SOLAR TODAY - September/October 2010

SunEdison developed the 410-kilowatt photovoltaic installation on the rooftop of this Kohl’s store in Laguna Niguel, Calif., and brought in an investor to own the system and sell the electricity to Kohl’s under a power purchase agreement.

of ownership. Most customers know very little about maintaining solar arrays and have little time to learn. Under a third-party model, the owner of the system — not the host customer — takes on the risk and obligation to keep the solar system operating at peak performance.

Finally, PPAs and leases typically have a clause permitting the customer to buy the array at a greatly reduced price in the future (after the owner has taken all of the tax benefits — typically at least six years). Most third-party contracts provide the customer an option to buy at “fair market value,” based on anticipated utility cost savings less anticipated O&M costs.

Limitations of PPAs and leases include some
added cost. Any third-party owner of an array
will require a return on their investment and
will incur transactional costs that a direct sale
will not. Legal documents from the third-party
model are more complex, as is the tax structure,
leading to higher legal and accounting costs
for this model. Another downside of PPAs and
leases is limited availability of tax equity. With
the economic downturn, several tax-equity
designed to maximize those benefits. And there’s
some truth to that — third-party ownership
structures are designed to efficiently use both the
30 percent federal investment tax credit (ITC)
and accelerated depreciation. Many customers
can’t use one or both benefits. Through better
utilization of the tax benefits, the present value of
the PPA or lease arrangement can, in some cases,
be less than half of the cost the customer would
face if they purchased the system outright.

As much as half of the PV capacity installed in the past five years wouldn’t exist without the innovation of third-party ownership.

solartoday.org SOLAR TODAY September/October 2010 47 investors have exited the solar market. Others have incurred significant financial losses that already offset any tax liability those entities had. While the PPAs in place are safe, many third-party model providers are struggling to find new entities with a large tax burden interested in the solar tax credits. The result is potentially higher fees from the smaller pool of solar tax-equity investors. Overall, the unique costs and fees of third-party ownership reduce the savings passed along to customers, and there will be no net benefit for customers who can take at least some tax credits themselves.