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On-Site Renewable Power Purchase Agreements for Renewable Energy Projects

An on-site renewable power purchase agreement (PPA) enables Federal agencies to fund a renewable energy project by contracting to purchase the power generated by the system. The renewable energy equipment is installed and owned by a developer but located on-site at the agency facility.

As noted in the renewable energy project funding overview, PPAs provide a range of attractive benefits to Federal agencies trying to access renewable energy. These include no up-front capital costs; the ability to monetize tax incentives; typically a known, long-term energy price; no operations and maintenance (O&M) responsibilities; and minimal risk to the agency. These benefits have all led PPAs to become a major funding vehicle for renewable energy, solar in particular, in the United States.

Several issues relate generally to any Federal use of PPAs for on-site renewable energy systems:

  • Agencies also need to pay attention to the treatment of renewable energy certificates (RECs) in the PPA as their ownership can affect the energy price as well as an agency's ability to meet Federal energy requirements. Because some RECs are more valuable than others, an agency can sometimes purchase less expensive RECs to replace project RECs sold to improve project cost effectiveness and meet requirements.

  • Despite their prevalence in the private sector, PPAs still face several challenges for Federal agencies. Federal PPAs are generally limited to a 10-year term because of General Services Administration FAR Part 41 utility contracting authority. However, there are two potential exceptions. The Western Area Power Administration can sign longer-term PPAs for Federal agencies in their service territory and the Department of Defense can sign up to a 30-year contract using 10 USC 2922a.

  • PPAs are dependent upon the developer having legal access to and control over the specific site of the renewable energy system, agencies should review potential site access and land use agreement options, such as leases, easements, or licenses to determine viable options.

  • PPAs between a customer and a separate private owner of the on-site renewable electricity system, sometimes referred to as a "third party" owner, are not legally recognized in many states or utility service territories. In fact, in a few states, this model is specifically disallowed. The Database on State Incentives for Renewables and Efficiency has information on which states currently allow third-party PPAs for solar projects.

FEMP also provides a wide range of information on these issues and the use of PPAs by Federal agencies. FEMP also created a Quick Guide to on-site PPAs for Federal projects.

This section only discusses a few detailed issues associated with a Federal agency using a PPA for integrating renewable energy into a larger construction project. The primary issue is the coordination of the PPA developer's activities with those of the project design team and contractors. Additional issues can arise in specific instances of having multiple renewable energy systems or transferring site operations to a management and operations (M&O) contractor.

Coordination of Separate Contracts

The developer in a PPA is responsible for project equipment purchase, design, installation, output, and maintenance. Provisions must be included in the agreement, similar to an engineering, procurement and construction contract, requiring participation in the integrated design process and coordination of designs and construction with prime contractors. The project energy lead needs to review the renewable energy system design to ensure elements do not affect other energy issues with the building.

As an example, a Federal laboratory used a PPA to install photovoltaics in conjunction with the construction of a highly energy-efficient building. The renewable energy developer planned to use their standardized design to mount the system to the sloped roof, but the design would have penetrated the additional insulation and thermal barrier of the roof. Both the laboratory and the developer modified their design to resolve the issue. Without coordination, this could have affected the energy performance of the building.

In a construction project, a related concern is that the PPA needs to specify the boundaries of the covered renewable energy system—both for ownership purposes and design responsibility. Details delineating the design and ownership responsibilities need to be very specific, including details as specific as the exact location at which ownership of the electric wiring transfers from the renewable energy developer to the agency.

Management and Operations Contractor

If the agency plans to turn the responsibility for facility operations over to an M&O or other type of contractor, the agency may not even receive appropriations for power purchases and might be unable to enter into a PPA. If the M&O contractor is the listed utility customer and is responsible for utility payments, it may be necessary or easier for the contractor rather than the agency to enter into the PPA, if allowable. This is not necessary (or even possible) with all M&O contracts, but the contractor's buy-in is essential if this affects a construction project, so early coordination with the contractor is prudent. If it is then determined that a PPA will be advantageous to the contractor, the details of the contracting can be established.

The challenge for this type of arrangement is usually the term of the M&O contract. The contract will usually be re-competed within 10 years and the contractor cannot sign a longer-term PPA. For the contract to remain in effect beyond the current term, the contract needs to be re-signed for the subsequent M&O contracting period. This is expected in most cases, but it may not be sufficient assurance for the developer or its financiers.

A few approaches have been proposed to resolve this challenge. The developer may be willing to enter a shorter-term PPA, taking the risk that any successor contractor will find the price of power under a successor PPA more attractive than the alternative price of power from the utility. This could be a reasonable risk given historical energy price trends, but the developer will likely want a higher energy price during the shorter contract. The agency could grant the developer a favorable, long-term lease or easement for the system so the right to keep the renewable energy system at the site is clear. This gives the developer access to the successor M&O contractor as a customer for a successor PPA. Further information on varying contract lengths can be found in the summary of the responses to a PPA request for information from the U.S. Department of Energy in spring 2011.

Coordination of Multiple Renewable Electricity Systems

In cases where a Federal agency is incorporating multiple renewable electricity technologies into one site, there can be difficulties with coordinating design and accounting for electricity if the ownership is different for the separate systems. Each system must be metered separately.

The various systems need to be designed in a coordinated manner to ensure that they do not negatively affect each other and that interconnection and net metering provisions are still available. The project energy lead should be working with all entities and the utility to identify and resolve any design, utility, or accounting issues.