Solar Energy Provides Economic Relief from California’s Drought

Published in World Water

Solar Energy Provides Economic Relief from California’s Drought

No matter how small or large, no water district can escape the financial implications of chronic drought. Water district budgets are being constricted in a variety of ways, including loss of revenue resulting from customers’ conservation efforts, capital expenditure to add more equipment, or increased energy costs. As a result, water agencies are having to produce solutions quickly.

In the US state of California, the cities of Los Angeles, San Diego, and Santa Barbara have covered the deficit by adding charges to customer’s bills. The city of Pleasanton achieved the same effect by moving funds from another part of its budget. However, an increasing number of cities are investing in solar energy to reduce operating costs. For most, the investment results in millions of dollars of avoided energy costs over the system’s life span.

Investing in solar is an economically viable way for municipalities to help reduce cost pressures. Additionally, the majority of public entities in the United States can access a variety of funding sources and financing options. The most popular financing mechanism is a Power Purchase Agreement (PPA), in which the customer pays nothing up front and instead pays a set price for energy produced through the agreement term, which is usually 20 to 25 years.

Tranquillity Irrigation District (TID), which serves the water needs of the 4,350-hectare agricultural community of Tranquillity in Fresno County, California recently announced plans to build a 1.8-megawatt ground-mounted solar tracker system that will provide enough electricity to meet 50 percent of the agency’s energy demand. In its first year of operation, the array will generate an estimated 3.3 million kilowatt-hours of electricity— enough to power approximately 450 homes.

In response to the drought, the District has needed to use its wells more than it had pre-drought. As a result, more electricity is required to power the pumps bringing water toward the surface. The District recently received a US$5-million grant from the California State Department of Health to build a water treatment facility. By working with Borrego Solar Systems and an independent engineering consulting firm, Provost & Pritchard, they determined that solar would be feasible to install on the treatment facility site.

TID is using PPA financing to pay for its installation, which will enable the district to save a net $10 million over the 25-year term. With PPAs, a third-party investor takes on all finance, design, installation, and ownership and maintenance (O&M) costs; while the customer, in this case Tranquillity, agrees to buy the power back at a predetermined rate. With a PPA, third-party investors can monetize federal tax incentives that come with buying a solar system, including a 30-percent investment tax credit and accelerated depreciation. Since water authorities are tax-exempt entities, they cannot take advantage of these federal tax benefits, but they can still benefit from the PPA in the form of a guaranteed lower price per kilowatt-hour of electricity.

Previously, PPAs were practically the only third-party financing option for municipalities, but only entities with investment-grade credit would qualify for them. But now that confidence in photovoltaics has increased, the credit rating threshold has declined. There is more interest from Wall Street in investing in solar, and banks have developed creative ways to finance projects. In addition to PPAs, municipalities are using municipal leases from major banking institutions, such as Bank of America, Merrill Lynch, and Wells Fargo.

Public entities can also use a variety of funding sources and incentives to pay for their solar projects, such as Clean Renewable Energy Bonds (CREBs) and California Energy Commission (CEC) low interest loans. Financing is available to make solar projects a reality, lower energy costs, and protect public entities from utility rate volatility moving forward.

Tranquillity is taking advantage of a California utility program available to municipalities called RES-BCT, or Renewable Energy Self-Generation Bill Credit Transfer program. It allows public entities to aggregate their utility meters at multiple sites and bundle them under one solar installation. Before RES-BCT, the solar array could be no larger than what was needed to generate enough energy to meet the demand on site. Now, a single array can be built in one location, and the energy credits can be applied to the public entity’s various other meters.

A barrier that has prevented smaller public entities from installing solar is the requirement to issue a Request for Proposal (RFP). Issuing a RFP is ideal if one has the sufficient time and internal resources needed, but for smaller municipalities, these process demands are often unrealistic. Fortunately, there is a clause within California code 42-17 (42-17.18) that provides public entities with an alternative to a formal RFP process while still complying with public procurement requirements.

Since solar qualifies as an energy purchasing decision, as long as the contract shows net-savings, the project does not have to go out to public bid. Working with a single solar developer that has proven experience or receiving bids from a few EPCs that have experience building similar projects is a great way to avoid the lengthy public procurement process. Using this path, Tranquillity was able to get a contract and financing agreement inked within 30 days.

By taking advantage of various programs and financing options, water districts throughout California can get solar projects online and quickly begin saving money in the face of the drought’s cost pressures.

Author’s Note

Borrego Solar’s Vice President of Project Development Kyle Kearney heads all business and project development efforts for the Western US Project Development Team. His primary focus is to support Borrego Solar’s continued success in the commercial, municipal, education, and agribusiness sectors. Kyle entered the solar industry in 2007 and spent 10 years prior to that working in environmental permitting and sustainable development.