Intro to On-Site Generation:
Primer on Best Practices

The business case for customer-sited generation has never been more compelling for corporate energy users. Inclusive of technologies like solar PV, battery storage, combined heat and power (CHP), fuel cells and more – these installations can help companies reduce utility costs, improve reliability and operate more sustainably.

In this primer, our team explores the factors influencing the rise of on-site generation and explains how companies can evaluate and implement projects with attractive economic returns.

5 Trends Driving Growth in On-Site Generation

There are five key trends driving the value proposition for on-site generation:

  1. 1. Rising Utility Rates

    While wholesale power prices remain hard to predict, the cost of delivering electricity is clearly on the rise. As grid investments are passed onto consumers through rate increases, companies can avoid rising costs by installing on-site generation and buying less power from the grid.

  2. 2. Falling Installed Costs

    Maturing business models and manufacturing expansions have driven down the cost of equipment and installation across many technologies. Falling costs have improved the economics of customer-sited generation, which can often be cash flow positive in Year 1, when funded through a third-party.

  3. 3. Increasing Incentives

    Regulators at the federal, state and local levels are rolling out powerful incentives for distributed renewables. Ranging from expanded tax benefits in the Inflation Reduction Act to state REC programs and utility rebates, these incentives commonly cover over 30-50% of the total system cost.

  4. 4. Grid Reliability Issues

    Grid reliability concerns are increasing due to factors including aging infrastructure and climate-related extreme weather events. Many forms of on-site generation can be used to protect against costly grid disturbances and outages, making such installations necessary to ensure resiliency.

  5. 5. Sustainability Mandates

    Companies seeking to improve sustainability will not find a better option than installing on-site renewables. The unquestionable “additionality” and unmatched proximity to load results in RECs of the highest quality – while the parallel benefits of cost savings make such projects uniquely attractive.

 

While rising utility prices and falling costs have improved the financial returns of on-site generation, companies still must determine how to fund these projects. Buyers may consider purchasing the system directly, thereby receiving tax credits (read more on Tax Credits) and a typical payback of 3-8 years – however such investments may not be approved in light of competing demands for capital.

For this reason, customer-sited generation is often funded through third-parties, eliminating the need for an upfront investment and enabling the company to pay for the project over its lifetime. One common funding solution, the Power Purchase Agreement (PPA), allows companies to pay for power as a service, as it is produced, often resulting in positive cash flow on day one – assuming the purchase price is lower than what was previously paid to the local utility.

Companies should evaluate all available funding options and may pursue a portfolio of solutions tailored to the circumstances of each opportunity. See Exhibit 1 below for a simplified cash flow comparison of two common funding options, exemplifying this type of assessment.

How to Buy Clean Energy:
Buyer’s Guide to RECs

Companies around the world are committing to GHG reduction goals, such as Science-Based Targets, at an unprecedented pace. As part of their journey, companies are expected to measure and reduce their Scope 2 emissions – principally derived from their electricity consumption. Scope 2 emissions can be reduced by using less power, such as through efficiency upgrades, however most Scope 2 progress comes through the transition to clean (zero emission) electricity supply.

Despite the importance of clean energy in this equation, the mechanisms for purchasing and accounting for the consumption of clean energy are often misrepresented and misunderstood. This confusion has led to blanket criticism and press coverage of RECs as “not real,” and even evidence of corporate “greenwashing.”

In this primer, our team sheds light on how RECs work, how to gauge REC quality, and how to understand your options for buying RECs that meet your needs.

Renewable Energy Certificates (RECs) 101

Regardless of the source of electricity generation, once power is exported onto the grid for transportation, all power is fungible, therefore it is impossible to recognize “renewable” power as it reaches your facilities. To solve for this fact and track the environmental attributes of power generation, “Renewable Energy Certificates” (RECs) and Tracking Systems were created – initially by states to monitor compliance with regulations that mandated the adoption of renewable energy. Note: Renewable Energy Certificates and Renewable Energy Credits are used interchangeably in the industry.

These certificates, originating in the 1990’s to early 2000’s, became the fundamental and unavoidable accounting instrument for tracking the attributes of power generation. RECs are generated in parallel with the physical power (1 MWh = 1 REC) and may be sold separately from the physical power. RECs contain embedded information such as the technology and date (the “vintage”) of generation. Once generated, the RECs are tracked electronically in a registry, such as the Generation Attribute Tracking System (GATS) of PJM, where they can be transferred to another entity and/or retired.

Energy Tax Credits 101:
Tax Credits and Tax Equity

Following the passage of the Inflation Reduction Act (IRA) in 2022, Energy Tax Credits have been thrust into the national spotlight. Due to some notable updates, Corporate Sustainability and Finance teams across the U.S. are beginning to explore the implications and opportunities available to them under the IRA.

In this primer, our team explains how tax credits work, what changed with the IRA, and how companies can take advantage of tax credits in their decarbonization journey.

Energy Tax Credits 101

The Energy Policy Acts of 1992 and 2005 introduced tax credits for wind and solar technologies, respectively. Enacted in 1992, the Production Tax Credit (PTC) is an inflation-adjusted per-kilowatt-hour (kWh) tax credit for electricity generated by qualifying resources, including wind power. Enacted in 2005, the Investment Tax Credit (ITC) is a percentage tax credit applied to the capital invested into qualifying resources, including solar power.

Both credits provide for a dollar-for-dollar reduction in federal income taxes owed. Importantly, both forms of tax credits are unrelated to Renewable Energy Credits (RECs) and neither form of tax credit can be used to claim the consumption of renewable energy or reduce your GHG emissions. Energy tax credits are solely used for tax savings, creating a strong financial incentive to build new projects.

When projects are developed, the tax credits that are created belong to the owner of the project. Since companies often do not fund and own these projects themselves, opting instead to pay for the power through PPAs (Power Purchase Agreements) as it is produced, the tax credits belong to the owner(s) of the projects rather than the customer. The economic value of the tax credit is generally passed through to the customer in the form of a reduced PPA price (read more on PPAs).

This presents a problem, however, since most “Project Developers” do not have sufficient federal income tax liabilities to use the tax credits generated across all their projects. Before the Inflation Reduction Act, to solve for this and ensure that the tax benefits are used efficiently, “Tax Equity” became a foundational component of project finance (Exhibit 1).

This mechanism involves bringing in another equity investor (the “tax equity investor”) that does have tax liabilities, and creating a commercial structure whereby the tax benefits are allocated to the tax equity investor. Historically, almost all tax equity investors are large banks such as JP Morgan and Bank of America, which alone have accounted for over 50% of tax equity deals in recent years.