We’re increasingly seeing larger and larger projects and portfolios coming in with extremely low PPA rates, sometimes as low as 4 – 5 cents/kWh. Why? Or better yet, how?
As costs have come down – both on the soft costs and also hard with falling technology prices – more markets have opened up for utility-scale projects that may sell electricity to utilities at wholesale or avoided cost rates (slightly higher, but still low). These projects, with no net metering or behind-the-meter designation, are known as “qualifying facilities” under the Public Utility Regulatory Policies Act (PURPA). As such, utilities are required by law to buy the power from these facilities. For a refresher on PURPA, check out our March edition of SOURCE, where we predicted that PURPA would become an increasing driver of solar development as costs come down, and incentive programs dry up in other states.
Where is this development happening? Interestingly enough, most of the development has been in non-traditional solar states, such as the Pacific Northwest, Texas, Idaho, Montana, and parts of the Midwest. In some cases, developers who were very active in North Carolina’s utility-scale market have moved to these relatively untapped markets, as deals are structured similarly.
While costs continue to fall and make these low PPA rates possible, risk is still on the table, especially as the industry awaits clarity on whether commence construction language will be granted by Congress. Will these large projects that are emerging in these markets meet a December 31, 2016 placed in service deadline? Remember: 2016 will be the year of “get it done, and fast.” Any additional execution risk, already unwelcome in any normal year, will not be tolerated by a rational investor.
Unfortunately, even with the cost wins, these markets will become out of reach with a 10% solar investment tax credit (ITC) with current costs and financing structures. The moral of the story? Unless commence construction or an ITC extension is achieved, expect the PURPA solar surge to fade, as only the most efficient developers and financiers can tackle these large-and-low-rate deals.
This is an excerpt from our December edition of SOURCE: the Sol Project Finance Journal, a monthly electronic newsletter analyzing the solar industry’s latest trends based on our unique position in the solar financing space. To view the full Journal or subscribe, please e-mail firstname.lastname@example.org.
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