Asumag 467 201011 Renewable Resources

Renewable Resources

Nov. 1, 2010
Many institutions are considering renewable-energy programs.

Since 2007, more than 600 colleges and universities have signed the American College and University Presidents Climate Change Commitment to cut emissions of greenhouse gases. This pledge calls for each campus not only to take incremental steps such as switching to energy-efficient appliances or lighting, but also to develop comprehensive, institutional plans to become climate-neutral.

Renewable energy makes it possible for education institutions to significantly reduce or even offset their carbon footprints, control their electricity bills, help develop a market for renewable technologies, make a public commitment to sustainability, and hedge against rising fossil fuel prices. Many options exist for procuring renewable energy, and facility managers and administrators should consider a variety of ownership and contractual arrangements in developing and carrying out a renewable-energy program.

Multiple incentives

Economic and policy incentives to switch to renewable energy make "green" power an attractive choice for colleges and universities. The costs of purchasing renewable-energy sources have declined in recent years. According to the Solar Energy Industries Association, the price of photovoltaic solar panels dropped more than 40 percent in 2009. And Bloomberg New Energy Finance reports that wind turbine prices have declined by 15 percent in the last two years.

Coupled with these declining costs, governmental incentives in the form of loan guarantees and tax benefits have lowered the costs of renewable projects significantly. The IRS offers a variety of tax credits and grants for renewable energy projects, including credits for both the investment costs of installing renewable-energy sources (the investment tax credit, or ITC), and for the generation of renewable energy (production tax credit).

The American Recovery and Reinvestment Act of 2009 (the Stimulus Act) greatly expanded the popularity of these tax benefits by permitting many taxpayers who otherwise could not benefit from the investment tax credit to obtain a cash grant in lieu of the ITC. The ITC grant pays for 30 percent of the eligible capital cost of most renewable-power projects (and 10 percent for small cogeneration projects and for geothermal heat pumps), provided they are placed in service, or start construction, by January 1, 2011. Private owners of renewable energy also can take advantage of accelerated depreciation of eligible renewable energy property, enabling a faster write-off of the investment for tax purposes. Ongoing tax subsidies, such as production tax credits (PTCs) and accelerated depreciation, often are "monetized" at the commencement of operations by selling off the benefit of the PTCs to a tax investor, effectively reducing the upfront capital costs.

In addition, the U.S. Department of Energy’s Loan Guarantee Program, which initially was established under the Energy Policy Act of 2005, authorizes the Secretary of Energy to issue loan guarantees to qualified renewable energy projects. The Stimulus Act increased the funding available for Energy Department loan guarantees for renewable projects, and widened the scope of eligible projects from just "innovative" renewable technologies to include commercially proven renewable technologies.

State (and potentially federal) renewable portfolio standards (RPS) also have increased the demand for renewable energy. An RPS requires a certain proportion of the electric power generated or delivered by a utility to be derived from renewable sources. These popular renewable-energy polices—as of August 2010, 29 states plus the District of Columbia had adopted renewable portfolio standards, and seven states had renewable portfolio goals, according to the Database of State Incentives for Renewables & Efficiency’s "Renewable Portfolio Standards Map"—utilize a market-based system to incentivize renewable energy, as utilities compete to purchase available supplies of renewable power or the tradable credits, known as renewable energy credits (or RECs), generated by renewable-power projects.

Further, the Obama administration, environmental and industry groups, and many in Congress continue to press for comprehensive energy legislation that may include a cap-and-trade system for greenhouse gases, or carbon taxes, as well as a nationwide RPS. Numerous states have formed state compacts to create regional markets for greenhouse-gas emissions and offsets, including the Regional Greenhouse Gas Initiative in New England and the Mid-Atlantic states, and the Western Climate Initiative, and several voluntary markets have arisen. For the moment, these greenhouse-gas offset markets are separate from the REC markets, and serve different purposes, but the two markets eventually may be consolidated into a single national or international market.

Finally, the extreme volatility in recent years in the prices of traditional fuels, including coal and natural gas, has made renewable energy more attractive as a hedge against rising fuel prices. For instance, light crude-oil prices jumped from $75/barrel in July 2007 to $145 in July 2008 and then decreased to $40 in January of 2009. This past year, oil prices have swung from a low of $62.70 to a high of $87.15. Similarly, in the natural-gas market, prices for natural gas have swung from $11.32 per 1,000 cubic feet (mcf) in July 2008 to $4.36/mcf in July 2010, according to the U.S. Energy Information Administration’s "U.S. Natural Gas Wellhead Price." By reducing exposure to fossil fuel and natural gas price volatility, campuses will be better able to manage their own risk.

Seeking alternatives

As the economic and policy incentives to switch to renewable energy grow, more campuses are seeking renewable energy to replace older, less efficient fossil-fired on-site generation:

•A university in Maryland has signed a power purchase agreement with a solar PV project to be installed on land leased from the university. The state of Maryland is buying the rest of the power produced by the facility.

•A university in North Carolina intends to replace 20 percent of its coal with biomass by 2015, and to avoid using coal produced by mountaintop removal mines, as part of a process to phase out coal usage by 2020.

•One Ivy League school purchases 50 percent of its electricity use through RECs from a wind farm in a rural area within the state. The 10-year purchase agreement enabled the farm to complete financing for its 12 wind turbines.

•A university in Massachusetts recently installed solar thermal panels on a freshman residence hall rooftop to provide hot water to nearby halls and other college buildings. The system will pay for itself in 10 years and prevent the emission of 4,150 tons of carbon dioxide over its life cycle, which is expected to be 25 years or more.

•A Midwestern university is in the early stages of a plan to replace four coal-fired stoker boilers with a system based entirely on geothermal energy.

•A Colorado university has a solar farm on land owned and operated by a large solar developer. According to press reports, the solar power company, with the help of rebates from a local utility company, covered all construction, maintenance and interconnection negotiation costs, while the campus provided the guaranteed demand for the power and the land on which to site the installation.

Energy options

Education institutions can choose among several models to procure on-site or off-site renewable energy. The choice will depend on a number of factors, including the price of electric power from third-party sources, capital and operating costs for the renewable alternative, the university’s existing physical plant, tax considerations, and the university’s available resources and appetite for risk.

1. Off-site options. A college may purchase renewable power through existing suppliers, often including its local utility or a renewable energy marketer. Although the rates may be slightly higher, the electricity will be generated through renewable resources. A college also could enter into a power purchase agreement (PPA) to buy the electricity generated by a specific renewable facility, whether the facility is situated on-site or nearby, or at some distance.

However, because many of the most promising sites for renewable energy can be situated in remote areas, arranging for transmission of renewable energy from a distant facility to the campus may be impractical. Moreover, the output of many renewable-energy sources is intermittent; they depend on variable energy inputs such as solar insolation or wind speed and density, which vary seasonally and with time of day. As an alternative to a direct purchase, therefore, a school can buy RECs in lieu of renewable energy itself.

RECs represent the "green" attributes of electricity generated from renewable resources, and are traded separately from the electricity itself. Certification procedures ensure that the "renewable" aspect of each unit of renewable energy is traced to a particular renewable-energy generating unit and is not double-counted. Because electricity is largely fungible, RECs simplify the market for renewable energy by making it unnecessary to match actual kWhs of renewable energy from a particular project with the usage by a particular customer. About half of the electricity flowing across the nation’s electrical grid comes from fossil-fuel sources, and much of that from coal, but the university effectively can "green" this power by buying RECs while continuing to purchase power from its traditional supplier.

By purchasing an REC, a college would buy the green qualities associated with renewable energy, but would not have to purchase and transmit the actual energy generated by the renewable facility.

2. On-site options. Institutions considering on-site generation of renewable energy face an array of options, from self-building, to leasing space to a renewable-energy company to install renewable-energy facilities (buying the power under a power purchase agreement (PPA)), to various forms of equipment leases, joint ownership or joint ventures. For instance, a renewable-energy system, such as solar panels, solar hot-water heaters or wind turbines, may be installed on university land (or rooftops), producing both electricity and RECs, by the local utility, the university itself, a third-party developer, or a joint venture of the university and another entity.

3. Hybrid solutions. Hybrid solutions, such as adding solar-water heating or solar-preheating to existing generation, partial replacement of fossil-fueled energy with renewable energy, substitution of natural gas for coal, or co-firing biomass with coal, may need to be considered to bridge the gap between existing power generation and future renewable technologies. Purchasing RECs or carbon credits, moreover, can help to offset the carbon emissions produced by the existing university infrastructure while alternatives can be developed in an economically and environmentally sound manner. Lastly, combining procurement of renewable energy with an effective energy-conservation program can reduce overall energy usage and carbon emissions, and by reducing the quantity of energy that must be replaced with renewable energy, lower the cost and risk of finding alternative to traditional fuels.

Advance planning

Universities will need to undertake careful advance planning in order to use renewable energy on campus. In addition to technical considerations, various alternative ownership and financial structures should be considered:

1. Consideration of alternative ownership and financing structures.

-Clean renewable energy bonds and tax-exempt bonds. Much of the recent policy support for renewable energy has been intended to expand markets for renewable-energy equipment and encourage the installation and use of renewable energy through tax incentives to private companies. However, a variety of other financing solutions exist to address the cost barriers associated with adding renewable energy to university campus portfolios, such as clean renewable-energy bonds (CREBs) and issuing tax-exempt bonds. CREBs, which were created by the U.S. Energy Policy Act of 2005 and expanded by the Stimulus Act, are interest-free bonds that were created for public universities, other government entities and co-op utilities to invest in renewable-energy facilities. The borrower repays only the principal of the bond, and the holder of the bond receives federal tax credits in lieu of interest payments.

Given their status as non-profit institutions, universities may want to consider issuing tax-exempt bonds for projects they own and operate.

-Third-party renewable energy developers and the PPA. Because many incentives for renewable energy are offered in the form of tax benefits, and such tax benefits are available only to tax-paying entities, non-profits or public institutions such as universities seeking to take advantage of these cost reductions should explore innovative financing and ownership models.

For instance, for-profit project developers may apply for these tax credits and pass the savings along to the university through a properly structured PPA or lease. A PPA is a contractual arrangement in which a third-party energy developer owns, operates and maintains a renewable energy system; the university agrees to serve as the site of the system and to purchase the system’s electric output, usually at a predetermined price for a predetermined period sufficient to amortize the initial capital costs, including repayment of project debt. Depending on the technology, the developer or equipment manufacturer generally warrants the project’s initial power output, its annual output, and the efficiency of the system in converting a renewable resource of a given strength or intensity into electric energy. The developer also assumes responsibility for arranging financing; selecting, procuring, and installing the equipment; obtaining permits; and managing day-to-day operations and long-term maintenance.

Because the developer bears the upfront cost of installing a renewable-energy system, the developer must recover these costs over time through the rates charged under the PPA. The price of renewable energy to the university therefore will depend on the developer’s upfront capital costs and access to low-cost financing. These rates also may be influenced by ongoing operating and maintenance costs, and by receipt of other revenues, such as sales of RECs or surplus power. However, because most renewable-energy projects (including solar and wind) do not have fuel costs, and have relatively high capital costs and low operating costs compared with fossil-fuel projects, most of the ongoing cost represents the amortization of the initial investment. The lower the initial capital cost to the developer, the lower the ultimate cost to the university. Accordingly, the university can take indirect advantage of tax subsidies that reduce the upfront capital cost to a private developer, through lower rates under the PPA.

A properly structured lease financing or joint venture may achieve many of the same basic objectives. However, in many cases, the PPA structure may be the better option; several important tax benefits—accelerated depreciation, the PTC and the ITC (though not the ITC grant under the Stimulus Act)—may not be available for equipment leased to a non-profit. In addition, certain tax benefits, including PTCs, may be reduced if a project receives other public benefits, such as tax-exempt bond financing and other subsidies and credits, so such transactions must be structured carefully.

At the end of the term of the PPA, the equipment generally remains the property of the energy developer, though the university customer may have an option to purchase the equipment. However, care must be taken to avoid a bargain purchase option or other features that could cause the IRS to recharacterize a PPA as a lease, if a PPA is the intended structure.

2. Procurement plan. Entering into a PPA or installing renewable-energy facilities and equipment on campus is a long-term proposition, and the aggregate dollars involved (and the attendant risks) can be large. Complicating the picture, many university campuses rely on existing on-site fossil fuel plants, such as coal boilers that produce steam for heating campus buildings. Replacing an existing fossil-fueled power plant, with its attendant infrastructure, may be expensive and technically challenging. Campus administrators in these universities may have to consider other factors than the mere price or availability of renewable sources of electricity, such as the practicability and cost of retrofitting buildings and campus infrastructure. The university should assemble a team to assess the campus’ energy needs and options, with input from engineering, financial and legal perspectives, and develop a deliberate renewable energy strategy.

Sidebar: Dealing with RFPs

For the best chance of arriving at an optimal solution at a competitive price, a well-thought-out procurement program should be coupled with an open, competitive process such as a request for proposals (RFP). If the university decides to issue an RFP, either by itself or in conjunction with other institutions, there are a number of parameters the university should consider:

•Whether the utility is seeking a total, campuswide renewable-energy solution, combining renewable energy with energy management or energy-efficiency initiatives, or a limited solution with defined parameters.

•Whether to seek a specific type of renewable energy, or even a specific technology, such as solar PV, or to be open to all sources of renewable energy.

•Whether to propose a specific ownership and transaction structure.

•Whether to include a model PPA, lease or other transaction documents.

•The deadline by which the new power generation resources must be available, and the term required for the resources.

•The minimum and maximum capacities of energy deliveries to be sought, which will determine the size and cost of the facility.

•The campus’ average usage and typical energy profile by time of day and season—many renewable energy technologies are intermittent, and they may not match the campus’ energy usage patterns; other energy resources will be needed to continue to meet demand in other hours.

•The required experience, capabilities and qualifications of eligible bidders.

A more general request for proposals may elicit more highly creative responses from developers, but also is likely to generate proposals that are less well-thought out technically and less competitive commercially. With careful preparation by facility engineering staff, campus administrators and legal advisers, a more focused request is likely to yield a more robust response. If the basic technology and transaction structure has been determined, such as a third-party PPA for an on-site solar, wind or geothermal project, the RFP itself can include more information of the type needed to make an intelligent bid, and the RFP can be directed to a more select group of providers that are more likely to submit a meaningful response.

Finally, a well-crafted RFP can include model documentation, such as a facility lease and a model PPA, which will enable bidders to understand the precise terms of the deal and make a stronger proposal. Further, the university evaluation team will be able to make a more accurate comparison of proposals, since the proposals from different developers will be based on common assumptions working from common documents.

  • Read the "Dealing With RFPs" sidebar to learn about procurement plans and issuing an RFP.

Shaw is a corporate and energy attorney with Skadden, Arps, Slate, Meagher & Flom LLP in Washington, D.C. Whitney Washington and Milli Hansen assisted with this article. He can be reached at [email protected].

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