Lesson 4: Introduction to Solar Project Finance - YouTube

Welcome to the SunShot Solar Outreach Partnership's

Solar Powering Your Community workshop series

My name is Jayson Uppal from Meister Consultants Group

and this is Lesson 4: Introduction to Solar Project Finance

In this lesson we're going to cover different solar ownership structure,

discuss some of the pros and cons of each of these different structures

and discuss how different entities can maximize the value of solar ownership.

While there are a variety of different ownership structures

out there for solar projects, there are three basic

ownership structures that will talk about today:

direct ownership, third-party ownership, and community ownership.

The first ownership structure we're going to talk about

is the direct ownership structure

and this is where a customer will, with upfront cash

or by taking out debt

finance, own and operate a solar installation themselves.

So they'll own the system up front and they'll receive all the electricity

from the system as well as an incentives associated from that and replace

purchasing electricity from the grid that they would have done previously

before the installation was in place. So there are a number of

benefits for the direct ownership structure one of them is that once the

installation is installed the electricity is virtually free

there's no fuel costs associated with it just maintenance cost for the

panels and equipment themselves, there's also incentive revenues so in a prior

lesson we discussed renewable energy credits as an example incentive

and that can provide an additional revenue stream for the owner of the system.

Finally for local governments in particular

they can actually utilize cheap loan money through issuing bonds

or through low-interest loan programs that can help to reduce the overall upfront costs

and make the project more financially viable. There are also a number of

drawbacks associated with the direct ownership structure

mainly that there's a incredibly high upfront cost since most of

the cost is front-loaded with the equipment purchase requirements.

There's also the long-term management risks associated with the ownership

of the system both in terms of maintenance costs as well as any

performance and development risk that goes along with the installation.

And finally if you're a local government you actually can't take advantage of those tax benefits

and this'll actually play a role as we talk about some of the other ownership

structures but it can have a pretty large impact on the overall

return-on-investment of the system if the local government or

non-profit entity owns it themselves.

The next ownership structure I want to talk about is

third-party ownership and in this case the developer

rather than the customer is the one that's actually putting up the up-front capital

to purchase, own, and operate the system. So the developer pays for all the equipment necessary

and they actually own the systems themselves even if the system may be on the customer's roof.

The customer will then enter into what's called a power purchase agreement

could also be a lease agreement in order to receive the electricity from the

system at a predetermined price.

It's important to note here that the developers actually take the incentives in this case

so the customer doesn't receive those renewable energy credits

and they also don't receive those tax credits. Now this actually plays an important

role when thinking about the structure that makes the most sense

for a local government or non-profit entity.

Since the developer is able to take those tax credits

they can actually build the value of those tax credits into

the overall power purchase agreement price.

Even though you're involving an additional entity here that may require

some sort of return, it can actually be cheaper or more cost effective for a local government

to move forward with a third-party ownership option rather than the direct ownership option

because of the tax incentives. There's also other benefits such as

the fact there's no up-front costs associated with third-party ownership for the customer,

the third-party developer will deal with the operations and maintenance of

the systems and they'll pay for all that.

There's very low risk as the performance of the system

will impact the return-on-investment for the developer and not for the customer

and the payments are predictable as there's usually a long-term contract

maybe twenty to twenty-five years.

There are also a few drawbacks associated with the third party ownership structure.

The customer doesn't get to keep the incentives in most cases so the

developer will actually take those renewable energy credits as well as any tax benefits,

you are also involving an additional party that may require a certain

return-on-investment and so that can reduce the amount of value that ends up back to the customer.

In the case of local governments, you can't actually use

bonds under the traditional third-party ownership structure

and the third party ownership structure actually is not available in every state.

Third-party ownership has actually increased

in adoption rates over the past couple years. In the top five solar states,

we've seen fifty percent or higher of new residential installations actually

taking that third-party ownership structure,

rather than going the direct ownership route.

So it is becoming increasingly more popular.

But as I mentioned it's actually not available in every state

and this has to do with how states look at public utilities and whether

they consider a developer selling electricity back to a customer

a public utility and in that case it requires a significant amount of regulation

and limits the ability for third-party ownership structure to work in these states.

So if you're interested in finding out more about whether or not third party ownership is

available in your state I would suggest you check out the database for

State Renewable Energy Incentives or DSIRE that has a rundown of

all the state policies for each individual state.

Now I mentioned that local governments, through the third party ownership structure,

traditionally can't use cheap bond money

but there actually have been cases through the bond-PPA hybrid structure

where they can utilize the third party ownership benefits of a developer being able to take those

tax credits and build those credits into the value of the power purchase agreement

while still using cheap available bond capital to actually invest in the project

The bond-PPA hybrid is a financing option by which a public entity issues a government bond

at a low interest rate and transfers the low-cost of capital to

the developer in exchange for a lower power purchase agreement price.

To illustrate how this works, a municipality will choose to issue

a bond and sell that bond to bondholders in order to raise capital.

The municipality will then actually purchase the equipment for the installation

and then through a lease-purchase agreement will actually lease the system to the developer,

such that in the eyes of the IRS, the developer is actually owner of the project.

The municipality can then use that money that they receive through the

lease payment to pay back the bondholders, both in terms of their

principal as well as their interests payments.

Then the municipality, just like the third party ownership option,

will enter into a power purchase agreement through which at a predetermined price

the developer will sell electricity back to the municipality.

The developer in this case can also take the incentives

so for the municipality that isn't eligible for that investment tax credit incentive

and the accelerated depreciation incentive, that value can still be built into the PPA price

resulting in a higher return on investment for municipality.

Reviewing the benefits of this structure, there's no upfront cost to the customer

no operations and maintenance costs, they can actually use bonds under the structure,

the payments are predictable and they can also take advantage of the tax benefits.

The drawbacks to this type of structure is that they still don't get

to keep the other incentives of the renewable energy credits

and because of the complexity of this structure

there are generally higher transaction costs.

This structure was actually pioneered by Morris County in New Jersey

and the National Renewable Energy Laboratory has created a fact sheet that

explains how the structure worked

and provides some case studies as to what the ultimate power purchase agreement

prices were for the municipality and the ultimate return-on-investment.

So if you're interested in learning more, you can check out this fact sheet at www.nrel.gov

The third and final ownership structure that we're going to talk about

is community ownership.

Many customers, particularly on the residential and commercial side

may not be able to install solar onsite either because maybe they're renting the

facility that they're in and they don't have access to the roof or the surrounding ground

or they may not have a roof that's feasible for solar development

if there are structural issues or shading issues.

There's a huge part in the country that actually can't adopt solar even if they wanted to.

and the community ownership structure helps to solve this issue.

There are three different program models that we're going to discuss today

the Special Purpose Entity model or SPE model,

the investment model and the utility model.

Under the Special Purpose Entity structure

a group of investors will get together and collectively purchase a solar installation.

The solar insolation may be centrally located whereas the investors themselves may be dispersed

throughout the community. Depending upon the number of shares that they own

they can then receive electricity over the life of the system.

This type of structure is not available everywhere

particularly because it's difficult to get the electricity

from where the installation is to where all the investors are.

It requires policies such as virtual net metering which we've discussed in earlier lessons.

The other big barrier to this type of structure is that

the investment tax credit actually can't be taken by those individual homeowners.

The investment structure can actually overcome

a number of the barriers for the special purpose entity structure.

The way the investment structure works

the group investors will again collectively purchase a solar installation,

but rather than receiving the electricity benefits from that installation themselves

they'll actually enter into a third party power purchase agreement with

a customer to take that electricity. Those individual investors will then see

a return-on-investment based on their ownership shares of the installation.

In this case they're not receive the electricity,

the electricity is going to another customer

but they actually receive a return-on-investment and because the electricity

is only going to a single customer, you don't have the same

issues associated with getting the electricity back to those original investors.

The other advantage of the investment model is that in this case

the installation can actually take that investment tax credit.

The third structure that we're going to talk about is the utility model.

Under this model, the utility will actually be the one to collectively invest in the solar installation.

Then individual homeowners can actually purchase shares of the installation from the utility.

and just like under the special purpose entity model

they can then receive the electricity benefits from that installation.

The advantage here is that again you don't have the same administrative

issues that you do under the special purpose entity model

because the utility is directly involved and can administrate the whole process.

They can go through the process of crediting your electricity bill

based on the amount of electricity that's produced depending upon how many

shares of the installation that you own.

In this particular case the utility can't actually take the investment tax credits

that is one drawback.

If you're interested in learning more about community ownership structures

I would suggestion you check out A Guide to Community Solar.

It's a resource for community organizers

and local government leaders who want to develop community solar projects

and it's available through the National Renewable Energy Laboratory

at www.nrel.gov.

That concludes Lesson 4: Introduction to Solar Project Finance

Next up Lesson 5: Local Solar Policies and Programs