Solar PPAs – the Uber of Solar is Riding into the Virginia Sunset, Unless Localities Act Now

Local governments in Virginia can benefit from the 30% federal tax credit by using a Power Purchase Agreement (PPA) to finance their solar installation — but only if they act soon.

As Virginia local governments and advocates consider whether and how to advance renewable energy in their communities this year, they will very likely be looking at one of the most powerful financing methods for commercial-scale solar, the solar Power Purchase Agreement (PPA).

Solar PPAs arrived in Virginia in 2010 and were enacted into law in 2013. But by December 2019 PPAs may be approaching their legislative cap in Virginia. The future is upon us, and those localities that continue to defer decisions on solar may find it more, not less, expensive in the future.

Here’s why.

Buy the Ride, Not the Car

First, some background on why Virginia localities should view PPAs as the Uber of solar deployment in their communities and why that’s a good thing.

Ever since this form of solar financing was introduced by Sun Edison and Wells Fargo in 2002, PPAs have remained the single greatest factor in the widespread deployment of solar in the commercial and government sectors in the United States. That’s because solar PPAs require no capital investment, carry no maintenance cost, and entail no performance risk for the customer. At the same time, solar PPAs can offer electricity rates lower than electric utilities, with a fixed escalation rate that enables customers to budget their electricity costs for 20 to 25 years.

With solar PPAs, customers buy solar power, not solar panels.  Buy the ride, not the car.  Think Uber.

Secure Futures was the first solar company to deploy a solar PPA in Virginia in 2010 for a 104 kilowatt solar rooftop project at Eastern Mennonite University (then the largest solar array in Virginia). In 2013 Secure Futures introduced legislation with state Senator John Edwards to make solar PPAs legal in Dominion territory, and negotiated terms with Dominion and other stakeholders to help usher the legislation into law. Dominion agreed to a pilot program with the proviso that there be a cap of 50 megawatts of solar PPAs, and no project larger than 1 megawatt.

Since the PPA program started, Secure Futures has continued to lead in the deployment of PPAs in the Commonwealth, developing solar projects with this powerful financing method across Virginia. Back in 2013 PPA caps seemed far off into the future. But today they do not.

Key Deadlines Coming Up

The future is upon us regarding going solar. Local governments wishing to go solar can no longer afford to procrastinate, as future events will likely constrain their options. Regarding the future of solar PPAs in Virginia, localities may want to consider the following challenges to accelerate their planning for solar this year, as well as to make their voices known in the state legislature:

• The federal investment tax credit (ITC) begins to ratchet down after December 31, 2019 from 30% to 26%, then to 22% the following year, and finally to 10% thereafter for non-residential solar projects. Private sector investors and developers of solar projects pass along the ITC benefits to customers in the form of lower electricity costs.  All things being equal, reductions in the ITC will present an economic hike in the cost of solar electricity to customers;
• Virginia electric utilities have made plain their intentions to curb solar net-metering, now capped at 1% of the utility company’s peak demand, which will have a dampening effect on the spread of solar, as we saw in South Carolina this summer; and
• We may hit the 50 megawatt cap for solar PPAs in Dominion territory in 2019, or most certainly by 2020, thus creating a race to the cliff for solar customers and developers.

Solar Power Purchase Agreements have finally developed some momentum in Virginia.  At this writing there are 7.6 megawatts of solar PPAs recorded in Dominion territory with the State Corporation Commission, and none in APCo territory. That’s a 300% growth from the beginning of this calendar year.  We are witnessing a hockey stick trend, and we could expect to see another 25 to 35 megawatts of solar PPAs put on the boards next year, that will thenceforth create a zone of uncertainty for customers and developers in investing in the engineering and other soft costs to develop solar projects as we approach the 50 megawatt cap.

And Now, for Some Good News

On May 14, 2018, Virginia State Comptroller David Von Moll issued an informal advisory, via email, to the Director of the Virginia Department of Mines, Minerals, and Energy (DMME), that a solar PPA is indeed a service agreement and not a lease. His email stated:

We’ve examined the key provisions of this agreement template and don’t believe the draft proposal would qualify as a capital lease now or after GASB 87 implementation.  Our views could change after the implementation guidance is issued, but as of now with these provisions there would be no impact on debt.

As his email was specific to the Secure Futures’ solar PPA template agreement, his advisory may or may not differ with other forms of solar PPAs. Not all solar PPAs are cut from the same cloth, even though some industry standards have emerged for much of the boilerplate language contained in solar PPAs.

This is good news, since for a long time the Comptroller had previously opined that solar PPAs were capital leases. This new advisory clears a large uncertainty for local and state governments to no longer construe a solar PPA as debt. This means that localities would not require approval by governing bodies for a capital outlay for a solar PPA. The service agreement would show up as an annual operating expense, not as a liability on the balance sheet. This advisory has several qualifiers, however, including:

• It is an email message and not a formal legal opinion;
• It is limited in its scope to Secure Futures’ solar PPA;
• Future guidance may change, but remains unlikely to do so; and
• For now, localities could use the Secure Futures solar PPA template with some confidence that it would not be construed as debt.

For those localities that have hesitated about solar PPAs due to the confusion over the debt question, now is the time to engage and work with other localities to amend the solar PPA legislation.

The common sense and greater good approach would be to raise the total cap for solar PPAs to 200 megawatts, raise the project cap to 2 megawatts, and to ask the State Corporation Commission to open a docket to determine the circumstances, if any, when it makes sense to put a cap on solar PPAs and net-metering in Virginia. An SCC docket would bring all the benefits of transparency and inclusiveness, and would build a foundation on which to create economic incentives for the electric utilities to support distributed solar.

— Tony Smith, Secure Futures Solar