In response to customer demand for clean energy, and with the public sector being driven to install solar power facilities to minimize energy costs, municipal solar development is heating up. One of the ways the construction market is responding to this demand is by offering project delivery through public-private partnerships (P3s).
P3s are an alternative project delivery method for public projects that lies somewhere on the spectrum between design-build and full privatization. The private partner agrees to undertake operations, maintenance (or both) in addition to design and construction services, while the public partner oversees the project and retains control and risk where most appropriate to ensure performance goals are satisfied. In some cases, the private partner offers private financing and is repaid directly through user fees from the project or a subsequent municipal bond issuance.
P3s are particularly useful for municipal solar generation projects because the structure enables municipalities to offset development costs, allocate risk and increase leverage through public sector innovation. Additionally, by shifting ownership and operation to a private partner, solar development can benefit from federal energy investment tax credits, accelerated depreciation, and varying state and local incentives.
In turn, public benefits can be found through reduced upfront project costs, long-term gains from renewable energy generation and the ability to address additional priorities by use of leveraged investments.
P3s provide financing flexibility and the ability to monetize tax benefits that are otherwise unavailable to municipalities, all while shifting the project delivery responsibilities to a private partner with expertise in the area of solar development and generation.
That said, just as with other P3 projects, the private partner needs to be cognizant of risks throughout the process, such as:
- Whether to make the long-term commitment to developing a relationship and educating a municipality on the economics of a solar project if there will eventually be a competitive bidding process. When a municipality issues a request for qualifications or proposals for a solar project, then the front-end commitment will be limited, but there will be substantially more competition. In that case, the question becomes whether to invest time and resources in preparing a response if there are a number of other competitors.
Whether public contracting requirements, such as prevailing wages, labor, disadvantaged business set-asides and bonding requirements apply. And, if so, what the impact on the value-for-money analysis is for both parties? With a P3 model, these requirements may not apply or may be negotiated by the municipality.
- Whether securing entitlements will be an issue. The tax incentive and utility regulatory environment for solar projects each vary depending on the type of municipality, by state and by regulatory jurisdiction. Furthermore, federal investment tax credits are set to expire in 2016, causing uncertainty.
- Whether there is statutory authorization for the transaction structure. While specific P3 legislation is usually not necessary, the structure will likely vary depending on state statutes and local ordinances.
- Whether there is shared risk for fluctuations in equipment pricing, sourcing or shortages due to tariffs or other causes outside the control of either party.
- Whether the municipal equity participation will be in-kind, such as through donation of real estate, and if so, who will be responsible for latent subsurface and environmental conditions. Will testing take place prior to the project award? Furthermore, if the property is not donated, will the private partner’s long-term lease of the real property at nominal rental rates trigger a tax liability?
- Who can utilize the tax credits? The transaction costs associated with structuring the P3 are substantially reduced if the private partner has the ability to utilize tax credits directly because participation by third-party investors would not be required to monetize the tax benefits. The cost savings would give the private partner a competitive advantage in any competitive proposal process.
P3s are not just for mega-projects or states with specific P3 legislation; rather, this project delivery method can be a viable alternative for public projects in which long-term public benefits are otherwise hindered by short-term public sector constraints.
In the municipal solar development context, P3s are particularly useful because they can be combined with existing incentives to make both small and large projects feasible. The keys to the private partner’s success are good risk analysis, expert team assembly and proper alignment of the public partner’s goals with the public sector’s priorities.