By Alan Pryor and Richard McCann
At the last City Council meeting, more than 20 people called in opposition to the City of Davis entering a lease option agreement with BrightNight to develop a solar project on a 235-acre parcel next to the City’s waste water treatment plan. Councilmembers Lee, Carson, Arnold, and Partida all voted for the proposal. Only Councilmember Frerichs voted against the proposal citing his strong concerns about the lack of Commission involvement, the failure to follow normal City policy to procure open bids, and the lack of guaranteed energy sales to the City and Valley Clean Energy.
After the controversy had risen to a high profile, the City Staff issued a “Q & A City of Davis Solar Lease 4/15/20” to defend its decision. Unfortunately, this response is misleading and filled with errors. In this series of articles we go through the Q&A question by question in their order. Our responses also address the gist of Staff's answers. You can follow the link to the Staff’s answers if you are interested, but you should have a good understanding of the issues from this article. Because answering these questions completely is a lengthy endeavor, we have divided this into three parts. This is Part 2 in the series.
Part 1 can be found here (https://www.davisite.org/2020/04/city-misleads-on-brightnight-deal.html) which includes a more complete background of the controversy. Part 3 will be published in the immediate future. The questions posed in both Parts 1 & 3 are posted at the end of this article.
Q. What are the allowable uses for this land under Yolo County zoning?
City Staff claims that large-scale, private, commercial development is not allowed under the zoning designation for the land in question so commercial rates are not comparable. But large-scale solar development is currently allowed for the parcel under County zoning laws and this 25 MW solar development is, in fact, a huge large-scale private commercial development. So competitive commercial land lease rates should clearly have been required by the City for the land-lease and the failure to do so is undeniably a waste of City assets. The City is allowing the developers to avoid the expense of rezoning that land which has substantial value.
Q. Were there other land uses that were considered?
Staff says the Council made the decision that solar was the best use of the land but that is only because that is what Staff told Council based on incomplete information. In fact, the determination of the best use of the property was still ongoing with the Utilities Commission, the Natural Resources Commission, and Open Space and Habitat Commission which have all discussed the matter in recent months. Solar was only one of many potential uses discussed and all of the Commissions expected the matter to be brought back to them for further discussions and a final recommendation. Staff was fully aware of these unfinished discussions but decided to end-run this process and made a unilateral decision that was NOT supported by any Commission.
One alternative option being considered was use of the Wastewater Treatment Plant site for composting the City's organic waste. Composting of the City's organic waste was determined to be the likely lowest cost option for handling of the organic waste stream by the City. Every other organic processing option would produce additional costs that were substantially in excess of the meager $78,000/year lease revenue initially received for the solar land lease. Thus, the solar land lease is likely a net economic loss for the City because it precludes implementing the lowest cost option for organics/green waste processing. It is otherwise unlikely, as Staff is aware, that a deal with UCD for processing the City's organic waste would ever be worked out because UCD's anaerobic organic waste digester cannot process the City's landscaping green waste. Thus, the solar land lease is likely a net economic loss for the City because it precludes implementing the lowest cost option for organics/green waste processing.
Q. Why is the City using a fixed-rate rental rate escalator?
The City claims it would be an administrative burden to have a variable escalator in the land lease rate and a fixed escalator is easier. But it would take not more than an hour once a year to look up the relevant inflation index and calculate the new lease rate and send a letter to BrightNight. This is hardly an administrative burden. Or the City can just make BrightNight do it and double-check their calculations. Instead Staff has arbitrarily used the lower end of the escalation scale as a fixed benchmark.
Q. What is the Term Sheet in the Lease Option Agreement?
The Term Sheet is a set of requirements that will be in the final lease agreement to be negotiated between the City and BrightNight Energy. The City claims the Term Sheet is completely negotiable in the future and that it will get a better deal once the final terms are agreed upon. But this is not necessarily true. As mentioned in Part 1 of this series of articles, only the "Solar Development details" in the Term Sheet will be finalized later in the Lease Option Agreement the City has already signed. All of the other terms in the lease agreement appear to be not subject to renegotiation. "Solar Development details" has to do with the size and/or the type of the solar system. This phrase, "Solar Development details" does not at all indicate that term, pricing, and/or other contractual problems with the lease can be renegotiated. Further, it is not clear what leverage the City has over BrightNight for changing the terms significantly. Arguably its permitting authority is basically ministerial and not to be used to gain other benefits.
Q. Were there any other solar leases to comparable to the City's deal with BrightNight?
Staff says there were not any comparable "arms-length" solar land lease deals in Yolo County by which to compare the fairness of the BrightNight solar land lease. But did Staff not look at other solar land lease rates in the Central Valley? If so, what were they? If not, why not? A simple internet search reveals a wealth of other available information to use to benchmark the BrightNight deal but Staff apparently did not contact any other land lease holders or consultants in the industry but instead decided to accept very low agricultural land lease rates offered by BrightNight without any other comparison?
Q. How does the City solar deal compare to the County's project at the Grasslands Regional Park?
The Staff’s answer is interesting because it shows large benefits the County receives from ownership of their large solar system but then inexplicably claims, without any evidence, that such a structure would be too risky for the City because of risk of performance and operation and maintenance responsibilities. But this is simply not true. Even with the repayment of the bonds and all operational expenses and maintenance (mostly done by the solar system vendor, Sunpower), the County still received approximately 70 times the revenue on a per MW basis than does the City by simply leasing the City land. Over a 35-year period, this would result in over $170,000,000 in net revenue to the City or about $121,000,000 in NPV at a 3% discount. This would pay for all of the City's additional costs necessary over the next 10 years to bring the City's streets and bike paths up to desired functional standards. True, the City might not be able to gain these benefits in today’s power market, but the magnitude is so large that those potential benefits cannot be discounted lightly.
And the solar system vendor also guarantees the output of the solar system for an extended period of time removing solar system performance as a risk factor to the County. By failing to properly evaluate a detailed no-capital outlay system purchase option as done by the County with their Grasslands Park solar system and present this analysis to the Council and the public, the City failed to consider how to maximize the value of that land to our long term financial detriment. Clearly this was a failure on the part of Staff and the Council to conduct the due diligence that it otherwise claims that it had done.
Q. The option period and lease period seem long. Are they typical for this industry?
Although Staff says the option structure is customary, it does NOT say that a five-year option period is customary - only that the optionee requested it. What is a customary option length in the industry? The process for obtaining California ISO approval for interconnection of the solar system to the electricity grid typically only takes a year during which financing would presumably be lined up. This would also be conditional on a successful CEQA certification that should only take six months. If the developer cannot secure a power purchase agreement in short order, particularly if it is with the City or VCEA, then we have to question the claim that this project must be done quickly. Thus, five years for an option term appears to be excessive and ties the City's hands if the applicant cannot perform in bringing on a solar system.
Q. What if the lessee defaults on the project?
There is a huge opportunity loss if BrightNight defaults under the option agreement because the City is precluded from seeking more beneficial arrangements to have solar installed. As mentioned above, the City will have lost five years in planning and implementing other opportunities.
Q. Why doesn't the agreement stipulate that Davis residents will benefit from the solar power generated at the site? Can the lessee sell power to Valley Clean Energy (VCE)?
The future lease "could" include more details about how Davis residents and VCE could benefit but BrightNight is NOT obligated to provide them and is free to sell to the highest bidder even if remotely located in Southern California or out of state. A “commitment to work in good faith” towards offering sale of the plant output to the City or Valley Clean Energy is meaningless—there has to be an absolute iron-clad commitment to sell all of the solar energy system output at a predetermined rate to the City and Valley Clean Energy with no “out” for BrightNight. Otherwise, if Bright Night secures a higher price than what Valley Clean Energy or the City could pay, then BrightNight could simply offer the same higher price to the City and Valley Clean Energy and this would satisfy any legal requirements that Bright Night negotiate “in good faith." The simply reality is there are no guarantees that the City or VCE will ever receive a single kWh from the solar development despite the spin Staff is trying to put on it.
In fact, this agreement has opened up the possibility for PG&E to step in to buy the entire solar plant output and then turn around and sell it to City and County customers through PG&E’s Green Tariff/Shared Renewables program in a way that completely undermines our own VCE consortium.
Part 1 published on Thursday answered the following questions that exposed the City's misguided efforts surrounding this lease and lease option agreement:
- Did the City enter into a lease for a solar farm?
- Is the lease rate at market value? Were all uses considered?
- How was the lease rate determined?
- The City did not utilize the RFP process for this solar deal. Why?
- Is a sole-source procurement process consistent with the City's procurement policy?
Upcoming Part 3 will delve into the following questions:
- What will happen to the deal if the lessee goes out of business?
- How is the City protected from any future claims made against this project?
- What was the hurry to apply for connection to the California Independent System Operation (Cal ISO)?
- What is BrightNight's track record? Isn't it a new company?
- The negotiating party identified on the February 11, 2020, City Council closed session agenda is listed as Davis Energy Technology Center. What is that?
- Are there potential conflicts of interest between BrightNight and its affiliates and PVEL and its affiliates?
- What about CEQA concerns?
About the Authors:
Richard McCann: Richard is a Davis resident and much of his work has focused on identifying market trends, and developing and assessing incentive structures in both energy markets and environmental regulations. He has analyzed and designed both wholesale and retail electricity pricing and identified key technological and institutional factors driving pricing factors. In particular, he has addressed both the market and environmental barriers to increased renewables energy development. That work has included utility-scale, community or neighborhood, and customer-side resources. He also successfully persuaded electric utilities to institute asset acquisition programs that produced benefits for both specific customer classes and larger communities. On water policy, he analyzed water transfer markets, water efficiency measures, and agricultural water management. And he has participated in a broad range of regulatory forums beyond energy and water, including air quality and greenhouse gases, and land-use planning. He is a member of the City of Davis Natural Resources Commission, a past member of the Utilities Commission, and a former member of the Technical Advisory Subcommittee of the city's Community Choice Energy Advisory Committee which recommended a community energy agency. That recommendation eventually bore fruit in the form of Valley Clean Energy (VCE), which saves Davis and Yolo County residents money on their monthly electric bill, with cleaner renewable energy to boot. Richard was just selected as a group member for city's 2020 Environmental Recognition Award for his work on behalf of that Technical Advisory Subcommittee
Alan Pryor: Davis resident Alan Pryor has a long career in commercializing large-scale alternative energy projects and other enviromnetally benign technologires. He is the founder and a director of Yolo Clean Air, a nonprofit organization that focuses on improving air quality for the benefit of environmentally sensitive individuals suffering from respiratory health problems - particularly children and senior citizens. He is also the current chair of the local Sierra Club Yolano Group (which has taken no position in this matter), a member of the city’s Natural Resources Commission, and former Chair of the city's Community Choice Energy Advisory Committee.