Third party ownership has been established as a financing solution for renewable instilla-tions in the United States and for many public buildings across the country, it has been a catalyst for offsetting up front instillation costs as well as subsequent maintenance costs. Despite it’s po-tential, third party ownership does face significant challenges in several states . Other states 98 such as California however, have implemented solutions to combat these challenges. One major challenge to Third party ownership Through PPA’s pertains to the state’s definition of an “Elec-tricity utility includes seller of elec“Elec-tricity” where California’s Solution was to exempt non-con-ventional generation (including solar) from definition of electrical corporation or public utility.
Alternatives to PPA for third party ownership for public buildings include solar leasing, Clean Renewable Energy Bonds (CREB’s), and Utilities as contract intermediaries . 99
The solar leasing model was adopted in St. Louis County, Missouri and has proven to be a success. Here the Parkway school district installed solar arrays on all 28 of its schools at no upfront cost through a 20 year lease which has cut the district’s energy costs significantly (an es-timated $1 million over the course of the lease. The fixed lease rate allows aids the district in realizing cost savings as utility rates increase over time. Operations and maintenance are not the responsibility of the school since the system is owned by a third party. While Parkway school district exemplifies the benefits of this approach, critics of the Solar leasing model argue that
Cory, Karlynn. “Don’t Be a Party Pooper! How States can attract Third Party PPA Financing” https://financere.n
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-rel.gov/finance/content/don%E2%80%99t-be-party-pooper-how-states-can-attract-3rd-party-owned-ppa-financing 02/08/2010
Internal Revenue Service (IRS). IRS Announces New Clean Renewable Energy Bonds Allocations: Notice
2009-99
33. Last Updated (15.02.2017) www.irs.gov.
Munis and co-ops may apply to the Internal Revenue Service (IRS) for clean renewable energy bonds (CREBs) to help finance renewable projects, which have traditionally been smaller projects. CREBs, an alternative to tax-ex-empt bonds, are a financing instrument with a structure similar to a tax-extax-ex-empt bond except that the federal govern-ment provides the investor with a tax credit in lieu of an interest paygovern-ment (Cory, Coughlin, and Coggeshall 2008). A recent allocation and authorization of $800 million in CREBs funding (H.R. 2008) makes this option again available to state and local governments, co-ops, and munis, each of which receives one third of the allocation.18 While this structure has some challenges (Cory, Coughlin, and Coggeshall 2008), Congress updated the CREBs structure in October 2008 in an attempt to address a number of the drawbacks.
though solar leasing avoids the retail cost of electricity, this model creates challenges for the use of federal tax credit and accelerated depreciation.
Clean Renewable Energy Bonds are another aforementioned strategy that are designed exclusively for states and municipalities that want to install solar PV on government property.
Critics argued that some projects may be too large to qualify under the initial 2005 round howev-er, project size was not a factor in the CREB 2009 round. Unfortunately project owners had to apply by August 2009 to secure a CREB allocation. However, Another application round for CREB’s was opened on March 5 2015, where the federal government made 1.4 billion USD for new CREB’s where applications were taken on a first come first serve basis and applicants in-cluded government bodies, cooperative electric companies, and a closed end application period for public power providers. This new CREB application round was validated under §54C(a) 100 of the Internal Revenue Code which, provides guidance on application requirements and forms for request of volume cap allocation; the methods that the Department of the Treasury and the Internal Revenue Service will use to allocate the remaining volume cap. 101
CREB’s were created under the Energy Tax incentives of 2005 and by 2009, the CREB allocation was increased by $1.6 billion bringing the total of New CREB’s to $2.4 billion . Un102 -der this program the investor receives a type of tax credit bond from the U.S. Department of the Treasury rather than an interest payment from the issuer. In many cases however, the tax credit provided to investors has proven insufficient and investors have required issuers to pay supple-mental interest payments or issue their bonds at a discount. The lesson here is that Tax credit bonds differ greatly from tax-exempt municipal bonds. The latter constitutes the issuer making cash interest payments and the federal government exempts this interest from the federal taxes which, allows investors to offer bond rates that are lower than that of corporate bonds of similar credit rating (remember the PACE program).
Internal Revenue Service. IRS Announces New Clean Renewable Energy Bonds Allocation. IRS.gov
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04.03.2016
Internal Revenue Service. Part III-Administrative, Procedural, and Miscellaneous: New Clean Renewable Ener
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-gy Bonds. Notice 215-12. 2015, Section 1.
Kollins, Kathrine - Speer, Bethany, - Cory, Karlynn. Solar PV Project Financing: Regulatory and Legislative
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Challenges for Third-Party PPA. System Owners P.43. National Renewable Energy Laboratory (2010).
On the other hand, Tax credit bonds under which CREB’s operate, constitute the federal government providing the investor with tax credits instead of interest payments from the borrow-er. Unlike tax-exempt bonds, CREB’s are considered taxable income according to the IRS. In addition to this, the benefit of long term tax-exempt municipal bonds does not apply here since under the CREB longer terms translates into increased cost to the Treasury Department, bond term limits are set at a maximum of 14 to 15 years. In theory, this approach subsidizes municipal borrowing entirely. The plus side to this approach was that it avoided technology bias and eligi-ble projects included facilities generating power from a variety of sources, including solar and geothermal. CREB’s also proved to offer public entities lower cost financing than traditional municipal bonds . Applications for this bond must be prepared in the same format as the form 103 and must be submitted by a qualified issuer i.e. government body, cooperative electric company, public power provider, clean renewable energy bond lender, and a non-profit electric utility which has received a loan or a loan guarantee under the rural electrification act. There were 104 17 states (government bodies) that were allocated CREB’s yet of these states, California had the most projects by far the majority of which, were issued by school districts within various cities across the state. 105
Another approach to third-party ownership mentioned above, were the Utilities acting as contract intermediaries. In states like North Carolina where utilities are monopolized and third party ownership is not allowed, Utilities may act as contract intermediaries . Under this 106 arrangement the third party owner sells power from the solar PV system back to the utility which, then sells the power back to the site host/end user. However, third parties are likely to be dis-incentivized to deploy solar PV technology in states where where there is potential regulatory
See, 99. IRS Guidance
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See, 95. Internal Revenue Service, 2015, Section 3.02(a).
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Internal Revenue Service. New Clean Renewable Energy Bonds-2009 Allocations: This Schedule Allocates New
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Clean Renewable Energy Bonds Among Qualified Issuers
Kollins, Kathrine. Solar PV Project Financing: Regulatory and Legislative Challenges for Third-Party PPA Sys
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-tem Owners. National Renewable Energy Laboratory. February, 2010
“Utilities as Contractual Intermediaries: A utility may act as a contractual intermediary.Under this arrangement, the third-party owner sells power from the solar PV system to the utility, which, in turn, sells the power back to the site host/end-user”
uncertainty or if net metering is prohibited in that state. Another downside to this approach is that the host building is not benefit from the power generated onsite and is therefore still required to pay electricity costs to the utility.
At present, the use of PPA’s are the fastest growing financing model for non-residential solar PV instillations, and took over all other financing models in 2008 . The third party PPA 107 model constitutes a customer hosting property where the instillations will take place and signing a PPA with the project developer. The developer builds, owns, and operates the system at the host site and then sells the electricity back to the customer via the long term PPA. Under this model, the customer reaps the benefits of solar power while also dodging the upfront capital cost of instillation. The capital costs are placed on the generator because it is an entity that is designed to capture available tax benefits. In addition to tax benefits, other incentives for developers un-der a PPA model include electricity sales, the sale of environmental attributes (REC’s), cash in-centives, and state and federal tax incentives that constitute a return for paying for the project up front. Customers wanting to avoid any up front costs entirely, generally will pay more for elec-tricity. As discussed earlier with the PACE program, the biggest deterrent for renewable instilla-tions is the high upfront costs. Therefore the greatest benefit of a PPA model is that it offsets the up front cost challenge and recognizes that most people are more equipped to make payments over time rather than a large initial payment all at once.
Under the right circumstances, the PPA third party ownership model has great potential for facilitating solar instillations on public buildings. However, developers wanting to approach third-party ownership using the PPA model, must take into consideration whether or not the state has a regulated or deregulated electricity market or a hybrid of both . In regulated states where 108
See, 106. Kollins,Kathrine. “The third-party PPA model is quickly becoming the financing method of choice
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across a wide range of PV generation market segments (Frantzis et al. 2008) and is even finding a niche in the resi-dential and federal markets. However, use of this finance model may be inhibited if it conflicts with state legislation and regulation that was established before third-party ownership was used to finance renewable energy projects.”
See, 70. Nickokalou, T. P. 4. Oregon, 2007.
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“In states with regulated, vertically integrated utilities, third-party owners of PV must understand the regulatory framework within which they operate. First, the state’s definition of a utility maybe problematic. In some states, selling power to an end-use customer may mean that the third party provider would be considered a utility and there-fore need to be regulated by the utility regulators. In a few states with ample incentives or REC markets, the third-party owners have tried to get the regulations or laws changed”
utilities are monopolized and customer choice is not an option, third party ownership may not be permitted. In states like Texas with co-op utilities and municipal utilities, do not open their terri-tory to competition and are regulated by their cities and have a different set of rules and regula-tions than IOU’s. Alternatively, in states like California where electricity markets are a hybrid of regulated and deregulated, developers will want to consider how that state defines a utility and subsequently, whether or not it will be regulated as such. In addition to this, a developer will want to know whether or not net metering is permitted in the state and if it is not, developers should consider this a deal breaker.
In order for PPA’s to be effective, California had to make some adjustments to how a util-ity would be defined. California public utilutil-ity code 218 states the following: “A corporation or person employing cogeneration technology or producing power from other than a conventional power source for the generation of electricity solely for… the use of sale for not more than two other corporations or persons solely for use on the real property on which the electricity is gener-ated.” This stipulation not only makes allowances for developers to sell electricity to residential customers, but also to commercial and industrial buildings that are net metered. In order for states to make adjustments to how renewable energy suppliers are defined will take the effort and support of lawmakers to change state laws, otherwise PPA will not be an option for them.
To the extent that power generation equipment is considered a public utility, will pose another challenge to the PPA model. The legislative solution to this is to explicitly exempt the desired renewable energy sources from being considered power generation equipment. This was done in Oregon where all power generation equipment is to be considered a public utility source with the exception of solar and wind . Another legislative challenge which developers should 109 seek clarification about before entering into a PPA agreement in a particular state, is how the state defines competitive service suppliers. This is because the extent to which developers pro-vide services to site hosts via maintenance and operations, it may be subject to regulation if the definition of competitive service supplier is vague. Oregon debunked this vagueness by
See, 70. Nickokalou, T P. 5 Oregon 2007. “Notably, not all states have clearly regulated or deregulated retail
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electricity generation markets. In fact, some could be said to have “hybrid” markets with characteristics similar to both regulated and deregulated markets. Oregon is an example of a hybrid electricity market where third-party own-ership is allowed and where a combination of IOUs, munis, and co-ops provide electricity to customers”.
nizing that ancillary services that relate to the management of electric power that is delivered through the transmission and distribution grid did not apply to third party owners who generated power on the customer’s side of the meter and did not use the distribution system. Oregon’s re-defining of competitive utilities and clarification of service suppliers should be a model for other states looking to promote third party development of renewable energy sources for the simple reason that, if faced with regulation equal to that of utilities, doing business would be much too difficult for third party owners. Therefore, when it comes to the regulatory decisions made by utility commissions, having state legislation that promotes the deployment of renewable energy is a necessity.
VI. PUBLIC LEADERSHIP PROGRAMS A. RE:FIT London Program
In June 2015 the mayor of London at that time, Boris Johnson, announced that there
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would be money transferred into the city’s budget for the development of solar PV on public buildings across the city under the RE:FIT program. Making it one of his top priorities to sup-port public sector solar programs with the 2015/2016 budget, Johnson’s plan has resulted in the Green Party estimation that the vast majority of London’s 3,000 schools could accommodate 25 KW or more of rooftop solar . In addition to London’s school buildings, other buildings being 111 retrofitted or in the process of retrofit include, Libraries, office buildings, civic centers, hospitals, cultural centers, theaters, hostels, universities, fire and police stations, community centers, leisure centers, and crematoriums. Not only would this Satisfy the DECC target goal of 22 GW of solar PV capacity by 2020, but it would also make a significant contribution to London’s goal of cutting carbon emissions by 60% below 1990 levels by 2025. This ambitious program goes into stark contrast with the UK’s Climate Change act which, aims for an 80% reduction in green house gas emissions below 1990 levels by 2050.
Funding for RE:FIT projects in London is provided mostly in part by the London Energy Efficiency Fund (LEEF) . LEEF currently has 100 million in pounds from the European Re112 -gional Development Fund and the London Green Fund to be lent to the public or private sector borrowers on projects that promote energy efficiency. Working with building owners, public bodies and voluntary bodies, ESCO’s and developers, LEEF will support refurbishment projects and projects under the retrofit in London. To the extent that your works will promote energy ef-ficiency or reduce carbon emissions and your funding requirement is between 1 million pounds and 20 million pounds, your project will be benefited by LEEF. Loans under LEEF are both flexible and competitive and lasting for up to 10 years at an interest rate of 1.65%.
Clover, Ian. UK Solar PV Capacity Tops 6.5 GW Despite April Slowdown. PV Magazine. June 2nd 2015.
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London’s Building Retrofit Programme - RE:FIT. Greater London – United Kingdom. http://www.citynvest.eu/
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sites/default/files/library-documents/Model%203_London%20Building%20Retrofit%20Programme_final.pdf London Energy Efficiency Fund. Amber Green Sustainable Capital: Executive Summary p.2 (April, 2014).
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Surprisingly, the RE:FIT scheme is modeled after the Energy Performance Contracts in the US. Upon meeting with Bill Clinton in 2008 at the GLA for c40 cities, Mayor of London at the time, Ken Livingston, was intrigued by the EPC process and asked if it could be applied in his city . By 2010, the Greater London Area applied for European Local Energy Assistance 113 (ELENA) and in the following year, ELENA accepted project awards for program delivery unit.
In London, the program delivery unit manages the RE:FIT framework of suppliers, facilitates the uptake by London based public sector organizations, and supports clients through all stages.
Mayor Boris Johnson points out that most clients lack the knowledge and expertise necessary to undertake Energy performance contracts and advises that they explore the framework of EPC’s, funding options, the RE:FIT process, project delivery, and the ESCO approach.
Energy performance contracting is a financing mechanism where upfront project costs are financed through delayed payback which comes from the savings acquired from the retrofit project. Under EPC, the savings and financing options are based on increases in energy effi114 -ciency that yield savings in utilities and operation costs. The EPC approach is usually lead by Energy Service Companies ESCO’s. ESCO’s are generally tasked with the development, con-struct, and financing of projects aimed at the reduction of resource consumption. In 2013, 75%
of ESCO revenue projects came from renewable energy projects on state and municipal build-ings . The EPC process emulates the design build process for delivering construction projects 115 but with the incorporation of performance guarantees as well as measurement and verification.
The greatest advantage in using an EPC process is that it addresses specific financial lim-itations that would otherwise prevent project development under retrofit. For instance, EPC
C40 Cities. Case Study: RE:FIT Programme Cuts Carbon Emissions from London’s Public Buildings (Sep
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-tember 30 2014). http://www.c40.org/case_studies/re-fit-programme-cuts-carbon-emissions-from-london-s-public-buildings
Berghorn, George. Energy Performance Projects Yielding Greening and Security Benefits. Corrections Today
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March, 2013. Vol 75 Issue1. p. 44-48.
London’s Building RetroFit Programme: RE:FIT. Greater London-United Kingdom, Model 3 p.2 (2015). http://
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www.citynvest.eu/sites/default/files/library-documents/Model%203_London%20Building%20Retrofit%20Pro-gramme_final.pdf
corporates financial incentives offered by utilities as a means to acquire additional capital . 116 Subsequently, the performance guarantee offsets the risk that project savings through efficiency will not meet minimum return on investment thresholds established by most public entities.
Finally, EPC process mitigates the issue of funding shortages by providing low interest financing and payment of project costs through he recapture of savings by an ESCO . However, EPC is 117
Finally, EPC process mitigates the issue of funding shortages by providing low interest financing and payment of project costs through he recapture of savings by an ESCO . However, EPC is 117