WHAT HAPPENS WHEN AN ON-SITE SOLAR PROJECT ISN’T PRACTICAL?
Advances in solar technology and a sharp decline in equipment costs have transformed electricity customers from “price takers” to “price choosers.” On-site solar customers receive electricity at a fixed, predictable price. Even as energy costs rise over time, the price of solar power remains constant. Stable renewable energy contracts hedge against electricity pricing hikes and allow customers to support the construction of new, clean sources of power. Thousands of electricity customers have taken control of their energy procurement with on-site renewable generation.
However, many organizations, including universities, municipalities, and businesses, simply don’t have sufficient rooftop or open space to host solar projects large enough to make a significant impact on utility bills. Some organizations don’t own their facilities or they inhabit buildings that are shaded.
What’s needed is a development model designed to meet the needs of this underserved, mid-range market. With that in mind, one model rising in popularity is off-site solar, supported by a power purchase agreement (PPA).
How It Works
Like standard on-site solar PPAs, off-site arrangements enable customers to purchase and own the physical energy produced by a PV system without the upfront cost burden. Because PPA customers pay a fixed price for each kilowatt-hour produced over a contract term—generally in the ballpark of 15-25 years—organizations receive a hedge against rate increases, capturing both the economic and environmental benefits of solar power. What’s truly groundbreaking is that when systems are built off-site, developers are no longer constrained by property size or rooftop orientation. Instead, developers can ensure each system is appropriately sized—typically in the range of 2–50 MW—to meet a significant portion of the customer’s electricity needs. Organizations otherwise left out of the solar market can now access solar systems that benefit their bottom line without incurring any upfront costs.
Off-site PPAs in Action
In 2014, the National Aquarium in Baltimore entered into an off-site power purchase agreement for a 4.3 MW solar electric project. The system will provide enough clean power to meet nearly 40 percent of the National Aquarium’s electricity needs for the next 25 years. By removing the sizing constraints inherent in an on-site project, the National Aquarium was able to tailor the project to meet its unique energy and financial profile. The National Aquarium’s utility partner, will own and operate the system and supply the Aquarium with the balance of its power needs.
Everyone Wins
The off-site PPA model benefits more than just the power customers. For utilities facing an evolving electricity market, off-site solar also provides an opportunity to retain its customer base, as off-site PPA users still rely on (and pay for) the utility distribution and transmission infrastructure. These large-scale projects also support grid resiliency, a key concern for utilities faced with managing the integration of many new distributed solar assets.
This model can also unlock some surprising benefits for the local community housing the project. For landowners, systems can generate important revenue on otherwise unusable land, such as unproductive farmland or brownfield sites. The solar project development process has virtually no negative environmental impact, and offers meaningful jobs and tax benefits to the local economy.
In nearly all cases, third-party project financiers or independent power producers (IPPs) own and operate the systems and execute the PPAs; managing the important operational details on behalf of the customer. For these financiers, off-site solar projects represent reliable, low-risk investment opportunities. The recent emergence of new, creative financing vehicles (e.g., “YieldCos” and solar asset-backed debt funds), has significantly reduced the cost of capital for solar projects and the cost of power for the end-user of the electricity—making projects more attractive for investors and customers alike.
Renewable project cost reductions have made clean power solutions more accessible than ever. Many customers, having faced volatile electricity prices in the past, realize that now is the time to participate in the fixed-price renewables market. Off-site solar projects offer price reliability to customers. The model accommodates customers’ existing power consumption and power purchase profiles to optimize the benefit of renewables. Off-site solar advances the goals of financiers, utilities, landowners, and communities, and represents a vital new component of our evolving energy system.
Volume: May/June 2015