Municipal Bond: PPA Model Continues to Provide Low-cost Solar Energy
The municipal bond–power purchase agreement (PPA) model might not have just rolled off the lot, but it still has that new car smell. A former NREL colleague first looked into this unique third-party ownership–public debt hybrid financing model last year. Here, I discuss recent applications and provide new insights based on a conversation with James Mann, co-founder and general counsel of Sunlight General Capital.
The municipal bond–PPA model is also known as the Morris Model after Morris County, New Jersey, where the arrangement was first applied. The gist of the model is that it combines the tax monetization benefits of third-party ownership with low-cost capital in the form of public debt. To make use of federal tax incentives, the county government issues taxable bonds and passes the proceeds on to the developer through a lease-purchase agreement. The lease-purchase agreement transfers ownership of the solar installations to the developer and also requires the developer to make payments to the county that are in turn used to pay principal and interest on the bonds. The county government also enters into a PPA with the developer on behalf of the public schools and other municipal facilities where the solar installations will be located. By onlending the public debt to the developer, the county/state government is in effect buying down the developer’s cost of capital and, in exchange, receives a reduced PPA price.