Energy Prepayment Powers Virginia's Largest Solar Project

By Jennifer Dockery, Assignment Editor, Novogradac & Company LLP

A project that began as an academic exercise has, through sweat and stimulus funding, become the model for the largest solar array to date in Virginia. Developed by Staunton, Va.-based Secure Futures LLC (SFLLC), a soon-to-be-400 kilowatt (kW) solar project will provide energy to Eastern Mennonite University (EMU), a private university in Virginia's Shenandoah Valley. In November, EMU and SFLLC completed construction on a 104-kW array on the roof of the university's Sadie Hartzler Library, the first of two arrays that SFLLC will develop on the campus.

Photo Courtesy: Jon Styler, Eastern Mennonite University
The roof of Sadie Hartzler Library at Eastern Mennonite University in Harrisonburg, Va. features 238 solar panels.

"We have historically … identified sustainability as one of our core values and this was a way that we could publicly show that we take sustainability seriously," said Daryl Bert, EMU's vice president for finance. "Our students also have an appreciation for environmental concerns. Those two things aligned very nicely with this project."

The two-phase, 400 kW-project is EMU's first solar energy project on campus. The university, which describes itself as a liberal arts Christian college with core values of peace and sustainability, anticipates that the project will provide 9 percent of its electricity and save $2 million during 20-year power purchase agreement (PPA) life of the project. The 104-kW first array was completed in early November. The first array includes 328 high efficiency photovoltaic panels manufactured by the SunPower Corporation. A 300-kW array will be added to carports on the university's campus early next year. SFLLC contracted with Southern Energy Management (SEM) to design, install and maintain the solar arrays.

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Breaking Barriers
Virginia is not an easy state in which to develop a renewable energy project, said Dr. Anthony Smith, SFLLC's chief executive officer and co-director of EMU's Steward-Leadership MBA program. The state has one of the lowest electricity rates in the country, generates large amounts of energy from coal and nuclear sources, and imports much of its energy from neighboring states. Additionally, Virginia does not offer state tax incentives or credits for clean energy projects and compliance with its renewable portfolio standards is voluntary. This meant that SFLLC would need to finance the EMU project through federal programs and private capital. To that end, the company developed a business plan that included a prepaid PPA.

"Our business model was to beat the odds," Smith said of the plan that won SFLLC third place in James Madison University's first sustainable business plan competition in 2009 and served as the model for the EMU transaction.

Finding Funding

Photo Courtesy: Jon Styler, Eastern Mennonite University
Eastern Mennonite University President Loren Swartzendruber shows guests the solar array's output via a web site that tracks its operations.

"In other markets, you sort of have a template from which you work. In Virginia, we didn't have that … It took a lot of effort, resources, innovation and collaboration from Secure Futures, Eastern Mennonite University, HEC [Harrisonburg Electric Commission], DMME [the Virginia Department of Mines, Minerals and Energy] and Southern Energy Management to make this work," said Blair Kendall, SEM's director of business development. "For us, this was not another standard install. It took as much education and development work as a much larger project in a more mature solar market."

The first funding piece that came into the project was courtesy of the American Recovery and Reinvestment Act. The DMME used stimulus money to provide a $225,000 grant to the project through its solar incentives grant program. EMU then provided a letter of intent stating that it would prepay for its first 10 years of energy usage and in late September signed the PPA.

"We've negotiated a PPA that actually rewards them for doing that. In other words, it factors in EMU's time value of money for prepayment," Smith said. SFLLC secured the PPA with a 20-year guaranteed system output and the solar panel manufacturer has provided a 25-year performance agreement for the panels. EMU also agreed to provide the funds during construction. The university paid in installments as the project reached certain benchmarks.

Once SFLLC received the grant and the university's financing commitment, the company approached local financial institutions to provide additional funding for the first 104 kWs of the project, which is estimated to cost between $600,000 and $1 million. Community Bank provided the construction lending for the project and SFLLC approached community members to invest in the project. The community investors formed Community Solar LLC, an LLC developed and managed by SFLLC.

"It really is going to eventually be owned in a significant way by members of the community," said Smith who noted that investors include EMU graduates and members of the Mennonite Church.

Photo Courtesy: Jon Styler, Eastern Mennonite University
Anthony Smith, Secure Futures LLC's chief executive officer, spoke to attendees at the array's ribbon cutting on November 15.

Additionally, SFLLC and HEC spent five months negotiating a solar net-metering policy that enabled SFLLC to claim renewable energy credits (RECs) generated by the project. SFLLC will sell the RECs to out-of-state utility companies because Virginia does not have an REC market. Community Solar will apply for a Section 1603 grant after the second array is placed in service. The first array qualifies for an estimated $200,000 to $300,000 in Section 1603 grant money. Smith said that he expects the Section 1603 grant for the 400 kW arrays to total about $1 million.

"It would've been impossible for us to put this together without the investment tax credit grant," Smith said.

EMU and Secure Futures signed the PPA on September 23, 2010; construction began on the first array during the first week of October and ended on November 3. At press time, the system was operating and exceeding its guaranteed output projections. Secure Futures was also working on closing financing for the second array.

"It's a very humble beginning in comparison to what's happening in other states, [but] if it can be done in Virginia, it can be done anywhere," Smith said.

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