Financing Solar Energy Projects for Municipalities

Experts Discuss Options at NLC Session

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Posted: Wednesday, December 22, 2010 11:16 am | Updated: 10:35 am, Wed Feb 9, 2011.

How can municipalities help generate electricity from solar energy without actually paying for the development? The answer, increasingly, is through Power Purchase Agreements (PPAs), a financing device that entices private developers with tax credits and locks down energy costs for their public-sector partners.

While there are numerous grants and municipal bond programs that help local governments pay for their own solar installations, one federal authority said cities should think twice about investing in solar if they haven't already made their municipal operations as energy efficient as possible.

"Even though solar is sexy, the marginal dollars need to be spent on energy efficiency, because that's really where you're going to get the payback," said Jason Coughlin, senior project leader in the Strategic Energy Analysis and Applications Center of the National Renewable Energy Laboratory (NREL) based in Golden, Colo. "Unless you have dedicated funds for solar, if you've got a dollar to spend, you want to make sure you spend it first on efficiencies that will pay back in a year or two, and then look at solar."

Coughlin made his statements at the National League of Cities Congress of Cities held in Denver early this month in a session entitled, "Financing Solar Energy Projects: The Role of Local Government." The session was moderated by Gaithersburg, Md., council member Michael A. Sesma, and included presentations by Scott Morrissey, deputy director of the city of Denver's Greenprint Denver initiative, and Anne Hunt, policy director of environment for the city of St. Paul, Minn.

Denver and St. Paul are both among the 25 original member-cities of the Solar America Communities program, an effort by the U.S. Department of Energy and its NREL to rapidly increase the integration of solar energy in communities across the country.

Both Denver and St. Paul utilized PPAs to get private developers to invest in large-scale solar projects. PPAs have been used to finance solar projects since 2003 and they are now driving most commercial solar installations, according to the DOE.

"Basically, the idea is that corporate entities can take tax credits for solar, and public tax-exempt entities can't," Coughlin said. "PPA's are a way we can combine the two so that local governments can benefit intrinsically from tax credits. ... Rather than purchasing the system, you actually partner with a solar developer and give them a lease to your roof or maybe an easement. They buy the system, and then you agree to buy all the electricity from them at a fixed price over 15 to 25 years. Most large systems are being financing using this model," he said.

Morrissey said Denver currently has 4 megawatts of photovoltaic (PV) solar capacity installed on city facilities, including 3.6 megawatts located at the Denver International Airport. That project, as well as smaller installations on the roofs of the Colorado Convention Center and the Denver Museum of Nature and Science, used PPAs as one piece of a complex funding puzzle that also included utility incentives, federal grants, tax credits and other sources.

Morrissey said PPAs are a great way to "hedge against raising energy costs," since they freeze the price of electricity, potentially for decades. However, he warned, negotiating a PPA is not child's play.

"These are complex legal arrangements. It's important that you have good support from your city attorney's office. It's really critical that we think about all the issues before we start projects," he said.

As an example, Morrissey said, typical utility contracts are not structured with PPAs in mind. "So, we needed to make some changes with our public utilities commission in order to take advantage of the incentives the way we needed to," he said. Other issues, like the way solar panels impact roof warranties on buildings, might not be anticipated, so Morrissey suggested cities take the time to engage with all stakeholders early in the process and seek advice from federal agencies and cities that have experience with financing solar projects through PPAs.

Among the tax credits available to the private sector is the Federal Investment Tax Credit for Wind and Solar, which Hunt said is a 30% tax credit for residential and commercial systems available through 2016. Commercial systems enjoy an accelerated depreciation of 40% in the first year.

"From a local community perspective, one of the roles you can play when it comes to solar energy is ... removing barriers to solar installations," Coughlin said. "A lot of communities are basically operating in that realm." Examples include updating building codes and simplifying the permit process; actively supporting private-sector projects; educating the public on best practices; and helping to survey proposed solar sites to make sure solar makes sense in those locations.

Coughlin said some cities are adding property tax incentives, sales tax rebates, revolving loan funds and other benefits to encourage private development.

Hunt outlined St. Paul's "Solar Cities" partnership with Minneapolis, an initiative that gave the Solar American Communities program an example of how solar can be utilized even in the sometimes frigid northern states. The partnership's flagship 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 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.

St. Paul also received a $1 million DOE Solar Market Transformation grant in 2009 to help pay for a $2.1 million 1 megawatt solar thermal system on the roof of the St. Paul RiverCentre, integrating the power into a district energy system that operates a biomass-fueled hot water heating system. When complete in January, 21,000 square feet of panels will be the Midwest's largest solar thermal system.

"St. Paul has the largest hot-water district energy system in North America. It powers about 80% of our downtown buildings. So, I always say that our capital complex in downtown St. Paul was green before it was fashionable," Hunt said.

"The project we proposed to the DOE was: How could you integrate a large-scale solar thermal project into an existing district energy system?"

Hunt said the Solar Cities project, which has resulted in numerous smaller commercial and residential solar energy systems throughout the region, helped the Twin Cities develop funding sources it had never used before. They included money from Xcel Energy's Renewable Development Grant Fund, utility incentives, state financial incentives, solar leasing, PPAs, Stimulus Fund grants, PACE legislation and solar bulk purchasing programs.

Bulk purchasing programs are often used in residential solar installations. Coughlin said they've worked especially well in Portland, Ore., where neighborhood associations have negotiated discounted pricing from solar installers by purchasing up to 150 solar installations at a time.

"I was in Portland a few months ago walking around these neighborhoods," Coughlin said, "and it's kind of cool to see a neighborhood where every third house has a solar system on it as a result of these bulk purchasing programs."

Smaller cities are dabbling in solar, too. Sesma said Gaithersburg, population 58,744 has built the first LEED Platinum youth center in the world. It uses passive solar features like tinted glass windows and awnings, along with 72 PV panels on the roof, to augment a variety of other energy- and water-efficient features.

"It's another way we can reduce our carbon footprint, because other than the production of the panels themselves, and the transportation and installation of them, they don't generate any carbon dioxide," Sesma said.

By ordinance, municipal buildings in Gaithersburg are required to be built as green facilities. "We used Energy Efficiency and Conservation Block Grants to complete the comprehensive energy audits to determine efficiencies that can be accomplished either by retrofit, including consideration of solar facilities, or new buildings like the youth center," Sesma said. "Our philosophy is that it would not be proper to require other people to do it if we didn't do it ourselves," he said.

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