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Clean-tech deals: Solar power purchase agreements

San Diego's gift of perpetual sunshine is ideal for generating solar electricity. Three solar power systems recently completed in San Diego demonstrate the technical and financial viability of solar power as a source of clean energy. They also illustrate the use of power purchase agreements, or PPAs, to finance and develop solar power systems without upfront capital costs to the customer.

Solar projects and solar PPAs are now set to receive an added boost from provisions in the Obama administration's stimulus package to spur investment in renewable energy projects.


Snapshot of three San Diego solar projects

Solar Power Partners, a California-based solar power provider, announced in March that it had completed solar power systems for three institutions in San Diego -- a 357 kilowatt system at Point Loma Nazarene University, an 878 kilowatt system for the University of California,San Diego, and a 1.1 megawatt system for the Valley Center Water District.

According to Solar Power Partners, the system at Valley Center is expected to produce an estimated 2.1 million kilowatt hours of solar electricity a year, which offsets the annual equivalent of burning 171,283 gallons of gasoline or spewing 1,509 metric tons of carbon dioxide into the atmosphere. In a rising cost environment for conventional energy, solar power from the system at long-term stable prices will also reduce the district's overall power costs. The systems at Point Loma Nazarene University and UC San Diego are expected to produce comparable results, albeit scaled to their smaller size.

All three systems were financed and developed by Solar Power Partners using PPAs under which the company will also own, operate and manage the systems. The host institution in each case pays only for the electricity produced over the term of the PPA.


How solar power purchase agreements work

PPAs for solar power systems are a commonly used mechanism for providing host customers with solar electricity at a negotiated, long-term and stable price, with no initial capital outlay. Specifics vary from case to case but a "model" PPA works like this:

  • The host customer contracts with a solar developer to design, finance, install, operate and manage the system;
  • The host customer agrees to have the system installed on its property, to work with the developer to enable efficient installation, and to provide access to the system for monitoring and maintenance; the host customer does not own the system or pay for its construction, but agrees to purchase all the electricity it produces at a negotiated rate for the term of the PPA;
  • The developer engages financing partners -- a lender to provide construction and long-term debt financing for the system, and one or more investors to provide equity financing;
  • The investors and developer form a special purpose entity to own the system, allocate the tax benefits of ownership, and receive the income from electricity sales;
  • The host customer pays the special purpose entity for the electricity produced by the system; the payments are determined in advance, so that the customer knows what it must pay for power from the system over the life of the PPA, which is usually 15 to 20 years; the payments are set at a level that will allow the special purpose entity to amortize the debt incurred for the project and return a profit to its owners. In many cases the host customer has an option to purchase the system at fair market value at specified times during the term of the PPA, or at its end. Electric utilities may also support the project through "net metering," where any energy produced by the system but not used by the customer is fed back into the utility grid and credited against the customer's electricity bill.


    Stimulus package

    Most notably for solar PPAs, the Obama administration's stimulus package -- the American Recovery and Reinvestment Act of 2009 -- creates a new program through the Department of the Treasury to provide cash grants equal to 30 percent of the cost of qualifying solar property placed in service during 2009 and 2010. Taxpayers may elect to claim the cash grants in lieu of renewable energy tax credits. The cash grants are a source of revenue for project financing, and are expected to provide a strong investment incentive for owner-investors who cannot make use of tax credits.

    To spur investment in equipment, the package also extends a 50 percent "depreciation bonus" for qualifying capital expenditures on solar equipment placed in service in 2009. This means half the equipment cost is deducted in the year the equipment is placed in service, with the remaining 50 percent depreciated according to regular depreciation schedules. For owner-investors that can take advantage of the accelerated depreciation, this also provides additional cash for the financing of a project.

    The stimulus package as a whole provides some $43 billion for various energy-related programs, of which a significant portion is available for renewable energy development. San Diego has a growing clean-tech industry and world-class institutions capable of developing clean technologies for the future. For San Diego businesses the clean-tech opportunities are there to be seized.


    Kaplan is an international corporate and business law attorney in San Diego. Send comments to editor@sddt.com. All comments are forwarded to the author and may be used as Letters to the Editor.

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David Calderon 9:27pm March 4, 2010

I have 560 acres in San Diego, and need a PPA to start the project. 310 461 4130 cellular 310 461 3535 office