Third-party System Ownership
About Third-Party Ownership
Third-party-financed PV installations are owned and operated by another entity, usually a solar developer or its investors. The school then pays the developer or investors for the electricity produced by the panels, sometimes at a rate lower than what they pay their utility.
Third-Party Ownership Models
A number of different third-party ownership models exist, most of them based on Power Purchase Agreements.
Power Purchase Agreement
The most common third-party ownership approach is called a Power Purchase Agreement (PPA). This approach is advantageous for schools because:
- PPAs allow the school to go solar without a large initial capital outlay;
- The project developer is responsible for maintaining the system for the length of the contract; and
- As private entities, developers are able to take state and federal tax incentives and pass those savings onto the school.
Third-party ownership does have some disadvantages, however:
- A PPA is a complicated transaction and schools must dedicate time and money to ensuring that they negotiate a fair and equitable contract with the solar developer.
- Under a PPA agreement, the solar system’s SRECs are usually allocated to the investor. The school is therefore not able to claim the environmental benefits associated with clean electricity production (i.e., claim that the school is 100% powered by solar energy).
- At the end of the PPA contract period (usually 10 to 20 years), the school will not own the PV system (this is required by law so the owner can take the federal tax incentive). As a result the school must either choose to purchase the panels at fair market value or have the panels removed by the developer. Schools should make sure their PPA contract includes language that requires the developer to remove the system at no additional cost at the end of their contract, to avoid additional expense if they choose not to purchase the system at the end of the contract.
- Most PPAs apply an escalation rate to the solar-produced energy they will be providing. Sometimes those escalation rates are very steep, so make sure you look very closely at the fine print of the contract.
This approach to financing solar is only available in states where PPAs have been authorized.
As with any financing arrangement, it is important to have a committee in place to ask the right questions. Issues to address when considering a PPA include: Who owns the system? Who will maintain it? What happens to the system at the end of the 20-year contract period? What rates will the school pay for electricity over the life of the contract?
Community-Owned Power Purchase Agreements
Community-owned PPAs are similar to traditional PPAs, with the exception that members of the community create a third-party entity to own the system on behalf of the school in order to take advantage of tax incentives. This third-party entity (made up of community members) owns and operates the solar system and the school pays this entity for the electricity produced by the panels on its building.
The benefit of a community-owned PPA is that members of the community can support a solar project financially while still earning a modest return on their investment. Walnut Gulch School in California was one of the first schools to pioneer the community-owned investment approach and many others have since followed. Sidwell Friends School in Washington, DC teamed up with Common Cents Solar of Chevy Chase to install 120 solar panels on its gym roof. To fund the $200,000 cost of the project, members of Sidwell Friends Community were invited to purchase solar bonds in increments of $5,000, on which they earn a modest rate of return for about 10 years. Sidwell Friends will purchase the solar-generated electricity at fixed rates that protect it against inflating energy costs. After the investors are repaid, the school will reap solar energy at no cost for the rest of the predicted 30-year life of the system. The solar panels will also offset approximately 1 million tons of greenhouse gases, fulfilling the school’s commitment to a reduced carbon footprint.
This approach was also used to install solar on a church in University Park, MD. If your school is interested in this model, the University Park Solar LLC can provide technical assistance and some of the documents necessary to create the third-party entity.
Similar to a Power Purchase Agreement, the “Morris Model” (so named because it was developed in Morris County, New Jersey) is a hybrid approach that allows a private solar developer to become the owner of the project. The state or local government then provides the solar developer with low-cost project capital by issuing debt (such as bonds). By providing low-cost capital to the developer, the local or state government is able to negotiate for much lower rates on the electricity produced by the solar panels.
Since Morris County’s first bond issue in 2010, the model has also been replicated and refined in Somerset County, NJ. Eight other New Jersey counties are also setting up their own programs. The Morris County schools district also went solar using this approach.