Thanks to a Morris County energy partnership, local governments
receive access to renewable energy for a portion of their energy
needs at a price below what they are paying, and they have no
obligation on the debt.
Morris County has created a renewable energy program through the unique powers of its Improvement Authority. The goals of the program are to:
provide renewable energy, starting with solar panels, for local governments in the county on a turnkey basis,
with no capital cost passed on to the local units,
at operating costs lower than existing utility rates, thereby resulting in operating budget certainty and savings for its local government participants.
Based on these goals, the county has heard from over 40 local
units that are interested in installing solar panels on over 7
million square feet of roof space, which equates to roughly 20
megawatts (MW) of renewable energy. Morris County is doing its
part to realize the state's Energy Master Plan goal that by 2020,
30 percent of the state's electricity needs are to be provided
from renewable energy sources.
The county has sought a county-wide geographic reach in its initial pilot program. We are presently in the process of receiving proposals pursuant to the state's competitive contracting procedures under Local Public Contracts Law. This pilot program seeks to provide 3 MWs of power on as many as 16 local and county buildings for five boards of education, the county, and the county's Park Commission, along with certain capital improvements related to these panels, such as roofing improvements and electrical upgrades.
The cost of this pilot program is still to be determined through the competitive RFP process, though the state's Local Finance Board has approved Improvement Authority bonds of up to $30 million for this pilot program.
While other local governments have either financed solar programs with tax exempt bonds or entered into turnkey relationships with private solar developers (no longer can these private contracts be sole sourced; Local Finance Board notices 2008-20 dated December 3, 2008 and 2009-10 dated June 12, 2009 require use of the competitive contracting procedures of the Local Public Contracts Law), the county's program seeks to take advantage of the benefits of both options, while minimizing the drawbacks.
Since government can generally access capital at costs cheaper
than the private markets, the Improvement Authority is proposing
to issue bonds to finance this program that are guaranteed by the
county and its AAA rating. This program has been run through the
rating agencies, which are supportive and have upheld the
county's AAA rating.
The private solar developer sector, on the other hand, can take advantage of federal tax benefits (such as the 30 percent investment tax credit and five year advanced depreciation on 25 year assets), and is experienced in optimizing the monetization of solar renewable energy credits (SRECs) obtained through the state's Board of Public Utilities for producing renewable energy.
These benefits have been combined in the county's renewable energy program. The authority enters into a series of license agreements with its local governments that want renewable energy, in order to gain access to their roof space. After the Authority issues its AAA county guaranteed bonds to finance the solar projects, the Authority leases the solar panels to a competitively procured solar developer, structuring that lease purchase in such a manner as to convey tax ownership to the private solar developer (a determination made by the private party).
The solar developer, in turn, makes lease payments to the Authority to fully pay the debt service on the Authority bonds. Through a power purchase agreement (PPA), the private solar developer sells the electricity generated by these solar panels (having been leased to the private solar developer) through the Authority back to the local units at a rate below the existing utility tariff rate. Finally, the county is asking that the solar developer produce a letter of credit, or some functional equivalent, to ensure that if the county guaranty is ever called upon (e.g., due to a failure by the solar developer to make its required lease payments that service the bonds), the county is repaid in full. The county is exploring whether the Federal Department of Energy loan guarantees can be a realistic substitute for this security.
This structure in effect allows the private market to do what it does best, take advantage of the benefits (such as tax, SRECs, PPA price) and assimilate the burdens (pay the debt and produce security, like a letter of credit) of the renewable energy program, and embed all of that and convert it into a turnkey sales price for renewable energy that is attractive to local governments.
At the end of the day, the local governments get renewable energy for a portion of their energy needs at a price below what they are paying, and they have no obligation on the debt. This reduces local operating budget expenses (in addition to providing budget certainty for the 15 year life of this program under existing law), and doesn't require bond approval. The county is lending its rating to this process, in order to provide the lowest cost of capital, thereby ensuring that the local governments can receive a below tariff electricity rate. Moreover, the solar developer gets the incidental benefit of earning a fair return (in part, thanks to the federal tax and state energy benefits), and the county is protected from downside risk by the security provided by the solar developer.
This hybrid model can be expanded to other forms of renewable energy, including wind, hydro-electric, geothermal and others, albeit with differing financial implications due to varying federal and state incentive programs. The county plans to work through its local government demand for the program before it addresses whether it shall expand the program (which is legally permissible) to not-for-profit organizations. Pricing can be further lowered should the state determine to extend the maximum PPA life from the present 15 years, to 30 years, as the state Legislature did this past June for county colleges (only) under the state's stimulus bill.
The Federal government could further lower the cost to local governments should it expand the present Build America Bond program, presently providing 35 percent of the interest cost on bonded debt to be paid by the Federal government, to this type of renewable energy structure.