ShoreBank Blog

Power Purchase Agreements for the Rest of Us

by Joel on October 7th, 2008

An increasingly popular idea about how to finance alternative energy and energy efficiency improvements involves the use of performance contracts or power purchase agreements (PPA).  These types of financing arrangements involve a third party installing and owning the energy systems and then leasing the improvements back to the building owner.  The structure has been used extensively by governmental entities (especially school districts) and by large Fortune 500 companies such as Google, Wal-Mart, etc.

At ShoreBank, we have been working for some time on what we call a “PPA for the rest of us” – meaning, performance contracts and PPA arrangements involving deals of less than $1 million, which cater to small nonprofits and other institutions, such as affordable housing projects, charter schools, and religious institutions.  As we have explored doing so, we’ve discovered that these arrangements are far more complex than many people recognize.  Aside from the credit issues that accompany these types of organizations, the long-term nature of the contracts and requirements for performance guarantees also present significant obstacles.  Because the deals specify a fixed payment schedule from the beneficiaries, the interest rate on the financing must be fixed for the life of the agreement, usually 15-20 years in length.  This fixed rate presents a significant hurdle given the lack of any secondary market.  Similarly, due to the small size of the projects, and economic development goals, such as by small, minority contractors, performance guarantees are a concern.  The firms involved are typically under-capitalized and therefore lack the financial strength to make the lender whole should the performance not meet required standards at some point in the future.

We believe that performance contracting and PPA arrangements offer a fantastic opportunity to promote energy efficiency and alternative energy.  However, foundations, utilities, and governmental agencies must begin to partner with financial institutions to develop the requisite funding mechanisms and to create new types of performance guarantees if we are going to broaden the array of potential participants.  Given the current financial crisis, we believe doing so is even more critical than ever and hope other partners will join us as we begin to pilot these initiatives.

Tags: community development, energy conservation loans, green banking, green building, power purchase agreement, ShoreBank, triple bottom line

This entry was posted on Tuesday, October 7th, 2008 and is filed under Green Collar. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.