PPA – Economics and Incentives

Jan Borchert, Current Hydro and Dana Hall, Esq.

So far we’ve looked at the “when, what and how” and the participating entities of PPAs. But let’s look at the economics, incentives and tax benefits.

PPA Price per kWh

The PPA is centered around identifying the right price per kWh for the offtaker to pay the developer. This agreed upon per kWh price is not based solely on the utility price for electricity that the offtaker would otherwise pay. Instead, it is has to cover the developer’s fixed costs (such as return on equity); and the charge to cover variable operation and maintenance costs of the plant, as well as administrative costs such as legal review and permitting.

The PPA rate schedule is determined at the inception of the agreement and has a known escalator for the full term of the agreement. This means that the offtaker knows exactly what they will be paying per kWh from the first year to the last year of the term (which may range from 10 – 20 years).

Other factors influence the kWh rate are the size and complexity of the project, the incentives available, other options afforded to the customer, and the offtaker’s credit rating. The escalator may be fixed or step-based, but it is usually some combination of kWh rate and an inflation schedule to provide a return on investment for the system owners while also accounting for the time-value of money.

Overall, the agreed upon per kWh price has to meet everyone’s needs or the economics of the project will not add up.

Economic Incentives

In the United States, where there is no federal policy imposing a price on carbon or GHG emissions and the full life-cycle costs of fossil and nuclear technologies are externalized from the price of electricity making it artificially low, most renewable energy projects rely on government incentives to be competitive. As a result, federal tax credits have become foundational to renewable project development economics. Additionally, the value of environmental attributes associated with clean energy also provide a revenue stream, realized through Renewable Energy Certificates (RECs). A single REC represents one megawatt hour of generation from a qualifying renewable resource, and in New York State, RECs are procured through NYSERDA (see NYSERDA: REC-and-ZEC-Purchasers for more information).

Tax Benefits:

Most renewable energy PPAs involve a range of economic incentives that are monetized by the investor. These include tax benefits such as renewable energy tax credits and depreciation.

As of this writing, the federal Renewable Electricity Production Tax Credit (PTC) and Investment Tax Credit (ITC) have both expired for hydropower and were not extended, though they remain available for other technologies like solar and wind. In March 2019, a bill was introduced in the Senate to extend the PTC retroactively for all of 2018 through the end of 2019. The “Tax Extender and Disaster Relief Act of 2019,” sponsored by Senators Grassley (IA) and Wyden (OR), would establish a credit rate for micro hydropower facilities adjusted for inflation (1.2 cents per kWh in 2017). If signed into law, the PTC will remain in place for 10 years following the establishment of the facility, and taxpayers may elect to claim a 30-percent investment tax credit in lieu of the production tax credit.

The Clean Renewable Energy Bonds (CREBs), a popular benefit for renewable energy developers, were repealed by the Tax Cuts and Jobs Act of 2017 and are no longer available to taxpayers.

Renewable energy equipment may qualify for Modified Accelerated Cost Recovery System (MACRS) or bonus depreciation. Under MACRS, qualifying fixed assets have designated depreciation periods, which can be a useful tax benefit. Hydroelectric generation assets do not appear to qualify for MACRS or bonus depreciation. Microgrids and green energy property are examples of qualifying assets. Additionally, the 2017 tax bill increased bonus deprecation for renewable energy to 100% for property placed in service after September 27, 2017 and before January 1, 2023.

As with any information related to taxes, it is strongly recommended that you speak with a tax professional to better understand these incentives and how you can use them.

Renewable Energy Certificates (RECs)

In New York, qualifying new renewable energy projects can contract with NYSERDA for Tier 1 RECs, which can be an important revenue stream for financing a PPA structure. For hydroelectric resources to qualify for Tier 1, they must be new, low-impact, run-of-river or incremental upgrades. The production associated with a new hydroelectric facility must also involve no newly constructed storage impoundments.

In order to sell RECs, you must register with the New York Generation Attribute Tracking System (NYGATS), which uses unique serial numbers, to issue, track, and manage energy attribute certificates and renewable energy certificates. You can register your project or facility – whether operational or provisional – and then apply for certification under Tier 1 of RES.
More details on eligibility requirements for Tier 1 certification, can be found in NYSERDA’s Renewable Energy Standard (RES) Eligibility and Certification Guidelines.

If your project is not yet operational, and you wish to apply for provisional certification, you can submit a resource eligibility determination request in NYGATS to receive a Provisional Statement of Qualification (SoQ). You will need to attach a report to your application, prepared by an independent professional engineer, verifying that the design meets the eligibility criteria. Once operational, you may return to NYGATS to complete an operational certification submission starting with the information provided in the provisional certification.

Registered NYGATS users can trade, retire, or verify and substantiate ownership of RECs to support compliance or voluntary claims. Certificates can be bundled and traded with megawatt-hours of energy, but this is not a requirement in NYGATS.

Next Steps

Most of the above, like the tax benefits and RECs, are relevant to the owner of the facility – in most cases the developer. But in what relationship do developer and his investors stand? Read more in our next post.

Or download our full Microhydro PPA Report.