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Building Futures, a publication of the New Jersey Education Facilities Authority (NJEFA), published an article by DeCotiis, FitzPatrick, Cole & Giblin partners Ryan Scerbo and William Mayer titled “Solar Renewable Energy Opportunities for New Jersey Colleges and Universities.” To date, the green practice has negotiated more than 100 power purchase agreements that save energy and capital for private and public entities and benefit our environment. In the article, Scerbo and Mayer outline the benefits of utilizing solar renewable energy and financing opportunities and tax breaks to make these projects more affordable.

Scerbo and Mayer’s article can be found below:

Solar Renewable Energy Opportunities for New Jersey Colleges and Universities
http://www.njefa.com/njefa/pdf/newsletter/201104_newsbulletin.pdf

April 2011

By:  Ryan Scerbo, Esq., and William Mayer, Esq., Partners, DeCotiis, FitzPatrick, Cole & Giblin, LLP
For: NJEFA Building Futures 

Solar development is exploding in New Jersey. Presently, New Jersey ranks second only to California for the highest number of solar installations among all states. This impressive statistic is not due to the amount of sunshine in New Jersey; rather it is a direct result of New Jersey’s robust regulatory program supporting solar renewable energy financing and development. When combined with certain Federal tax benefits, New Jersey’s incentives can make solar development extremely attractive.

Specifically, the New Jersey legislature has implemented laws that require electricity supply companies to either (1) provide a percentage of energy sales, calculated in megawatt hours (MWhs), or installed capacity, calculated in megawatts (MWs), from solar renewable energy sources, or (2) pay a predetermined penalty. These requirements are known as the Renewable Portfolio Standards (RPS). The required percentages of solar renewable energy mandated under the RPS increases incrementally on an annual basis, beginning from a base year, until an ultimate RPS target of nearly 5,000 MW of installed solar electric generation is reached by 2026.

To comply with the solar electric generation portion of New Jersey’s RPS regulations, electricity supply companies must either construct their own solar electric generation facilities or purchase Solar Renewable Energy Certificates (SRECs) generated by solar electric generation facilities owned and operated by a third party. An SREC represents the environmental benefits or attributes of one MWh of solar electric generation. SRECs are the largest economic drivers of solar projects in New Jersey.

In addition to SRECs, private and public higher educational institutions should be aware of certain tax benefits that are available. First, there are significant federal tax benefits available to a private solar developer who is treated as the “owner” of the solar project for federal tax purposes. These benefits include (1) a federal Energy Credit equal to 30% of the capital costs of the solar project, which offsets the developer’s federal income taxes dollar for dollar or, in lieu of the Energy Credit, a cash grant to the developer from the United States Treasury Department equal to 30% of the capital costs of the solar project (provided the project is started before December 31, 2011); and (2) a special depreciation allowance that permits a solar developer to claim a depreciation deduction in an amount equal to 100% of the cost of the solar project (reduced by 50% of the amount of any Energy Credit taken or grant in lieu thereof) in the year it is placed in service if it is placed in service in 2011, or 50% of such cost if it is placed in service in 2012, with the balance of such cost depreciated over the next four years.

Also, the sale or use of energy to or by a governmental entity or nonprofit is generally subject to New Jersey’s 7% Sales Tax. However, receipts from the sale of electricity are exempt if the electricity is generated by a facility located on the user’s property and is consumed by the one on-site end user on the user’s property.

The two federal tax benefits and the New Jersey Sales Tax exemption, when combined with SRECs, generate significant economic value for solar projects in New Jersey. Understanding these benefits, utilizing that knowledge to create a public or private procurement, and structuring the transaction in a manner to maximize the tax benefits, will assist the public or private institution in obtaining a competitive PPA price for energy.

Contracting for Solar Opportunities

Many governmental and public and private educational institutions, including colleges and universities, are capitalizing on New Jersey’s growing solar market. One of the most popular methods such entities are employing to develop solar opportunities is the Power Purchase Agreement (PPA) structure.

Under a PPA structure, a private solar developer is responsible for permitting, designing, financing, installing, operating and maintaining a solar electric generation project on or adjacent

to a host facility, and providing the host with electricity from the solar project at a price per kilowatt hour (kWh) lower than the rate the host is currently paying to its local utility.

State colleges and universities must use a public procurement process when seeking PPA opportunities. The key to ensuring a successful procurement is utilizing a well crafted and informative set of procurement documents. By issuing clear procurement documents with specific parameters and requirements applicable to all respondents, a state college or university can receive proposals that can be easily compared and are responsive to the school’s needs.

Many entities focus only on the PPA price offered for each kWh of electricity to be provided by the solar developer.

Proposals, however, can vary widely on a myriad of important details besides PPA price. For instance, if a procurement does not specifically require all respondents to include such protections as construction performance bonds, guaranteed electricity outputs and construction completion timeframes, proposals can pose significant risks to the procuring entity.

Solar PPA procurements in New Jersey have yielded varying PPA prices. These wide ranging PPA prices are likely the result of a combination of factors, including the availability and cost for materials, competition among installers, SREC market concerns, procurement document requirements (e.g., guarantees, performance bonds, time frames for installation), the type of solar installation preferred (e.g., roof, ground, carport) and the quality and size of the site (e.g., location, age of roofs, available roof space, need for structural improvements, orientation).

Conclusion

Colleges and universities throughout the State are exploring andimplementing solar PPA opportunities. Any educational institution interested in procuring a solar PPA should consider retaining experienced legal and technical professionals to assist them in determining whether a solar project is viable at their facilities.

As a resource to its clients, NJEFA invites experts from various fields to contribute articles to “Building futures”that may be of value to New Jersey’s colleges and universities. NJEFA would like to thank Ryan Scerbo, Esq., and William Mayer, Esq., from DeCotiis, FitzPatrick, Cole & Giblin, LLP, Teaneck, New Jersey, for the preparation of this article.

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