Georgia’s Municipalities Can Gain Budget Certainty by Going Solar via a SEPA
Georgia’s cities, counties and school boards (collectively referred to as “municipalities” in this article) have a powerful tool that they can use to lower their energy expenses: on-site solar electricity. Up until recently, municipalities had to purchase solar electricity systems to receive the benefits of solar electricity. That changed with the passing of the Georgia Solar Power Free-Market Financing Act of 2015 (commonly referred to as “HB 57”).
HB 57 allows a third-party solar company to own a solar system located on a property and to sell the solar electricity generated by the solar system to that property’s owner via a Solar Energy Procurement Agreement (SEPA). The customer purchases solar electricity with no upfront costs while the owner of the solar system generates income and monetizes the federal tax incentives. SEPAs are known as Power Purchase Agreements (PPAs) in the rest of the country.
While this arrangement is new to Georgia, it has been successfully used by municipalities in other parts of the country. For example, the District of Columbia has a 20 year PPA with Nextility for the deployment of 11.4 megawatts (MWs) of solar photovoltaic (PV) systems on roofs and parking lots of 34 District-owned facilities. The District is projected to save $25 million during the PPA term through the purchase of cheaper solar electricity and avoided capacity charges for peak demand.
Summary of HB 57
Any municipality seeking to take advantage of HB 57 should keep the following key details of the law in mind:
- The law only authorizes solar systems that generate electricity fueled by sunlight (e.g., PV panels).
- The solar system must be installed on property owned or occupied by the entity purchasing the system’s electricity. The definition of “property” extends to all adjacent contiguous tracts of land utilized by the entity purchasing the solar system’s electricity.
- The solar system must be connected to the utility’s distribution system on either side of the utility’s meter.
- The capacity limit of a commercial solar system, stated in alternating current (AC), must be no greater than 125 percent of the actual or expected maximum annual peak demand of the premises the solar system serves.
The law explicitly states that utilities cannot prevent or otherwise interfere with the installation, operation or financing of solar technology by a retail electric customer through a SEPA. Utilities can, however, require the retail electric customer to meet applicable safety, power quality and interconnection requirements.
Georgia’s First SEPA
In February 2016, Macon-Bibb County issued a Request for Proposal (RFP) for a SEPA that provides solar electricity to the municipality’s Emergency Management Agency Operations Center and Sheriff Investigative Center. Later in August, Macon-Bibb Commissioners approved the state’s first SEPA with Cherry Street Energy and its partners Joule Solar Energy and Hannah Solar.
As per the requirements of HB 57, Cherry Street Energy sized each building’s solar system to be no greater than 125 percent of peak demand. This resulted in a sizing of 225 kilowatts (kW) for each building for a total of 450 kW covered by the SEPA. The systems are expected to provide 20 percent of each building’s electricity.
The SEPA term is 20 years. All long term operations and maintenance of the systems will be handled by Cherry Street Energy and Hannah Solar. Macon-Bibb will bear no cost of upkeep and will only pay for solar energy that is produced by the system.
The agreement sets a per kWh rate for solar electricity that has a slight escalation each year. However, the SEPA’s escalation will never exceed Georgia Power’s rate escalation. This stipulation provides Macon-Bibb with the safety net that its SEPA rate will never exceed Georgia Power’s escalation and reinforces a main reason that Macon-Bibb sought a SEPA: to gain budget certainty because the SEPA lists the solar electricity price over the course of the agreement. Through its SEPA, Macon-Bibb should break even in the first two years of the agreement and then start realizing cost savings in year three onward.
Key Points for Municipalities Seeking to Use a SEPA
While Georgia only has one executed municipal SEPA, several municipalities have issued RFPs for SEPAs. Therefore, we have enough experiential information to provide key points that municipalities should consider when seeking solar via a SEPA.
Understand the Players
Municipalities should keep in mind that the entity who builds a solar system may not necessarily be the same entity that owns the solar system. In fact, most often they will be separate entities who are working together on a bid. A solar engineering, procurement and construction (EPC) firm will construct the solar system. A financier will provide the capital for the SEPA project and will own the system once it is completed. This entity is referred to as the “SEPA provider” in this article.
Understanding the different roles is important because a municipality’s ongoing relationship with the parties will be different. The solar EPC may complete the project and be out of the picture unless it has an operating and maintenance contract with the SEPA provider. A municipality enters into a contract with the SEPA provider for the delivery of solar power. Therefore, a municipality may want to determine whether the SEPA provider has a track record of owning its solar assets for a long-term or whether it typically flips the assets, i.e., completes a project and then sells the long-term contract to another owner. A municipality should also seek credentials of the solar EPC.
Engage Municipal Staff
Any municipality seeking to go solar should engage critical municipal staff members early in the process. This includes individuals who have access to building electricity consumption data, those who work for the municipality’s facilities team and those whose departments/offices are in buildings that will likely be identified as being prime for solar. A municipality should also involve individuals from its procurement and legal departments as soon as possible, so they understand how SEPAs differ from construction bids (discussed in more detail below).
Identify Ideal Buildings
Before issuing a RFP for a SEPA, a municipality should identify which of its buildings are ideal for solar, keeping in mind that pursuant to HB 57, the third-party solar system has to be located onsite or on a contiguous piece of property that is owed by the municipality. Ideal buildings have the following characteristics:
- A new building, an older building with a roof that has recently been refurbished or a roof that is in good condition and will not need refurbishing for many years.
- Access to unobstructed sunlight, with that access expected to continue for the foreseeable future.
- Consistent user of electricity during the day, preferably seven days a week (e.g., schools, police and fire buildings, recreation centers and wastewater treatment facilities).
- An electricity rate of about eight cents a kilowatt hour (kWh) or greater after factoring in all of the “extras” such as environmental compliance cost, nuclear construction cost and sales tax.
As would be expected, larger systems have lower prices per watt installed because the installer is able to capitalize on economies of scale (e.g., transportation and labor costs become lower per watt as the system size increases). Therefore, a municipality should consider solar for a building that is a heavy consumer of electricity and has sufficient space for a larger solar system.
A municipality can also consider a portfolio of buildings in order to capture economies of scale. For example, a smaller building can have a 20 kW system, but still obtain a lower price per watt because it is part of a much larger portfolio of buildings going solar. Rural municipalities may have enough land on, or adjacent to, the building site for a ground-mount solar system.
Leverage the Knowledge of Solar Developers Who Bid on the RFP
While it is important for a municipality to have a good sense of which buildings are ideal for solar, a municipality should not spend too much time analyzing its building stock. Bidders on the project will likely perform their own analysis outside any specific engineering work that a municipality provides to them.
Sizing of Solar Systems is Critical
For each selected building, a municipality should calculate (or ensure that bidders calculate) the maximum allowable capacity pursuant to HB 57. In order for a third-party solar system to be legal it cannot be greater than 125 percent of the building’s peak demand. For example, if a building’s peak load over the course of 12 months is 100 kW, then the maximum solar system size will be 125 kW (AC).
For a new building, sizing is based on monitoring the first six months of building’s consumption and then calculating a projected load. This is the approach that was taken for the Macon-Bibb Sheriff Investigative Center, which is a newly renovated building. Cherry Street Energy worked with Georgia Power to calculate the legal size limit for the solar system.
Several Georgia municipalities issued an RFP for a solar system that was sized for available roof space (e.g., 900 kWs) instead of maximum legal capacity (e.g., 250 kWs). This resulted in no bidders for the RFP, and the municipalities had to restart the process. The RFP had to be rewritten and this delayed the process, ultimately causing the municipalities to postpone their solar effort.
Sizing a system is also important from a practical perspective because a SEPA provider wants the vast majority of solar electricity purchased by its municipal customer, not the utility. Excess electricity is sold to utilities at “solar avoided cost,” which is currently less than four cents per kWh. Because solar avoided cost is less than the installation cost, a SEPA provider cannot sell too much of its electricity to the grid. If the system size is not optimized to maximize onsite consumption of solar electricity, a municipality may have a hard time attracting bidders. Given the importance of sizing, if a municipality does not have the in-house expertise or bandwidth to identify a portfolio of buildings that can benefit from solar and the optimal system size for each building, the municipality should consider engaging a third-party consultant for assistance.
Maintain Flexibility in the RFP
A municipality should not issue an RFP that is too open-ended without some specifics of the buildings on which solar is likely optimal. The RFP should spell out the basic contract arrangement the municipality wants from the bidders (e.g., x amount of capacity across y amount of buildings). Conversely, the RFP should not be too specific either (e.g., specified equipment that must be used). The RFP should have enough flexibility to allow bidders to present unique and interesting solutions.
Furthermore, municipalities should not confuse a SEPA with a construction project. With a SEPA, a municipality will not own the system. It will only purchase the solar electricity generated by the system. Therefore, the RFP for a SEPA project should not be lumped into the category of construction projects, which typically have more difficult procurement guidelines.
Seek a Reasonable Level of Protection
Municipalities will naturally want some level of protection in exchange for entering into a long-term SEPA. However, municipalities should not require the solar EPC to provide a performance bond that lasts for the entirety of the “SEPA project,” which could be anywhere from 20 to 30 years. The protection that a municipality seeks can be provided through the following customary approaches taken in the national third-party solar market:
- A bid bond issued by the bidder to the municipality, which provides a guarantee that the winning bidder will undertake the contract under the terms of its bid.
- A construction bond from the solar EPC for the period of time required to construct the solar system(s).
- Inclusion of a decommissioning security in the municipality’s contract with the SEPA provider that requires the SEPA provider to remove its solar system(s) and, to the extent possible, restore the property to a pre-installation condition. The municipality may consider requiring a decommissioning bond or a renewable energy decommissioning insurance policy.
- Inclusion of a performance guarantee in the municipality’s contract with the SEPA provider for the life of the SEPA once the system is constructed.
Manage the Relationship with the Existing Utility Provider
Any municipality discussing with their utility account representative the possibility of going solar through use of a third-party financing mechanism should never use the term “power purchase agreement” or “PPA.” HB 57 does not authorize municipalities to purchase electricity through a PPA, rather just solar electricity through a SEPA.
A municipality should foster collaborative relationships with its existing utility provider so they understand the municipality’s goals with going solar. As per HB 57, the utility is required to provide the municipality with the data required to properly size the third party-owned solar systems.
If a municipality is not a Georgia Power customer, it should ensure that its utility does not have a distributed generation rider or “standby fee.” Some electric municipal corporations and municipal electric authorities in Georgia are charging solar customers fees as high as $10 to $20 per kW per month. Such punitive fees destroy the economics of a solar system, which no third-party financiers will accept.
SEPAs are Ideal for Municipalities
Purchasing electricity through a SEPA provides municipalities with multiple benefits. First and foremost, a municipality can purchase the solar electricity with no upfront costs and gain budget certainty because the SEPA lists the solar electricity price over the course of the agreement. Over the course of the SEPA term, a municipality should realize long-term savings.
Furthermore, the SEPA arrangement gives municipalities the flexibility to adapt to new technology. For example, after five years of usage data, the SEPA provider could integrate battery technology that allows a municipality to use stored solar electricity during times when the sun is not shining. Municipalities who want to be sustainability leaders can further their commitment to stewardship with no upfront costs. And finally, local solar energy is a positive story that becomes even more compelling when coupled with a good budget story.
The world is undergoing an energy transformation. We are adjusting to the new ways in which energy is consumed. Capitalizing on this transition will require civic leadership and courage to be a first mover and blaze a new path that can be followed by other municipalities. Thousands of businesses and residents in Georgia, as well as all of Georgia’s major electric utilities, have already taken advantage of this clean energy opportunity. The solar industry expects for many more municipal SEPAs to be signed in 2017 and 2018 as municipalities and SEPA providers better understand Georgia’s municipal solar market.