Solar farms embark on a delicate dance with Duke

There were smiles all around Tuesday as Cornelius-based O2 Energies showed off the 5-megawatt solar farm it’s developing in Montgomery County, about 60 miles east of Charlotte.

Dozens of such farms have quickly catapulted North Carolina toward the top of national solar rankings. But the next step in that evolution, including larger farms, is proving thorny.

O2 and Duke Energy Progress signed a power-purchase agreement for another planned solar farm – a few miles away but with a 20-megawatt capacity – only after asking the N.C. Utilities Commission to referee.

The dispute illustrates the delicate balance in a fast-growing solar industry between utilities who are obligated under federal law to buy green energy and solar developers who can’t afford to anger their only conduit to the grid.

“We have one customer, and that customer is Duke Energy,” said Zoe Hanes, general counsel for Asheville-based FLS Energy, which bought the Biscoe farm from O2.

The commission has been asked to arbitrate at least three other disputes between green-energy developers and the utilities.

Last week it also heard testimony on setting the rates – based on “avoided costs” of generating or buying electricity elsewhere – that utilities have to pay for green energy.

Duke wants to lower the threshold of projects eligible for pre-approved rates and contract terms, called the standard offer, from the current 5 megawatts to 100 kilowatts. Solar developers want the offer extended to projects of up to 10 megawatts.

There’s a reason nearly all of North Carolina’s solar farms built so far have been under 5 megawatts. Larger projects need more land, may be harder to connect to the grid and require more financing.

Complex power-purchase agreements, the linchpin of financing, also have to be individually negotiated for large farms.

“Our customers expect us to get the best deal where we can, whether it’s buying solar energy or power poles,” Duke spokesman Randy Wheeless said. “These contracts go out for 15 years, and if we pay too much we pay it for 15 years.”

Duke’s two North Carolina utilities have received 62 requests for power purchase agreements from solar farms larger than 5 megawatts, but signed only two, the commission’s consumer advocacy Public Staff has said.

Duke says those failures rarely have to do with the purchase terms of the agreements. But O2 Energies and Duke Energy Progress showed they can go badly.

Months of negotiations

Negotiations between the two began in April 2013. Last August, O2 said in filings to the Utilities Commission, Duke offered rates that were “significantly lower” than the utility had proposed in a 2012 proceeding.

In March, O2 said, Duke offered purchase rates that were lower still and reduced the contract term from 15 years to 10 years.

Those conditions and others “render the project financially infeasible, as a potential investor would not be able to estimate, with reasonable certainty, the expected return on a potential investment in the facility,” O2 wrote.

Duke countered that O2 had demanded the same rates for its 20-megawatt farm as 5-megawatt and smaller projects get under the standard offer.

O2 “blatantly ignores the significant contributing reason to the time delay during the (power purchase) negotiation – complainant and O2 Energies’ inability to obtain financing for their projects and ultimately unsuccessful efforts to secure such financing from Duke Energy,” Duke wrote.

O2 says it has completed seven solar farms, is building three more including the one in Biscoe and has six under development.

Duke’s two North Carolina utilities have bought 370 megawatts of solar capacity, including 195 megawatts in 2013 and 33 megawatts so far this year. Projects totaling 3,300 megawatts have been proposed.

In the midst of the year-long negotiations with O2, Duke in February issued a request for proposals to sell 300 megawatts of solar capacity in North Carolina. Duke says it prefers those projects be 20 megawatt or larger – the size of O2’s planned farm – for the economies of scale they offer.

Duke said the request was intended to “gain better control of the process” in the face of large numbers of proposed solar projects and the impending expiration (in 2015) of state green-energy tax credits.

Joel Olsen, O2’s managing director, said he believes “Duke was trying to figure out their own strategy on solar.”

Duke’s request for proposals offered both to buy power and tradeable renewable energy certificates, or to buy the solar farms themselves.

O2 asked the commission to dismiss the arbitration case on June 30. The company has signed a power-purchase agreement for the solar farm, which is still under development.

“We’ve been working with Duke a long time to be able to come to a settlement,” Olsen said. “We’re glad that in the end we were able to settle on terms and conditions.”

‘A thing you want’

O2 had previously negotiated a power-purchase agreement with Duke on the 5-megawatt Biscoe solar farm. The project has been sold to FLS Energy, which also built it.

Rows of blue solar panels at the $15 million farm undulate across a rolling 30 acres that was once part of a cattle ranch. When it’s finished in a few weeks, sheep will graze the replanted grass.

Montgomery County officials hope the solar farm, and the 20-megawatt site O2 plans to build a few miles away, will help draw tenants to a 3,000-acre business development site that lies between them.

“For economic development, a solar farm is a thing you want to have,” said county development director Ashley Cagle.