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Thursday, July 12, 2007

About those solar panels on county buildings...

We blogged a while back about Multnomah County's plan to put solar panels on a bunch of its buildings. The announcement, by Commissioner Jeff Cogen, explained that the units would be owned by a group of private investors, who would sell the power they generated to the county for 10 years. The investors would get to take a bunch of tax credits for solar power devices on their tax returns. At the end of the 10 years, the county would take over the units, and keep all the power that they produced for itself.

Aside from the greater societal benefits of solar energy in general, there are potentially two advantageous aspects of this plan for county taxpayers. But I stress the word "potentially."

The first would be realized if the county could effectively prevent increases in its own power costs, at least to the extent of the output from the solar units, for the life of the panels. I asked Cogen about this on his blog:

What's the deal on electricity costs over the 10-year period? Someone said the county gets a lock on the current rates it pays for power. Is that true?
He promptly responded (and I'm grateful for his attention):
That is the what Energy Trust told us to expect. As you noted on your blog, we still have to do an RFP to find the company to own the solar panels (and to answer your concern, no we don't have anyone lined up - there will be a fair, open, competetive process). But the Energy Trust has done these sorts of projects before, and has experience regarding what terms we can expect, and based on their experience we are predicting stable electric rates for the 10 year term. It makes sense when you think about it: unlike gas or coal generated electricity, there are no fuel costs, which vary quite a lot. All of the costs are fixed, upfront costs associated with the purchase and installation of the panels, so the costs are predictable and stable.
A bit vague -- we're talking about a financial deal with parties that haven't been identified yet, and the benefit is a mere "expectation" rather than a promise -- but if it were to come true, great.

The second good part of the deal for taxpayers, it was said when the public announcement was made, would come at the end of the 10-year period, when the county got its hands on the units and got to keep all the power they produced. I had a couple of questions. One of them was what kind of condition the solar panels would be in after 10 Oregon winters. There was a difference of opinion among our readers about that. A few shared my skepticism that they'd be highly productive (net of repair and maintenance costs) at that point.

And it turns out that there's yet another reason to postpone scheduling a celebration: It's not clear how much the county is going to have to pay to take title to the units after the 10-year main contract period. Over on Cogen's blog, I asked him:

How much will the county pay at the end of the 10 years to take title to the units? If it's nothing, or a nominal amount, then how can the private investors be treated as the owners of the units for tax purposes?
He responded:
[W]e don't know the exact amount we would be paying at the end of the 10 year term, that is something that will be part of the RFP and subsequent negotiations. But based on other experiences, it will likely be a small amount that is factored into the payment structure all along. You are correct that it needs to be a more than merely symbolic payment, in order to be valid "consideration" for the deal and to assure that the investors can legitimately claim the tax credits. However, in other deals the amount has been relatively small, because a substantial portion of the value to the investors is in the tax credits.
It will be interesting to see where the negotiations wind up on this point. In some creative tax-oriented financings (something I actually know something about), the "end user" (here, the county) is required to pay the fair market value of the equipment, whatever it may be, at the end of the contract term. Indeed, that's often the safest way to guarantee that the "funding source" (here, the private investors) get the tax writeoffs associated with owning the equipment. If that's the deal, it's not really much of a deal at all for the county. It will have to pay whatever the appraisers say the panels are worth 10 years from now. Heck, if it wanted to pay the going price for used panels at that point, it could easily do so in the after-market, without giving anyone free access to county buildings for 10 years.

On the other hand, if the buyout price that the county has to pay is too low, the investors might not get the tax goodies. And it's completely open to negotiations what would happen in that case. If the tax credits don't materialize, will the county have to pay a lot more to the investors to make up for it? It's all part of the contract negotiations, which have not even begun in earnest.

In short, you may want to hold off on the champagne over the solar energy deal, taxpayers. This one is far from a done deal, or a good deal, just yet. As always, the devil is in the details.

Comments (7)

Agreed, the responses contain all the requisite code words and code phrases, including the perceived safety of RFPs.

We all know RFPs can be written in such a way that a limited number (and in some cases, just one) candidates actually qualify. That being said, you'll be accepting their terms re what happens at year #10, etc, vis a vi taking title to the 10 year old equipment.

Hi BoJack - please don't eat me alive. If you could reference our website - www.commissionercogen.com - where people can ask Jeff questions, I'd appreciate it. We want the discussion and the opportunity to take some issues head on, but we can't do that if we don't know that community members are chatting about it over here.

Thanks for the chat.

One thing I really like about commissioner Cogen is it's very easy to speak with him directly via both email and telephone.

I've done a fair amount of research into alternative energy sources and right now solar panels are simply not economically practical. Of course that fact doesn't stop our "leaders" who take our money by by force (taxation) from throwing money at this so they can look like green weenies.
Solar panels have improved dramatically over the years and are being used more and more but they are not economically practical for high energy applications.
How about having the people who are so "gung-ho" about this alternative energy stuff put THEIR money into it?

The proposed structure sounds very similar to the now suspect (prohibited?) sale/leaseback transactions that lead to large, taxable companies owning parts of the NYC subway system, municipal sewage treatment facilities, and similar depreciable properties. My understanding was that most of those transactions are now considered to lack economic substance and no longer work to allow the taxable company to get the tax breaks associated with the assets (guess this goes to Jack's point about who really owns the panels for tax purposes). Is this proposal different enough to pass muster?

The Oregon legislature could have rendered that private tax inquiry for Oregon tax purposes, for any subdivision of Oregon, irrelevant by substituting a state grant when the ultimate consumer of the panels is a subdivision of the state. It would have precisely the same pro-solar bias in the exercise of the state-level taxing power. It would have precisely the same alteration of the price point between solar and non-solar from the microeconomic perspective of any individual subdivision of the state.

It seems logical too to wait if Solaicx will switch from manufacture of panels to seller only of equipment to others so that these others can use the equipment to make panels, thus increasing the supply and driving down the price. I get the feeling that the Rivergate plant is a test plant to prove the process so as to subsequently sell equipment, and work out bugs in the process. This is just an educated guess, subject to rebuttal, of course.

My proposed remedy, if there must be haste to just get started for political Green reasons, is to build in a clause in any panel purchase contract to reset the price in say three years to the market price at that time. This would mitigate one of my concerns for the potential gaming of the political purchasing system and the possible unsavory timing issue of the recent round of funding for Solaicx by private equity folks that are privy to and in control of facts that the general public has no knowledge. If the panel prices are already forecast to fall significantly in the near-term then it would be something worse than folly to not address this issue in any contract, where the risk of future price changes is openly addressed and bargained . . . whereupon I could at least have an "issue" that is amenable to review for validity.

Sorry for omitting the link to Cogen's blog. (It was inadvertent.) It's here. The solar panel entry is here.

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