Financing and Contracting Decisions for Solar Projects on Federal Sites

Selecting the financing or contracting option for the federal solar project can be a complex decision, especially if funding from the agency has not been designated. If no direct funding is available, then financing options must be considered. Before choosing an available financing option, review the options and information presented in this guide. Then contact a financing specialist to discuss the specifics of the project and confirm the appropriateness of the financing decision.

For option-neutral direction on this topic, contact Michael Callahan at NREL. In addition, the Federal Energy Management Program (FEMP) maintains a Web site and offers Webinars and workshops to educate participants on the different financing options available.

The financing options considered in this guide are the:

The sections below describe general characteristics, provide case studies and project process, and list available resources.

Agency-Funded Financing

An agency-funded or agency-appropriated project is one for which funds have been designated for the outright purchase of a project, in this case a solar energy project. The government owns the system, its energy production, and all the attributes of the system (e.g., SRECs).

Pros

  • Well-understood mechanism.
  • Common to many federal capital projects.
  • Does not incur any financing costs.
  • Long-term energy-cost reduction.

Cons

  • Site is responsible for operations and maintenance arrangements (including inverter replacement) but can purchase an operations and maintenance (O&M) service contract.
  • No assurance of long-term performance (can purchase optional long-term performance guarantees, which differ from a manufacturer's warranty).
  • Could be more human-resource intensive than other options.
  • Will not be able to monetize available tax incentives.

Power Purchase Agreement

Power Purchase Agreements (PPAs) have been used to finance solar projects since 2003 and they are now driving most commercial solar installations. They are increasingly being used by the federal sector. Under a PPA, a private entity (typically a group consisting of developers, construction companies, and finance companies) installs, owns, operates, and maintains customer-sited (behind the meter) solar energy generation equipment. The site purchases electricity or thermal energy through a long-term contract with specified energy prices. Payment is based on actual energy (kilowatt-hours or therms) generated from the solar equipment and consumed by the site. So far, PPAs only have been applied to electricity purchases, but there is no obvious reason why they couldn't be used to purchase thermal energy as well. Be aware that some of the obstacles to PPAs—such as their legality in certain states—does not apply to thermal projects because thermal energy is not regulated in the same manner as electricity production.

A PPA is a relatively new contracting option and, as such, the PPA section of this guide is based on a limited level of federal PPA experience. This section will be updated periodically to reflect new information and recommended best practices—especially if long-term renewable contract authority legislation is passed to make PPAs more financially viable within the federal sector (PPAs almost always require long-term contracts to make the offered price of energy competitive). To address the contract length limitation, federal agencies are exploring methods that are available under existing federal laws and regulations, and also are making other contractual issue improvements. Agencies and industry are encouraged to work to find successful solutions and to share any lessons learned.

Note that innovative options are being used to reduce the transaction costs of completing PPAs, such as multi-award contracts (MACs) that are indefinite delivery, indefinite quality (IDIQ) contracts made with preapproved solar developers. In this example, only a smaller set of project specific details must be worked out and several of the steps listed above can be shortened or can be skipped altogether. An example of this approach is the MAC that the Naval Facilities Engineering Command Southwest (NAVFAC SW) division is pursuing with five solar developers for PPA projects in its region, and which only can be used by U.S. Navy and Marine Corps facilities.

Pros

  • Renewable energy developer is eligible for tax incentives and accelerated depreciation, which could lead to reduced energy costs.
  • Agency is not required to provide up-front capital.
  • Renewable energy developer provides operations and maintenance for the duration of the contract (no agency O&M responsibilities).
  • Government faces minimal risk.
  • Agency typically receives a known long-term electricity or thermal energy price for a portion of the site load (which reduces the price risk of fluctuating utility energy prices).
  • Developer has incentive to maximize production by the system (compared to the case of a direct purchase of the system).
  • Agency potentially can use available funds for a front-end buy down to get a better PPA price or a larger system.

Cons

  • Transaction costs include a significant learning curve and time investment.
  • Federal-sector experience is limited.
  • Civilian agencies are limited to 10-year term PPA utility contracts (the U.S. Department of Defense, or DOD, has 2922A authority, which permits 30-year terms).
  • Site-access issues are complex.
  • Management and ownership structures are complex.
  • Contract termination penalties.

Energy Savings Performance Contract

Energy savings performance contracts (ESPC) have a long history of use in the federal sector and have primarily been used for energy efficiency projects. They are increasingly being seen, however, as a long-term financing method for solar projects. An ESPC is a guaranteed savings contracting mechanism  that requires no up-front cost. An energy services company (ESCO) incurs the cost of implementing a range of energy conservation measures (ECMs)—which can include solar—and is paid from the energy, water, and operations savings resulting from these ECMs. The ESCO and the agency negotiate to decide who maintains the ECMs. Payments to the contractor cannot exceed savings in any one year. These contracts are recommended for renewable energy projects only if energy-efficiency measures also are being performed.

Multiple contracting options are available to agencies interested in an ESPC. The DOE offers an indefinite delivery, indefinite quantity contract designed to make an ESPC as cost-effective and easy to implement as is possible for federal agencies. Several ESCOs are prequalified and have accepted the terms of the IDIQ contract; these companies thus can respond to project requests. The U.S. Army also has an IDIQ contract in place as an alternative to the DOE option. The discussion below focuses on the DOE ESPC process, which is explicitly defined. Additional information is available on the FEMP Web site. Also, FEMP has extensive resources including contract templates, flowcharts, and process guidance.

Pros

  • The 25-year contract length fits well with longer renewable energy paybacks.
  • The performance is guaranteed.
  • The operations and maintenance can be included as part of the contract.
  • The agency in charge of the site can require that solar be a part of the project.
  • A project facilitator is assigned (FEMP-funded through initial proposal or preliminary assessment).
  • The sale of excess electricity and thermal energy is allowed (EISA provision).
  • The agency contracting officer (CO) has the discretion to allow ESCO or third-party ownership of the renewable energy conservation measures eligible for federal and state tax incentives.

Cons

  • Since ESCOs traditionally do not own assets, it is difficult to monetize tax incentives related to solar.
  • Not recommended for renewable-only projects.

Utility Energy Services Contract

Utility energy services contracts (UESC), like ESPCs, have a history of use in the federal sector primarily for energy efficiency projects. Now, these contracts are also being seen as a method of long-term financing, with the added benefit of usually being a sole source contract. A UESC is an agreement that allows a "serving" utility to provide an agency with comprehensive energy- and water-efficiency improvements and demand-reduction services. The utility could partner with an ESCO to provide the installation, but the contract is between the federal agency and the "serving" utility. This contracting mechanism primarily is for bundled energy-efficiency and renewable energy projects, and typically is not used for standalone renewable energy projects. The steps in the UESC process are well defined, but different utilities might describe them differently. The process steps described below are representative of the general process.

An effort currently is underway to define a process for a utility renewable electric service contract (URESC) for parties interested in pursuing a standalone solar electric project with a utility in a specific service territory. The URESC concept is envisioned to produce a cross between a PPA and an UESC. It is hoped that an URESC project will commence in 2010 and define this financing and contracting option.

Note that the following discussion focuses on the renewable energy portion of a UESC project.
For general information and assistance with UESCs, the FEMP offers Utility Energy Service Contract: Enabling Documents.

Pros

  • The UESC contract term is 10 to 25 years, and varies by agency (average project term is 14 years). The EISA (section 513) prohibits agency policies that limit privately financed contract terms to a maximum period of less than 25 years.
  • The GSA legal opinion states that extended utility agreements are allowed (Utility Energy Services Contracts: Enabling Documents <link to http://www1.eere.energy.gov/femp/pdfs/ uesc_enabling_documents09.pdf>.
  • Utilities now are eligible for a renewable investment tax credit (the utility must own a renewable energy plant).
  • Interconnection, tariff, and standby issues should be minimal with utility ownership (but this is not always true and should be explored prior to proceeding).
  • Utilities are interested in a wide range of project sizes (large and small dollar value projects).
  • A relationship already exists.
  • Utilities often have access to reduced financing rates due to their financial strength.

Cons

  • Not all utilities offer UESCs but FEMP is helping utilities launch UESC programs.
  • The utility might have limited renewable experience and could be uncomfortable with renewable projects.
  • Issues could arise regarding contracts for terms of more than 10 years; 10 years is acceptable for energy efficiency but renewable energy projects usually require a longer contract to be economically feasible.

Enhanced Use Lease

In the federal sector, enhanced use leases (EULs) have a history of being used to implement infrastructure building projects. Now, they are also being used to realize solar energy projects. An EUL is a real estate agreement that focuses on underutilized land. Prospective developers compete for the lease, and payment can be either monetary or in-kind consideration (in this case, renewable power can be part of the consideration). The value of the lease is used to determine the amount of consideration. An EUL typically is used for large projects, for example those having a capacity that is greater than the site load. A few agencies have the authority to execute an EUL.

Pros

  • Discovers unrealized value of underutilized property.
  • Supplements underfunded facilities costs.
  • Can be used in combination with the ESPC, UESC, and PPA.

Cons

  • Currently only DOD, DOE, National Aeronautics and Space Administration (NASA), and the U.S. Department of Veterans Affairs (VA) have the authority to execute an EUL.
  • Must not be excess property as defined by 40 U.S.C. § 102.

After making your financing decisions, the next step in the process is implementing for the solar installation.