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On-Site Solar

Select an Ownership Model

Once you have designated specific sites for on-site solar PV and understood their solar energy potential, you need to decide on the system’s ownership model, as this will inform financing considerations and RFP specifications. First, identify which Third Party Ownership (TPO) models are allowed in your state by using TPO maps or reaching out to local solar contractors. In many states, the legality of TPO and the incentives available through TPO models are vague but your legal department or utility point of contact can help clarify.

After identifying which ownership models are available, next determine which best serves your local context. It may be helpful to examine successful examples of each model, such as Washington, DC’s on-site solar PPA, Peralta Community College’s on-site solar direct ownership project, and Lowell’s on-site energy service provider contract (ESPC). The table below summarizes key considerations for the three primary ownership models Financing Mechanisms:
NREL has webinars that can help you decide on a financing approach and begin the solar PV procurement process. Section 7.3 of the DOE’s Solar Powering your Community: A Guide for Local Governments report highlights the advantages and disadvantages of various financing models. And Part 2 of DOE’s Procuring Solar Energy: A Guide for Federal Facility Decision Makers describes general characteristics, provides case studies and information on project process, and lists available resources for various financing models.
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Possible Considerations
Negative
Positive
Direct Ownership
Third-Party Ownershipg
Performance Contracting
Overview

Third-Party Ownershipg

The municipality purchases the system and accepts all responsibility for financing and system operations, maintenance, and performance, and their corresponding risks.

Performance Contracting

A third-party developer purchases the system and takes all operational responsibilities and risks. The municipality typically either enters into a power purchase agreement (PPA), in which the municipality will pay the third-party owner a specified rate for the solar electricity generated over a fixed term (usually 15 to 25 years), or a solar lease, whereby the municipality makes monthly payments over a fixed term to the installer to pay off the solar equipment. Under both TPO models, the municipality may have the option of owning the system at the end of the contract term.

The municipality signs an energy savings performance contract (ESPC), which is a public–private partnership between the municipality and an energy service company (ESCO) that can take the form of either a direct-ownership or third-party ownership model. ESPCs for solar PV are typically used in concert with building energy efficiency upgrades. They include a guaranteed savings requirement where the customer pays a set fraction of electricity cost savings to the ESCO until the end of the contract, after which the customer receives all savings.

Local, state, and federal regulation considerations

Third-Party Ownershipg

Municipalities cannot utilize tax incentives such as the investment tax credit (ITC) or modified accelerated cost recovery system (MACRS)

Certain debt financing may require voter approval

Performance Contracting

Some municipal agencies limit the length of long-term municipal contracts, thus preventing TPO

Many state laws are unclear or explicitly prohibit PPAs.

Can utilize tax incentives such as ITC and MACRS

Many state laws restrict TPO ESPCs for solar PV

Can utilize tax incentives such as the ITC and MACRS

Economic considerations

Third-Party Ownershipg

Requires access to a large amount of capital. This may be financed through:

  • internal revenue, such as tax collection or allocated funds
  • external funds, such as general obligation (G.O.) bonds, low-interest loans, or utility grant funds.

Access to cheap municipal debt

May result in greatest return on investment of three options as the ITC steps down in 2020

Performance Contracting

Little to no up-front capital required

The PPA rate may be lower than the current utility rate and makes for an easily understood economic comparison with business-as-usual rates.

A fixed electricity rate hedges against future electricity market fluctuation

Municipality is paying a cost premium in the PPA or lease price in exchange for the TPO taking on risk

Little to no up-front capital required

Improved PV contract terms when bundled with quick-payback energy efficiency measures

When contracting with an ESPC, a clear funding source is required, although in some cases the ESCO may assist with or provide financing

Risk considerations

Third-Party Ownershipg

Municipality is liable for any PV-related accidents.

Operational and performance risks in the case of natural disasters, unplanned system downtime, or underperformance not covered by the panel manufacturer

Relying on debt financing, such as G.O. bonds, incurs legislative risk because they may require voter approval

Performance Contracting

The owner of the solar PV system has inherent rights to the generated renewable energy certificates (RECs), which are required for renewable energy or carbon goals, so it is important to require municipal REC ownership in the RFP if you want the project to count toward those targets

The set amount paid in estimated savings doesn’t always match actual savings or account for changes in utility rates

If contracted through a TPO structure, the municipality will need to require municipal REC ownership in the RFP if you want the project to count toward your renewable energy targets

Outcome

  • Understand the project’s general economic implications, such as up-front cost, NPV, and IRR
  • Align on an ownership structure to pursue in the RFP process
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