The World's #1 Renewable Energy Network for News, Information, and Companies.
Untitled Document

Municipal Bond: PPA Model Continues to Provide Low-cost Solar Energy

The municipal bond–power purchase agreement (PPA) model might not have just rolled off the lot, but it still has that new car smell. A former NREL colleague first looked into this unique third-party ownership–public debt hybrid financing model last year. Here, I discuss recent applications and provide new insights based on a conversation with James Mann, co-founder and general counsel of Sunlight General Capital.

The municipal bond–PPA model is also known as the Morris Model after Morris County, New Jersey, where the arrangement was first applied. The gist of the model is that it combines the tax monetization benefits of third-party ownership with low-cost capital in the form of public debt. To make use of federal tax incentives, the county government issues taxable bonds and passes the proceeds on to the developer through a lease-purchase agreement. The lease-purchase agreement transfers ownership of the solar installations to the developer and also requires the developer to make payments to the county that are in turn used to pay principal and interest on the bonds. The county government also enters into a PPA with the developer on behalf of the public schools and other municipal facilities where the solar installations will be located. By onlending the public debt to the developer, the county/state government is in effect buying down the developer's cost of capital and, in exchange, receives a reduced PPA price.

So far, the model has been used to support projects for schools, colleges, county administrative buildings, and other public buildings. The municipal bond–PPA model appears to have been applied only in New Jersey to date. It is quite possible that localities in other states could replicate this financing; for feasibility analysis of 10 key solar markets, see this fact sheet.

Over the past year, six counties in New Jersey have issued request for proposals (RFP) to support eight solar photovoltaic (PV) project portfolios. For each RFP, the counties allowed the respondents to chose from one of three financing mechanisms: (1) PPA (with the projects being financed by outside investors), (2) partial municipal bond financing (the other part to be financed by outside investors), or (3) full municipal bond financing. Interestingly, all except one of the awarded proposals use full municipal bond financing.

Sunlight General Capital will build, own, and operate four of the project portfolios, all of which are qualified to use the 1603 Treasury cash grant and the 50% bonus depreciation (for those facilities placed in service before the end of 2012). The other successful bidders include Tioga Energy and Vanguard Energy Partners.

Sunlight has yet to determine if they will try to monetize the depreciation to tax equity investors. But, as it stands, the projects will provide PPAs at $0.03–$0.10/kWh—a steal compared to local retail electric rates of $0.16–$0.17/kWh.

The bonds have 15-year terms and roughly 4% interest rates and are all guaranteed by the counties in which the projects are located. The New Jersey bonds used for the municipal bond–PPA model are taxable at the federal level (because they are for private use) but exempt from state taxes, providing some tax shelter to local investors.

According to Mann, there is a potential secondary market for the projects, pending approval from the localities. Utilities are one potential strategic buyer and could be attracted to the projects due to their profitability and need to meet renewable portfolio standard requirements.

Why, then, hasn't the municipal bond–PPA model become a silver bullet?  Primarily it's the learning curve: municipalities, developers, and lenders must get comfortable with the model and be able to acquire necessary (and extensive) tax counsel. However, based on the sales of the bonds issued under this model, investors, at least, are more than comfortable with this financing arrangement.

A key aspect of the PPA–municipal debt model is, of course, the low-cost financing that might not be viable for municipalities with a less-than-stellar credit rating. And in many places, voter-based debt restrictions could be in place, thereby limiting the ability of local governments to issue bonds that might result in tax increases.

As is the case with most solar PV projects at current installed costs, incentives are needed to make the cost of electricity economical. New Jersey projects were previously buoyed by strong solar renewable energy certificate (REC) spot prices of around $600/MWh. But, these have now sunk to $140/MWh.

With REC prices so low, does the municipal bond-PPA model still have steam left? It's unclear, but let's hope it doesn't have the same fate as the Studebaker Electric.

This article was originally published on NREL Renewable Energy Finance and was republished with permission.

Lead image: Solar panels via Shutterstock

Untitled Document

Get All the Renewable Energy World News Delivered to Your Inbox - FREE!

Subscribe to Renewable Energy World Magazine and our award-winning e-Newsletter to stay up to date on current news and industry trends.

 Subscribe Now


US Senate Democrats Unveil Energy Bill That Restores PTC and Extends ITC

Brian Eckhouse, Bloomberg Senate Democrats unveiled a bill that would provide more tax credits for renewable energy while killing some tax ince...

US, China Solar PV Players Team Up, Invest $100MM in Chile, Uruguay and Japan

Andrew Burger Private equity infrastructure specialist Hudson Clean Energy Partners and Hong Kong-based independent power producer ...

CEO Gilles: Challenge in Geothermal is to 'Level Playing Field' with Wind, Solar

Jennifer Delony The current challenge for the geothermal energy industry is what U.S. Geothermal CEO Dennis Gilles calls “leveling th...

NRG Energy to Form Renewable Unit, Sell Wind Assets to Yieldco

Mark Chediak and Matthew Monks, Bloomberg NRG Energy Inc., the worst-performing member of the S&P 500 Utilities Index this year, said it will form a renewa...


Array Technologies Finalizes Shipments to E.ON’s Maricopa West Solar Project

Array Technologies, Inc. (ATI) has completed DuraTrack® HZ shipments to the 20 MW (ac) ...

B.C. Energy Minister to provide keynote at renewables for mines summit.

BC Minister of Energy and Mines to address the challenges of providing alternative powe...

Mining leaders seek renewables solutions at Toronto Summit

The global mining sector is facing a tough business environment with low commodity pric...

American Renewable Energy Institute Gears Up for 12th Annual Summit

"Racing Climate Change: Green Bridge with China, The Road to Paris” is the theme of th...


New Mexico Attracts Jobs and Revenues with Renewable Energy Tax Credit

New Mexico has abundant fossil fuel resources: in 2013, it ranked sixth in the nation for crude oil production, seven...

The Vice President Stole My Show (Not Really)

When I finished my Solar Power International (SPI) panel discussing what future opportunities the panelists saw in so...

The Value Of The Building

If you’re selling efficiency solutions in the built environment, you may find yourself being asked by your pros...

Sewage provides energy through processing

Many nations are investing in new technology to turn sewage waste into usable energy. Japan has recently revised its ...


Bethany Speer is an Energy Analyst with the National Renewable Energy Laboratory’s project finance team. Her principal areas of focus are in domestic and international clean energy policy and finance analysis, with particular attention to risk mit...


Volume 18, Issue 4


To register for our free
e-Newsletters, subscribe today:


Tweet the Editors! @jennrunyon



Successfully Integrating Solar: A Proactive Approach

•      What does the increasing solar penetrati...

Canadian Solar Inverters Webinar

Canadian Solar is proud to be hosting two free webinars in October! The ...

JuiceBox Energy Certified Installer Class

JuiceBox Energy is rapidly building out its national certified installer...


How To Speak, How To Listen

As sales professionals, effective communication is paramount to our succ...

Get In The Habit

We all develop habits throughout our lives. Sometimes they’re bene...

Becoming An Efficiency Sales Professional

In order to become a sales professional, you must first realize that: E...


Renewable Energy: Subscribe Now

Solar Energy: Subscribe Now

Wind Energy: Subscribe Now

Geothermal Energy: Subscribe Now

Bioenergy: Subscribe Now