Welcome to the SunShot Solar Outreach
Partnership's
Solar Powering Your Community 
workshop series
My name is Jayson Uppal 
from Meister Consultants Group
and this is Lesson 4:
Introduction to Solar Project Finance
In this lesson we're going to cover
different solar ownership structure,
discuss some of the pros and cons of 
each of these different structures
and discuss how different entities can
maximize the value of solar ownership.
While there are a variety of different
ownership structures
out there for solar projects,
there are three basic
ownership structures that will 
talk about today:
direct ownership, third-party ownership, 
and community ownership.
The first ownership structure we're
going to talk about
is the direct ownership structure
and this is where a customer will,
with upfront cash
or by taking out debt
finance, own and operate 
a solar installation themselves.
So they'll own the system up front and 
they'll receive all the electricity
from the system as well as an incentives
associated from that and replace
purchasing electricity from the grid
that they would have done previously
before the installation was in place. 
So there are a number of
benefits for the direct ownership
structure one of them is that once the
installation is installed the
electricity is virtually free
there's no fuel costs associated with it
 just maintenance cost for the
panels and equipment themselves, there's
also incentive revenues so in a prior
lesson we discussed renewable energy
credits as an example incentive
and that can provide an additional
revenue stream for the owner of the system.
Finally for local governments in
particular
they can actually utilize cheap loan
money through issuing bonds
or through low-interest loan programs
that can help to reduce the overall upfront costs
and make the project more financially viable.
There are also a number of
drawbacks associated with the direct
ownership structure
mainly that there's a incredibly high
upfront cost since most of
the cost is front-loaded with the 
equipment purchase requirements.
There's also the long-term management risks
associated with the ownership
of the system both in terms of
maintenance costs as well as any
performance and development risk
that goes along with the installation.
And finally if you're a local government you actually
can't take advantage of those tax benefits
and this'll actually play a role as we talk
about some of the other ownership
structures but it can have a pretty 
large impact on the overall
return-on-investment of the system if
the local government or
non-profit entity owns it themselves.
The next ownership structure I want to talk about is
third-party ownership and in this case
the developer
rather than the customer is the one that's
actually putting up the up-front capital
to purchase, own, and operate the system.
So the developer pays for all the equipment necessary
and they actually own the systems themselves 
even if the system may be on the customer's roof.
The customer will then enter into what's
called a power purchase agreement
could also be a lease agreement in order
to receive the electricity from the
system at a predetermined price.
It's important to note here that the
developers actually take the incentives in this case
so the customer doesn't receive those
renewable energy credits
and they also don't receive those tax credits.
Now this actually plays an important
role when thinking about the structure
that makes the most sense
for a local government or 
non-profit entity.
Since the developer is able to take 
those tax credits
they can actually build the value of
those tax credits into
the overall power purchase 
agreement price.
Even though you're involving an
additional entity here that may require
some sort of return, it can actually be cheaper 
or more cost effective for a local government
to move forward with a third-party ownership option
rather than the direct ownership option
because of the tax incentives.
There's also other benefits such as
the fact there's no up-front costs associated
with third-party ownership for the customer,
the third-party developer will deal
with the operations and maintenance of
the systems and they'll pay for all that.
There's very low risk as the performance
of the system
will impact the return-on-investment
for the developer and not for the customer
and the payments are predictable as
there's usually a long-term contract
maybe twenty to twenty-five years.
There are also a few drawbacks associated
 with the third party ownership structure.
The customer doesn't get to keep the
incentives in most cases so the
developer will actually take those renewable
energy credits as well as any tax benefits,
you are also involving an additional
party that may require a certain
return-on-investment and so that can reduce the 
amount of value that ends up back to the customer.
In the case of local governments, 
you can't actually use
bonds under the traditional third-party
ownership structure
and the third party ownership structure
actually is not available in every state.
Third-party ownership has actually increased
in adoption rates over the past couple years. 
In the top five solar states,
we've seen fifty percent or higher of
new residential installations actually
taking that third-party ownership structure,
rather than going the direct
ownership route.
So it is becoming increasingly more popular.
But as I mentioned it's actually not
available in every state
and this has to do with how states
look at public utilities and whether
they consider a developer selling
electricity back to a customer
a public utility and in that case it requires
a significant amount of regulation
and limits the ability for third-party
ownership structure to work in these states.
So if you're interested in finding out
more about whether or not third party ownership is
available in your state I would suggest
you check out the database for
State Renewable Energy Incentives 
or DSIRE that has a rundown of
all the state policies for each
individual state.
Now I mentioned that local governments,
through the third party ownership structure,
traditionally can't use cheap bond money
but there actually have been cases
through the bond-PPA hybrid structure
where they can utilize the third party ownership 
benefits of a developer being able to take those
tax credits and build those credits into
the value of the power purchase agreement
while still using cheap available bond
capital to actually invest in the project
The bond-PPA hybrid is a financing option by 
which a public entity issues a government bond
at a low interest rate and transfers the
low-cost of capital to
the developer in exchange for a
lower power purchase agreement price.
To illustrate how this works,
a municipality will choose to issue
a bond and sell that bond to
bondholders in order to raise capital.
The municipality will then actually purchase
the equipment for the installation
and then through a lease-purchase agreement 
will actually lease the system to the developer,
such that in the eyes of the IRS, 
the developer is actually owner of the project.
The municipality can then use that
money that they receive through the
lease payment to pay back the 
bondholders, both in terms of their
principal as well as their interests payments.
Then the municipality, just like the third
party ownership option,
will enter into a power purchase agreement
through which at a predetermined price
the developer will sell electricity back to the municipality.
The developer in this case can also take the incentives
so for the municipality that isn't eligible 
for that investment tax credit incentive
and the accelerated depreciation incentive,
that value can still be built into the PPA price
resulting in a higher return on
investment for municipality.
Reviewing the benefits of this structure,
there's no upfront cost to the customer
no operations and maintenance costs,
they can actually use bonds under the structure,
the payments are predictable and
they can also take advantage of the tax benefits.
The drawbacks to this type of
structure is that they still don't get
to keep the other incentives of the 
renewable energy credits
and because of the complexity of this structure
there are generally higher transaction costs.
This structure was actually pioneered 
by Morris County in New Jersey
and the National Renewable Energy
Laboratory has created a fact sheet that
explains how the structure worked
and provides some case studies as to what
the ultimate power purchase agreement
prices were for the municipality and
the ultimate return-on-investment.
So if you're interested in learning more, 
you can check out this fact sheet at www.nrel.gov
The third and final ownership
structure that we're going to talk about
is community ownership.
Many customers, particularly on the
residential and commercial side
may not be able to install solar onsite
either because maybe they're renting the
facility that they're in and they don't
have access to the roof or the surrounding ground
or they may not have a roof that's
feasible for solar development
if there are structural issues or shading issues.
There's a huge part in the country that
actually can't adopt solar even if they wanted to.
and the community ownership structure 
helps to solve this issue.
There are three different program
models that we're going to discuss today
the Special Purpose Entity model or SPE model,
the investment model and the utility model.
Under the Special Purpose Entity structure
a group of investors will get together
and collectively purchase a solar installation.
The solar insolation may be centrally located 
whereas the investors themselves may be dispersed
throughout the community. 
Depending upon the number of shares that they own
they can then receive electricity over
the life of the system.
This type of structure is not available everywhere
particularly because it's difficult to
get the electricity
from where the installation is to 
where all the investors are.
It requires policies such as virtual net metering 
which we've discussed in earlier lessons.
The other big barrier to this type 
of structure is that
the investment tax credit actually 
can't be taken by those individual homeowners.
The investment structure can actually overcome
a number of the barriers for the 
special purpose entity structure.
The way the investment structure works
the group investors will again collectively
purchase a solar installation,
but rather than receiving the electricity
 benefits from that installation themselves
they'll actually enter into a third party power
purchase agreement with
a customer to take that electricity.
Those individual investors will then see
a return-on-investment based on their 
ownership shares of the installation.
In this case they're not receive the electricity,
the electricity is going to another customer
but they actually receive a return-on-investment
 and because the electricity
is only going to a single customer,
you don't have the same
issues associated with getting the
electricity back to those original investors.
The other advantage of the investment
model is that in this case
the installation can actually take that
investment tax credit.
The third structure that we're going to talk about is the utility model.
Under this model, the utility will actually be the one 
to collectively invest in the solar installation.
Then individual homeowners can actually
purchase shares of the installation from the utility.
and just like under the 
special purpose entity model
they can then receive the electricity
benefits from that installation.
The advantage here is that again you
don't have the same administrative
issues that you do under the 
special purpose entity model
because the utility is directly involved 
and can administrate the whole process.
They can go through the process of
crediting your electricity bill
based on the amount of electricity
that's produced depending upon how many
shares of the installation that you own.
In this particular case the utility can't actually
take the investment tax credits
that is one drawback.
If you're interested in learning more
about community ownership structures
I would suggestion you check out 
A Guide to Community Solar.
It's a resource for community organizers
and local government leaders who want to
develop community solar projects
and it's available through the 
National Renewable Energy Laboratory
at www.nrel.gov.
That concludes Lesson 4:
Introduction to Solar Project Finance
Next up Lesson 5:
Local Solar Policies and Programs
