By David Tucker
David Tucker is a Project Director for the Environmental Finance Center.
As the University of North Carolina system campuses work to increase efficiency and to be even better stewards than ever of public funds, reducing energy costs is a topic of growing importance. One way to go about this is to employ any of a wide variety of energy efficiency measures. Another approach is to take advantage of opportunities for renewable energy generation, such as installing solar photovoltaic (PV) arrays on campus. Appalachian State University (ASU), host of this year’s Appalachian Energy Summit (AES), is looking into innovative ways to finance solar PV on their campus.
Renewable Energy Initiative
ASU students are driving the adoption of renewable energy technologies on campus through the Renewable Energy Initiative (REI), a largely student-led organization dedicated to “reducing the environmental impact of Appalachian State University by replacing the University’s existing sources of energy with cleaner forms of renewable energy technology on campus and serve as a resource for students and faculty by identifying and investing in the most appropriate energy projects.” The ASU REI leadership committee, comprised of students with faculty and staff advisors, allocates funds from student fee of $5 per student per semester – a fee which the student body imposed upon itself in 2004 via a referendum that passed with an 83% approval. (This result was reconfirmed by a 2007 referendum with 97% in favor of the fee—quite a hefty approval rate for, in essence, taxing oneself!) With approximately 17,000 current students, the fees result in $170,000 in annual capital for renewable energy initiatives at ASU.
The REI, working closely with the leadership of ASU, has sponsored 15 innovative renewable energy projects on campus, including solar hot water, solar PV, biodiesel, and wind energy. One of their solar projects, the 1.5 kW Kerr Scott Hall Photovoltaic Array, was installed in 2007-08 by the Department of Technology (DoT) and the REI. This solar PV array is a direct grid-tied system and was funded with $5,000 from REI and $7,000 from DoT.
Power Purchase Agreements (PPA)
Other solar PV installations on ASU’s campus are of similar size and scale. While all of these projects are exciting and help to reduce the school’s electric bills paid to the local utility, the relatively small scale of these initiatives has left REI student leaders with the question of what funding models could be employed to accelerate the pace and size of solar PV deployment at ASU. According to current REI student leaders Bryce Oakley and Josh Brooks, one option currently under investigation is to use a third-party Power Purchase Agreement (PPA), an arrangement which allows you to tap into OPM (Other People’s Money).
Under the laws and regulations of the state of North Carolina, a PPA is easier to use for a solar hot water project than for a solar PV project, as solar hot water projects avoid the regulation of electric power generation. For example, a typical solar hot water PPA may involve Company A installing the solar hot water project on the roof of a building on campus. Company A puts up all of the capital for this project, and the university puts up no capital (though this is not always the case). The two parties then sign a contract for 10 or 15 years, where Company A sells the hot water to the university.
Evaluating the heating capacity of the system in Btu (British thermal units), the company converts the Btu units to their kWh (kilowatt-hours) equivalents, and sets the rate for sale at one below that of what the university would pay to the local electric utility for grid-supplied electricity to heat the water. The university gets the hot water for a cheaper equivalent rate, and Company A also gets to take advantage of the current federal 30% investment tax credit for renewable energy, as well as the similar state of North Carolina 35% investment tax credit. (The N.C. tax credit is currently scheduled to expire in 2015, unless it were to be extended by legislative action.) Of course, company A, being a private institution, is able to take advantage of these tax credits, which a public university could not, and this incentivizes the company to enter into the PPA with the university. At the end of the term of the contract, it can be extended, or the solar thermal system can simply be turned over to or sold to the university at a greatly discounted price, depending on how the contract is written. Such a project would also create renewable energy credits (RECs) under the state of North Carolina’s Renewable Energy and Energy Efficiency Portfolio Standard.
Using a “Buy-all, sell-all” PPA to Fund Solar PV
While a PPA is mutually advantageous in the case of solar hot water, using a PPA financial instrument to fund solar PV in North Carolina a bit more complicated. In general, if you are not already an electric utility in N.C., you are not legally able to sell electric power to another party such as a university. There is, of course, no problem with a university purchasing a solar PV system outright, and consuming the electricity itself (and possibly net metering surplus electricity produced back through the grid for a credit from the local utility company at a pre-arranged tariff). But having another company own and operate the PV array and sell you, the university, their electrons is currently problematic. What to do?
The REI’s answer is an ambitious solar PV project for the ASU campus which would work something like this. A 300 kW solar PV canopy would be built over a campus parking lot. The REI would put up $320,000 in capital out of cash. The remaining capital would be supplied by a developer. The developer (the “third party” in this equation – with the “second party” being the local electric power utility, New River Power and Light, or NRPL) would initially own and operate the system over a contractual period of 6 years. The electricity generated by the solar array would be sold by the developer to NRPL , who, in turn, would sell it to Blue Ridge Electric Power Company, a subsidiary of Duke Energy. The developer would pay a fee to the university during the 6 year period for the opportunity to use their property for this arrangement – essentially a lease arrangement. The university could set aside the proceeds from these lease payments to help them pay their electric bills to the local utility. The university, consuming none of the electrons from this project, would continue to buy power from the local utility. The developer would take advantage of the federal and state tax credits across the 6 years of the project (they must be used up in 5 years, in the case of the state tax credit). ASU would buy the RECs generated by the project from the developer and retire them, counting towards their compliance with their self-set goal to attain carbon neutrality in the years to come. At the end of 6 years, the system’s ownership would revert to the university, which could then consume the electricity itself that the solar PV array generates. This arrangement, taken as a whole, may be referred to as a “buy-all, sell-all” PPA – one where the developer sells all the power to the local utility, and the university buys all the power it needs from the local utility (exclusive of the power generated by their pre-existing renewable energy projects on campus, of course).
Such a buy-all, sell-all, solar PPA arrangement has the potential to leverage the university’s own capital with that of a developer, expand the size and scale of solar PV on campus, deploy it faster, and take advantage of an innovative funding model. However, the complexity of this model, especially as it is not as direct and straightforward as the solar hot water PPA model, may deter other parties from attempting this. So ASU and the REI are once again blazing the trail for their own campus, and for the UNC system as a whole. No doubt we will all learn valuable lessons from this project as it goes forward in the near future.