Power Purchase Agreements Debated in Iowa

Officials Debate the Definition of 'Public Utility'

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Posted: Wednesday, November 16, 2011 3:30 pm | Updated: 8:52 am, Fri Jul 27, 2012.

Imagine you are a municipality interested in sustainability and lowering your carbon footprint. You notice a big open rooftop on your city shop, perfect for solar panels to collect the sun's rays and provide part of the building's electricity. You connect with a local solar company that agrees to install the solar photovoltaic (PV) system.

But the two of you can't do it alone because, as a tax-exempt organization, your city cannot use renewable energy incentives. You identify a third party investor - a local bank, perhaps - that would own the system and sell you the power through a third-party Power Purchase Agreement (PPA).

The solar company is ready to move forward and you request permission from your city council. You can almost feel the rays of the sun providing about a third of the needed electricity when you are contacted by your utility company, which informs you that the project cannot proceed as planned.

This scenario occurred recently in Dubuque, Iowa, and is being repeated around the country as states, private businesses and power companies grapple with doing what they all say is important: creating affordable renewable energy. So far, whether third-party PPAs can be used to finance these ventures seems to come down to interpretations of various regulations in your state.

Third-party PPAs are designed to work in this way: A city (for example) and a third-party investor develop a contract. The city owns the property where the array will be positioned, and the investor is able to utilize the renewable energy incentives because it is a tax-paying entity.

According to the Database of State Incentives for Renewables and Efficiency, at least 21 states and Puerto Rico allow third-party PPAs. Two states disallow or restrict these arrangements, while regulations in the rest, like Iowa, are undefined.

One complication occurs when a third-party PPA is planned for a regulated utility state, like Iowa. Alliant Energy, which operates in Iowa, Minnesota and Wisconsin, explained through spokesman Justin Foss what "regulation" means. In a regulated utility state, the utility company's rights, duties and obligations are assigned and written out clearly. "Here in Iowa, because we're regulated, state government has assigned a utility provided to each community, to each address in the state," Foss said. "By contrast, in a non-regulated state, you can buy your electricity like you can go to Target or Wal-Mart, so the obligations and rights aren't clearly defined," he said.

Another complication is determining what constitutes a utility. When Eagle Point Solar was about to install the photovoltaic panels on a City of Dubuque rooftop, it learned Alliant would view it as a competing utility company. But Eagle Point Solar owner Barry Shear said that Alliant's assumption that his company is operating as a utility is incorrect on several points.

"Alliant is taking the position that by furnishing electricity, I am an electricity provider, triggering their monopoly provisions as a regulated utility." The difference, he said is that he is not "furnishing electricity to the public for compensation."

Shear said the project started as a $1 million deal to provide 200 kilowatts of electricity at a negotiated $5.00 a watt rate. The bank was leasing the equipment back to Eagle Point Solar, which was in turn selling the power generated to the city. The city would pay 11 cents a kilowatt to Eagle Point Solar, and the company would then make a lease payment back to the bank. But because the bank was eligible for a renewable energy grant, that dropped the project cost down to $700,000, plus a one-year depreciation write off, Shear said. That reduced capital costs by another 35 percent. So, basically 65 percent of costs are subsidized by renewable energy credits, bringing the capital costs of $1 million to about $350,000.

"It is imperative to have a taxable entity to take advantage of the renewable energy incentives," he said. Without it, no municipality will pay 65 percent more for renewable energy. Incentives have to be there."

Shear said the solution in Dubuque was to lease the solar equipment directly to the city, charging a flat monthly fee. "That's a more difficult sell to a municipality - but they need the power; that's a given," he said.

A municipality doesn't take on any risk under a PPA because it has no out-of-pocket expenses - the array is put there by the investor and the city is purchasing renewable energy at a negotiated rate. Under a PPA they are only paying for the energy that is generated. Under an equipment lease, the municipality pays a flat monthly fee, even if an extended cloudy period results in less power being generated in a given month.

With this sort of money at stake, it is important to define just when an entity might be seen as a utility in competition with the main utility. Power companies are guaranteed a monopoly in return for serving an area even if they'd prefer not to, and having to request rate hikes from state public service commissions, Foss explained. After all, they've invested quite a bit in utility lines and other infrastructure, he said, so it isn't fair to allow others to use their equipment to deliver power. Yet, anyone who wants to place a wind turbine or photovoltaic panels on their property for their own use may do so. That's Alliant's argument: the electricity Eagle Point Solar was selling was not for its own use, it was for the city of Dubuque.

Foss said if the city of Dubuque owned the solar panels they would not have objected. But he said the utility considers that third-party PPA a violation of state regulations, since Eagle Point would technically be selling electricity to the city. "If Eagle Point supplies power to one of our customers, they in fact become the utility."

The city of Dubuque, meanwhile, had to do some revamping of its project so that those 847 rooftop photovoltaic panels could be ready for the interconnection in late November, allowing them to produce electricity. Aaron DeJong, Dubuque's assistant economic development director, said when the project started as a third-party PPA, they weren't at risk if the solar panels underperformed. "We thought the project was done but then we had to do more thinking. I understand Alliant's business model and making sure their service territory is preserved. We understand providing electricity is a very expensive business to be in."

DeJong said, "The fix was easier than I thought it would be at first. I'd like to have seen the PPA go through because it minimized risk. But it is still a great project. The panels will produce electricity and save the city money in the end."

These debates have triggered the interest of the Environmental Law and Policy Center (ELPC). Attorney Bradley Klein is the lead author of a memo that disagrees with Alliant's assertion their monopoly was violated. Klein argued that because the building's solar panels would be "behind the meter," they would supply electricity only to that building.

In spite of these disagreements and complexities in law, many governmental entities and other tax-exempt organizations develop renewable energy projects. In Minnesota, also a state where third-party PPA regulations are unclear according to DSIRE, the city of Minneapolis recently completed a large photovoltaic project on the roof of its convention center. As SCN has previously reported, the project, a 600 kilowatt solar installation on the roof of the Minneapolis Convention Center, involved a PPA with Best Power Int'l, LLC, a grant from Xcel Energy and other funding. With 2,613 solar panels, the system is the largest PV installation in Minnesota. Its solar system went online ahead of schedule in late November 2010 and will provide 750,000 kWh of renewable electricity per year, the equivalent of powering 85 homes and offsetting 539 metric tons of carbon dioxide emissions. Westwood Renewables, recently purchased by Westwood Professional Services, provided program management, design and engineering for the convention center's solar project.

Nathan Franzen, of Westwood Professional Services, explained that Xcel Energy does allow third party financing such as a PPA for behind the meter applications, however third party ownership is not allowed if used in conjunction with Xcel Energy's Solar Rewards program (which is Minnesota's largest solar incentive program). He said there are a variety of issues that drive policies regarding renewable energy and funding at the local level, from state laws to the pressure of high energy prices

Regulations vary widely by state. In light of this, the National Renewable Energy Laboratory (NREL), operated by the U.S. Department of Energy, issued a technical report in February 2010 describing the desirability of renewable energy and the often prohibitive cost. One solution they describe is the third-party PPA. While acknowledging some of the obstacles presented by public utilities, NREL said some states, including Colorado, New Mexico, and California, have determined that third-party owned systems are not utilities or electrical corporations and are therefore exempt from regulation. Nevada and Oregon exclude third-party owned renewable energy systems (specifically solar and wind power in Oregon) from the definition of a public utility. Peter Kostes of the Nevada Public Service Commission explained that even though Nevada is a state that regulates utilities, it has a "hybrid condition for those large commercial customers or public entities as a way to leave the electric grid provider in a regulated process."

Nevada codifies exemptions to developers based on location, size, and percentage of the overall electrical requirement. "There is a process for commercial customers, 1 megawatt or larger, to exit the system," Kostes said. "There is another way for public entities to do the same thing if aggregated to at least 1 megawatt. Under bill SB 211, they could exit the system, but the difficulty is the reserve requirement for transmission and that economically kills that process for most. The requirement that such systems can't produce more than 150 percent of the electrical load on site is key."

The memo written by the ELPC reviewing the situation in Iowa concludes: "An analysis of the Iowa statutes, the relevant case law, public policy considerations, and the decisions of utility commissions in other states all support the conclusion that third-party owners of behind-the-meter renewable energy systems delivering energy to Iowa customers under long-term PPAs are not ‘public utilities' and should not be regulated as such by the Iowa Utilities Board."

Alliant will continue to protect its monopoly under the present system, as Foss reminds municipalities. "If you are going to do something like this, check with us first. We are the experts," he said.

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