Power Purchase Agreements: Can I Develop Renewable Energy and Keep the Carbon Too?
by Dano Weisbord, Environmental Sustainability Director, Smith College
(This article appears in the June, 2010 issue of The ACUPCC Implementer)
Smith College recently installed a 29 kilowatt photo-voltaic (PV) array on our Campus Center. We developed this project using a power purchase agreement (PPA). The PPA is an increasingly common model for developing renewable energy projects because it requires no up-front capital. Our Campus Center project is great, but given the amount of power we produce, it is more a demonstration than a significant new source of renewable power for campus. I am glad it is small-scale because we learned some critical lessons about PPAs that would lead us to do things differently the next time around. First, we learned that most PPAs include terms that would make it unethical for us to count as “carbon free” the electricity produced. Second, we learned how we might develop a PPA that would reduce the sacrifices to our carbon emission reduction efforts.
Before I discuss the relationship between PPAs and carbon-accounting, it is important to understand how a PPA provider makes a profit. Smith College contracted with Community Energy Inc. (CEI) for our system. Our central agreement terms were as follows: Smith College gave CEI an easement to the roof of our Campus Center plus permission to make roof penetrations and access to our electrical distribution system. Smith agreed to purchase all of the power supplied by the PV array. CEI will own and maintain the array for 20 years. Over that term, we will pay CEI a fixed price for electricity produced by the system. In our case, the price paid is competitive with the cost of grid-supplied electricity. Smith College did not provide any capital and need not maintain the system. If production is interrupted, we pay only for electricity that is produced.
For-profit PPA providers like CEI finance their projects by bundling a number of revenue sources and incentives. These include:
- federal incentives for renewable power development (the investment tax credit and accelerated depreciation on the cost of the system);
- the customer payment per kilowatt hour (kWh);
- any direct incentives for construction (usually provided by states); and
- the sale of renewable energy credits (RECs).
The sale of RECs represents the component of the financial bundle that should concern ACUPCC signatories or other intuitions committed to reducing carbon emissions. If the RECs associated with your project are being sold into the renewable energy credit market to help finance the project, your institution may not count the solar electricity produced as carbon-free. To sell the RECs and take credit for them in your inventory would be inconsistent with the Greenhouse Gas Protocol, or in essence “double-dipping.” At Smith, I will actively subtract the 30 megawatt hours produced by our system each year and add 30 megawatt hours of grid produced electricity into our scope 2 emissions.
When I first learned that the sale of RECs would not allow Smith to count the project as “carbon free,” I decided that if we were to do more (and larger) projects they would have to be self-financed. This was disappointing because Smith College cannot take advantage of the federal incentives that are pitched to for-profit organizations; therefore, the cost of any future project would present a significant challenge.
Then I had the opportunity to be a webinar co-presenter with Steven Strong of Solar Design Associates. Steve is a luminary in the solar field. On the webinar, he explained that PPA providers make most of their money in the first five to six years of the agreement; and therefore, it might be possible to negotiate a “modified PPA” in which the RECs revert to the college or university after the initial period. I decided to find out for myself whether a PPA provider would consider a structure where the RECs revert to Smith after the first five years into a 20 year contract. I called Jay Carlis, Vice-President at CEI to propose this structure. I was surprised by his answer. Jay suggested that from a business standpoint, it would be beneficial to the project if part of the package included customer purchase of the RECs in the later years of the agreement. This is because most REC markets are both variable and subject to regulatory changes. As a result, projects that return the RECs to a college or university after an initial period are likely to have easier access to financing. Jay suggested that “the certainty of REC values provided by a contract for the later years of project life could be a real asset to the project when it comes to financing.”
If you are considering renewable power for your campus, you want to be able to count the power as “carbon-free,” and you do not have ready access to capital, a PPA may be the right solution. However, it is critical that you discuss (and perhaps negotiate) the disposition of RECs within that agreement. Modifying a PPA will lead to higher costs per kWh; however, I believe that it may still be more cost-effective than trying to finance the project yourself.
You are welcome to look at Smith’s real-time production at:
Dealing with RECs is not the only issue involved in negotiating a PPA. Consulting legal counsel is highly recommended. Here are a few additional items you should consider negotiating into your agreement:
- Be sure you have an exit clause if it the structural integrity of the roof of involved buildings proves insufficient prior to installation.
- Approval of installation plans (both structural and electrical)
- Maintenance of roof warrantees and protection from potential damage caused by installation
- Approval of all sub-contractors
- Address what happens at the end of the agreement. Who owns the system? Who is responsible for decommissioning?