A recent article published by the American Society for Healthcare Engineering (ASHE) showcases the increasing availability and financial possibilities of solar-powered commercial buildings in the United States, made possible by a budding energy model: power purchasing agreements. According to the article, “Going Solar Without Capital Costs: The Dawning of Power Purchase Agreements,” “The biggest transformation of the solar market will come from how it has been traditionally delivered. A new commercial delivery model called the Power Purchase Agreement (PPA) promises to not only make solar more affordable to businesses, but less risky as well.”

These PPAs—more specifically, a new form that incorporates renewable energy—are poised to make a significant difference in the way hospitals and other healthcare institutions handle their expansive energy needs. Currently, a number of hospitals which are implementing a more traditional model of these agreements, one in which a central plant is built to manage and run the hospital's electricity and various other needs. But a new wave of environmentally sustainable PPAs looks to not only benefit the environment but also become a more viable and affordable option for many hospitals.

Walter Vernon, CEO of the California-based engineering firm Mazzetti and Associates, explains the traditional model for these PPAs: “Historically, what some hospitals would do, is contract with somebody who would build a central plant, which would provide them with steam-chilled water, electricity, whatever they needed. So, the hospital could focus on running a hospital and not owning a plant.”

As Vernon explains, creating these on-site energy sources is no easy task, which stands as one of the primary motivations for hospitals to enter into these agreements. On the most basic level, a hospital will lease some part of its property (e.g., space on the building's roof or designated spots in a parking area) to a third party contractor who will invest the capital, build and complete the installment, and sell the created energy back to the hospital for an extended amount of time. These agreements typically last somewhere between 10 and 20 years.

Where these renewable energy agreements drastically differ from more traditional systems, and what ultimately makes them more appealing, is the pricing regulation of the energy being sold back to the hospital. Vernon explains that, because of the nature of natural gas prices, with more traditional systems, the price the hospital will pay fluctuates with the market value of gas. “Cogeneration systems are exactly like the renewable, solar one, except that the third party is now buying gas, turning it into heat and electricity, and selling those products to the hospital,” Vernon says. “So, the agreement has a risk depending on what happens to natural gas prices, and the third party will pass that risk along to the hospital. The nice thing about the renewables is that there's no fuel-source risk. That's probably the most compelling reason aside from not investing capital, the positive PR, and the ability to do something green.”
“The nice thing about the renewables is that there's no fuel-source risk.”

While doing something for the environment is certainly a factor that will motivate many hospitals to pursue these agreements, Vernon admits that these are primarily financially driven arrangements. In the case of the renewable PPAs, there are serious tax incentives that motive these deals, yet another benefit that the renewable agreements have that traditional ones do not. But since nonprofit hospitals are unable to take advantage of these tax incentives, PPAs, when managed correctly from the hospital's perspective, are a logical avenue that can save the money the tax incentive would.

Another potentially frugal aspect of these agreements—one that can actually result in a net positive for a hospital—comes in the form of environmental attributes or RECs (renewable energy credits). On a basic level, these RECs are credits, which can be sold in cap and trade markets, that are given to corporations that produce a specific amount of renewable energy. These credits are sold to buyers who are looking to, essentially, lower their pollution emissions, a process which Vernon notes is ultimately good for the environment, “The social policy behind all that is, if not for the money the owner of the renewable energy asset gets from selling their offsets, they couldn't have afforded to do the [sustainable] project.”

But because of the growing profitability of these assets (Vernon believes that, with the presidential change, these RECs could become significantly more expensive, increasing the owner's revenue) the third-party contractor and hospital will both be vying for control of them. “In the deal between the third party, who owns the panels, and the hospital, which pays for the energy, one of the issues will be who owns the environmental attributes,” Vernon says. “Right now, those things are selling for a penny per kilowatt hour, more or less. A lot of people are betting that once these various markets come into place, and particularly after the elections in November when we have a new president, new administration, and new congress, it seems highly likely that the United States will move toward a federal cap and trade system. In that event, these renewable energy credits could be worth more than a penny per kilowatt hour.”

It is these nuances in the PPAs and the general fear of these new systems that has been holding back many hospitals from what is otherwise a fairly innocuous, albeit profitable, agreement. “Since so many different people are involved, and it's so different from what they normally do, I find that nobody knows how to approve this deal, and everybody is scared to death of it,” says Vernon. “Nobody wants to take responsibility for these because nobody understands them well enough to put all the pieces together and take the risk to do it.”

Aside from these manageable risks, Vernon can hardly find a downside to renewable PPAs, though he does warn that they are unable to increase the reliability of a hospital's energy: “One of the misconceptions about these systems is that they can improve the reliability of power to your system,” Vernon says. “A lot of people think, ‘I've got this renewable source so if I lose power, I'll still have power available to me.’ It could be designed to work that way but typically they aren't because it would cost too much.”

Vernon also says there are intricacies involved in the creation and use of the energy: “In a typical hospital, the peak energy usage may not occur at the same time as the peak energy generation from a solar power source. In that instance, you have to do one of two things: Either you're generating more power than you're consuming and you have to sell it back to the utility, or you have to make your system smaller, so that at the time of peak generation, you're able to consume 100% of the generation,” Vernon says. But these are minor problems that can easily be fixed in the design of the installment.

Most importantly, Vernon questions the inability of many of these hospitals to take action. If a hospital follows traditional methods of obtaining energy, namely municipal utilities, it could be stuck in a similarly extensive contract that ultimately costs it more money due to fluctuating energy prices. “The real question becomes: What set of risks are you more likely to succeed with? Most people, because this is new, only see are the risks of the new, not the risks of continuing with the old. And that's really important.” HD


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