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HomeMy WebLinkAboutSRCEA Item 3 - SR re PPA Area 1Southwest Riverside County Energy Authority a Joint Powers Authority of the Cities of Temecula and Lake Elsinore, California REPORT TO SRCEA BOARD To: Honorable Chair and Members of the Board From: Michael Bracken, Staff Liaison to the SRCEA JPA Board Date: February 14, 2018 Subject: SRCEA Solar Power Purchase Agreement, Sublease Agreement, License Use Agreement, and Interconnection Agreement; (SUBLEASE AREA 1) Recommendation adopt A RESOLUTION OF THE SOUTHWEST RIVERSIDE COUNTY ENERGY AUTHORITY (SRCEA) APPROVING AND AUTHORIZING THE EXECUTION AND DELIVERY BY RESPONSIBLE OFFICERS OF THE SOLAR POWER PURCHASE AGREEMENT, THE SUBLEASE AGREEMENT, THE LICENSE USE AGREEMENT, AND THE INTERCONNECTION AGREEMENT, AND APPROVING AND AUTHORIZING THE SRCEA EXECUTIVE DIRECTOR TO EXECUTED SAID AGREEMENTS FOR SUBLEASE AREA 1 Background and Overview The proposed agreements enable the Southwest Riverside County Energy Authority to purchase electrical power for a variety of City facilities (cities within the SRCEA) from a solar power generating facility to be constructed on land in the Santa Margarita Ecological Reserve in the City of Temecula. The cost of the electricity from this solar power generating facility to the City will initially be approximately 10% less than the cost of electricity available to the City from Southern California Edison (SCE). As electricity rates increase over time, the savings to the SRCEA and member cities will increase correspondingly (as the City, acting through the SRCEA, would be entering into a fixed rate purchase agreement/arrangement). The solar power generating facility would be constructed by SMER Research 1, LLC which holds a leasehold interest granted by San Diego State University, the owner of the Santa Margarita Ecological Reserve (in the City of Temecula) for the land commonly known as the "Santa Margarita Ecological Preserve SOLAR Initiative Research Site." SMER Research and San Diego State University entered into the ground lease on October 21, 2014 for use of the site for solar projects. Electricity will be generated by the collection of sunlight onto an array of photovoltaic (PV) cells that are ground-mounted onto posts. Sufficient electricity will be generated to serve several of the city facilities within the cities of Temecula and Lake Elsinore. The photovoltaic cells are similar to those now being used in home solar energy systems and in commercial scale solar fields that have been constructed in such places as Imperial, Riverside and San Bernardino counties. In addition to the public benefits of lower electricity rates and obtaining electricity from a renewable source of power, SMER Research and San Diego State University have agreed to conduct substantial academic research projects at the solar power generating facility that will study solar radiation, solar energy, soils and other meteorological and geotechnical data as well as habitat and habitat restoration. This research may prove beneficial to the City of Lake Elsinore as the community has similar environmental and ecological characteristics. The SRCEA's fundamental role in this solar project is only as a purchaser of electricity for the benefit of the cities of Temecula and Lake Elsinore. SMER Research will design the solar project, obtain all required permits from the California Public Utilities Commission, San Diego State University (and the California State University), City of Temecula and any/all other regulatory/resource protection agencies at its sole cost, expense and time. Discussion Local Government Renewable Energy Self-Generation Program, codified at Public Utilities Code Section 2830, requires that the investor-owned utilities like Southern California Edison (“SCE”) offer a tariff (commonly referred to as the “The Renewable Energy Self-Generation Bill Credit Transfer Program” or “RES-BCT” program) that allows “Local Governments” to generate energy from an “Eligible Renewable Generating Facility” for their own use as a “Generating Account.” The foregoing agreements are necessary to enable SMER Research to maximize its ability to obtain tax credits and energy incentives under the alternative energy programs under Federal law and the RES-BCT program, and in turn, allow the City to participate in the RES-BCT program. To bring this project (and the savings) to fruition, there are a series of agreements that would be subject to approval at the joint powers authority (JPA) level (Power Purchase Agreement, the Sublease Agreement, the License Agreement and the Southern California Edison Interconnection Agreement). Additionally, the cities of Temecula and Lake Elsinore would be a signatory to a financial guarantee for the Power Purchase Agreement. What follows is a more detailed description of the agreements. Solar Power Purchase Agreement The SRCEA and SMER Research will need to enter into a Solar Power Purchase Agreement, in substantially the form attached. Under the Power Purchase Agreement, the City (again, acting through the SRCEA) will purchase electricity generated by the solar facility for various City facilities. The term will be 20 years from the operation date of the solar generation facility and may be extended for an additional five years. The price of electricity for the benefit of the City’s “account” will be fixed for the term. The price is guaranteed to initially be at least 10% less than the cost of electricity from SCE. As electricity rates increase over time, the savings to the City will increase correspondingly. The cities of Temecula and Lake Elsinore, acting through the SRCEA, will be able to terminate the Power Purchase Agreement before the end of the term in the event of an uncured breach. However, neither the City nor the SRCEA will be allowed to terminate the Power Purchase Agreement for its convenience unless the City pays a significant termination fee. The termination fee in total (if both the cities of Temecula and Lake Elsinore terminated in the first year) is $10.972 million. Individually, Temecula's first year termination fee is $6.76 million while Lake Elsinore's is $4.21 million. The termination fee is based on the amount of energy each city is purchasing. The termination fee is reduced each year during the term of the Power Purchase Agreement. The hefty termination fee is necessary, according to SMER, because the construction of the solar generating facility is being financed through the anticipated revenue from the electricity sales to the City. The Power Purchase Agreement provides for the installation of metering devices and interconnection facilities/devices with SCE's electrical distribution system. The cost of installing the meters and interconnection facilities is the sole financial responsibility of SMER Research. SMER Research is required to maintain the insurance required by its Ground Lease with San Diego State University, the City of Lake Elsinore, and SRCEA as additional insured. The insurance will be in the amount of $2 million general liability with $15 million excess insurance with updated limits as required by San Diego State University. Each City (Temecula and Lake Elsinore) will own the "Green Attributes" and "Retain Environmental Financial Incentives" These are various types of financial and tax incentives that are often referred to as "Offset Credits or "Carbon Reduction Credits". While these may not have value for/to the City now, it is likely they will have economic value in the future as the alternative energy industry and a potential market for the sale of these incentives develops. Sublease Agreement and License Agreement between SMER and SRCEA As noted above, SMER Research and San Diego State University have entered into a Ground Lease for the Santa Margarita Ecological Reserve SOLAR Initiative Research Site. Under the RES-BCT, the generation system must be owned, operated, or on the property under the control of the “local government” that is seeking to benefit from the program and must be located within the boundaries of that “local government.” In order to meet this requirement, SMER Research will sublease a portion of the research site to SRCEA that, once developed, will generate electricity for the benefit of the City’s account. SRCEA and SMER Research will also need to enter into a License Agreement allowing SMER Research to enter upon and use the same subleased site for the solar generating facility. Under the Sublease Agreement and License Agreement, SMER Research is required at its sole cost and expense to use and maintain the site in accordance with the Ground Lease at all times. In return, the use of the Sublease Agreement and License Agreement will enable SMER Research to maximize its ability to obtain tax credits and energy incentives under the alternative energy programs under Federal law and the RES-BCT program. Additionally, as a member of SRCEA with the City of Temecula, the City of Lake Elsinore qualifies to participate and benefit from the RES-BCT even though the energy generation facility is located in the City of Temecula. Interconnection Agreement with Southern California Edison Company The SRCEA and potentially the City (in order to assure the benefits flow to the City’s accounts) will need to enter into an Interconnection Agreement with SCE. The Interconnection Agreement governs the distribution of electricity from the Solar Generating Facility at Santa Margarita Ecological Reserve Solar Initiative Research Site to the SCE nearest substation. The Interconnection Agreement implements the requirements of California Public Utilities Commission Electric Rule 21. In the Solar Power Purchase Agreement, SMER Research has agreed to pay all of the costs of for compliance with SCE’s requirements under the Interconnection Agreement including the construction and installation of the interconnection facilities and meters. Financial Guarantee While the newly formed SRCEA is the legal entity approving most of the agreements, the purchase of the power itself (for the benefit of the cities of Temecula and Lake Elsinore individually) is also guaranteed by the individual cities. Exhibit I to the Power Purchase Agreement contains the Guarantee of the Solar Power Purchase Agreement (“Guarantee”). Essentially, the SRCEA does not have independent assets or revenues to satisfy the obligation to purchase power under the Power Purchase Agreement, yet the project developer (SMER Research) will be responsible for a capital outlay of millions of dollars to construct the solar facility. The Guarantee essentially states that if SMER Research delivers power for which the City can take credit under the RES-BCT, that the City will guarantee the payment obligation of the power purchaser to SMER Research under the Power Purchase Agreement. In no way is SRCEA nor a City financially responsible for the default of any other participants in this project. That said, one unique feature of the JPA and the Agreements is in a case where another participant chooses (City of Temecula) not to purchase the prescribed power, the other participant (City of Lake Elsinore) has the ability to purchase that power at the same rate within the Power Purchase Agreement (and vice versa). Usage and Summarized Savings SMER Research 1, LLC estimates that in the first year of (full) production, the facility will generate 3.65MW of energy. This is equivalent to 6.347 million kilowatt hours of energy. It is estimated that the cities of Temecula and Lake Elsinore are paying an estimated 13.96 cents per kilowatt hour of energy at current ($886,044). Under the SMER Research 1, LLC project (and RES-BCT program) the new energy price (Year 1) is 12.53 cents per kilowatt hour. This is about $795,282 in power costs. Meaning that the JPA members would save $90,762 in the first year. The savings increases each year as the cost of electricity purchased through Southern California Edison is likely to rise, while the cost of energy purchased through SMER Research 1, LLC is fixed for the entire term of the Power Purchase Agreement (PPA). In running a full 20-year savings model, SRCEA members stand to save substantially on their municipal energy bills. The following provides savings examples: Scenario Savings Amount Basis A $5.62 million 2% Increase in SCE Rates Each Year B $8.39 million 3.2% Increase in SCE Rates Each Year* C $11.49 million 4.36% Increase in SCE Rates Each Year** * Based on historic 10-year rate increase average ** Based on historic 5-year rate increase average Fiscal Impact The above-reference agreements do not impose any cost or expenses on the SRCEA nor member cities (Temecula and Lake Elsinore) except with respect to the purchase of the generated electricity. The member cities will realize a savings in electrical energy costs by purchasing electricity generated by the solar generating facility. All costs related to the solar generating facility and the interconnection facilities to so that the generated electricity is credited towards the electricity used at various City facilities will be paid by SMER Research. Exhibit(s) A – Resolution No. 2018-___ B – Solar Power Purchase Agreement Sublease Area 1 including: Power Purchase Agreement Sublease Agreement License Agreement Southern California Edison Interconnection Agreement Form of Guarantee (City of Temecula)