By Derek Price, Johnson Controls, Inc.
Picture a large medical center in a major metropolitan area. An eight-story hospital dominates the center’s two-acre campus, which is also dotted with smaller clinics, office buildings and parking structures. Hundreds of doctors, nurses, administrators and other staff work around the clock to provide top-notch health care to people from all over the region – care that saves many lives, and makes many more worth living.
Now picture the center’s electric bill. It’s big, really big. And with energy prices that are always either rising or falling – sometimes quite dramatically and with little warning – it’s pretty hard for the facility manager to come up with a budget every year, much less stick to it.
Here’s a thought: with so many buildings, couldn’t the medical center generate its own electricity with solar panels spread out over all those empty rooftops? Wouldn’t that help stabilize the center’s electric bills, reduce its carbon footprint and send a strong message to the community that it’s a caring and responsible corporate citizen? Isn’t that an option?
The answer is yes, it is an option. But it’s not a very good one, and here’s why: Many of the financial incentives available to help offset the initial costs of installing a solar photovoltaic (PV) system come in the form of tax credits, or accelerated depreciation on the solar equipment itself. Those incentives are great for businesses that pay taxes. But the medical center is a non-profit organization, so it doesn’t pay taxes. That means it can’t benefit from the tax breaks. And that makes it much, much harder for the medical center to make going solar financially feasible.
Fortunately, there’s an easy solution: a Power Purchase Agreement, or PPA. A PPA is a contract – in this case, a contract between someone who owns a solar PV system and someone else who buys the electricity that system generates. Here’s how it could work for the medical center:
- The medical center signs a PPA with a third party – typically an investor or group of investors
- The medical center agrees to let the third party install solar panels (and related equipment) on its facilities
- The medical center also agrees to buy all the electricity the solar panels generate – at fixed prices – for the life of the contract, which could be as long as 25 years
What’s in it for the medical center? Lots:
- No up-front costs of purchasing and installing the solar panels –the third party puts up the money
- No ongoing operating and maintenance expenses – likewise, the third party bears those costs
- Stable electric rates for the life of the contract – eliminating the ups and downs in its electric bills and providing a hedge against dramatic increases in energy prices
- The positive goodwill in the community that comes with doing the right thing
The third party investors are, of course, a commercial business, so they can benefit from the tax credits and other incentives that make these kinds of projects good investments. It’s a classic win-win – and it’s perfect for hospitals, schools, state and local governments and other non-profit organizations in states where a) electricity rates are relatively high and b) state tax credits are available.
If you’d like to learn more, check out our white paper on funding renewable energy projects.