At the beginning of June 2015, ILSR released its Public Rooftop Revolution report, which described how cities across the nation put the shine on municipal rooftops with more than 5,000 MW of solar. That 5,000 MW is as much as one-quarter of all solar installed in the U.S. to date — and many cities could install solar little or no upfront cash. The energy savings would allow cities to redirect millions to other public goods.
ILSR’s Director of Democratic Energy John Farrell presented the report’s findings in a webinar, hosted by Applied Solutions, on June 9, 2015. But time constraints meant many unanswered questions. In the first guest-hosted episode, John answers questions from Carolyn Glanton of Applied Solutions on everything from the expiration of federal tax credits to the payback period for municipal solar arrays.
Rooftop Revolution Webinar – Unanswered Questions
Read the Public Rooftop Revolution report
Q: What opportunities are available with the expiration of the federal tax credit for wind and solar?
John Farrell: That’s a great question. The way I look at this is that all of the financial and financing structures revolve around that federal tax credit, the 30% federal tax credit. That means that any entity, whether it’s a for-profit or a nonprofit, is trying to find some sort of partner that can take advantage of that and lower the cost of the installation.
But these middle always take a cut of that. And it creates problems. So for example, during the financial crisis in 2008, when a lot of the Wall Street firms that had traditionally taken these incentives, did not have any tax liability because they were losing money hand-over fist. All of a sudden it was difficult for solar developers, whose businesses were continuing to grow, to find partners that they could work with for financing. Because nobody needed these tax credits. The federal government had to step in and transition it to a cash grant for a two-year period between 2009 and 2011.
What I see then, with that background, is that the expiration of those tax credits is going to give us a chance to look at financing tools that don’t involve those middleman, that there might be institutional investors that, for example, expect lower returns than Wall Street firms that will be willing to lend money at lower interest rates and lower project costs. And I think there’s already some evidence that suggest we could cover the loss of at least one of those tax incentives, the tax credit or depreciation, simply with lower financing costs in the near. So there might be some really good opportunities to expand lower cost financing and make it a bunch more accessible to different entities.
Q: Do you have any advice on financing for countries other than the US, such as local councils in Africa? What kind of legal issues does one have to put into consideration in such a venture?
John: I’m going to have to be very general in my response, because I don’t have kind of expertise with the finance and policy structures of other countries, or very limited experience. What I would say though with that policy framework is that policies like what Germany and Denmark and other countries have used, called a feed-in tariff (it’s much more common in Europe), are much better in terms of setting up the financing structure for renewable energy projects. They basically say anybody who wants to connect to the grid with a wind or solar project can get a guaranteed 20-year project at a guaranteed price, enough to make back their costs and make a small return on investment. These have been very successful at allowing a wide range of ownership structures for projects, much more so than in the United States where we’ve relied on tax incentives.
So I think that’s one piece to look at. And the other is this issue of finding the right ownership structure. Something I’ve written about before is that it’s very difficult to have, for example, community-based renewable energy projects in the United States, because it’s difficult to align the kind of legal entity that you have, like a nonprofit organization with tax incentives. So a lot of organizations that we would use for community-based projects aren’t eligible to get those incentives and therefore have to pay a higher price.
Q: Can a municipality install solar for benefits of its residents yet? In other words, can a municipality install a large array to feed back into the grid and benefit its residents?
John: This is a great question, because we’re sort of testing that theory a little bit in Minneapolis right now. There are two answers to this question.
The first is, if the municipality owns its own utility, therefore has its own city-owned utility like some 2,000 cities in the U.S., yes, you can do that already. Because you can just decide you are going to purchase soalr energy systems for local consumption, for the electric grid, for all the customers. And you see that, for example, in San Antonio, at Austin Energy in Texas, the Sacramento Municipal Utility District in Sacramento, are already able to go out and purchase solar on behalf of everyone. That opportunity is already there.
What we haven’t seen as much of is cities without utilities purchasing solar on behalf of their residents. And it’s a little bit tricky. There are a couple ways this could happen. One is, and we’re looking at this right now in Minneapolis as part of a city-utility partnership program, is could the city get some kind of tariff, or price that it would pay, to buy energy, say, from a wind developer outside of the city that the utility would basically have an access fee to use the grid, that would allow the city to go out and purchase clean energy.
As far as I understand it, that’s something that would only apply to the city’s own internal electric, and not the use for residents and businesses. But it would potentially, by lowering the cost of energy, be a benefit by freeing up more of the city’s budget for public priorities. There are always ways that the city can own their own wind and solar arrays and finance them themselves and simply sell the energy to the grid and reduce the energy costs to the city.
As far as installing solar for the benefits of its residents, sort of like community solar, I think one other possibility is with community solar arrays, where you can have the city as an anchor tenant on a community solar project, either built within the city or outside the city. The city could subscribe to purchase half the energy of that solar array and the other residents and businesses could subscribe to the other portion. It would be the city helping make that project happen and by being anchor tenant, making sure it’s financeable, but it might be residents and businesses that are able to subscribe and lower their energy bills.
There haven’t been, in the structure of that question, I catch this notion of the city doing it in a way that is of direct economic benefit to the residents. There haven’t been very many examples of that because you get into some interesting issues of spending public dollars for private benefit.
Q: How about Gross Metering for solar rooftop project?
John: I have to confess, I’m not sure I understand this question. [Carolyn says it might be about net metering.] The only thing I can think of is the difference between net metering and a feed-in tariff.
In net metering, the solar array is attached to the same meter and it simply spins it backwards, offsetting your energy consumption.
The mechanics of a feed-in tariff require two meters, because you are selling all your energy you’ve produced to the utility, and continue to the buy all the energy you consumed from the utility. So when you talk about gross metering, I think about the process of you selling all the energy to the utility for solar rooftop projects. The problem with that is most utilities, when you ask them how much they’re willing to pay for power that you’re simply putting on the grid, it’s a very, very low price that reflects what they can buy on the wholesale market. I don’t think that’s a very good concept. You have to have usuall,y with a feed-in tariff, coming to a value that is attractive to the customer as well as the utility.
Q: Can you or john point me to PPA providers who work in Ohio? (I did ask this during the webinar but he sent a follow up email asking again)
John: That’s a tough question. Quite frankly, I can only think of this in the context of what I would do. I would get on Google and start looking for somebody who can sell me solar in Ohio, and I would probably look to some kind of third-party rating service like Angie’s List to find out whether or not they have a good record to the stuff they’ve delivered, or ask for some references from customers they’ve done a power purchase agreement so I can call them up myself and ask how they went, whether or not they’re saving money.
That’s actually a fairly important issue. I finished up a conversation with the Sacramento Municipal Utility this morning, and they have done some surveys with their customers about the power purchase and leasing contracts that they’ve signed. Only about 20% of them, in the admittedly small sample size that they had, were actually saving money with these lease and PPAs. It is a rather important issue, that you’ve done your homework and found the right person that will actually result in you saving money on your energy bill, if that’s your primary motivation.
Q: Can you quickly explain again why exactly a third party ownership is needed?
John: The simple answer to that is that it’s not needed. You can certainly do solar without needing a third party. A city can do solar without a third party. It’s just that, given the structure of our financial incentives make it easier if you have a third party. The federal tax incentives aren’t available to cities that are tax-exempt. it’s only through a third party that they can access those incentives.
And second of all, cities are always having lots of different priorities competing for their budget dollars. And so a third party that can offer a zero money-down opportunity for a city, not on their capital budget or their operating budget, is very attractive for a city that sees itself as cash strapped.
Q: Does Michigan have 3rd party ownership agreements?
John: I don’t have the map in front of me, but you can find it on the website and in the report. I would just refer folks there. [Michigan does allow third-party PPAs.]
Q: How would the cash flows work under a PPA? Would the municipality have to pay anything up front?
John: That’s a great question. As I understand it, most power purchase agreements don’t have an upfront charge. That’s not to say what somebody would offer you if you went out for a bid today. And with cash flows, it varies. Basic principle for a power purchase agreement is that you sign up for an energy cost for a 15 to 20-year term.
But it may mean you pay a little more right now than yo have been paying, but that you have a fixed price for twenty years. It might mean you pay a little less than you’re paying right now, but there is an inflation adjustment on the amount you pay on that agreement. And the assumed savings come from that inflation rate and that actual inflation rate of electricity prices. For example, if your PPA electricity prices go up 1% a year, and you anticipate electricity prices to rise 3%, so that difference between 1% and 3% is additional savings.
But nobody knows what’s going to happen to electricity prices over the next 15, 20 years. They’ve been turning up sharply over the past decade, 4 to 5%, but there’s not a guarantee it’s going to continue that way.
Q: Thank you for very interesting webinar. My question is from Bosnia. Can you please explain in short steps how to do to investigate buildings potential for solar?
John: I can say nothing at all about the particular situation in Bosnia, but obviously one of the first things you need to do is get a bid from somebody that knows what they’re talking about. So find solar installers, find contractors who you feel like are credible, and have them give you a quote, have them tell you about the opportunity.
That’s what I did for my own home. Somebody came out, they looked at my house, said there’s basically nowhere where I can put solar on here. You garage looks good. We’re going to get on your garage to test how much sun it’ll get over the course of a given year with a little measuring tool that they had. We’re going to measure it. We’re going to look at the structural beams underneath it. We’re going to make sure it’s able to bear the weight of a solar installation. We’re going to look at your meter and where we would do all of that.
All of those things would be involved with any building, and I would say finding an expert is your first step.
Q: Can you discuss transaction cost basis by type of method and if/how it has changed over time?
John: So I think this question was specific to this issue of third party arrangements for cities and the transaction costs in getting the third parties to access the tax incentives. I don’t have a very deep level of understanding about how those calculations were made. I have relied on reporting from the National Renewable Energy Laboratory and others who have studied in aggregate those transaction costs and found that, in general, about 50 cents on the dollar is lost to cities working with a third party as a result of the returns required by that partner. I don’t know that I can add more detail.
I would add one other thing, however. During the time in which the federal government allowed the cash grant option, there were many more community-based renewable energy projects that were financed and a higher proportion of the money from the federal government went to those projects. There is a distinction as the way we provide those benefits, and if we give it away as a cash instead of a tax benefit, we can get more of that money to the ultimate customer because it doesn’t require partnership with these tax entities. I can’t get into more detail than that.
Q: Why no transaction cost for private sector — don’t they also have to pay legal fees and other costs?
John: The transaction costs that I was specifically talking about was that the city would have to partner with a private entity to access tax incentives, and a private entity like a small business or an IKEA, whoever wants to do solar, may have a tax appetite that they can offset with the tax incentives themselves that don’t require a third party.
So I wasn’t speaking specifically to the transaction costs writ large with installing solar, of which legal fees and permitting would all be a part, but simply the transaction cost to access the tax incentives, which only applies to nontaxable entities like cities.
Q: Have you worked with TVA installing a solar array
John: This is an easy one. No.
Q: Why municipalities don’t set incentives for private citizens to use their roofs to generate solar power? The potential could be far larger, is that right?
John: It’s kind of a complicated question. There are a lot of different was that municipalities encourage people to use solar.
You can throw money at it by giving incentives to people to install solar, but you’re essentially competing with other public priorities. Who’s to say that getting a private individual to put solar on their roof for their private benefit, is better than road maintenance or libraries? That kind of question is always going to be a big debate at cities, and one reason why cities haven’t always put their own money up to incentivize the installation of solar.
I think the bigger question is: what is it cities can do and why haven’t they done everything they can to encourage private sector development. That gets into that issue I talked a little bit about in the presentation previously about permitting and licensing rules and other ways the city’s own rules and regulations impact the private market for solar development. VoteSolar has done some remarkable work, others been cataloging and mapping out leading cities that have been reducing those costs and what are the best practices.
In the interview I had with Brent Sloan of Sacramento Municipal Utility District this morning, he talked about how they went — this is a municipal utility, mind you. They serve several different jurisdictions — when they were interested in doing solar, they went out and talked to all seven jurisdictions, and said, “Here’s our package for distributed solar. Can you work with us on minimizing the costs to our customers from permitting and those other things.”
There certainly are opportunities for cities to make solar more economical and realize that greater potential that exists on their rooftops, but using their general fund dollars to subsidize is generally not seen as an appropriate use of city funds relative to other city priorities.
Q: What is typical payback period for municipality on a project they might install?
John: If there was a typical city, I could give you a typical answer. I think it really, as we highlighted in the Public Rooftop Revolution report with our five featured cities, we have such variation in two really key factors.
One is, how good is your solar resource? Lancaster, CA, gets something like thirty more kilowatt-hours out of a similarly-sized solar array in Kansas City, MO, a given year. The more solar you produce, the more cost you’re going to offset from a similar sized solar array.
The second factor is, what’s the cost to buy electricity? What’s the cost you’re offsetting with that solar installation? You have in New Bedford, MA, for example, utility rates that are 15 to 20 cents a kilowatt-hour. On the other hand, you have Kansas City, you’re offsetting utility electric prices at 8 to 9 cents an hour.
There’s just an awful lot of variation. Some of those sunny places with high electricity prices, the payback period could be as low as five years, and some places it might be more like 20 to 25.
In California, you mentioned the ability aggregate net metering accounts. Do you happen to know the size limit of the aggregate virtual net metering for CA, and specifically, PG&E?
John: No, I don’t know much about those aggregation limits. It’s an interesting point, because somebody from Virginia specifically followed up with me after the report, because we had talked about the power purchase agreement being legal in California. They said, “Actually, at the state level, there’s a 50 megawatt cap total on all for the amount of capacity that is contracted under a power purchase agreement.”
Those kinds of state level details are more than what we have the time to be able to investigate. No, I don’t know the answer to the question or for California and PG&E.
In the webinar, you mentioned that bureaucracy can be a barrier to rooftop solar. Are you suggesting an alternative structure to bypass this problem and implement the programs? Or do you have any suggestions for working around the bureaucracy?
John: No, I can’t say you’re ever going to go around the bureaucracy. That’s a core piece of the functioning of a city which has so many resopnsibilities that need to be dealt with all at the same time. You simply have to have different departments and specializations and sometimes there’s not a lot of overlap with different silos, and that can make it challenging.
Frankly, I think that the examples I’ve seen of cities overcoming them really involve one of two things, or probably both.
One is political will and some desire from elected leadership saying this has to happen. That gives cover for folks who are within their different silos to go outside of what they’ve done before and rather than talk about things in the context of, “Well, this is what it will cost us to do that,” it will lead them to say, “Here’s how I think we can do things at a lower price.”
The second thing is simply having conversations with all the different people who are involved. Between the folks who license installers of solar and the folks who do permitting for solar and the building permitting folks and the inspectors and all those different folks. Getting them to sit down and say, “OK, well when we have a solar array, what is it we’re doing right now? how many times are we going to visit the property? How many times are we going to look at that solar array? Is there something that we can do different that would be more efficient from our perspective but also the customer’s perspective that would allow us to lower the price?”
I think that’s something we found with the best practices for solar rules in cities is that, when we use best practices, we’re not cutting around bureaucracy and setting up your system. It’s a matter of a city doing some honest accounting for how much it actually costs us and how can we be as efficient as possible with our resources and still have safely installed solar arrays. The answer usually is, there’s quite a bit we can do differently, and it will make everybody in the end happier.
This is a special edition of Local Energy Rules, an ILSR podcast with Director of Democratic Energy John Farrell that shares powerful stories of successful local renewable energy and exposes the policy and practical barriers to its expansion. Other than his immediate family, the audience is primarily researchers, grassroots organizers, and grasstops policy wonks who want vivid examples of how local renewable energy can power local economies. It is published irregularly. Click to subscribe to the podcast: iTunes or RSS/XML