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January 28, 2021
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Monetization is the process of converting assets into economic value. Looking for more options to generate revenue, municipalities have begun using solar projects to help monetize formerly “passive” or unused public assets, such as vacant land, rooftops, parking lots, and storm basins. There is a tremendous upside for such development; and in recent years, potential liabilities have shifted from municipalities to the solar companies.

Today’s common model for a municipal solar development is similar to a public-private partnership. The municipality provides the land or space for the project, and the solar company covers the capital costs of developing and installing the solar array, along with operating the facility once complete. Clean power is then sold to the municipality under a power purchase agreement, often at a savings compared to traditional sources of electricity.

Under a solar power purchase agreement, the facility is owned by a third-party operator, which leases the underlying land from the municipality. Lease rent tends to be negligible, as the purchase of electricity provides the primary financial benefit, which is twofold: (1) the cost of solar power can be cheaper than electricity from traditional sources, and (2) under a power purchase agreement, rates and escalations are agreed upon up front, giving the parties relatively stable financial expectations for 15 to 20 years or more.

By comparison, the traditional model for a solar project requires a significant capital outlay from the landowner “host” to purchase and operate the solar facility. Savings may be realized over time from “free” power, but the host retains liability for maintenance and repair of the system, as well as any personal injuries occurring on the site. Under a power purchase agreement, the solar company bears all liabilities for costs and potential claims.

Use of the traditional model peaked around 2010. Since then, the proportion of systems owned by third-party operators has risen dramatically. The financial benefit for solar companies is that, after an initial capital outlay, a project provides investors with a highly predictable, nearly fixed rate of return. This is due in part to a municipality’s obligation to purchase all the power produced by a project. If there is more power than can be used, the municipality may be able sell the surplus to the grid by what is known as “net-metering.”

Beyond the financial advantages of a solar project, a municipality can promote “green” benefits for the community. In this way, formerly “passive” or unused assets can be monetized for the public good and used to help foster social values.

The McNees Public Finance & Government Services group is a team of accomplished lawyers from various practice areas with the experience to provide specialized legal services to government entities at all levels. Download our Solicitors Flyer to learn more.

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