Sustainability at Harvard

Solar Array the Third Party Way

March 30, 2009 filed under
Credit: Jenny Harvey

Imagine a flat, black, south-facing roof the size of three football fields. What comes to mind? If you’re in a green mood, the answer is: “solar!”

“A Roof to Drool Over”

That’s how one solar installer described the building at 395 Arsenal Street, formerly a warhead assembly warehouse. Engineers estimate that the roof has room for more than 1,000 panels, which would produce over 600,000 kWh per year of clean electricity. That equates to avoiding 7% of the building’s annual electricity consumption, 238 metric tons of CO2 per year, or the equivalent electric use of 31 households.

Solar photovoltaic (PV) power is a reliable and relatively simple technology. Unfortunately, it is not exactly a low-cost measure. High prices for materials and installation result in a long payback. Fortunately, Harvard has access to programs that can get PV projects off the ground. Grants from the Massachusetts Technology Collaborative (MTC) and the Harvard Green Campus Loan Fund helped make possible Harvard’s three existing PV arrays, which are a combined total of 57.5 kW.

The proposed PV project at the Arsenal would dwarf those projects in both size and cost. But Harvard Real Estate Services (HRES), which owns the property, knows solar is the right thing to do. Luckily, outside investors agree - for both environmental and financial reasons. That’s where a third party financing comes in.

How It Works

In third party financing for solar PV, an investment company (financer) builds a solar power project on a host’s property. The financer owns the system and its risks. The host buys all of the electricity produced by the system.

Third party financing works particularly well for large renewable power projects because financers are eligible for funding that universities are not. Specifically, third party financers can take advantage of the federal business energy tax credit for clean energy systems, and the Modified Accelerated Cost-Recovery System (MACRS).

Financers pass the combined revenue sources back to the host in the form of low electricity rates for the solar power. Thus, the third party finance approach allows the host to pay less for the solar power over the life of the system than if it had purchased the system outright.

Win-Win Scenario

In this partnership, the goals of a financer and the host are aligned. A high performing PV system is in everyone’s best interest: the financer gets to sell more energy while it owns the system, and anytime after year 6, the host can purchase the system at fair market value knowing it’s a reliable source of energy.

Look at the following table, some might say the host has a few more "wins" than the financer:

  Financer (Third Party) Host (HRES)
Responsibilities

Finance the entire system

  1. Permitting
  2. Engineering & design
  3. Procurement
  4. Installation

Own and operate the system

  1. Operations & maintenance
  2. Insurance
  3. Third party verification of energy
  1. Provide roof space
  2. Commit to buying electricity over a period of 6-25 years
  3. Provide site access for maintenance
Benefits
  1. Low maintenance, low risk, environmentally responsible investment
  2. PR value
  1. No up front capital
  2. Access to tax benefits that are monetized and passed through; allows non-profit organizations to take advantage of tax credits
  3. Performance based: only pay for electricity produced
  4. Easy to maintain system after purchase

And that’s not all. There are many other benefits of benefits of having solar PV on the roof, regardless of how it is funded. For example:

  • energy production at peak hours, when conventional electricity production is most expensive and dirty
  • cooler interior temperatures due to panel reflectance
  • extended roof life due to shading by panels
  • reduction in greenhouse gas emissions

The Catch

In third party financing, the financer owns both the solar power generating facility and the right to sell the Renewable Energy Credits, or RECs. As long as the financer owns the PV system, HRES cannot claim the greenhouse gas reductions unless it purchases the RECs from the financer; which is exactly what HRES plans to do.

See addendum for more on RECs.

Addendum: Renewable Energy Credits

A renewable power facility, such as solar PV, produces commodities for two markets. The actual energy (kW) is sold in the energy market, just like electricity. The environmental benefits associated with making clean energy are considered property rights, and are sold in the Renewable Energy Credit (REC) market. The revenue from REC sales helps offset the higher cost of producing clean energy, and promotes the development of new renewable energy.

But there are greenhouse gas implications in selling RECs, and we all know how important greenhouse gas reduction is at Harvard! If a renewable power facility sells its RECs, then the emissions reductions from the clean power cannot be counted in the facility’s greenhouse gas inventory. The emissions reductions become the property of whoever bought the RECs.

Unless HRES buys the RECs from the financer, the avoided greenhouse gases won’t “count” toward HRES. When HRES buys the system from the financer, it will own both the system and the RECs.

by Jenny Harvey
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