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Posts Tagged ‘PPA solar PV’

In a typical solar power purchase agreement (PPA), a community hosts solar PV on public rooftops or land and enters into a long-term contract for the purchase of electricity from the PV system(s). This third-party ownership model is the most common way in which Massachusetts communities procure solar PV systems (as opposed to outright ownership, for example).  While 2010 and 2011 saw a significant number of public solar PPA projects in the state, interest from solar developers has slowed in recent months. As a result, those communities just releasing RFPs for their solar project or reviewing bids from a recent solicitation may not see as many responses or as attractive prices as their predecessors, leaving many to wonder –what is going on in the Massachusetts community solar market?

Concern over Renewable Energy Incentives

Solar Renewable Energy Credits (SRECs) generated by PV systems (which communities typically give over to solar developers in PPAs) are an important revenue stream in a developer’s financial model for a PV project. Due to recent analyses of and concerns about the state’s SREC market, some developers are struggling to secure SREC contracts at sufficient prices. Without adequate SREC contracts, developers cannot offer attractive PPA rates to communities. Many solar developers active in Massachusetts have slowed or stopped activity in the state.

What does that mean for my community’s hopes for a solar PPA project?

Some developers and analysts believe that Massachusetts SREC prices will recover in six to nine months and that the pace of development will pick up again at this time. In the interim, communities may not see as much interest from the development community or receive attractive PPA rates (e.g., less than 10 cents) on proposed projects.

In order to take advantage of federal incentives that apply to solar projects developed in 2012, community solar project teams should use this period to prepare for a summer 2012 RFP (or RFQ) release, should the SREC market turn around at that time. Proactive teams can use online tools such as the National Renewable Energy Lab’s In My Backyard tool or PVWatts for preliminary resource assessments and to narrow down potential project sites. Using the results of these analyses, as well as details about the sites, solar project teams should begin preparing language for a RFP or RFQ. If more detailed site assessments are conducted, finding should also be included in the RFP.

If and when Massachusetts SREC market projections improve, the most proactive project teams will be first in line to do business with an eager solar industry.

What if we are currently negotiating a solar PPA?

Local officials and staff in Massachusetts are constantly contacted by interested solar developers. If your community is executing a PPA project at this time, be sure to get as much information as possible as possible about the SREC assumptions used in the developer’s financial model for your project. If a developer assumes more than $285 per megawatt-hour (28.5 cents per kilowatt-hour) for 10 years worth of SRECs, tread cautiously. Make sure that your PPA does not contain, for example, a “Change in Law” provision that allows the developer to renegotiate the PPA price with you during the contract term if their SREC assumptions do not hold (e.g., if the assumptions about SRECs used to price your project were out of date or overly optimistic). Also, if the solar developer will use SREC brokers to sell the SRECs from your project, encourage them to get regular updates from their brokers on available SREC contracts.

 

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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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