States Authorizing 3rd Party Power Purchase Agreements
First, the bad news: policy battles over 3rd party ownership of solar muddy the waters
Just pile it on top of the other cadre of unenlightened policies that North Carolina is behind these days. Yes, North Carolina, my home state, is making headlines for another boneheaded public policy move, this time regarding the highly controversial topic of… solar! The NC Utility Commission (NCUC) recently upheld a law that prevents 3rd party ownership of solar projects. The case that brought the issue into the public limelight concerned a whopping 5.25 kW installation that the environmental advocacy group NC WARN had built to provide electricity to a local church. The two parties signed a 3-year PPA at a discounted rate, which, doing some quick math, might have provided around 23,000 kWh per year valued at around $4,000 or so for the life of the PPA based on prevailing rates. Well, Duke Energy was not having it! The biggest utility in the nation, valued at over $55 billion, opposed NCUC and beat down this encroachment on their business. And just to make an example out of NC WARN, they were slapped a $60,000 fine, which is around 15x more than the electricity that would have been sold in the PPA arrangement. Duke Energy is not entirely foolish to help combat the proliferation of 3rd party ownership, but their choice to do so goes against the countervailing inertia moving us into a more distributed energy future. Duke Energy will surely be fighting an uphill battle on this issues for years to come.
North Carolina is not alone in this business of prohibiting 3rd party ownership of solar projects. The state stands in solidarity with Florida, Kentucky, and Oklahoma, which sounds like a NCAA Final Four (pause for sad memories of UNC’s recent loss). Unfortunately, that is where the commonalities stop, because, in the case of solar, competition (in this case with incumbent utilities) is prohibited. The game is rigged in favor of utilities with virtual, if not actual, monopoly power, something that supposedly goes against federal trust law. As a North Carolinian, it is with deep regret that I admit that South Carolina (!) recently passed legislation to allow for 3rd party ownership of solar projects. Georgia has done the same (although not accounted for in the map above). So, take heed, NCUC, your neighbors to the south are upstaging you on the transition to clean energy. Well done. Just add it to the list...
On a positive note, 3rd party ownership trends are helping to unlock potential in the behind-the-meter corporate solar market
Commercial PV Installations by Ownership Structure
(Source: GreenTech Media)
With all of the pushback on 3rd party ownership of solar in certain states, one has to consider what might happen if this was allowed. Well, one thing is for certain - corporations would be buying into solar, and likely in a big way. This is, after all, the situation that we see in states that allow 3rd parties to sell electricity from solar projects to corporations. As solar has become more competitive with prevailing retail electricity rates, corporations have started to see locking in stable electricity prices from solar as a complete OpEx no-brainer. Though a handful of corporations opt for the direct ownership and financing approach, the vast majority are seeking 3rd party owners to provide them with solar solutions. And those trends are expected to continue, as shown in the projections above. I go into further detail on this topic in a previous blog. So, what is to like and dislike about this arrangement?
One the one hand, 3rd party ownership does fundamentally decentralize the electricity provision business, especially as behind-the-meter applications become more reliable and cost-effective. That is seen as a threat to incumbent utilities who have historically been the end-all-be-all of power provision. Setting aside utility concerns for revenue loss, the real question is whether utilities can meet the needs of large offtakers looking for distributed power solutions. The answer is yes and no, depending on the utility.
It seems like 3rd party solar ownership is here to stay, so what’s the catch?
This gap in the market opened the door for an explosion of independent power producers, offering a staggering array of behind-the-meter solutions to customers. Some of these we have come to know well - SolarCity, SunRun, Vivint, etc. But there are many others vying for a place near the top of the pecking order. So, what of the risk of working with these solar companies?
It really boils down to counterparty risk. Two parties really have to believe that each other will continue to exist as solvent enterprises for decades to come. Not a trivial proposition from the standpoint of a corporation analyzing the evolution of the solar industry, perhaps for the first time. Clearly, the ongoing tumult of the growing solar industry (aaahh SunEdison chuuu) brings to light the sometimes ugly process of picking winners and losers. It would not be unreasonable to assume that the landscape of solar companies out there will continue to change for some years to come. So, why should you sign a decades-long PPA with a company that may not continue to exist for the next five years? That is the question of the moment. But if the data are any indication, corporations are becoming increasingly comfortable with signing long-term PPAs with 3rd party solar power producers, not to mention homeowners. So, back to the original story, what are the NCUC and Duke Energy, in a classic “tail wagging the dog” relationship, so worried about? It might be the “adapt or die” mantra that has been reverberating around the industry since the collapse of several European utility titans. But rather than adapting, they are digging in their heels on an issue that 46 other states in the U.S. have already come to an agreement on. If there is anything that we can agree about the future, it is that change will be ever present.
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