State and local governmental agencies can employ a variety of models to deploy solar photovoltaic (PV) projects:
Direct Ownership Models include tax-exempt financing and energy service performance contracting (ESPC).
Third-party Ownership Models include solar power purchase agreements (PPAs) and solar leases.
Hybrid Models include bond-PPA hybrids, popularized by the Morris Model.
The EPA financing web pages are designed for state and local government staff working to encourage clean energy improvements, either in their own facilities or in their residential and commercial sectors.
- Key Objectives for State and Local Governments: Helps identify the objectives for a financing program
- Understanding Financing Programs: Helps understand the key elements of a successful clean energy financing program
- Financing Program Decision Tool: Helps choose the best program(s) for a jurisdiction
- Financing Programs Decision Guide: Provides an in-depth look at issues and considerations for getting started with and choosing a clean energy financing program
A great collection of solar financing resources including a presentation about financial viability, a presentation from Xcel Energy, as well as several case studies.
The levelized cost of energy (LCOE) calculator (last updated September 2013) provides a simple calculator for both utility-scale and distributed generation (DG) renewable energy technologies that compares the combination of capital costs, operations and maintenance (O&M), performance, and fuel costs. Note that this does not include financing issues, discount issues, future replacement, or degradation costs. Each of these would need to be included for a thorough analysis.
Direct Ownership Resources
Three methods that local governments often use to finance solar projects utilizing a direct ownership model include grants, tax-exempt financing (which could include Qualified Energy Conservation Bonds (QECBs)), and energy service performance contracts (ESPC).
- The newly created Energy Savings Partnership (pdf brochure) is a program offered through the St. Paul Port Authority (SPPA), with a grant from the Minnesota Department of Commerce. It is a municipal leasing program with U.S. Bank, that can offer reduced-rate loans to cities and counties, public schools and regional governmental entities.
- In the past years many solar projects have been financed through grants made possible through the Federal Stimulus Package. These funding opportunities have largely dried-up, but special grants are, of course, a great way to get solar projects funded under a direct ownership model. The Excel RDF program provides special funding for solar projects.
- Local governments have the authority to issue tax-exempt bonds. These bonds typically fall into one of two categories: (1) general obligation bonds, which are backed by the full taxing authority of the local government and require voter approval; or (2) revenue bonds, which are backed solely by the revenue generated by the project being financed. Tax-exempt bonds can be a source of capital for solar installation projects. In many cases, a single solar project is not large enough for a dedicated issuance but will instead be bundled into a larger bond.
- A solar installation can be bundled into an energy service performance contract (ESPC). In the ESPC model, an energy services company(ESCO) makes energy efficiency investments on behalf of the city and then is repaid out of the energy savings that result from these investments. Many energy conservation mechanisms(ECMs), such as upgrading a facility’s lighting or installing a new boiler, have a much shorter payback term than that of a solar energy system. Combining these ECMs with solar technologies ideally creates a package of energy efficiency and renewable energy investments with a total payback period that’s attractive to the municipality.
Outlines the conditions under which a commissioner may contract to purchase by installment payments capital or other equipment or services intended to improve the energy efficiency or reduce the energy costs of a state building or facility.
Third Party Ownership Models
Americans wanting to switch to clean energy and hedge against rising electricity prices are increasingly choosing to either a solar lease or a solar PPA. Third party ownership models now accounts for 75% of the residential solar market in California and more than 80% in Massachusetts.
The differences between these two models are subtle, but can be important:
- Solar lease: The solar hosts pay a fixed amount every month for the solar panels. The same amount is paid each month, regardless of how much energy the panels produce.
- Power purchase agreement (PPA): The solar hosts pay a fixed rate for the electricity your panels produce. You only pay for the electricity your system produces each month.
PPAs are most often utilized by local government to take advantage of tax incentives. The PPA financing model requires a separate, taxable entity (“system owner”) to procure, install, and operate the solar PV system on a consumer’s premises (i.e., the government agency). The government agency enters into a long-term contract (typically referred to as the PPA) to purchase 100% of the electricity generated by the system from the system owner. The system owner is often a third-party investor (“tax investor”) who provides investment capital to the project in return for tax benefits. These tax incentives can account for approximately 50% of the project’s financial return. Without the PPA structure, the government agency could not benefit from these federal incentives due to its tax-exempt status.
Some important advantages of a PPA for public agencies:
- No/low up-front cost.
- Ability for tax-exempt entity to enjoy lower electricity prices thanks to savings passed on from federal tax incentives.
- A predictable cost of electricity over 15–25 years.
- No need to deal with complex system design and permitting process.
- No operating and maintenance responsibilities.
An often contested aspect of third party ownership models for public entities is the ownership of the green attributes. Usually with PPAs and leases, the host of the system does not get ownership of the green attributes. The cost of solar with third party ownership models is often considerably higher than a direct ownership solar installation.
This fact sheet provides information and guidance on the solar photovoltaic (PV) power purchase agreement (PPA), which is a financing mechanism that state and local government entities can use to acquire clean, renewable energy. The technical details should be discussed later with the developer/contractor. This fact sheet is written to support decision makers in U.S. state and local governments who are aware of solar PPAs and may have a cursory knowledge of their structure but they still require further information before committing to a particular project.
Tioga Energy, a solar PPA provider to commercial, government and non-profit organizations, created unique tools and collected original research and other resources that provide a deeper look at this financing model. On this page you will find an annotated PPA, a solar PPA calculator, and other reports.
A recent article by John Farrell that describes some of the downsides of solar third party ownership models.
Hybrid Ownership Models
The hybrid model is a financing option by which a public entity issues a government bond at a low interest rate and transfers that low-cost capital to a developer in exchange for a lower PPA price. To date, the model has been used to finance solar PV projects on schools, colleges, county administrative buildings, and other public buildings in several jurisdictions in New Jersey. Implementers have achieved notable energy cost savings as compared to projections of their local electricity rate.
Instead of using bonds, grants, or general funds to purchase and install a PV system, a community might be able to stretch these resources and install a larger project by partnering with a third-party solar developer. If the host decides to exercise its buyout option in the PPA, the outstanding loan can be netted against the purchase price. As a result, the public entity can end up owning a larger system than it would have if it simply had purchased one at the outset.
Interest in the hybrid model is increasing nationwide due to its promise of reducing the cost of purchasing solar power. The model is likely to remain attractive to public entities as long as publicly sourced capital is cheaper than what can be obtained in the private market. The cost of capital with a PPA needs to be sufficiently high so investors turn a profit, thus reducing the economic benefit to the host over the lifetime of the project. Public funding may reduce the cost of debt by reducing the interest rate and associated lender or investor fees.
Historically, state and local governmental agencies have employed one of two models to deploy solar photovoltaic (PV) projects: (1) self-ownership (financed through a variety of means) or (2) third-party ownership through a power purchase agreement (PPA). Morris County, New Jersey, administrators recently pioneered a way to combine many of the benefits of self-ownership and third-party PPAs through a bond-PPA hybrid, frequently referred to as the Morris Model. At the request of the Department of Energy’s Solar Market Transformation group, NREL examined the hybrid model. This fact sheet describes how the hybrid model works, assesses the model’s relative advantages and challenges as compared to self-ownership and the third-party PPA model, provides a quick guide to project implementation, and assesses the replicability of the model in other jurisdictions across the United States.