Solar PPA v2.0: Hybrid Morris Model Saves Public Facilities Money

Claire Kreycik's picture

An innovative solar power purchase agreement (PPA) financing arrangement has allowed some schools in New Jersey to save approximately 60% from their average utility rates of 15¢–16¢/kWh. Thirty-one public facilities in Somerset County will pay 4.9¢/kWh for their power this year, escalating to 7¢/kWh in 2026 [1].

 The “Morris Model”—so named because it was developed in Morris County, New Jersey, makes the private solar developer the owner of the project for federal income tax purposes and a lessee for state law purposes. The overall benefit of this hybrid approach allows state and local governments to bargain for a better solar PPA deal. The negotiating point: they can contribute low-cost project capital through a debt issuance. Since Morris County’s first bond issuance in 2010, the model has also been replicated and refined in Somerset County, New Jersey. When I spoke with Steve Pearlman, the attorney supporting the program, he mentioned that eight other New Jersey counties are setting up their own programs.

If you are a state or local official, this success story may beg the question: How can I achieve these savings for my solar PV projects?

Wider Replicability is Possible, Given Some Prerequisites

In my interview with Steve Pearlman of Inglesino, Pearlman, Wyciskala, & Taylor, LLC, he emphasized that the model can be adopted on either a state or county level. He suggested that in order to implement such a program, a jurisdiction would need to consider the following:

  • A “deep pocket” is required to back up debt. It helps if the regional government has a strong credit rating and taxing authority. Both Somerset and Morris County have the highest possible credit rating (AAA), which was important to making the deal work.  Pearlman pointed out that a county would likely need at least a single-A rating. Thus, balance sheet, market access, or other debt issuances may stand in the way of replicating the model.
  • Additionally, though not a pre-requisite, the use of a conduit issuer, might facilitate the model. A conduit issuer (e.g. a county improvement authority (as in New Jersey), a non-profit issuer, or an industrial development authority) can issue debt on behalf of a local government, who guarantees the debt. Whether a bond is issued directly - or by a conduit - impacts credit standing with rating agencies. Direct obligations count against how much debt the government can take on, while guarantee obligations do not.

Furthermore, certain laws are essential for making it happen:

  • Energy law: States must have a sufficient renewable energy standard or similar policy of renewable energy support to attract third-party developers. For example, high demand for solar electricity has translated into significant revenues for solar developers in New Jersey. Solar renewable energy certificate (SREC) revenues can comprise around 40% of a project’s internal rate of return (IRR) in the state[1]. 
  • Law that enables third-party ownership model: In some states, laws pertaining to public utilities make it challenging for third-party developers to own a host’s solar PV system (see an NREL report on the subject). DSIRE has a resource about where laws are supportive of third-party ownership. Analysts note that the resource is not intended to be legal advice.
  • Favorable bonding laws: Requirements and regulations surrounding debt issuance vary by state. The model is easiest to implement if there is a streamlined process for bond approval. If voter referendum is required (e.g., under an unlimited tax general obligation pledge), issuing a bond for this purpose may be more burdensome. If the goal is solar development in school districts, it may be worth looking into issuing a bond at the state level because school district funds are often backed by dedicated sales tax revenue. New Jersey bonding law is conducive to the model. In New Jersey, there is a mechanism for streamlined bond approval, which does not require voter approval.  It’s important to note that this structure adds an extra layer of liability for the municipality—it is liable to bond holders, as well as the third-party developer, for making PPA payments.
  • Public contracting law: Multi-year contracting on the order of 15 or more years is important for enabling a third-party PPA. 
  • Procurement law:  Procurement law may vary significantly from state to state. Municipalities are often obligated to conduct competitive solicitations [or request for proposals (RFPs)] for products and services. However in certain cases, municipalities may be able to enter into direct contracts (i.e., for professional services, where a contractor’s license would be pulled in the case of non-performance).
  • In some states, municipalities may be required to select the lowest bid resulting from an RFP. If state law is permissive, municipalities may be able to enter contracts resulting from RFPs that weigh criteria beyond price. New Jersey has a competitive procurement law [Local Public Contracts Law (N.J.S.A. 40A:11-4.1(k)] that allows local government agencies to weigh criteria beyond price in a competitive solicitation for services [2]. In other states, public contracting laws may or may not be conducive to this hybrid PPA model. A state may need to pass legislation that allows competitive procurement in order to pursue this model. 

The replicability of the Morris Model, other technical details, and insights for implementation will be explored further in a case study in the upcoming months. Stay tuned.

References:

[1] Perlman, S. (25 February 2011). “Solar Power Purchase Agreements (PPA): Financing Options for Local Governments – Hybrid Option (Morris Model).” The Council of State Governments, Eastern Regional Conference: Webinar.

[2] Local Public Contracts Law Home Page. New Jersey Division of Local Government Services. N.J.S.A. 40A:11-4.1(k)

SRECs

Hello, Can I ask what the SCRECs are which can add to project revenue? I am unable to access the webinar. thank you, Amy (SREC) revenues can comprise around 40% of a project’s internal rate of return (IRR) in the state[1].