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Jan 31, 2012

Economizing Distributed Solar on a National Scale

 

Posted with permission from the National Renewable Energy Laboratory (NREL). This NREL article/blog is not to be used to promote any commercial product or service or to imply an endorsement regarding the same by NREL or the U.S. Department of Energy.

Anyone who's taken an economics course knows the fundamental advantages in economies of scale. But achieving lower costs through aggregated purchasing, standardized processes, and large sales contracts is easier said than done. This is especially true when the product is commoditized, cannot be stored, and pricing is not consistent across multiple markets. Despite these challenges, a couple of major institutions have developed replicable models that could lower the cost of distributed solar generation at an aggregate utility scale.

The models stem from two major multi-billion dollar solar programs announced in 2011, "Project Amp" and "Project SolarStrong." The multi-state projects, with the capacity to generate a total of up to 733 and 300 megawatts of solar generation capacity, respectively, were developed through the combined efforts of industry heavyweights Prologis, Bank of America Merrill Lynch (BofA Merrill Lynch) and NRG Energy for Project Amp, and SolarCity, BofA Merrill Lynch and U.S. Renewables Group for Project SolarStrong. While Amp is slated to sell power directly to utilities, SolarStrong is planned to be behind the meter, giving credence to two different revenue models. In addition, both projects are slated to span multiple markets with diverse incentive programs and electricity prices, indicating an improvement in the economics of large-scale, distributed solar.

Not surprisingly, these ambitious, innovative solar programs were not designed over night. According to Jonathan Plowe, BofA Merrill Lynch Managing Director and head of New Energy & Infrastructure Solutions, "a significant amount of time, money and due diligence was dedicated to developing a low-cost capital structure that was also scalable."

BofA Merrill Lynch had to do its own credit and legal analysis, and work with the rating agency to create a new framework to rate Project Amp's debt. "It was a major challenge to develop standards that met internal, rating agency and loan guarantee requirements…but also was commercially viable," said Plowe.

Once developed, however, those standardized contracts, metrics, processes and rating methodology provided a blueprint that can be leveraged across multiple projects in various markets across the country. Economies of scale were gained, which allows BofA Merrill Lynch to efficiently profile and package projects, lower its operating costs, and in turn, lower the project's financial cost structure and cost of debt.

While standardization will facilitate lower debt charges and ensure long-term financing certainty, power purchase agreements (PPAs) and available acreage will improve a project's speed-to-market. With thousands of acres of rooftop located in urban centers where power is needed and virtually no environmental permitting is required, Prologis is well positioned from a project development perspective. The major remaining decision is market penetration, driven primarily by PPA negotiations with utilities.

Because pricing certainty drives investment certainty and lower PPA prices increase the attractiveness of renewable energy for utilities, "the Department of Energy loan guarantee was critical to the financials and timing [of Project Amp]," noted Drew Torbin, Vice President of Renewable Energy at Prologis. "Having certainty on the availability and cost of financing with a project of this size and geographic diversity is new to the industry and will certainly improve speed to market for these projects."

Despite the critical role the loan guarantee played in moving Project Amp forward, the sun has not necessarily set for distributed projects not receiving a loan guarantee. Plowe noted that BofA Merrill Lynch expects to use the template they developed for Project Amp to drive additional projects without help from a government guarantee, starting with Project SolarStrong, which is expected to be the largest residential solar project in American history.

Ryan Hubbell is a Research Program Participant with the National Renewable Energy Laboratory’s project finance team and has 10 years of experience, including in the oil and gas business. Ryan holds a B.S. in Finance from Texas Christian University and is currently seeking an International MBA at the University of Denver.

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