnection runs, tree stumping required), may not be financeable at a low PPA rate.

Finally, many PPAs contain language that allows for developers to exit the contract prior to commercial operation if they are unable to find financing. Therefore, selecting a PPA rate that makes financial sense to your community, the developer, and their financing partners is important to helping all parties efficiently realize the benefits of renewable energy.

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This is the second post in our series highlighting “keys to success” for community renewable energy projects. In this post, we focus on how to build a savvy project team to ensure the success of your project.

Who should I consider for the project team?

To build a project team, consider the human capital in your community. Local resources may include volunteer energy committees, municipal energy coordinators, schools and universities, and private citizen groups. Invite interested parties to lend their expertise to the community’s clean energy efforts and create a strong team through collaboration.

Renewable energy projects can be very time-intensive. We have found that the most successful teams have at least one project champion. Ideally, this individual is able to manage the time requirements of the project, and they can organize and motivate a strong team of supporters. The project champion ensures that the project progresses even when other project team members are largely unavailable. They help identify solutions in the face of opposition. These individuals are the backbone of the project team, and they can be critical to a project’s success.

With their wealth of knowledge of municipal facilities, finances, and politics, local officials and staff are also valuable project team members. Facilities managers have detailed knowledge of potential project sites. Finance committee members can critically review price proposals. Teachers can help negotiate the most valuable educational “add-ons” to a project. Town counsel or city solicitors can provide a detailed legal review of contract specifics such as indemnification, representations and warranties, and default and remedies. While local officials and staff may have limited time, their expertise and ownership of a project makes for a very strong negotiating team.

Savvy volunteers often represent the majority of project team members. Consider energy and sustainability-focused disciplines at local academic institutions. Professors may be willing to lend their expertise, and students may have both valuable skills (e.g., financial modeling) and a flexible schedule. Solicit participation among your community’s retirees. Former small business owners, financiers, and engineers –especially those with an interest or experience in clean energy—frequently lead very effective project teams. Tap into existing local energy or climate change committees for those with demonstrated interest in municipal sustainability efforts.

Finally, look to regional organizations, such as regional planning commissions, and state and federal government for technical assistance programs. The U.S. DOE regularly presents technical assistance webinars for state, city, county, and tribal energy practitioners through their Technical Assistance Program (TAP). On September 28, 2011 at 2 p.m. EST, a TAP webinar will cover “Advanced Topics in Power Purchase Agreements,” including the complex terms and conditions of these contracts. The TAP blog provides an up to date list of technical assistance webinars and other resources for communities interested in renewable energy. In Massachusetts, DOER’s Green Communities program provides a range of resources and funding to cities and towns promoting energy conservation and renewable energy.

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In May 2011, Cadmus’ renewable energy team was invited to present at a series of Massachusetts Municipal Association events entitled “Solar in Cities and Towns.” Our presentation outlined five important steps on the pathway to success for a municipal solar PV project. These steps include garnering project support, building a savvy team, evaluating between options, understanding procurement pathways, and navigating contract negotiations.

One of the keys to project success is generating apples-to-apples bid comparisons. An apples-to-apples comparison can be approached proactively or achieved through careful bid review and clarifying questions. When regarding an estimated installed cost or proposed Power Purchase Agreement (PPA) rate, it is critical to investigate the terms behind this price. A proactive approach would be to include a checklist with your RFP price sheet asking the vendor to certify that all of the listed requirements are included in the price (e.g., curriculum package, public relations support, pre-installation roof work).

Looking beyond first year PPA rates at other metrics such as net present value over the term of the contract will also help generate apples-to-apples bid comparisons. Without considering the PPA rate escalation, first year PPA rates do not fully capture the value (or not) of a proposal. For example, a first year PPA rate of 10 cents per kiloWatt hour (kWh) escalating 3% each year will exceed 15 cents per kWh in year 15 of the contract. Excessively high escalation rates could result in communities paying more for solar electricity than for grid electricity.

The importance of apples-to-apples bid comparison cannot be emphasized enough when considering the value – financial or otherwise – that could be left on the table.

Suggested Strategies

  • Design an RFP to allow for apples-to-apples bid comparisons. Compare proposals using a baseline system capacity that they must bid against, but remember –the lowest cost bidder may not be the best value.
  • Include a checklist with your price sheet. Ask the developer to specify exactly what IS and IS NOT included in the price.
  • Get the full picture. Examine long-term financial metrics such as the net present value of the 20 year solar PPA.
  • Identify conservative standard assumptions for developers to use in savings models that they show you, such as grid electricity rate escalation of 2%.

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