In 2022, over 1.1 trillion dollars were invested globally in non-fossil fuel energy, about ninety percent in renewables, Bloomberg reports. This is just the beginning. A global efficient renewable transformation from fossil fuels is expected to mean investment in the range of at least $62 trillion according to Clean Technica; with a six-year simple payback.
We can take advantage of the available opportunities to enable a very significant, or even dominant, ownership pattern of energy users to become energy owners of the global renewable energy system. Here, I will focus on the U.S. and the use of existing financial tools that can both facilitate this transformation and reduce the amount of capital required by energy users, and, at the same time, greatly magnify the effectiveness of federal funds and taxpayer dollars.
These tools include taking advantage of both the exhaustion of tax equity from the Investment tax credit (ITC) and MACRS depreciation in year six after solar construction. Municipals, coops, associations and entities enter into contracts with renewable developers for long-term agreements to buy renewable power that reduces both capital costs for developers and the future purchase price of the systems by energy users.
$27 billion in Inflation Reduction Act (IRA) funds are directed to benefit low-income census tracks. The use of IRA grants can leverage IRA benefits by helping support the organization of muni/coop/association actions to take advantage of available financial tools. Now’s the time for developing creative programs to guide the IRA to accelerate the renewable energy transformation. This will magnify the effect of federal funds, and increase energy user ownership and equity by taking advantage of existing financial tools and minimizing the need for government capital. This allows $27 billion to have many times the impact on energy user benefits far beyond just the contribution of capital costs.
It appears that a relatively small number of large grants will be made under the IRA. It’s important that these concepts of leveraging federal funds and increasing energy user ownership be made an important part of these grant rules. This should include efforts for national participation of diverse Community Development Financial Institutions (CDFIs), Credit Unions, and Community Banks.
Below, I outline a model for a one million-household low-income energy census track leading to an energy user-owned renewable system. But this one million model can be the start of hundreds of separate million household efforts that the IRA can facilitate.
It’s important to note the enormous scale of what is unfolding. Trillions of investments include not just building sun, wind, hydro, geothermal, green hydrogen systems, and bio-energy negative emissions (NE) renewable energy generation. This will be further amplified by the rapid development and integration of micro-grids on feeder levels that can encompass city-wide systems, as well as smart controls down to inverter-based individual systems to measure and respond quickly to voltage and frequency changes, and the use of a combination of distributed renewable generation and storage to act as virtual power plans (VPP) and virtual mass storage systems dispatched to meet utility system need.
Investment also includes very substantial commitments to green hydrogen produced through renewably powered electrolyzers, new and retrofitted green hydrogen pipelines, green hydrogen combustion turbines to provide peak power as needed, and a wide range of battery storage devices. These range from familiar lithium-ion batteries to rapidly emerging flow batteries, such as Form Energy systems using iron and air, and a variety of other storage tools from flywheels to hot rock, to sand, and water storage systems. All these to be integrated using sophisticated control systems on local, regional, and national, and eventually with international integration.
Transformational opportunity: making energy users energy owners
The renewable transformation is as well an essential opportunity to build a global standard in ecological and social justice by making billions of energy users become energy owners with an equity interest in the power that drives our civilization.
This is more than just a case of fairness and justice. This helps establish the basis for common people to have a seat at the decision-making table in controlling the future shape of local and global renewables to optimize our collective interest. $27 billion in IRA funds directed to benefit of low-income census tracks can help give us a running start for energy user ownership for all.
The good news is that such a process in the United States, the world’s largest economy, can be accomplished using existing laws and regulations and well-understood financial means and tools.
We can approach the opportunity in a step process that leads to energy user ownership six years after renewable energy systems go online to sell power to these energy users. They have to put zero capital down to build the system and will contractually have an opportunity to purchase the system substantially supported by and have contracted to purchase the energy for 20 years at a defined price. This facilitates developer finance. At the same time, the contract gives the energy users the option to purchase the system in year six or later when tax equity is exhausted.
The renewable electric system purchases are financed in part from the income from energy user purchases. Rates users pay already include funds for operation and maintenance, loan finance, insurance, and profit. Any additional capital supported by such as low-interest revenue bonds, support by CDFIs, green banks, IRA funds.
Typical steps to energy user ownership
A municipality or municipal-based cooperative or an association contracts with a renewable developer of their choice, for example, SunPartnersSolar.com (SPS) to buy renewable electric power for at least 20 years at defined prices. This is done on the basis of competitive bidding. It can also include training and participation of local residents. For large city scale systems, multiple developers will be involved including a percentage reserved for small businesses, local developers meeting relevant criteria.
The negotiated price will cover the capital cost to build and pay loan interest and principal, operation and maintenance, reserves for inverter replacement, and insurance. SPS will remain in contact with interested banks or CDFIs, or emerging Green Banks during the contracting process. The agreement with Muni/coop/Association is key to finance at a reasonable rate for SPS.
The agreement with the Muni could include, for example, in addition to solar, also wind, geothermal, bio-energy and free-standing storage for both diversity of supply and 24/7/365 renewables. A more typical arrangement for SPS would be buying in the wholesale market a strip of the night off-peak wind power to combine with the solar + storage being built by SPS and sold to the muni or coop. The ownership transfer in this case would be for solar assets and storage with the long-term wind off-peak strip contract.
SPS will finalize negotiations with financial institutions for construction funding to be transformed into a long-term mortgage following the commercial operation date (COD).
At COD renewable power flows to the Town and income flows to SPS to pay its mortgage and maintain the solar and storage system.
The contract with the Muni/Coop/Association gives them the right to buy a full or partial interest in the solar system + storage beginning in year six when tax equity is exhausted. Under U.S. IRS rules, solar developers can receive an investment tax credit (ITC) of at least 30% of their capital costs (which now includes interconnection and storage costs) and can reach 50% under the new IRA if more than half of the benefits are shared with residents in low-income census tracks. In addition, the energy user owners receive accelerated MACRS depreciation based on the value of the purchase.
Opting to buy the system in year six takes advantage of the stream of income from existing energy purchase contracts for the system and profit for SPS. The value of the system in year six is substantially reduced after-tax equity and MACRS exhausted and SPS has done quite well. A negotiated fair price can be part of reaching an agreement with SPS and not another company.
The muni/coop/association will have its finance plan in advance to be implemented for the year six purchases. Although there is no ITC for the energy user purchase there is new MACRS depreciation based on the value of the purchase price. Built into the purchase analysis will be provided for an unexpectedly potential high number of people unable to pay their electric bills, which is generally small. Unless they are destitute in the midst of economic calamity people strive to keep the lights on.
Each coop/association member will have their own capital account and ownership share based on annual distributions based on their share of energy purchases and their share of profits based on energy sales and income from storage sales to utility or other third parties and participation in Virtual Power Plant (VPP) income. Payment for power is typically made through credit card or bank account payments. Members can use their equity interest for finance. Coop and associations. operate on basis of one member one vote. The coop/association can take advantage of the 50% ITC under the IRA for low-interest further solar development.
Making one million households in low-income census tracts energy owners
One million households in the low-income census track each household using 6,000 kWh per year which amounts to 6 billion kWh/yr.
Assume intensive efficiency programs and retrofits reduce consumption in half to 3 billion kWh per year through the use of low-cost/no-cost weatherization using thermal scans and batt insulation, new exterior computer-guided paneling, heat pumps, appliance upgrades and more.
Solar produces in the North East 1.6 million kWh per megawatt of solar installed using dual-sided panels and single-axis trackers.
The total required for 3 billion kWh/yr is 1.875-gigawatt solar with storage @1.25/watt = $2.3 billion capital coats + $200 million small-scale local solar = total cap cost $2.5 billion.
Combine large community solar developments with locally distributed solar. Use not only large 5-megawatt solar farms, but smaller single-phase power systems (70kw-150kw) and dual-use farm solar above pasture and row crops to benefit farmers as well.
Large systems can cost $1.00 a watt smaller systems $2.25 a watt.
IRA and other federal funds can be used to assist in organizing muni/coop/associations to assist in contracting and financial models with developers to facilitate system building and future purchases when tax equity is exhausted and, if necessary, make loans to help meet equity requirements for purchases.
The goal is to magnify the effectiveness of federal funds in a fashion that increases amounts of renewables, and broader energy user ownership, and establish available and transparent models for renewable energy transformation and energy user ownership.
Now is the time to understand that the global renewable energy transformation can be rooted in economic models that make energy users of all levels of income and wealth energy owners. This is a fundamental step to reduce the concentration of wealth in the hands of billionaires and at the same time to help accelerate renewable energy transformation. We can shape our futures.
Treasury and IRS Guidance for Energy Projects for low-income communities.
Clean Technica: Global Renewable Energy Transformation Cost $72 Trillion with 6 year payback.
Virtual PowerPlant: The Power of Many. Next Kraftwerke GmbH Cologne, Germany.