Utilities traditionally have met renewable portfolio standards with power purchases from IPPs. But new approaches are allowing utilities to build their rate bases with investments in solar...
Models are evolving for utility-scale solar development.
tax credits and new market tax credits encourage tax credit equity financing where investors invest in a project in exchange for the tax credits received by the project. The tax credits are then used to offset the non-project related income of the tax credit investor.
State programs such as RPS policies and feed-in tariffs also assist the development of the solar market. Tax-exempt bonds are issued by a municipality with interest that isn’t subject to federal taxation and, sometimes, state taxation. Tax-credit bonds allow the bond holder to claim a federal tax credit rather than receive tax-exempt interest.
Many programs offer loans and grants using federal stimulus money. Some such programs have been so popular that they’re oversubscribed. Some states have adopted feed-in tariffs, although the target is mostly smaller-scale residential load projects. Power purchase agreements (PPA) allow agencies, companies and individuals to purchase solar energy from a private solar company, similar to purchasing from a utility.
While understanding and taking advantage of government incentives is crucial, developers of solar projects understand that a long-term PPA is essential to procuring financing for any project. An interconnection agreement, construction permit and favorable internal rate of return (IRR) are also key to getting any solar project financed. Lenders typically expect certain terms and conditions in a PPA and interconnection agreement, such as assignment clauses that favor the lender. The amount of negotiation room in a PPA can differ drastically. Usually the utility has a form PPA that’s provided to all solar project developers. Often the terms differ depending upon the size of the project. Residential-scale projects might simply lack the bargaining power to demand anything but the standard terms, while larger-scale projects might have more success in negotiating price escalators and other developer-favorable terms.
Even with a PPA in place, developers face an uphill battle in securing funding. The pool of tax credit investors has been reduced as a result of the recession and thus the need to reduce tax liabilities. Private equity investors are still investing in solar projects, although the recent trend has been investments in larger developers and portfolios, rather than individual projects, which can make financing more difficult for smaller-scale developers. Further, we are seeing a trend toward tried and true technology and reluctance from investors when it comes to cutting-edge technology, although this is most true for debt financing. Debt markets are even more difficult. Lenders have significantly curtailed lending to projects of the size of utility-scale solar arrays, and, similar to equity investors, often give lukewarm receptions to cutting-edge technology. CSP projects need to be very large, typically a few hundred MWs, in order to be economically feasible. Securing debt financing for such a large project is typically more difficult than for a solar PV project. Tight financing has pushed utilities to adopt ownership models that give utilities control over electricity production as well as the tax benefits that accompany projects.
California, a state with an RPS that required utilities to purchase 20 percent of their electricity from renewable sources by 2010 (although compliance was pushed back until