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Why Did Apple Pay so Much for 130 MW of Solar? Is Google Part of the Answer?

Sometimes, we write blog posts that pose rhetorical questions in the title. This time, I have real questions. I lay out several possible answers below and would love input from blog readers.

Here’s a little background. Several weeks ago, to great fanfare, Apple and First Solar announced that Apple was paying $848 million for 25 years of the output of a 130 MW block of First Solar’s California Flats project in SE Monterey County. (The other portion of the project is under contract to PG&E.) First Solar’s press release heralded this as the “industry’s largest commercial solar deal” and Tim Cook noted that the solar electricity would offset a lot of Apple’s California consumption.

My husband, who also works in the energy industry, and I took this up at the dinner table, much to our kids’ chagrin. My husband did some quick math, and then grabbed a calculator to do the math again. He wanted to make sure he hadn’t screwed up. His calculations suggested that Apple had paid a significantly higher price compared to other recently announced power purchase agreements for solar.

He took the reported amount Apple was paying and divided by an estimate of how much electricity they would be buying. He guessed that the plant would have a capacity factor of 30% and hence produce 342,000 MWh/year (.3 x 130 MW x 8,760 hours/year), or approximately 8.5 million MWh over the life of the contract. Assuming that the reported contract value reflects the undiscounted sum of the payments under the contract, this yields an average price of approximately $100/MWh ($848 million / 8.5 million MWh).

My husband was surprised because prices for other recent solar deals have hovered around $60/MWh. The industry collectively cooed over a recent 25-year deal signed by Austin Energy to buy solar for $50/MWh.

A reporter for Forbes did a similar calculation. He used a higher capacity factor – 33% – and still seems surprised that Apple paid so much. He concludes, however, that it’s not a horrible move by Apple given that future prices for utility-supplied power may go up.

My guess is that Apple did not overpay. They are, after all, Apple.

An artist's rendering of Apple's planned campus in Cupertino (Source: sfgate.com)
An artist’s rendering of Apple’s planned campus in Cupertino (Source: sfgate.com)

Here are a couple conjectures:

  1. Apple is receiving the tax equity in addition to the electricity.

What does this mean? Through the end of 2016, a business that invests in a solar project is allowed to take 30 percent of the project cost as a tax credit. As I understand it (see here for a great explanation), this means that if a project costs $100 million, it will generate $30 million in potential tax savings through the Federal Investment Tax Credit (ITC). The problem is that First Solar is unlikely to have enough profits to take advantage of all the tax credits its projects generate. Historically, solar companies have sold the tax credits to banks or others in the financial sector, but, according to some reports, demand for what’s known as “tax equity” is drying up.

So, one possibility is that at least a share of what Apple bought was the tax equity on its 130 MWs. Accounting for this could make the price they paid much more reasonable. For instance, if they bought all the tax equity on the 130 MWs then we should think of the price they’re paying for electricity as just 70% of the total $850 million, since they’ll be able to use 30% of the $850 million to offset future tax liabilities.

Apple also may be able to obtain tax benefits from a share of the accelerated depreciation for which solar projects are eligible.

This is where Google comes in. Late last week, Google announced that it was investing $300 million in a fund created by Solar City. Some of the press on this deal said it was structured to allow Google to get the tax equity, which makes me more likely to believe that Apple got a similar deal with First Solar.

If this is what’s really happening, the headlines citing Apple’s $848 million purchase of solar-powered electricity are a bit misleading, at least as I see it. Sure, Apple is paying $848 million to First Solar, and part of what it’s getting is electricity, but it’s also getting the ability to avoid paying taxes in the future. To me, this is like saying I paid $10 for a sandwich, and neglecting to mention that I also got $3 back in change. Counter to First Solar’s press release, this would not just be a solar deal, but a solar and tax deal.

I can understand why companies like Apple might not boast about buying the right to pay lower taxes. It’s not in any way nefarious – and could help solar companies by keeping the market for the tax equity competitive – but it doesn’t burnish their green image in the same way that buying solar electricity to power their data centers does.

  1. Something else is missing. Apple is getting something else out of the deal?
  1. Apple did screw up. We all make mistakes, even big, smart companies.

Personally, I put my money on something along the lines of 1., but I am very curious to learn what, you, loyal and informed readers, are hearing.

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Catherine Wolfram View All

Catherine Wolfram is the Cora Jane Flood Professor of Business Administration at the Haas School of Business, Co-Director of the Energy Institute at Haas, and a Faculty Director of The E2e Project. Her research analyzes the impact of environmental regulation on energy markets and the effects of electricity industry privatization and restructuring around the world. She is currently implementing several randomized control trials to evaluate energy efficiency programs.

35 thoughts on “Why Did Apple Pay so Much for 130 MW of Solar? Is Google Part of the Answer? Leave a comment

  1. Data we don’t have:

    1. Is $848 million nominal or real?
    2. Is $848 million discounted or just the sum of annual nominal or real payments?
    3. Does the $848 million include the cost of “integration” or “firming” service, or is it just the bus-bar cost at the project site? These costs will differ depending on the Balancing Area in which the projected is located. Ditto for transmission service.
    4. Does the $848 million include any options for Apple to buy the project outright in the future?

    Solar at the generation bus-bar can be as cheap as $60/MWh in California, but the solar project has to be interconnected into a Balancing Area and commercial arrangements made for “delivery”
    as well as “integration. Neither is free.

    I’m surprised that the entire project isn’t single axis trackers. Fixed tilt is the least efficient in terms of MWh/panel/year, although tracking does add costs. If the site is suitable for at least some tracking, I would expect only that technology to be used.

    • Good question. Last year I completed a study of residential rooftop solar PV in California. RECs are retained by the owners of solar PV unless the power is sold to one of the state’s three Investor-owned utilities, in which case the RECs are transferred to the utility. However, the market value of the RECs is very low because the three utilities have acquired enough renewable energy to cover their retail sales they are not buying RECs.

      • Not quite. RECs are retained by the owner of the solar PV unless the owner sells them to someone else, not limited to the three California IOUs. Municipal utilities also buy solar power and the associated RECs. The current “market value” of some RECs is very low, in part because of regulations. All utilities also must sign contracts now to make sure that they are RPS compliant in the future, and RPS requirements are increasing over time, which means that there is demand-side pressure on prices, as well as supply-side (costs and competition).

  2. Still seems high. Let’s say they just built the system themselves. If they were just paying for solar panels to be installed somewhere, shouldn’t the price run around $3.5/W installed? So maybe $455 million? And then about $.03/W/year O&M, so another $100 million over 25 years, for $555 million. And *then* they could take the depreciation and other tax credits, right? They’d also have to be buy land, but that shouldn’t be a huge expense… http://emp.lbl.gov/sites/all/files/lbnl-6912e.pdf

  3. A capacity factor of 30% is basically impossible for a fixed-tilt PV system at California latitudes, even in the desert. Based on this solar farm’s location, NREL’s PVWATTS calculator (http://pvwatts.nrel.gov/pvwatts.php) estimates the capacity factor of a fixed-tilt system in this area as 20% (see the data for Paso Robles and Lemoore Naval Air Force Station, which are closest to the plant’s actual location, which is here: https://www.google.com/maps/place/35%C2%B050%2715.9%22N+120%C2%B017%2741.3%22W/@35.8377495,-120.2948056,15).

    However, a press report I found states that California Flats “is going to consist of a mix of fixed-tilt modules and single-axis trackers, according to a First Solar spokesperson.” What exactly this mix will be is unknown, but for the sake of simplicity, let’s suppose it’s 50/50.

    According to LBNL, a “A rule of thumb in the industry is that single-axis trackers will boost energy yield (i.e., capacity factor) by 20%, and this is roughly borne out by the sample of projects in the West.” (http://emp.lbl.gov/sites/all/files/lbnl-6408e_0.pdf#20, see footnote 22). So, if a fixed-axis plant has a capacity factor of 20%, a single-axis tracking plant in the same location will have a capacity factor of 25%. Averaging the two together, we get a combined capacity factor of 22.5%.

    Such a capacity factor leads to generation of 6.4 million MWh over the 25-year PPA lifetime. $848 million / 6.4 million = $132.4 / MWh.

    Looks like solar still isn’t ready to compete without accelerated depreciation and the investment tax credit. On the bright side for the industry, at least accelerated depreciation isn’t going to expire in 2016!

    • Well not quite, Andrew. You have to take the present value of the annual payments in order to calculate the levelized cost. Assuming the present value of the project outlays is roughly $848 million, the levelized cost will be more than $132 per MWh – even with a really low real discount rate of one percent.

      • Hi Robert. I was just repeating the methodology used by Catherine in her original post. See the forth paragraph where she writes: “Assuming that the reported contract value reflects the undiscounted sum of the payments under the contract…”

        If you think this is the wrong way to interpret the press release from FirstSolar, I don’t have a response. Please take it up with Catherine.

  4. When I’m noodling around on the back of a metaphorical envelope, I assume between 1800 and 2000 kWh of annual output per kW of capacity for a PV plant in California located outside the desert. That works out to a capacity factor at or just above 20%. Remember too that the output of a PV plant declines over time. One calculator I saw somewhere showed 25% less output in year 30 than in year 1..

    • Jack,

      The accepted industry assumption is that solar panel output degrades at about 0.5 percent per annum. Also, the manufacturers warrantee performance for 25 years consistent with that assumption. Of course, these manufacturers may not be around for the full 25 years. LOL.

    • In the PG&E advice letter to the CPUC, the company says it expects 381 GWh/year on average from its 150-MW portion of California Flats during the life of the contract, a capacity factor of 28.9 percent. The letter also notes that the panels will be on single-axis trackers. Assuming the 130-MW Apple portion is done similarly, that would work out to about 330 GWh/year, although the average might be slightly lower since Apple’s deal is for 20 years and years 16-20 would be less productive (although not hugely so).

    • Jack, utility-scale solar projects are realizing higher capacity factors, in part due to higher inverter loading ratios, as one of the other commenters noted. For example, see the first presentation in this zip file: http://www.cpuc.ca.gov/NR/rdonlyres/DDA00878-FEEC-4342-A3BB-8C17063310F9/0/RPSCalculatorPPTs.zip. It summarizes Black and Veatch’s work to develop cost estimates for different renewable technologies for the newest version of the RPS calculator. Also, note that even though the California Flats project is not in the desert, it is in a location with pretty good insolation. (The B&V presentation includes some nice maps of solar potential in different locations in California.)

  5. Do such solar installations currently receive the levellised value of their electricity, or the prevailing wholesale price in California? If it is currently levellised, how long is this concession going to last? In either case, at some stage it will matter how likely generation profiles for the plant match with Apple’s energy requirements. Having a source of electricity that matches your consumption profile closely would then be much more valuable than average. So what does Apple’s diurnal consumption pattern look like; is it heavy in the middle of the day?

  6. I was consulting to Google on electricity investments starting in late 2010. They were interested in exotic nuclear because, well, Bill Gates, was interested in exotic nuclear technologies and they didn’t want to get left behind. I told them that amateurs shouldn’t have anything to do with nuclear. (You can imagine that guys with net worths of over $100 million thought I was an asshole for calling them amateurs.) They had several nuclear power experts come in and give presentations on the latest and greatest nuclear technologies in late 2010 and early 2011. Then, whoops, Fukushima happened. We had a final presentation on what happened in Japan. Not a peep on new nuclear since then and I wasn’t invited back for a free lunch (or a free dinner between 6-7pm with the option of left over sushi from lunch). Google has been thinking about this for years. The basic thing they are buying is goodwill. They want to show the world that they aren’t just unethical power hungry privacy thieves. Maybe Apple would like to buy some goodwill too. But keep in mind that each “cloud” (data center) consumes 300MW (this is confidential, so don’t tell anyone else) that the number of data centers are growing, and someday somebody will notice, e.g., http://www.analyticspress.com/datacenters.html, that these guys are changing the climate.

  7. Is it possible that Apple is just trying to put its money where Silicon Valley thinks its mouth is – that is, we need to move away (more rapidly than ever, it seems) from a fossil-fuel dependent energy system. Perhaps Apple saw this as an opportunity to add further stimulus to doing exactly that. Not all social/public policy opportunities pencil out as being economically attractive at first look – besides economists rarely correctly account for externalities or indirect costs/benefits (all due respect). (Case in point: look at the long and still continuing battle over air pollution control). So maybe this is asking the wrong question?

    • I agree with this. Apple often says it’s “doing the right thing (even if that’s not good for shareholders),” but that aura may indeed be good for a company selling high end goodies. Oh, and the tax break helps 🙂

      But another question: what’s the estimated trajectory of carbon prices in Cali? Maybe that matters in their fossil fuel cost estimates?

    • The 250-MW California Valley Solar Ranch, about 15 miles from the California Flats site, generated 697,759 MWh in its first year of full operation (the 12-month period through September 2014). That’s a 32 percent capacity factor. Of course, the type of PV and the inverter loading ratio of the system can have a big impact on capacity factor.

  8. 30% for the capacity factor works if the installation is in the desert. On the economic calculation, you need to spread the $848M in equal annual increments, discount back to the present, then levels to calculate the annualized cost (using the capital recovery factor). Then you can divide annualized costs by the annual kWh generated to estimate costs/kWh. The current method isn’t accurate.

    Tax equity is important to this deal, no doubt.

    • HI Jonathan-

      Thanks for the comment. I haven’t seen any information on the pace of the payments Apple will make, but if every year is the same, your calculation yields the same price as mine.

      Catherine

    • The discount rate you choose would be based on Apple’s WACC, right (fairly low)? At 3% discount rate and an average capacity factor of 25%, I’m getting $86/MWh, so tax equity does seem like it’d be involved.

      • Grace,

        Your logic conflicts with finance theory. Apple’ WACC is determined by the risk associated with its core business – which has nothing to do with producing solar energy. This is a common mistake made by MBAs who don’t really understand the assumptions behind the derivation of WACC, thus do not understand its limitations.

        And where did you get a 3 percent discount rate? Is that real or nominal? Surely Apple’s WACC is closer to 10 percent real and even higher given its business risk is high – Apple is not a utility company.

        Seth Borenstein published in interesting paper back in 2012 (The Private and Public Economics of Renewable Electricity Generation) in which he used a 3 percent real discount rate. I think even that is too high. Why? Because the costs associated with solar projects consist almost totally of the the upfront capital costs, which are known with certainty when the plant enters service. That implies that the appropriate discount rate is something close to the real, riskless interest rate on 25-year US government bonds. Today 30-year US treasury bonds are yielding about 2.5 percent. Strip out 1.7 percent for the projected inflation rate and we are down below 1 percent. 30-year US Treasury Inflation Protected Securities are yielding about 0.75 percent, also implies a real discount rate of 1 percent or less.

        I the positive side, I do agree with your using a lower capacity factor. A fixed-axis solar PV facility in Monterey CA will produce a capacity factor of around 20 percent.

        What this all seems to add up to is that Apple did pay too much. But then we don’t know all of the details. Transferring the tax equity benefit to Apple seems like the only possible interpretation.

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