The renewables market offers great opportunities for utilities to develop and incorporate low-cost clean energy into their generation mix. However, with some of these financial benefits come tax and accounting headaches.
But the approach that utilities are taking toward developing and interconnecting renewable projects has begun to shift. Over the past few years, the market has started to move away from its historic focus on power purchase agreements (PPA) toward a build, own, transfer (BOT) model. Now, assessing options to execute these projects more closely resembles a traditional utility self-build.
Power Purchase Agreements
Utilities have long used PPAs to take advantage of the low energy costs associated with renewables through various tax incentives. For solar and batteries, this is specifically the investment tax credit (ITC) and five-year modified accelerated cost recovery system (MACRS) depreciation.
Fully monetizing these benefits often requires a greater tax appetite than many utilities have. As such, utilities rely on developers to take advantage of these renewable benefits and package the energy into a PPA to give back to the utility.
While offering low-cost energy, this approach of using PPAs alone would leave utilities without ownership of renewable assets over time. This, along with continued fossil fuel retirements and limited new fossil fuel generation, has started to put pressure on utilities to find ways to own and operate generation that can go into the overall rate base moving forward.
Build, Own, Transfer Model
First performed in 2017 by Liberty Utilities (CalPeco Electric), the BOT model was structured to allow a utility to partner with a tax equity investor (TEI) to use that TEI’s tax appetite to utilize ITC and MACRS depreciation benefits. In this structure, the utility owns and operates the asset after completion but still receives the financial benefits provided when the TEI monetizes the tax incentives. This reduces the overall cost of the project for the utility’s customers while also allowing the utility to deploy capital to its rate base.
The BOT model requires the utility to purchase the project from a developer that has taken on full control of the site. This goes beyond basic engineer-procure-construct (EPC) responsibilities and requires the developer to secure land, file the interconnect application, complete permitting and construct the renewable asset. In the end, the project is sold to the utility and TEI partnership.
Utilities began using this approach over PPAs because it results in utility ownership and offers significant financial benefits — it’s a “have your cake and eat it, too” scenario. The one significant drawback, however, is that utilities are left to own and operate a renewable asset that they have very little design input into. The BOT approach, by nature, gives the control of the project to the developer wrapping up the BOT. From the utility’s perspective, the whole BOT can look like a black box with only limited information shared as part of the bid process.
To overcome some of these limitations created in the BOT structure, utilities are finding ways to approach renewable projects like a utility self-build. By operating within the broad project structure of a BOT or comparable tax-advantageous setups, utilities can take control of the overall renewables project beginning with initial development. Although the exact approach differs from state to state based on what local public utility commissions will allow, utilities have been largely successful in finding ways to steer the considerations going into the BOT.
Rather than leaving the full project wrap-up to a developer, utilities have been successful in picking the project sites, controlling the interconnection process, leveraging retire and replacement benefits of retiring fossil fuel generation, and even steering the design, procurement and construction of these projects. By using this type of self-build strategy, utilities can fully vet design considerations that are truly effective for the overall lifetime return of the asset, not just the lowest initial capital cost. In this way, they can leverage siting advantages that are intrinsic to many utilities with existing generation and transmission infrastructure. Finally, when approached as a self-build, utilities can avoid typical BOT developer premiums and markups.
By taking a self-build view of BOTs and other project structures, utilities are taking back control of the design decisions in their renewable projects, owning and operating the asset from day one, and still receiving the financial benefits associated with the ITC and accelerated depreciation.
Developers have controlled the renewables market to date and will continue to be a key component of supplying low-cost renewable energy. But utilities are now figuring out how to become more influential players in the narrative and are positioning themselves to be the ones driving renewables forward.
Rural communities across the United States are reaping the benefits of performing projects that include renewable interconnection.