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Posts Tagged ‘PPA’

The Northeast Sustainable Energy Association (NESEA) and Renewable Sales held a Building Energy-caliber session at Renewable Sales’ showroom at 35 Jeffrey Avenue in Holliston, MA on February 16, 2012.

The evening featured networking in the Renewable Sales showroom followed by a discussion facilitated by The Cadmus Group about Massachusetts municipal solar PPA projects. Meg Lusardi, Director of the Green Communities Division of the Department of Energy Resources (DOER), spoke to the Department’s support for community scale renewable energy and outlined DOER resources available to Massachusetts municipalities. The panel featured case studies from the City of Medford and Town of Natick –two of the communities that receive technical assistance services from Cadmus. Cadmus spoke to best practices and lessons learned from our efforts working with local cities and towns on their renewable energy projects. We also reviewed how developers and vendors can apply these lessons when doing business with Massachusetts cities and towns.

Read more about the February NESEA/Renewable Sales event at Medford’s blog, The Medford Patch

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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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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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