Don’t Be a Party Pooper! How States Can Attract 3rd-Party Owned PPA Financing

Karlynn Cory's picture

3rd-party owners are helping residential and commercial end-use customers finance new PV projects – but only in certain locations.  "Why aren’t they coming to my state", you might ask, "and what can be done to get them here?"

Many end users of electricity would like to use on-site photovoltaic (PV) generation to hedge against volatile electric utility bills and reduce climate change impacts. However, PV systems have high initial costs, and they must be properly operated and maintained to deliver expected benefits.

As a result, several states have created juicy incentives to reduce the cost of PV to customers, or created renewable mandates to increase the number of new systems.  Many of the incentives are production based, to encourage efficient system operation. And the renewable mandates encourage utilities and load serving entities to work with their customers to build new systems.  But – and importantly for the end-users – these programs do not usually address the upfront cost of PV.

Contracts and cash flow in third-party ownership/ PPA model

Source: Department of Energy Solar Program.

Enter the 3rd-party owner, who uses a power purchase agreement (PPA) to finance an on-site PV system. This model—the 3rd-party ownership PPA model—allows a developer to build and own a PV system on the customer’s property and sell the power back to the customer. The 3rd-party owned PPA model enables the customer to support solar power while avoiding most or all initial costs as well as responsibilities for operations and maintenance, both of which typically transfer to the developer. These advantages appeal to owners of residential and commercial buildings who would like to obtain solar PV systems.

However, 3rd-party electricity sales face regulatory and legislative challenges. Several of these challenges pertain to whether 3rd-party owners are deemed to act as monopoly utilities, competitive electricity suppliers, or both depending on the degree of retail electricity market deregulation. For most states, the laws and regulations do not clearly distinguish how 3rd-party owners fit in to the existing system and thus, uncertainty prevails. The definitions of electric utilities and electric services may compel 3rd-party owners of solar PV systems to be regulated by state utility regulators – an uncertainty that these developers will not be willing to take.

NREL released a report exploring these issues that summarizes these challenges, when they occur, and how they have been addressed in five states. As of early February 2010, 3rd-party PPAs can clearly be used in California, Colorado, Michigan, Nevada, New Jersey, New Mexico, Oregon and Virginia; and they clearly cannot be used in Florida (although a solar lease is acceptable). This report also presents alternatives to the 3rd-party ownership PPA finance model, including solar leases (generally available across the U.S.), contractual intermediaries, and standardized contract language, among others.

In the end – as long as a state has adequate incentives or requirements in place, there is a foundation for 3rd-party ownership PPAs to consider entering your market.  But clarity for the 3rd-party owners is needed in state law and/or regulation, so they can understand their ability to conduct business in a state without being subject to oversight and regulation by utility regulators.