The road to increasing solar capacity in Salt Lake County has been arduous.

First, the county commissioned a study to gauge possible financing structures for developing a commercial-scale solar rooftop project. Next, the legislature had to pass regulations that allowed third-parties to own property that can generate power, which can be sold to non-profit entities. Finally, the county set it sights on selecting a project developer and structuring the project’s final financing. 

To select a project developer and installation contractor, the county conducted a successful competitive bidding process. The bid included both a description of the financing tools that would be made available to help encourage the project’s development, and the following incentives:

• a $600,000 grant from the U.S. Department of Energy, designated for solar project construction
• a state tax credit equal to 10% of the total project investment, up to $50,000
• the Recovery Act’s 1603 program grant in lieu of a renewable energy tax credit equal to 30% of the total capitalized project cost, plus accelerated depreciation
• a Qualified Energy Conservation Bond allocation of $1.9 million, which the county would lend to the project at sub-3% interest rate
• a new market tax credit because the project is located in a low-income area, resulting in additional low-interest debt

Combining all of the incentives into a single portfolio involved a complicated financing scheme. Salt Lake County used this new market finance structure to convert the debt and grants into low-interest and interest-only debt for the first seven years of the project’s life.

Today, the county is negotiating with project investors to provide the project the equity required to complete construction on the proposed 2 MW-system. Because of the complexity of the deal structure and the low power price ($0.075/kWh during the first seven years of the power purchase agreement), identifying an investor is a challenging process. 

Under a typical deal structure, a developer receives all grants or rebates directly, and then funds the remainder of the project with a blend of debt and equity. Grant funds and the revenues from the power sales under a power purchase agreement typically provide immediate returns to the developer. The Salt Lake County case, however, is unique in that the developer receives low-interest debt in place of direct benefits. For this reason, investors and developers must fully understand the deal structure. To participate in the deal, they have to be able to value the accelerated depreciation benefits and structure the financing with lower revenues during the first seven years of the project. It is challenging to find this kind of financing partner, and is one reason the project has taken longer than might otherwise be expected. 

However, if the project closes as anticipated, the result will be a solar array at least double the size of what the county could have built without a private partner. In addition, after the financial incentives, it will cost the county roughly the same amount as the existing power supply agreement with the local public utility—something Salt Lake County can feel proud of achieving in a challenging energy environment.

Content for this Blog post courtesy of the Center for Climate Strategies