Download Contract for Solar Energy Management Services

Contract for Solar Energy
Management Services
Municipalities interested in solar have multiple options for pursuing it, including direct
ownership, community shared solar, or a power purchase agreement (PPA). Each approach to
solar has different potential risks and benefits. A solar PPA may be a good option if access to upfront capital to purchase a solar photovoltaic (PV) system is an issue.
With a solar energy management services (EMS) contract, Massachusetts municipalities may lease
public space, such as a school roof or capped landfill, for the installation of a third-party owned
and operated solar PV system and enter into a long-term power purchase agreement for the
electricity produced by the system through a single, streamlined solicitation process. Over the
term of the contract, the municipality purchases 100% of the energy generated by the PV system.
With net metering, credits for power generated are applied to the municipality’s account—either
the building’s utility account or (with virtual net metering) the municipality’s other utility
accounts. When the system produces more power than is needed at the project site, excess power
is exported to the grid, the utility meter effectively spins backward, and the customer is credited
at near-retail rate for the electricity sent on to the grid. This strategy describes how to obtain
electricity from a renewable source through an EMS model.
Advantages and Disadvantages of the Solar EMS Model
The solar EMS model is one option for municipalities to support solar development and achieve
energy savings. However, not all renewable energy projects should be financed through an EMS
contract. Communities wishing to pursue renewable energy should make sure that the benefits
of an EMS outweigh any possible costs.
Advantages of the solar EMS model include:
• Low or no up-front cost–The vendor is responsible for developing the site, purchasing the
equipment, and installing the system—the municipality simply buys the electricity it generates
and provides the space where the system will be installed. The municipality’s up-front
investments are limited to the time and/or cost of developing solicitation documents and
negotiating the solar EMS contract. In some cases, the municipality may choose to buy down
the per-kWh rate up-front or help the developer reduce installation costs in other ways;
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however, this is not required. These upfront investments reduce the developer’s required upfront investment and therefore reduce the per-kWh cost of electricity agreed to in the solar
EMS contract.
• Ability to take advantage of tax incentives – A municipality’s tax-exempt status makes it
ineligible for federal tax incentives that substantially reduce the cost of a system—for example,
tax-paying entities can receive investment tax credit (ITC) for up to 30% of the total cost of a
renewable energy system. The vendor, on the other hand, can benefit from these incentives
and pass them on to the municipality in the form of lower electricity prices. Vendors in a
solar EMS contract tend to be tax investors motivated as much or more by the tax credits as
revenues from electricity sales and have detailed knowledge on how to optimize the benefits
from both state and federal sources.
• Predictable long-term electricity costs – A solar EMS contract provides a set price schedule
for the electricity generated by the PV system. The price schedule typically takes the form of a
first-year base price with set increases each year. Ideally, the per-kWh rate paid is less than
what the municipality would otherwise pay for electricity from the grid.
• Elimination of complicated design and permitting concerns – The vendor is responsible for
installing the system, including filing for permits and rebates in a timely manner. However,
the municipality would be well advised to work with the developer to stay informed about the
status and expiration dates of the various incentives, as their loss can negatively impact
project economics. While incentives decline with time, municipalities should proceed at a
pace that is appropriate for the project, stakeholders, and community.
• No operation and maintenance costs – The vendor conducts repairs and ongoing
maintenance of the system at no cost to the municipality during the term of the contract.
Disadvantages of the solar EMS model include:
• Difficulty attracting vendors for small systems – In general, vendors will only consider solar
EMS contracts for projects larger than 100kW and generally will only respond to RFPs for
projects larger than 500kW. Under emerging state solar policy, however, incentives are likely
to be structured in such a way that will increase the development of rooftop projects.
Municipalities with little available space for solar PV might also consider alternative
financing for direct ownership, group procurement options, or community shared solar.
• Cost of retaining renewable attributes – In a PPA, the municipality only
purchases power from the vendor. The solar renewable energy credits (SRECs) associated with
power production remain with the vendor unless the municipality agrees to purchase them
along with the electricity, which will drive up the price per kWh. However, if the
municipality chooses not to purchase the SRECs produced by the system, it cannot advertise
itself as being powered by renewable energy, which may defeat the initial purpose of the
project. (It can, however, advertise itself as “hosting a renewable energy project.”) For PPAs
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powered by an SREC-qualified solar system, the municipality can choose to participate in an
“SREC swap,” in which they forego the purchase of the SRECs generated by the system onsite and instead purchase cheaper replacement RECs (e.g., generated from wind or biomass)
in the voluntary market. Of course, a municipality could forego the PPA process entirely in
that case and simply purchase RECs in the voluntary market for the same advertising effect.
Models
The economic benefits of the solar EMS model can differ based on whether the electricity is
used directly on site or fed back into the grid.
• Behind-the-Meter Connection – This approach is commonly used where there is on-site load
(e.g., school, wastewater treatment facility). The PV system is interconnected behind the
facility’s existing meter. Electricity from the PV system directly serves the on-site load. As a
result, the facility uses less electricity from the grid.
• Virtual Net Metering – Sometimes called a credit purchase agreement, this interconnection
configuration is used where there is little or no on-site load (e.g., landfill); however, it can
also be used where there is on-site load (e.g., public school). The economics for this
configuration are typically more advantageous than for the behind-the-meter alternative. The
PV system is interconnected behind a new meter serving the PV system’s inverter. Rather
than serving the on-site load, if any, the electricity produced by the PV system is sent back to
the local distribution grid.
Implementation Steps
1. Establish goals and build team.
Proper planning before diving into a project can be the difference between success and
failure. Identifying project goals and finding the right team members early on will speed the
process along.
• Goals – Understanding why the municipality is interested in solar will help in the
decision-making process. Goals may include saving money, maximizing the environmental
benefits of solar, demonstrating leadership, or simply learning about options and paving
the way for future solar projects.
• Team – Identify a project champion within the municipality to connect with the right
people and guide the process. Find local experts such as energy committee members and
local businesses in the field and include diverse expertise, such as local staff, students, and
educators.
2. Consider potential locations.
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Before approaching a vendor, first find locations where a solar project may be a possibility. If
issuing an RFQ, this can be as simple as a list of municipal buildings, approximate roof area,
and years remaining on roof warranty. If issuing an RFP, look more in depth at the
characteristics of these locations, including size, shade, and accessibility. Depending on
whether a rooftop or ground-level system is a possibility, roof age and orientation or terrain,
security, wind, and landfill age should be taken into consideration.
• Site area and solar resources – In order to determine the potential output of a PV system,
find the total area of available spaces with good solar access: sites that will not experience
shade during the optimum solar window (9:00 a.m. to 3:00 p.m.). Even a small amount of
shade can substantially reduce the total output of the system. In general, 5-10 watts of
output can be expected per square foot of available space. A good tool to evaluate solar
resources is the National Renewable Energy Lab (NREL)’s In My Backyard
(IMBY) program. IMBY uses a Google Maps interface to look at satellite views of sites and
generate information on potential output and system costs based on selected areas.
• Accessibility – Sites must be accessible to grid interconnection points. In addition, PV
panels and inverters must be installed in places that will be easily accessible for
maintenance.
• Rooftop or ground-level – Ground-level PV is often cheaper and can be scaled up more
easily. It can also include technologies that tilt back and forth to track the sun across the
sky over the course of the day, resulting in higher energy output. However, roof space
tends to be underutilized and may be more freely available in densely developed areas.
Considerations for rooftop PV:
 Roof orientation – Rooftop-mounted panels cannot be adjusted to respond to
seasonal or daytime variations in the direction from which sunlight is received, so they
should be oriented facing south and tilted to optimize summer output.
 Roof soundness – Solar EMS contracts are for 20-plus years, and rooftop PV systems
can often outlive the roof on which they are mounted. They are also often ballasted
with cement weights and can be very heavy. During the term of the contract, if the
municipality needs to remove a PV system to repair or replace a roof, it will be
responsible for the cost of system removal, reinstallation, and the vendor’s revenue
losses due to system downtime (e.g., decreased electricity sales). Rooftop sites should
therefore be under five years old and be structurally sound, with available “dead load.”
Considerations for ground-level PV:
 Security – Theft of ground-mounted PV systems can be a concern, so plans for
potential ground site areas should include security provisions such as perimeter
fencing.
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 Terrain – Grade and soil type will affect design and installation costs. Some sites may
require leveling.
 Wind speed – The risk of extreme wind events will be factored into the design and
price estimate.
 Age of landfill cap – Landfills that were capped less than five years ago are likely to
settle, so solar installations are not appropriate for them.
3. Issue RFP and select vendor.
Massachusetts municipalities are authorized by M.G.L. chapter 25A section 11 to procure an
SEMS contract for the lease of public space, PV system construction, and a PPA through a
single, streamlined solicitation process. Include in the solicitation any information collected
in step two, in order to receive more accurate proposals. In their project proposals, vendors
will include potential project sites, system capacities and layouts, and savings estimates. The
vendor will also provide an installed cost for each system, in the event that the municipality
would rather purchase the solar PV system outright. Vendors may require municipalities to
sign a letter of intent prior to conducting detailed feasibility studies.
Depending on the municipality’s resources, it may choose to issue a request for proposals
(RFP) or a request for qualifications (RFQ). (For more information on the procurement
process, refer to the Procure Energy Services strategy.)
• RFP – Single municipalities with a clear idea of the desired project scope should issue an
RFP to select a vendor. With an RFP, vendors submit a technical and price proposal in
addition to qualifications and references, and the lowest-priced proposal is chosen.
• RFQ – Municipalities that need more guidance in defining the project, or groups of
municipalities banding together for economy of scale, should issue an RFQ. With an
RFQ, vendors submit qualifications and references, along with details on how they would
approach the project, and the vendor best suited to the project is chosen. If it is not
included in the RFQ, vendors will collect information on potential project sites,
including lists of available public rooftops and land, copies of electricity bills, lease fee,
and decommissioning assurance preferences.
4. Negotiate contract.
An EMS is not a public works contract, but an energy services contract. It is a long-term
contract that can include system design, financing, and installation; operations, maintenance,
and removal; lease of public space; electricity; and a guarantee of generation. Contract
negotiations can be time consuming and legally complex, so the legal assistance of municipal
attorneys is recommended, as well as the technical expertise of an owner’s agent. Specific
items to consider in a contract include:
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• Guarantee of generation – Massachusetts requires that vendors guarantee that the PV
system will produce a certain amount of electricity in each contract year (80% of
estimated annual production). If the PV system underperforms, the vendor must
compensate the municipality an amount equivalent to the lost savings.
• Decommissioning – The contract should require the vendor to remove the PV system at
the end of the term and restore the site to its original conditions, normal wear and tear
excluded. Contracts also typically contain language allowing the municipality to purchase
the system at the end of the term, often for a nominal fee ($1), rather than requiring the
developer to remove it.
• Rate schedule – The contracted electricity rate typically includes a yearly escalator to
anticipate increases in utility rates. For example, the per-kWh price may escalate at 2%
each year, since the U.S. Energy Information Administration projects that electricity
prices will remain relatively flat for the next 20 years. Estimated savings are highly
dependent on the annual rate escalation. Municipalities should try to negotiate both a
low rate and a low rate escalator. Less common rate schedules involve a fixed rate, a fixed
amount below the utility rate, or prepayment for a portion of power.
• Change-in-law provisions – The contract should not contain a clause that allows the
vendor to change the rate if Massachusetts laws are changed (e.g., if the SREC program
changes). However, if the economics for the municipality are dependent on virtual net
metering (e.g., landfill solar project), in the event that the solar carve-out is eliminated,
the municipality may wish to make the vendor responsible for brokering the sale of
electricity to the grid on the its behalf, interconnecting the PV system to a nearby load, or
committing to renegotiating the per-kWh rate.
• Project timeline – Municipalities may wish to negotiate a provision that allows them to
exit the agreement if the vendor does not meet a “commercial operation deadline” (e.g.,
365 days from the date of contract execution). Other milestone dates, such as
interconnection application submission, should also be considered.
• Financial assurance – Financial assurance mechanisms (such as a bond or letter of credit)
protect the municipality against other potential costs in the event that the vendor
defaults. If the project is completely abandoned by the investors and lenders, costs to the
municipality may include ongoing operations and maintenance, legal fees, and system
removal. (Under such a scenario, however, the municipality would benefit from the
electricity generated at no cost and could sell the PV system components for their salvage
value.) Such risk protection measures may increase costs or be cost prohibitive to vendors.
They must meet each municipality’s tolerance for risk and will vary by municipality.
• Lease Payments – Payments for leasing municipal space for PV systems are usually
nominal. Municipalities seeking higher lease payments will be charged higher electric
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rates by the vendor; however, annual lease payments may be more attractive to the
musicality than per-kWh energy savings.
5. Support vendor’s implementation efforts.
While municipalities are not responsible for the following steps, they can speed the process
by keeping an open dialogue with the vendor, providing any documentation required in a
timely manner, helping the vendor understand the local approval process, and, together with
the vendor, meeting with the approving authorities as soon as possible.
• Apply for permits and rebates – The permits required for PV systems on landfill sites can
be extensive (such as post-closure and reuse, wetlands, natural habitat, and stormwater
analysis). The vendor should work with MassDEP to ensure that the correct permits are
obtained and that other site conditions (such as settlement, stormwater, and landfill gas
management) are managed correctly.
• Install PV system – The vendor handles design of the PV system, procurement of any
equipment, construction, and commissioning (or testing the system to certify that it
operates as expected). Independent commissioning is not necessary for an EMS.
Additional Considerations
Potential issues could complicate the smooth execution of an EMS and should be taken into
consideration early on in the process. These include:
• Insurance – Insuring a PV system can often be difficult and expensive for a vendor, and this
can lead to higher electricity rates for the municipality. When possible, municipalities may
find it cheaper to offer their own insurance for the system and have the vendor reimburse
them for premiums.
• Electrical changes – Changes to a building’s electrical system could impact the PV system.
Any foreseeable electrical upgrades should be completed prior to installing a PV system.
• Site access limitations – The scheduling of solar PV installations must be coordinated with
any roof work or site access limitations, such as school hours.
• Property taxes – Privately owned, municipal-hosted PV systems that are not connected to a
facility using electricity, such as a landfill system, are subject to local property taxes. PV
systems are assessed at the commercial tax rate as personal property if easily movable, able to
be swapped out periodically, or transferred to a different site. Otherwise, they are assessed as
part of regular real estate. A Payment in Lieu of Tax (PILOT) agreement may be negotiated as
an alternative to property taxes. Although the transaction costs of negotiating and finalizing a
PILOT can be significant, the certainty the PILOT provides can be of greater value when
compared with the cost and uncertainty associated with yearly tax assessments. To prevent
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property tax uncertainties from slowing project progress, this topic should be broached early
in negotiations, and the local board of assessors should be consulted.
• Electric bills –If choosing the net metering model, a municipality must have sufficient electric
bills against which net metering credits can be applied. While credits may roll over
indefinitely, the anticipated aggregate value of net metering credits should be less than or
equal to anticipated energy costs.
• Competitive supply contracts – Some competitive supply contracts for electricity include a
minimum purchase requirement. If the installation of a PV system causes the municipality’s
purchase from the supplier to drop below the minimum purchase requirement, a surcharge
may result. Other competitive supply contracts prohibit the installation of behind-the-meter
PV systems altogether. Work with the selected vendor or other project advisors to review the
municipality’s competitive supply contracts for potential conflicts with solar.
• Zoning – Zoning changes may be necessary to allow a solar project, especially in the case of
landfill solar. This should be addressed early on in the process. The DOER’s guidelines for
community shared solar highlight common zoning issues.
References
• National Renewable Energy Laboratory (NREL)'s Power Purchase Agreement Checklist
for State and Local Governments. (2009) http://www.nrel.gov/docs/fy10osti/46668.pdf
• “Solar Power Purchase Agreements.” United States Environmental Protection Agency.
(2012) http://www.epa.gov/greenpower/buygp/solarpower.htm
• “Guide to Developing Solar Photovoltaics at Massachusetts Landfills.” Department of
Energy Resources. (2012) http://www.mass.gov/eea/docs/doer/green-communities/pubsreports/pvlandfillguide.pdf
• “In My Backyard.” National Renewable Energy Laboratory. http://maps.nrel.gov/imby
• “Community Shared Solar: Implementation Guidelines for Massachusetts
Communities.” Massachusetts Department of Energy Resources. (2013)
http://www.mass.gov/eea/docs/doer/renewables/solar/community-shared-solarimplementation-guidelines-with-contracts-032913.pdf
• “Energy Management Services (EMS).” Massachusetts Department of Energy Resources.
(2013) http://www.mass.gov/eea/energy-utilities-clean-tech/green-communities/ems.html
• “Energy Management Services: Frequently Asked Questions.” Massachusetts Department
of Energy Resources. (2011) http://www.mass.gov/eea/docs/doer/greencommunities/ems/faq-for-ems.pdf
8 | Last updated August 22, 2013. For the most up-to-date information and additional resources, visit
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• “Valuation of Solar Photovoltaic (PV) Projects for Ad Valorem Tax Purposes or for
Negotiation of PILOT Agreements.” George E. Sansoucy. (2013)
http://www.mass.gov/dor/docs/dls/dlspresentations/dorsolar.pdf
9 | Last updated August 22, 2013. For the most up-to-date information and additional resources, visit
http://www.mapc.org/clean-energy.