House Bill 589 passed the House and Senate, despite lengthy battles between Duke Energy and renewable energy developers. Rather than a fight for or against alternative energy, the difficult decisions centered around Duke’s control over how much power it would be required to purchase from developers and at what price. While Duke embraced the growing demand for alternative energy, it also made clear that it strongly disfavors the economics under the current regulatory structure. While it remains to be seen how H.B. 589 would affect the finance ability of renewable energy projects in North Carolina, pushing more projects into a competitive-bid environment and reducing the size of projects eligible for avoided cost rate contracts certainly will present new challenges for solar developers and their investors.
Where we started … A Closer Look at the Competitive Energy Solutions for NC Act
House Bill 589, otherwise known as the “Competitive Energy Solutions for NC Act,” is a detailed policy plan regarding the integration of renewable electricity generation in North Carolina. H.B. 589 reflects the culmination of nearly a year of back and forth between renewable energy advocates and Duke Energy. Renewable developers are eager to see legislation designed to further induce the development of new renewable energy in North Carolina, retaining North Carolina’s place near the top of renewable energy states nationwide. On the other hand, Duke successfully argued for the implementation of a competitive bidding process, which will reduce the amount it pays for new capacity brought online by independent developers. In short, policy changes will create affordable, unique, and steady sources of renewable energy for North Carolinians. However, its effect on the economics of these new projects for developers and other investors is unclear; nearly all providers of new renewable energy will be required to compete for lower prices and utility-approved project sites when seeking to obtain a power purchase agreement with Duke.
The bill is now on the desk of Governor Roy Cooper; it has passed both the House and Senate. He may choose to veto or move forward, but his decision was made much more difficult in the eleventh hour when Senator Harry Brown, a republican from Onslow County, tacked on a four-year wind energy moratorium. Vetoing the bill will protect wind-power developers from a huge freeze on new projects, whereas signing the bill will ink a commitment from Duke to add 2,660 MW to the grid by the end of 2021.
The wind energy moratorium was reduced to 18-months—better than the originally proposed 48 months—but, still, a significant loss for wind-power projects. The legislation appropriates $150,000 to hire a company to draw maps showing areas of concern with wind farms and military installations along North Carolina’s coast. What has arisen in the final form of H.B. 589 is the unfortunate choice of choosing between North Carolina’s largely solar renewable industries at the expense of wind farms.
How Will H.B. 589 Affect Debt Financing Opportunities?
The vast majority of solar added to the power grid since 2011 has taken advantage of PURPA’s requirements that Duke purchase power from solar developers at Duke’s avoided cost rate. These power purchase agreements established a fixed price for power and a term of up to 15 years. Such provisions have created a market for financing the development, construction and operation of renewable energy projects in North Carolina pursuant to which construction and term lenders alike can underwrite to a value based on predictable economic models over a term of 15 years.
Several of the provisions of H.B. 589 could present challenges to developers looking for access to capital. While the initiative to add a significant amount of renewable energy to the grid over the next four years clearly creates a need for new projects, developers (especially those that have focused their efforts on projects in the range of 5 MW) may have a difficult time adapting their business models to bring new projects online for a number of reasons, including some or all of the following:
- the establishment of a bidding process for all projects greater than 1 MW could push down the rates that Duke pays for power produced, thus reducing the overall value of a project – an important component of sizing construction debt – and the project’s capacity to service debt owed to term lenders after placement in service;
- Duke will have the ability to determine both the location and allocated amount of competitive bid projects within its territories, which may push new projects into areas of North Carolina where land cost could be materially more;
- even though competitive bid projects will come with a 20-year PPA instead of 15, it remains to be seen whether and how quickly lenders will be able to adapt their underwriting criteria to allow for a 20-year loan – and if they are unwilling or unable, then the longer term contract will not provide any benefit to the finance ability of the projects;
- due to the economies of scale in many renewable energy transactions with tax equity investors, those investors have grown accustomed to bundling 10 or more projects into a single transaction to create an aggregate size worthy of their time – bundling the required number of 1 MW projects to retain both the same aggregate portfolio MW and the avoided cost rate structure could be unworkable;
- the 1 MW threshold for standard offer PPAs steps down to 100 KW after a utility has entered into 100 MW or more of standard avoided cost rate contracts that established a legally enforceable obligation after November 15, 2016; and
- the inclusion of capacity as a component of the avoided cost rate is not required unless Duke’s most recent biennial integrated resource plan identifies a projected capacity need.
By: Andrae Bergeron
CCP Web Design