Forever is a very long time. And as we all know, time has a way of changing things. Time has certainly done a number on the solar industry, as can be seen in the many advances in module and inverter technology and costs. In addition, changes in utility rules, regulations and rates and in the number of participants engaged in developing, owning, hosting and managing commercial solar PV systems have all added to this complex and ever-evolving industry.
For many state agencies and organizations in California, deploying solar PV with a no up-front cost power purchase agreement (PPA) arrangement has been an attractive way for commercial organizations and state agencies to enjoy the benefits of lower energy costs, while promoting sustainability and clean energy goals. In such cases, site hosts became buyers of the power generated from the systems on their property, and PPA providers became sellers of that power. Site hosts do not own the solar PV systems which are often installed on carports or rooftops at various company, district or agency sites. A PPA defines the commercial terms of electricity sales between the buyer and seller, and it also is the key document that lists the project’s anticipated annual solar production and related costs per kWh.
As is often the case, organizations that initially were happy to host solar PV systems rather than own the systems, may find themselves with different objectives and with new financial opportunities in later years that now make owning solar PV systems deployed on their property more desirable. Unfortunately, contract terms for most commercial solar PV systems can be 20 or 25 years in length and many organizations may feel like they have no options when dealing with these contractual obligations that were made years ago. In some cases, based on escalating solar payment rates and changes in solar programs from utilities, site hosts may no longer be saving money from their solar projects. Luckily, there are options for those with PPA obligations that can open new financial opportunities and even result in long-term system improvements and extension of the anticipated life of the system.
Organizations that are looking for relief from high power rates and other contract terms that feel like a “forever” burden should consider two exciting options, a “Solar PPA Buyout”, or a “Solar PPA Refinance”.
The PPA Buyout: A Case Study
While each PPA is unique to the sites in question and the parties to the agreement, certain common contract terms can usually be found in most all commercial agreements. The terms of most PPAs will stipulate certain buy-out windows, which usually are available starting after the sixth year of the commercial operation. For those with access to the needed cash, a PPA buyout is an option that should be considered. Organizations should realize that PPA buy-outs can be complex and protracted exercises as the process may be subject to a variety of detailed requirements and stipulations. TerraVerde Energy recently assisted SCV Water in the successful buyout of their power purchase agreement, which resulted in them becoming the owners of the solar PV system operating on their property and no longer subject to third-party power rates.
(Read the SCV Water Press Release on this Solar PPA Buyout here)
SCV Water initially commissioned a financial analysis of their 4.5 MW solar PV portfolio, which was made up of two systems that had been deployed in phases in 2011 and 2013. The analysis included evaluating different scenarios and considered potential future changes to applicable utility rate tariffs. The results of the study showed that pursuing a PPA buyout option at the first available window would provide the best long-term financial benefit to the agency. It is not uncommon for PPAs to change hands during the term on the agreement, as was the case in this instance. One of the terms of the PPA agreement stated that the buyout price was to be the higher of the Fair Market Value (FMV) or the Termination Value (TV) . TerraVerde worked with SCV Water in mitigating the risks inherent in unique transactions of this type by evaluating the scope of owning the solar PV system including operational and maintenance costs and potential risks. TerraVerde created a buy-out plan and leveraged our expertise and experience in managing large commercial solar projects for California public agencies to guide SCV Water through the FMV process. Eventually a third-party appraisal firm was engaged to produce a final transaction price by which both parties would be bound. TerraVerde was able to provide data and input on the system valuation directly to the appraisal firm. After numerous rounds of negotiations, each round supported by analysis from TerraVerde, SCV Water completed the buy-out transaction in March of 2021. SCV Water completed the buy-out transaction with the confidence that the purchase will serve to put the agency in an improved financial position while benefiting from the clean, renewable energy. Having TerraVerde’s support throughout the process allowed SCV Water to enter all negotiations and meetings from a position of strength and understanding. Following the close of this transaction, Matt Stone, GM of SCV Water stated, “Thanks to TerraVerde for the detailed analysis and efforts that supported our decision-making processes through the feasibility assessment, appraisal and negotiation phases of this lengthy transaction”.
If your organization is considering a PPA buyout, take steps to ensure that you have the support and expertise necessary to realize a successful transaction.
A New Option: The Solar PPA Refinancing Alternative
For site hosts that do not have the cash available to buy-out their PPAs but are still looking to improve their financial position in their solar program, solar refinancing may be the solution. Much like mortgage refinancing, solar PPA refinancing is a means to lower current and future costs without having to supply capital resources. This program can be described as a Third-Party PPA Buyout paired with a new restructured power purchase terms and conditions. For site hosts with limited liquidity, this option can deliver lower power rates while still offering all the benefits that initially attracted them to a solar PPA.
The solar PPA refinancing begins with a full financial analysis of the solar PV system including assessing the remaining useful life and a full cash flow analysis under both the status quo and refinanced scenarios. If the analysis shows that the site host can benefit from an alternative rate structure and term, a buy-out can be pursued with a new third-party owner with the understanding that a new per kWh power rate will result in the site host securing a better long-term financial position over the life of the system. In many cases, refinancing can also result in the new owner making system improvements that will benefit the site host such as pursuing the deployment of battery energy storage systems (BESS). In this program, site hosts benefit from an improved PPA rate while still not having to be responsible for system operations and maintenance.
Organizations across California are starting to investigate solar PPA refinancing because it puts decision making back in their hands, rather than being subject to the decisions of others that may have different long-term goals. Many PPA providers are counting on their “forever” cash flows with escalating rates; but the solar PPA refinancing program can help turn the tables in favor of the site hosts.
There is no doubt that PPAs have helped to accelerate the adoption of solar PV in California and across the United States. The attraction of no up-front costs, no maintenance responsibilities, and lower starting power costs can be strong arguments for organizations deciding to go solar. But like in any long-term agreement, organizations should weigh all options before deciding to remain under an existing agreement and consider whether they should seek a buy-out or a refinancing option. Regardless of which path is chosen, it is paramount to have transparency into the current and future financial and operational performance of these systems. Solar site hosts should know whether their system is delivering the savings originally projected, and what impacts utility rate changes (such as the Time of Use rate shifts) are having on these programs. If you are concerned about your current solar energy cash flows or are unsure of where you stand, just remember that solar PPAs do not have to be “forever”.
If you have an existing solar PPA, reach out to firstname.lastname@example.org today to find out whether you qualify for a free solar analysis. For qualified organizations, TerraVerde will review your energy usage, historic bills and the details of your power purchase agreement and then provide you with a no-cost and no-commitment comprehensive solar assessment.