Innovative energy finds some innovative contracting—devised by and for the State of California.

By Lyn Corum

Virtually everyone involved in the development of solar power purchase and solar license agreements in Sacramento had the same comment: “This has been a real discovery process.” And virtually all seem to think it was worth the effort: Over the next 20 years, California now stands to benefit from seven solar photovoltaic (PV) installations, totaling 3.2 MW, at state-owned facilities—cheap energy without capital expenditures.

Roy McBrayer, deputy to the State Architect and manager of Governor Arnold Schwarzenegger’s Green Building Initiative, and Jigar Shah, president and chief executive officer of SunEdison, expect more such contracts. The governor’s energy reduction goals and solar initiatives are likely to spur a multitude of solar PV systems sprouting on state-owned rooftops and parking lots throughout the state.

At an estimated cost of $24 million, SunEdison is constructing and will own, operate, and maintain the seven PV systems. The company will sell power back at a discounted price, to the state institutions for the next 20 years. “What we’re doing is not new, but it’s new to solar,” says Shah.

Solar PV was not foreign to the state. A solar system is installed on the new Leadership in Energy and Environmental Design (LEED) Platinum–certified, state-leased building where the California Environmental Protection Agency has its headquarters. The Franchise Tax Board building was retrofitted with a solar system. And the Capital East End Complex in Sacramento, occupied in 2002, has an integrated solar system. The complex consists of five buildings that house the Department of Education (also LEED Platinum–certified) and the Department of Health Services, not to mention a parking garage.

Developing the Contract
This solar program began when the California legislation passed into law in 2001 and 2002 the Electric Generation Partnerships on State Buildings, created and designed by a state agency, the California Power Authority (CPA), that was unfunded in subsequent legislation. The principle was that state agencies would provide roof or land access to solar PV suppliers to install systems and then purchase the power generated at discounted prices.
The concept was borrowed from the cogeneration third-party contracts, known as qualifying-facility power purchase agreements, that proliferated starting in the early 1980s. Later, energy-management and -services companies began offering performance contracts, popular to this day. They finance and install equipment that reduces and manages utility costs. The project costs are paid out of the energy savings over time.

However, solar service agreements are slightly different. The parties sign a solar power purchase agreement plus a solar license agreement, similar to a traditional lease in which the customer agrees to host the solar photovoltaic system on its property. The power purchase agreement spells out the terms under which the customer buys electricity generated by the PV system at a rate discounted from its applicable utility tariff for every kilowatt and kilowatt-hour delivered.

Before the CPA went away in 2004, it had already enlisted the help of the State Department of General Services (DGS) to assist with bid solicitation and project management. In conjunction with the DGS, the CPA developed the bid package and issued it in April 2004. The DGS then inherited the program and now manages it. While the legislation creating the program ended on January 1, 2007, the program itself has been adopted by the governor’s Green Building Initiative, guaranteeing that it will live on.

The DGS’s 2004 solicitation produced only one qualified bidder—SunEdison, based in Baltimore, MD. Difficult on-again–off-again negotiations over a two-year period finally produced 20-year power purchase and license agreements with four California State University campuses, a state hospital, and a prison. Each institution leased roof or ground space to SunEdison, allowing it to build, own, and operate the PV systems and sell the electricity generated back to the building hosts.

McBrayer does not know why SunEdison was the only bidder. He surmises that it was because it was a new concept for the California market and because it required sharing of the risk. “We had hoped to see more bidders, and by modifying our bids in the future we hope to attract more,” he says. “We’re still trying to process what we’ve learned.”

The State’s Motivation
In the Green Building Initiative, which grew out of his December 2004 executive order, Governor Schwarzenegger called for public buildings to be 20% more energy-efficient by 2015, thereby creating a great deal of interest in additional solar third-party agreements.

This project represents the kind “we’d like to do more of,” McBrayer says. Distributed generation should contribute to the 20% drop in energy use the Governor is looking for in each state building, and in so doing it displaces dirty generation, reduces utility loads, and contributes to California’s Climate Change Initiative, he adds.

That motivation propelled the DGS through the two years of tough negotiations because it wanted the assurance that some energy costs will remain constant. “We think the power purchase agreement acquisition model is one that will work because it avoids large capital investments,” McBrayer says. Another important element is the ability of the contractor to get federal tax credits, self-generation incentive payments from the state (through investor-owned utilities), and other incentives to buy down up-front costs.

McBrayer characterizes the negotiating as a real discovery process. It involved working with unfamiliar companies, and each side had to learn how the other operated, what the market conditions were, and what were the operating guidelines. The structuring of agreements became important to account for project qualifications and the timing of construction to guarantee the maximum benefits of the federal tax credits for SunEdison. “All of this experience will help us to better structure the bidding process and contracts in the future,” McBrayer says.

SunEdison’s Shah agrees that the negotiations were a learning experience for both sides. Initial direct negotiations with the DGS were discouraging; but DGS attorney Ron Small joined the negotiating team, and his experience in negotiating power purchase agreements in the past, says Shah, refreshed the negotiations. Furthermore, representatives from the schools and agencies joined the negotiations, in one case adding expertise from years of negotiating QF power purchase agreements.

Shah continues: “After several rounds of amendments, we finally had a contract that was satisfactory for all parties”—including SunEdison’s investors.

Shah says some of the agencies got a bit frustrated while the negotiating team took months to figure out what regulatory rules applied to solar services contracts. This was after the initial euphoria of completing the contract, he says. “What was important, however, was that the parties developed clearly defined processes so the state can be part of the solution in improving its environment and to relieve strain on the grid,” he concludes.

Beyond avoiding large capital investments, many customers prefer this model because it is scalable, says Shah. They are interested in more than one location and don’t have the sufficient rate of return to invest in the projects with their own money. California will now be able to use the contracts developed over the two-year period and duplicate them for future projects.

What’s the Risk?
Assigning risk was apparently at the heart of contract negotiations. As DGS planners indicated, construction risk, technology risk, warranties and guarantees, service, and maintenance and operations were all on negotiators’ minds. It was necessary for the agreements specifically to address each of the risks and how those risks would be mitigated. It was also important to spell out the rights of the affected parties, the methods for determining damages, and time frames for taking appropriate actions. McBrayer concluded that risk assessment and management is crucial to a successful solar PV venture.

Shah also addresses the issue. “We’re really trying to apply risk to the people who can take it,” he says. “Customers are taking the risk that electricity prices won’t go down. Investors are taking the risk that regulatory policy won’t change [thereby continuing to honor rebates]. And we’re taking a risk on the price of solar materials and maintenance costs. If the system doesn’t perform as promised, we take the hit.”

Billing was another issue state personnel were concerned about. Since the price paid was discounted from the utility tariff, the DGS asked that bills from SunEdison be designed to be similar to the utility bills so that they could be easily compared. For example, if the facility is on a time-of-use tariff, the solar bill would be broken out into the appropriate time-of-use periods showing the generation data for each time period as a billing determinant along with the utility tariff billing determinant.

The solar system at Chuckawalla Valley State Prison was designed to supply one-quarter of the facility’s peak demand load of 4 MW.

Billing, of course, is dependent on accurate metering (on 15-minute increments) of both instantaneous demand (kilowatts) and the amount of energy used (kilowatt-hours), translating it into revenue-grade data.
What happens at the end of the 20-year lease? Customers can buy the system at fair market value, says Shah, since they have a 40-year lifetime. Or SunEdison can remove the system, either at the customer’s request or because the customer’s offer was too low. The customer also has the option to sign another contract.

Love at First Sites
The PV systems are being installed at four California State University campuses: Dominguez Hills, Chico, San Bernardino, and Cal Polytechnic, San Luis Obispo. The other three systems will be at Chuckawalla Valley State Prison in Blythe, Patton State Hospital in San Bernardino County, and the Stockton office of the California Department of Transportation (Caltrans).
Three systems have already been installed and began operating in 2006: Chuckawalla, Patton, and Cal State Dominguez Hills. The Cal Poly and Cal State Chico systems are under construction, and the Caltrans and Cal State San Bernardino systems were scheduled to begin construction before the end of 2006.

Chuckawalla Valley State Prison
SunEdison installed a 1-MW PV system on 10 acres in front of the prison. You can see it as you enter the main gate, according to Harry Franey, energy manager for the California Department of Corrections and Rehabilitation. He said the system was sized to conform to the state’s self-generation incentive program rebate formula, which provides a subsidy covering approximately half the price up to 1 MW. The solar system will supply one-quarter of the prison’s peak demand load of 4 MW.

Construction began in March 2006 and it was completed in late July, Franey says. SunEdison and the prison administration worked hard to avoid problems. Franey had direct input in the contract negotiations and was able to contribute experience gained when he negotiated QF power purchase agreements. “The contract gives us protection,” he says. For example, there is a $50,000 annual minimum benefit or savings requirement written into the contract. He says his department has a waiting list of institutions eager to install similar systems.

Franey says the economic benefits are indirect. The utility bill from Southern California Edison contains 30 different billing components, and it may be difficult to discern a reduced utility bill in any given month. For example, if the PV system is shaded by clouds—typical of Blythe’s desert monsoon season in August and September—one 15-minute period of peak utility power demand can bump up the demand charge for the rest of the year.

A second bill for the power the PV system supplies will come from SunEdison. It contains a discount off the utility tariff and is guaranteed to remain constant for the 20-year life of the project. Personnel at the prison, as well as Franey in Sacramento, will be able to monitor electricity use by dialing in either to the SCE meter or SunEdison’s.

This PV system joins two other renewable projects in the corrections system: a solar thermal project at a Tehachapi facility and a geothermal heating system at Susanville.

Patton State Hospital
Patton’s 279-kW solar PV system was installed on a parking canopy in one of the state hospital’s parking lots. SunEdison erected five steel canopy structures on one-half acre of the lot to hold 1,644 panels. Construction was completed at the end of July 2006.

Syed Alam, senior mechanical engineer in the Department of Mental Health, says the department was excited about getting the system and wants to have solar PV installations at its other hospitals in Atascadero, Los Angeles, Napa, and Coalinga. Patton was chosen for the first installation because it has a lot of open space. It chose one of its parking lots for its solar array because it wanted to provide cover for the cars parked there. The hospital is located in one of the hotter spots in the state: the San Gabriel Valley near San Bernardino.

Alam says the solar system will replace less than 20% of the hospital’s load—which ranges between 1.2 MW and 1.8 MW. The load not only varies, but its off-peak load often exceeds on-peak load because it has three pumps, 100 horsepower–150 horsepower, for its wells, which are operated only during off-peak hours. The department would like to eventually install a 1-MW PV system at Patton.

Alam also participated in the negotiations with SunEdison and found the process to be tedious but necessary because it was the first of its kind. He says billing procedures were one of the items that caused him concern but were eventually resolved.

California State University, Dominguez Hills
SunEdison installed a 500-kW array, also on parking canopies, in a parking lot at the Cal State campus located in Dominguez Hills. Steve Slimp, assistant director of the school’s physical plant, describes the only difficulty any of these installations has experienced to date: Students complained about cutting down the trees to make way for the solar installation. Had they remained, the trees would have shaded the panels too much. The students resolved their opposition by acknowledging that the installation was a renewable resource, even though it wasn’t as pretty as trees, Slimp says.

Slimp says his department identified the site and informed the California State University chancellor’s office to put the campus’s name in the hat for a project. The chancellor’s office negotiated on behalf of its campuses. Slimp was not surprised it took two years. “You always learn when you go through these things.”

Advice for Customers
SunEdison looks for customers who care about solar energy in a compelling way. Beyond that, a customer needs to have a good financial standing to guarantee it will be in its location for 20 years and that the site is ideal for solar. If planning for a roof installation, for example, the roof should be less than five years old, according to Shah. A roof that will last only for another five to seven years should not have a solar system installed on it.
To meet economies of scale, the project must be at least 125 kW. The inverter is cheaper for systems of 100 kW and larger. Labor costs are lower for larger systems and can be amortized at a better rate over time. “I have to pay engineers and marketing people the same rate for a 30-kilowatt and a 125-kilowatt system,” Shah says. Fixed costs for cranes and tools are the same for large and small systems.

The DGS advises that customers should understand their motivation for pursuing a solar PV project. Do you want to establish green credentials, and are you willing to pay a premium for power? Or are you looking for a peak load–shaving strategy? The answers to these questions will factor into decisions regarding business models, financing, installation, and operations, according to the DGS.

Customers should choose the business model that works best for them given their financial and operational opportunities and constraints. In the past, the business model has been to purchase a system outright with turnkey installation.

Another model is to finance the project, also with turnkey installation. Yet another is the third-party-ownership power purchase model chosen by the state in spite of the complexity of the required multiple agreements.

A clear understanding of solar technology and siting requirements is very important, according to the DGS, because much of the technical information will find its way into the agreements. For example, the agreement should reflect the risks associated with the installation of the modules, inverters, transformers, interconnections, and metering.

It is also critical for customers to understand their own electrical load profile on at least a 15-minute increment or whatever increment the local utility uses to measure delivered power. Accurately metering kilowatts and kilowatt-hours and translating them into revenue-grade data and information are critical for measuring and billing the solar system’s performance accurately.

Finally, any company or facility contemplating the installation of a solar system should understand how the market works and who the players are. Typically, they are not manufacturers but developers, either in the form of installers or lenders. Lenders or financing entities have recently entered the market, positioning themselves as primary contractors and financing entities. They then subcontract the suppliers and installers of equipment. Therefore, it is important to establish criteria and requirements for the service before requests for bids are released, and then base acceptance of bids on those criteria. 

California-based writer Lyn Corum specializes in topics related to energy and environment.

DE - March/April 2007