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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 Associate Dean for Academic Affairs and the Cora Jane Flood Professor of Business Administration at the Haas School of Business, University of California, Berkeley. ​She is the Program Director of the National Bureau of Economic Research's Environment and Energy Economics Program, Faculty Director of The E2e Project, a research organization focused on energy efficiency and a research affiliate at the Energy Institute at Haas. She is also an affiliated faculty member of in the Agriculture and Resource Economics department and the Energy and Resources Group at Berkeley.

Wolfram has published extensively on the economics of energy markets. Her work has analyzed rural electrification programs in the developing world, energy efficiency programs in the US, the effects of environmental regulation on energy markets and the impact of privatization and restructuring in the US and UK. She is currently implementing several randomized controlled trials to evaluate energy programs in the U.S., Ghana, and Kenya.

She received a PhD in Economics from MIT in 1996 and an AB from Harvard in 1989. Before joining the faculty at UC Berkeley, she was an Assistant Professor of Economics at Harvard.

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

  1. I think the answer is in Fortune’s article “How Apple is Making Money off its Landmark Solar Deal”
    http://fortune.com/2015/03/27/apple-solar-california/

    “But the key factor that has been overlooked in these calculations is that, while Apple and PG&E are splitting the solar power from the farm almost down the middle, PG&E’s deal is actually only for 15 years. Apple’s is for 25. After 15 years, Apple plans to buy up the solar power from the entire 280-megawatt site. So any financial calculations need to incorporate the fact that, in the last 10 years of the deal, Apple will be getting double the electricity”

    “Something that most people don’t understand is that on the back end of the deal, it goes from a 130-megawatt deal to 280 megawatts. Toward the end of the 25-year period—I’m not going to say when—we get the rest of that.”

  2. Catherine, please don’t leave us in suspense. Please write back in a month with your/your husband’s update. I bet you will get off-line comments from people who put similar projects together and don’t want to be quoted.

  3. So the consensus answer seems to be “project financing” plus deliberate vagueness about the terms of the deal in the press release. Under project financing, the biggest component is, no surprise, “tax effects.” In addition, the tax credits are received when the initial investment is made – so they are very heavily front loaded.
    I will add one more project financing issue: the firms (Apple and the seller) are quite likely using different discount rates. So the term structure of payments really matters. I would guess that Apple is simply paying _up front_ to cover 80% of the projected capital cost. If we use $3/Watt fixed cost (DOE http://www.nrel.gov/docs/fy14osti/62558.pdf) Capital cost = $400 million = half the total reported value. Apple pays $320M, and gets a $96M tax credit in 2016.
    As you say ” if every year is the same” AND both firms use the same discount rate, then an annualized calculation (the sandwich analogy) is accurate. But the first assumption is almost surely not correct, and the second one probably not.
    We can debate whether different firms _should_ use different discount rates for the same project, but they may face different financial risks. They certainly have different access to capital markets! What are the risk hedging contracts that Apple is planning to use with this – or are they big enough not to bother?

    The morass of tax credits, discount rates, and side contracts that matters a lot in financing real projects is one reason investment bankers get paid for structuring deals. Little of it is _socially_ valuable, though.

    • In the absence of the purchase and sale documents and the benefit of legal and tax counsel assessment, is it fair to say that the allegation of the price paid for the project is incomplete and may be misleading without the benefit of counsel on the terms of agreement? We live in an age when corporate finance has become an art and science to achieve goals that may not be readily discerned in the absence of the insider’s knowledge of the terms of agreement that confirm the price paid and the rationale why a higher price may have been paid without apparent benefit in return.

      • There is no consensus because Apple is way too rich to worry about these little investments. They are buying goodwill just like Arabian princes buy jets. Do you all think that princes think about all the financial aspects that have been mentioned in the last 10 days?

        Apple is a kingdom and its princes have money to buy toys that they can show to other princes, even Arabian princes who are now buying small modular advanced reactors (SMART) 100 MW reactors at a billion a pop from Korea. Do you think they did the same math? It was apparent in Jetta in 2008 when they brought us in to hear about their plans.

        You all are giving them way to much credit: they don’t need credit. They pay with cash!

  4. Does California have a carbon credit? If so, would not Apple directly or indirectly acquire the rights to a California carbon credit or off-set?

  5. Tax equity must definitely be a big part of the explanation. 30% * ($2MM/MW * 130MW = $260MM) = $78MM that they get back from the IRS within a year. In fact, it is likely that they are the tax equity for the other 100MW that is going to PG&E. If so, then tax equity contribution for PG&E is another $60MM

    The MACRS would be worth (260-78)* 45% total tax rate in California = $82MM in total value (undiscounted), and for PG&E another $63MM)

    Apple could also be the source for the 1 year of “security” that PG&E requires in at least the PG&E PPA, money of course that Apple would get back “someday”. 100MW *8760 * $80/MWh * 30% = $21MM

    If they are the tax equity, then they also get all of the revenue for the 1st 5 years. Not sure how that works with the IRS exactly, when you are also the buyer, but probably there are multiple LLCs involved. By coupling their price to that of PG&E, they could potentially rely on that arm’s-length negotiation if questioned by the IRS.

    So of the total $848MM announced, there is a tax equity and security explanation for up to $304MM that is nothing more than invested money in the project. The math on the project is then (848-304)/130/25/8760/30%) = $63.69/MWh, ($57.90 at 33% Capacity Factor) or just the range that one would expect the price to be. At 25% capacity factor, the price is $76.42. (And this still excludes the 99% project cash flow for the 1st 5 years.) Now this is just an “average price”. The reality is that it is probably lower the 1st few years, and higher later on, as this is what one would expect the PG&E contract to look like, assuming they adopted the PG&E arms-length negotiation as their cost basis.

    With Billions in cash, $304MM is still chump change, especially when it is all guaranteed to come back w/i 1 to 5 years (except the PGE $21MM). Nice to be Apple. And I think we can agree that
    Catherine is probably right. Explanation #1: Tax Equity. Apple got it right (of course).

  6. I am not sure I understand the logic on this article…Why would you state Apple “overpaid” in the first place?
    Using the numbers in the article, Apple has secured a $0.10 kWh rate for the next 25 years…the current PGE&E Industrial rate is $0.15 kWh and Energy prices have risen steadily over the past twenty years, and historical increases are likely to continue, driven by three structural forces:
    • Infrastructure upgrades: 2-2.5% annual increase
    • Fuel cost increases: 1.5-2% annual increase
    • Climate change legislation: 2-2.5% annual increase.
    So you do a financial options analysis and deduce if the rate paid is financially feasible or not.
    Then you have the depreciation of the installation which usually is designed to last 20-25 years for the electrical and renewable components.
    And then you have the rate breaks PG&E would provide for postponing the significant investment to increase its generation, transmission and generation capacity in an already strained and aged electrical system.
    In addition, why would you compare the $50-60 MWh price Austin Energy paid for renewables? Austin Energy will not simply pass through this rate to consumers…it will add on profit, and the usual rates to transmit and distribute the energy among its customers. So all said and done under current rates, you are looking at $100-115 MWh rates.

    So to put it in “Sandwich Terms”: If I tell the new deli shop owner I will pay him $10 for his product and he needs to set up an internal deli, knowing that the price of labor, flour, meat, lettuce and cheese will go up at a significant rate at other older and more expensive delis that currently charge me $15 to $13 for a sandwich and not only that, they older deli cannot handle making my sandwiches because she/he is to busy with other demand and if he wants to make me a sandwich he needs to increase the size of this oven, add seats…its pretty sure there will be an increase in the price of sandwiches going forward…
    Wow, looks like me outsourcing an internal cafeteria is better than going to the deli, and much cheaper…

    • Mr. Mendez hits the nail on the head. For all the back and forth about correct assumptions, you’re comparing wholesale to retail prices. Austin Energy’s purchase price isn’t the right benchmark.

  7. The California ISO that administers an LMP-based transmission system. There are not wheeling charges per se. The solar facility injects the energy and is paid the hourly LMP at that connection point and Apple withdraws energy (not necessarily that produced by the solar facility) and pays the hourly LMP at the withdrawal point. The cost of transporting the energy is the difference between these two LMPs (multiplied by the MWh in that hour). Apple and the Solar facility most likely have signed a contract for differences indexed to these LMPs so that the future transportation costs are fixed and assigned to one of the parties at the time the contract is signed. However, you’re right – among other things we don’t know the terms of that power contract.

  8. I have no answers, only more questions. What is the delivery point (we shouldn’t assume the energy is destined for Cupertino)? Are wheeling charges included in the price? Who is the ESP doing the scheduling and balancing? What other real or forecasted costs are included in the $ figure?
    Great blog post by the way. Good stuff!!!

  9. Why do we even consider solar? After decades of subsidy it is .4% (not even 1%!) of US power generated. Wind is 4-5%. No wonder Big Oil touts them on TV ads. No competition – ever!

    Solar operates at its full capacity for 20-25% of the time due to lack of sunlight. Wind is about 35-40% of rated capacity.

    Diablo Canyon nuclear power plant pumps out an average of 94% of maximum capacity because they operate 24/7 wind or no wind, sun or no sun.

    Nuclear power is by FAR (and by actual numbers) the safest power generating means known to man. (Forbes, “How Deadly is Your Kilowatt? 6/10/12).

    We hear news reports daily about death and destruction at the hands of fossil fuel. What is NOT on TV is information about deaths and injuries and illnesses caused by burning fossil fuel. Tiny waste particles are “stored” directly into our atmosphere, then into the lungs of adults and children where they lead to cancer, heart disease, emphysema and many other illnesses.

    The Medical School at Northwestern University just published a study showing fossil fuel burnt waste causes “instant death” from heart attacks and strokes – a previously un-linked phenomenon.

    New generation molten salt reactors are on the drawing boards. This exciting technology whereby little waste is produced and waste half life is short was actually built at Oak Ridge by the Director, the elite Manhattan Project physicist, Alvin Weinberg. It was scrapped in the 60’s because it would not contribute to A Bomb, a priority in the Cold War. Weinberg complete foresaw the threat of global warming and knew nuclear power was the answer.

    Why isn’t the destruction burning fossil fuels built into cost calculations? I’d call this very faulty economics, since business very much relies on a livable world to even exist, let alone make money.

    Your husband sounds like the guy to factor causing the end of all business into calculations on energy. Please put him to work on it ASAP.

    Thank you.
    William Gloege
    Californians for Green Nuclear Power

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