In Part 1 (Nov. 2), I discussed some of the whys and wherefores of Ashland’s 10x20 renewable energy ordinance project. Now we can discuss its economics and financing.
There are three nice surprises: The project is essentially free, the financing of it is relatively easy, and it is entered with no risk at all.
The project, now seen as a 55-acre solar farm across Interstate 5 on city-owned property, has a capital cost of millions of dollars which neither Ashland nor any of its residents ever see. There is no debt incurred. Rather, a private company undertakes all aspects of building, financing and operating the project, and obtains its return by selling the solar power to us. This is called a power purchase agreement (PPA) and it is the standard way public utilities acquire large energy projects. This works because companies can use tax incentives and depreciation. Cities cannot. This is why I say the financing is easy.
PPAs typically retire in 20 years. Then the city takes full ownership with no further obligations, receiving its 22 gigawatt-hours per year free. During the "purchase" period, Ashland will agree to buy the power at a wholesale "cents per kilowatt-hour" rate, if we like the proposal. If there is no proposal the city likes, we stop right there, with nothing spent. This is a City Council decision, informed by the public. This is why there is no risk: We know with certainty the full cost going in.
The project proceeds through a formal RFP (request for proposals). Ashland writes this proposal, and puts it out for bids. A well-conceived and well-written RFP will attract several companies, and hopefully at least one proposal will interest us.
We determine whether a PPA is in our interest by comparing its cents-per-kwh rate to what we pay now (wholesale) for our electricity. Because solar energy projects have burgeoned throughout the world, solar farms have become very reasonable. For example, Tucson has just been offered a PPA for a 100-megawatt system at 3 cents per kwh! Even in the Northwest, where the Bonneville Power Administration can sell us power at 4.5 cents (wholesale), solar is competitive. Ashland, developing a smaller 14 megawatt system farther north, will expect to pay a little more than 3 cents/kwh.
We can estimate how the solar farm, producing 10 percent of the city's power, will affect our actual utility bill. The PPA offers may range from about 5 cents per kwh to about 9 cents per kwh. And we can include the possible BPA contract penalty called Take or Pay, which could add an additional 4.5 cents per kwh in the first few years (I will explain in Part 3). These prices will result in an initial addition to the typical utility bill, ranging from a low of about 1.5 percent to a worst-case scenario of about 4.6 percent.
These increases, however, diminish over time, since the cost of the standard 90 percent of Ashland electricity will always increase due to inflation. Before the PPA runs out, its price per kwh will likely be less than the cost of BPA power Ashland buys. Utility bills then see a percentage decrease, due to the solar. And when the PPA ends, the solar portion is pure free power into the city, and any previously accumulated outlay is very quickly returned.
The purpose here has been to show how the Ashland solar farm is financially sound. The reasons for the ordinance itself, however, are not to save money. Rather, it is close-up action of significance, taking an actual step against climate change at the community level. It is offering every person in town, regardless of circumstance, some direct participation in the transition away from fuels with greenhouse gas emissions. It is Ashland making a strong statement.
In Part 3, we explain the BPA Take or Pay issue and give possible resolutions of other perceived hurdles in moving forward in a community clean energy project.
— Tom Marvin is professor emeritus of physics at Southern Oregon University.