ccDaily > Financing for renewable energy projects

Financing for renewable energy projects

Elliot Hinds

Editor's note: This is an extended version of an article that appeared in the October/November issue of the Community College Journal, the bimonthly magazine of the American Association of Community Colleges.

Recently, as part of efforts to control its energy costs and develop sustainable sources of energy, the Los Angeles Community College District (LACCD) embarked on a $65-million project to install solar panels on six of its nine campuses. The energy program was an integrated part of a larger $3-billion campuswide expansion effort.

The solar installation required LACCD to maneuver through a maze of federal tax incentives for renewable energy projects. The district’s desire to stretch its solar construction dollars opened decision makers’ eyes to the value of federal energy-incentive programs, which provided about 30 percent of the total construction cost for the project.

Most of the those incentives were reaped through the tax code—primarily in the form of the federal investment tax credit (ITC), which differs depending on the renewable resource (wind, solar or otherwise), or through a federal cash grant created through the 2009 American Recovery and Reinvestment Act.

LACCD’s solar projects relied largely on the cash grant. However, that grant expires for projects that are not under construction or do not meet strict commitment requirements by Dec. 31.

Paying for it

The cash grant and ITC require a tax-paying project owner, which prohibits LACCD and other community colleges like it from directly receive such benefits. To take advantage of the program, the district had to enter into a public-private partnership with a tax-paying investor that would own the solar project outright and either sell its power output to LACCD via a power purchase agreement (PPA) or lease the project to LACCD at a reduced, fixed price. Though PPAs are more common, LACCD opted for a lease arrangement because of local power utility restrictions.

Read more about LACCD's Sustainable Building Program  An attractive feature of renewable projects is that the projects tend to be constructed with little or no upfront payment by the customer, as long as the customer—in this case, a two-year college—signs the long-term PPA or lease. This allows cash-strapped governmental institutions to immediately receive the benefits of green power and reduced power costs without having a significant capital outlay, which is a typical requirement in construction projects.

However, since its construction bonds were at a relatively low interest rate, LACCD decided to prepay a significant amount of the lease using its bond proceeds. This resulted in lower financing cost and lower lease payments for the district. 

In addition, LACCD negotiated “buyout options” to buy one or more of the solar projects at certain points prior to the end of the lease term. These “buyout options” are another way for a college to reduce its financing costs if it has the available cash (similar to a debt prepayment). 

While the tax code restricts the number of buyout options and the buyout price that participating parties can have, community colleges may negotiate the buyout terms within those constructs to secure flexibility and a lower buyout price.

State and utility incentive programs are also potentially effective funding sources for renewable project construction. These incentives are typically in the form of grants, which are often administered by the utility companies, and/or tradable renewable energy credits (RECs). The renewable energy credit market differs considerably from state to state, and in many circumstances the customer has to choose between the grant and RECs. Where LACCD was forced to choose, it examined California’s underdeveloped REC market—and thus its uncertain REC values—and opted to pursue a state grant.

Planning, construction concerns

Since solar, wind and most other renewable energy resources are intermittent, LACCD had to ensure that its systems would not produce too much excess power. Although excess power is frequently sold back to the local utility, there are limitations, and the sale price offset the full cost for the college. LACCD hired consultants to evaluate historical and projected energy use on a site-by-site basis. It used that information to properly size each solar installation. 

Developing a renewable energy system—for free  In some cases, additional construction may be needed to complete a renewable project. For example, the project may need a new substation to manage the size of the system or it may require resurfacing a parking lot or modifying a roof to accommodate the system. Some of these costs cannot be covered through the incentive programs, so the college would need to pay for them separately. A college with limited funding may want to reconfigure its plans, or eliminate certain installation sites and/or increase the size on other sites.

Community colleges across the country will find that renewable projects such as those at LACCD have tremendous financial and environmental benefits. But they also require unique financing arrangements, special planning and fresh examination of traditional roles and structures. 

LACCD was an early adopter of those strategies, which are becoming commonplace for community colleges, school districts and other governmental organizations. Understanding the unique challenges and risks associated with renewable projects will help community colleges and similar institutions make better decisions and reap the rewards that such projects can offer.

Hinds is a lawyer who advises community colleges on campus improvement projects and a partner in Akin Gump Strauss Hauer & Feld LLP’s project finance and renewable energy practice.