What are Third Party Financing arrangements?
Third Party Financing arrangements are the general term for project financing that involves another party besides the buyer and seller – the third party– the financier.

Third party financing can take a variety of forms for energy projects, including:

Leasing & Sale Lease Combinations

Energy Savings Performance Contracts (“ESCO”)

A recent variation on these approaches is the Independent Energy Purchase (“IEP”). In this arrangement a developer/ financier designs and builds energy resources for a specific user, typically on his/ her property. Then the developer/ financier executes a long term agreement to sell to that user the energy produced by the developed energy resources.

In all of the above cases, the developer/ financier assumes some or all of the design/ build/ operate responsibilities. In addition to the project development and maintenance responsibilities such as
• develop, design, and finance the energy projects;
• install and maintain the energy equipment ;
• measure, monitor, and verify the project's energy savings and production ; and
• assume the risk that the project will produce/ save the amount of energy guaranteed.

What are the risks?
Your risks are dependent upon which of the design/ build/ operating responsibilities you take on and which the developer/ financier assumes. If all responsibilities are given to the developer/ financier then the only risk for the user is that the energy is not delivered, and purchases need to be made from other energy providers. Although there is some inconvenience associated with that, the financial risk is less than making the upfront capital investment and losing, for whatever reason, the ability to produce energy.

How does this change your operations?
Again, this depends on the distribution of responsibilities between you and the developer/ financier. The transaction could be structured where all the responsibility for Operations & Maintenance are given to the developer/ financier, thereby having little to no effect on the volume of responsibilities concerning operations. There would be difference in kind of responsibility. A possible reduction in system O&M would require an increasing responsibility of bill and contract monitoring.

What is the suite of financings that the third party financier coordinates?
Because of recent financial and policy initiatives, at both the federal and state level, a variety of financial mechanisms are available to fund renewable energy projects. These include federal investment tax credits, accelerated depreciation, utility regulations requiring renewable energy generation, and other state and local incentives. One of the values of the third party financing arrangement is that the developer/ financier is incentivized to maximize and integrate the mechanisms for you, the customer..

Federal Tax Credits
Federal Energy Policy Act of 2005, offers the following tax benefits:
• 30% up to $2,000 per system residential
• 30% no cap for commercial
• Begins 1/1/2006
• Ends 12/31/2007 (but could be extended)
• Five Year Accelerated Depreciation, effective incentive at 35% tax rate of 12-15% of capital costs

For those non-tax paying parties, such as governments and nonprofits, a mechanism was created to permit these entities to issue “Clean Energy Bonds” and pass those tax benefits to the bondholder. None of these transactions have been completed to date, since the Act was only recently signed into law.

Historically, the third party arrangements would provide a similar method for capturing the tax benefits. This is accomplished by the financier retaining ownership of the energy resources and selling the energy produced or leasing the asset back to end user. What the best approach for your project depends on several factors. See below for a matrix of techniques and situation/ resource requirements.

Regulatory Requirements & Funding for Renewable Energy
State regulators of electric utilities in 25 states require minimum percentages of renewable energy. Funding source available to meet requirement. Funding is often made available to customers and other renewable energy developers. To see what is available in your state: Database of State Incentives for Renewable Energy http://www.ies.ncsu.edu/dsire/.

Green Tag Sales
The Sale of Renewable Energy Certificates (RECs) is another regulatory based funding mechanism. RECs are the renewable attributes unbundled from the energy produced from renewable energy systems. The current market value of the REC market is $155 to $185 million. Although that may seem like a sufficiently large volume (especially if it were deposited in your personal savings account), it is actually indicative of the thinness of the market. (The New York Stock Exchange buys and sells roughly 1,500,000,000 billion shares per day). Selling prices range widely, currently from $.70 to $49 per MegaWatt Hour. A fragmented market, it is accessed for compliance and voluntary commitments. But as the market matures and consolidates, it could become an additional source of financing.

Other Local and Regional Incentives
These include fee waivers, low-cost loan programs, property tax abatements, sales tax waivers, etc.

What do I need to know about these financing suites to more effectively negotiate and monitor the transaction?
It would be useful to have a sense of what the current price is for these various resources. The third party financier will know because it is crucial to his/ her business day in and day out. But you cannot rely totally on the third party financier to give you the best deal for you, because the best deal for you would be at his/ her expense. To improve the chances of getting a fair deal, research recent market transactions and/ or hire an independent expert to advise you.

At some level, it is useful to coordinate with the financiers. Some mechanisms may be easier for them to coordinate than for a governmental entity. The regulatory funds may be better accessed through the financier since they are in the market regularly, developing multiple projects. Statement of experience and qualifications could suggest their market insight.

What if we prefer to access these financing mechanisms independent of the third party financier?
Accessing the federal tax credits if you are not a tax-paying entity can also be done by means of the Clean Energy Bonds mentioned above. Accessing utility regulatory funds for renewable energy can be done by means of the same application process that the third party financier would make. The difference would be in experience and insight concerning how the process works, how long it takes and pricing. Insight regarding this would need to be researched and/ or secured.

How do I begin working with Renewable Energy Project Developers
If your potential project is large enough, it may be useful to you to conduct a formal bidding process by means of a Request for Proposal (“RFP”). In some cases, you may be required to do so through procurement guidelines or requirements. See “Sources of Technical Information,” for potential project developers and financiers.
An important thing to remember when working with Project Developers is that you are buying energy from them, and not construction and development services.

How are the proposals best evaluated?
Although lowest cost is a critical concern of proposal evaluation, cost can only be assessed to the value given. The RFP process is an opportunity to discover other benefits that the companies active in the marketplace can possibly provide, including ways in which the proposal meets other goals and objectives. Some of those goals concerning the general public welfare that your government may have taken positions on include

• Diversifying Fuel Sources to Increase Energy Security
• Reducing pollution such as Greenhouse Gas & Mercury Emissions
• Increasing Energy Surety with distributed power generation
• Strengthening aging distribution infrastructure (especially in “downtown”)
• Utilizing an abundant local resources
• Enhancing local economic development

For example, the City of San Diego RFP for renewable energy included the following economic development criteria in their proposal request:

G. Market Penetration Support Discuss your firm’s interest in supporting the City’s efforts in encouraging investment in solar PV systems by industries and businesses within the region. Specifically discuss any pricing incentives or other mechanisms your firm is willing to employ to enhance investment in solar PV. (page 16)

How to decide what financing approach to pursue?
Each of the approaches will require an investment of staff time and other resources. Some approaches are more sensitive to scale. The table below summarizes the requirements across approaches.

	Capital Requirements	Staff Responsibility	Document Development	Scale Level
Self-Fund	HIGH	HIGH	HIGH	LOW to HIGH
Regulatory Renewables	MEDIUM	HIGH	HIGH	LOW to HIGH
Third Party Financing	LOW	MEDIUM	MEDIUM	HIGH
Clean Energy Bonds	MEDIUM	HIGH	HIGH	MEDIUM to HIGH
Other Bonding	MEDIUM	HIGH	HIGH	MEDIUM to HIGH
Financing Suites	MEDIUM to LOW	MEDIUM	MEDIUM	MEDIUM to HIGH

How do we begin the process?
There are four steps involved in developing financing for renewable energy for your government. They are

• Securing the support of elected officials
• Identifying initial projects
• Running the numbers
• Convene the technical team
• Identify and Assign Tasks

Securing the support of elected officials
It is important to secure both the support of the Elected Officials and staff. Access to either of these groups can be secured through energy or environmental advisory groups, recognized stakeholders in the field or with individuals or organizations that may have a working relationship with them. Initially, the support can be general and informal in nature. But eventually, it is useful to get official recognition through resolution, directive or ordinance.

Identifying initial projects
It is useful to identify a short list of potential projects to test out the approach. Later, when a energy provider is selected they can provide analytical support to identify other project options. Here are the following categories of information that are necessary to make a quick assessment of the project viability.

1. Available Space

• Roof space (10 watts = 1 sf for PV, Solar Thermal, less)

•Protected space (Ground Mounted)

2. Loads

• What load level and when?

•seasonally and daily

3. What kind of existing energy use and at what price?

• Natural gas, Electricity

Key factors in assessing what technologies to develop with the approach
Renewable technologies can generate electricity or process thermal energy. Usually, but not always, natural gas is used for thermal applications, so the relative prices and expected price volatility of electricity or vs. natural gas is important to assess in choosing between these broad classes of technologies. Since natural gas is used to produce electricity for most peaker plants, there may not be huge differences. But sometimes there is a lag in electricity pricings ability to reflect natural gas increases. In addition, pricing regulations can vary from region to region.

Other factors can effect technology choices, including comfort level and past experience with similar technologies. Regulatory based incentives can also be structured for a preference of one technology over the other, so the rules establishing the incentives should be carefully reviewed or relevant expertise should be secured.

Running the numbers
A quick Cash Flow Forecast for 10 to 20 Years then needs to be developed. The following information must be approximated:

1. Capital Costs.
2. Energy Production
3. Tax Credits and Incentives
4. Green Credit Sales/ Buy-downs
5. Projected Discount Rate
6. Operating Costs, maintenance, insurance, etc.
7. Current Price of Energy
8. Projected Energy Price Increases
9. Rates of Return (use Return on Investment, since payback is often deceptive).

Convene the technical team
You may have already convened some of the necessary technical team in your efforts to identify initial projects and run the numbers. The critical team members are:

• Financial Staff
• Procurement Staff
• Facilities Staff
• Energy Manager
• Technical Advisors

Identify and Assign Tasks
Completing the following tasks will move the project to completion:
1. Secure Sample Request for Proposals and/ or Quotations (samples on this site)
2. Revise RFP/ Q
3. Publish Request.
4. Establish Evaluation Committee.
5. Select Contractor & Establish Scope of Work.

Are there any case studies or document samples for using these approaches?
Two specific transactions are featured on this site the City of Tucson Solar Pools Financing and the City of San Diego Power Purchase Agreements for Photovoltaic Generation Systems.

The City of Tucson documents on this site are more extensive. The City of San Diego transaction is represented by a sole document, its RFP. Tucson’s case study covers solar pools, and solar service water heating devises. The San Diego case covers solar electric (photovoltaic) systems.

One thing to note concerning the San Diego document is the specific request for a power purchase agreement and that “third party financing is not a current option” (page 6). Technically, a power purchase agreement is a third party financing. But due to other financial circumstances (San Diego was grappling with a potential bankruptcy and federal indictments), it did not want potential financiers to consider this a financing opportunity that could be supported by the good faith and credit of the City. Thus, the stipulation.

Back To Top of Page