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Renewable Energy as an Airport Revenue Source (2015)

Chapter: Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy

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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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Suggested Citation:"Chapter 3 - Conducting Financial Assessments of Airport Renewable Energy." National Academies of Sciences, Engineering, and Medicine. 2015. Renewable Energy as an Airport Revenue Source. Washington, DC: The National Academies Press. doi: 10.17226/22139.
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83 Airports not only need to facilitate safe air travel, but also need to do so in an efficient and profitable way. The forces on airports to do so come both from federal legislation and market- based drivers. Under federal aviation law referred to as grant assurances, the aspirational goal is that federally- obligated airports are self-sustaining and do not require subsidies from general purpose funds. Local governments that operate airports have a strong incentive to help make the airport self- sufficient as any general tax revenues or assets it directs to the airport that are not specifically characterized to be loans cannot be recovered due to federal prohibition on revenue diversion. Furthermore, local government has many other demands on its services and isolating airport oper- ations as a separate entity relieves one source of financial pressure on government budgets (57). Airports also compete with each other for business. They do so by negotiating agreements with airlines and concessionaires, managing business commodities like parking and fuel costs, and developing alternative revenue sources. Managing an airport during a time of dynamic changes to the commercial airline business requires airport managers to consider creative ways to establish stable, long-term revenue and cost saving structures. This chapter reviews the financial factors that should be considered in evaluating renewable energy projects. It includes reference to modeling tools in Section 3.6 that airports can use to help them evaluate specific project types given the location of their airport. In particular, the reader is directed to a financial analysis tool in Section 3.6.3 developed under ACRP Report 110: Evaluating Impacts of Sustainability Practices on Airport Operations and Maintenance, which can be used to prepare a site-specific financial analysis for a renewable energy project. 3.1 Types of Financial Benefit Renewable energy projects can provide opportunities for airports to generate new revenue and achieve long-term energy cost savings. 3.1.1 Revenue Generation More and more, airports are looking for creative ways to utilize their assets to generate alterna- tive revenue sources. When it comes to renewable energy, the majority of financial benefits are accrued through cost savings rather than revenue generation which are described in Section 3.1.2. Cost savings are more applicable to airports because they consume lots of energy and investments in renewable projects typically result in an off-set to those energy operating costs. The primary method for airports to raise revenue through renewable energy projects is by entering into a prop- erty lease with a private renewable energy developer. A second possibility is a surcharge on a tenant owned system. C H A P T E R 3 Conducting Financial Assessments of Airport Renewable Energy

84 Renewable Energy as an Airport Revenue Source 3.1.1.1 Property Lease A land lease for a renewable energy facility on airport property is not particularly different from any other land lease agreement. The airport must assess the fair market value (FMV) of the land and demonstrate to the FAA that it is receiving FMV compensation through the lease. Renewable energy developers will seek to keep their costs down to ensure that the electricity produced can achieve a market rate. As a result, lease values for renewable energy projects are more comparable to those obtained for agricultural leases and often significantly lower than for other types of development such as commercial or industrial tenants. The best locations for siting projects on airfield lands are those sites with few other development alternatives such as noise compromised lands or areas with height restrictions due to close proximity to the airfield. It is important to note that airports that lease land for a renewable energy project and receive only a lease payment in return do not have a credible claim that it is using renewable energy to power the airport. The party that executes a PPA to buy the energy has a valid claim to the green power produced and owns the REC to document that claim. However, the public at-large is likely not able to recognize this distinction and the airport will benefit indirectly from the per- ception that it is using renewable energy. 3.1.1.2 Tenant Surcharge Tenants may lease airport buildings or construct and own a building through a long-term lease arrangement. In either case, the tenant is often responsible for paying its own utility bills and the airport is not involved in these transactions. In cases where the tenant wishes to install a renewable energy project on a building it owns or adjacent to a building it occupies, it seeks to do so to gain a long-term financial benefit from the renewable energy. It may be possible for the airport to assess a fee for allowing the deployment of the renewable energy system without discouraging the tenant from proceeding with the project, though the amount of money is likely relatively small. 3.1.2 Cost Savings There are a number of ways that an airport can obtain cost savings from its regular energy bill through the implementation of a renewable energy project. 3.1.2.1 On-site Generation When an airport builds and operates its own renewable energy system, the power it generates supplants electricity (or fuel for heating) previously purchased from the utility. The value of the energy no longer purchased from the utility represents a cost savings to the airport. The savings accumulate over time to a point where the value of the savings equals the cost of installing the system. This is customarily known as the simple payback period. Once the system is paid off, the energy that is produced on-site is nearly free with the exception of any operations and mainte- nance expenses which tend to be small for renewable technologies. 3.1.2.2 Sale of Net-Metered Electricity As described in Section 2.4.6, net metering refers to the utility’s purchase of surplus electricity generated by the renewable energy system. The purchase may come in the form of a credit on the utility bill or a check in the mail. Because the generator made an investment to build the renewable energy system, the value of the electricity sale can be considered a cost savings that is used to cal- culate the payback period. While the value of the sale on a kilowatt-hour basis will vary depending on the particular state and its net metering policy, the utility is obligated to purchase the surplus electricity. Therefore, the net metered power will produce a cost savings to the generator.

Conducting Financial Assessments of Airport Renewable Energy 85 3.1.2.3 Sale of RECs As described in Section 2.4.3 above, owners of renewable energy facilities generate both energy and RECs. The value of the electricity (or heating fuel) is determined by the spot market price or a pre-set price in a bulk purchase contract. The value of the REC is also set by market demand by REC buyers who include utilities that are obligated by law under an RPS to procure renew- able energy by purchasing RECs and institutions whose constituents strongly desire that green power be purchased from a voluntary market (e.g., corporations, universities, health care). The sale of the RECs, like the sale of surplus electricity, can be used to pay off the investment that was necessary to build the renewable energy facility and therefore represents a cost savings. However, current FAA guidance states that RECs created by projects funded with AIP funds associated with Section 512 of the FAA Modernization and Reform Act of 2012 cannot be sold to generate revenue (58). The airport can give the RECs to the utility in return for lower electricity rates. RECs accrue for both on-site generation and net-metered electricity. As noted previously, the sale of RECs transfers credit for the renewable energy to a third party who seeks to document and verify its purchase and, therefore, the seller of the REC releases the claim to renewable energy to the purchaser. 3.2 Capital and Maintenance Costs Capital and maintenance costs must be incorporated into the financial assessment of any renewable energy project regardless of the owner. For an airport owned and financed project, the predicted project cost will be compared to annual cost savings to calculate a simple payback period. For a third party owned project, the project costs will be financed by debt and equity. The annual revenue stream produced through the power purchase agreement must be sufficient to pay off the debt service and provide investors with capital repayment plus their required rate of return (e.g., 10–15%). Figure 3-1 presents a generic picture of the typical project costs and relative magnitude over the life cycle of a project including those for renewable energy. Capital and maintenance costs vary for different renewable energy technologies and may also vary significantly between states and site locations. This section presents thumbnail costs for installation and operations and maintenance for renewable energy technologies that are viable at airports. The data are produced by the DOE’s National Renewable Energy Laboratory (NREL) Source: Federal Aviation Administration Figure 3-1. Generic life cycle project costs.

86 Renewable Energy as an Airport Revenue Source updated August 2013 (59). As evidenced by the significant changes in renewable energy mar- kets over the past several years, installation costs can vary widely through time based on the maturation of a technology, scale up in production, increased competition, availability of criti- cal natural resources necessary for manufacturing, and other factors. The figures provided will be sensitive to change over time and should be updated if used for more than a screening level analysis (60). However, the available information is appropriate for use in conducting initial screening of a project’s economic viability. 3.2.1 Wind and Solar Table 3-1 contains installed costs and O&M costs for solar PV and wind projects produced by NREL. The data are divided up by project size (noted as nameplate capacity) as costs are sensi- tive to project size. For example, larger projects have more cost efficiencies taking advantage of economies of scale including fixed mobilization costs and reduced transactional costs on a per kW installed basis. Figure 3-2 presents the installed cost for each technology and project size on a chart including the average project as well as high and low costs using standard deviation. Airports are most likely to consider installing a variety of project sizes for solar PV represented in the data as well as wind projects under 1 MW. As the data show, wind projects in the smaller project sizes have the highest installed costs, which decrease as project size increases. There are a few wind projects at airports that have been installed with a nameplate capacity of greater than 100 kW though projects in the 10–100 kW range are more compatible with aviation uses. Across the board, solar PV projects for all project sizes are demonstrated to be more cost-effective than smaller scale wind projects. The added benefit of solar over wind is that larger scale projects can produce a greater amount of electricity that can be utilized by the airport while small scale wind projects have limited electricity producing capacity. O&M costs for solar PV and wind are also presented in Table 3-1. These demonstrate another advantage of solar PV over wind in that annual O&M costs for solar PV are 20–40% lower. Given that the solar PV numbers also include tracking systems that have a higher O&M cost and may not be proposed for many geographical locations, the appropriate comparison for solar PV O&M PV <10 kW $3,910 $921 $21 $20 33 11 PV 10–100 kW $3,819 $888 $19 $18 33 11 PV 100–1,000 kW $3,344 $697 $19 $15 33 11 PV 1–10 MW $2,667* $763 $20 $10 33 9 Wind <10 kW $7,859 $2,649 $28 $18 14 9 Wind 10–100 kW $6,389 $2,336 $38 $12 19 5 Wind 100–1,000 kW $4,019 $803 -$33 $13 16 0 Wind 1–10 MW $2,644 $900 $36 $16 20 7 * PVWatts Calculator (based on 2013 statistics) available from NREL uses $2.60/watt for solar PV above 1MW which is consistent with this data and the latest information. Technology Type Average installed cost ($/kW) Installed cost Std. Dev. ($/kW) +/– Fixed O&M ($/kW-yr) Useful Life (yr) Useful Life Std. Dev. (yr) Fixed O&M Std. Dev. ($/kW-yr) +/– Table 3-1. Costs for electric generating technologies.

Conducting Financial Assessments of Airport Renewable Energy 87 may be on the low end of the standard deviation. Other data presented by NREL show that solar PV O&M for fixed panels are relatively small and can reasonably be $0.02 per kW (see PVWatts calculator) (61). Figure 3-3 shows a simple and clean fixed-mounted solar installation at Reno Airport designed on a flat, gravel surface requiring no vegetation management or regular upkeep. Table 3-1 also presents NREL data for expected project life. These data also support solar PV over wind with solar PV projects having an expected lifespan of over 30 years while small scale wind turbines are in the range of 15–20 years. 3.2.2 Solar Thermal NREL information on solar thermal is presented specifically for producing hot water. The data for mean installed cost for solar thermal includes both commercial and residential uses. As costs for airports would be most comparable to commercial uses and the commercial data is typically cheaper than residential due to economies of scale advantages, prices for airports would be at the lower end of the range presented. O&M costs are presented as a percentage of the installed cost and only the commercial scale percentage is listed. Flat-plate collectors have been the most common collector for residential water-heating and space-heating installations. Source: National Renewable Energy Laboratory Figure 3-2. Installed cost of renewable energy technologies. Figure 3-3. Fixed ground-mounted solar PV requires little O&M (Reno Airport ARFF building).

88 Renewable Energy as an Airport Revenue Source Plastic collectors concentrate heat from the sun and have increased thermal efficiencies. Thus either system could be applicable to an airport. Table 3-2 summarizes the installed and O&M cost of solar thermal technologies. 3.2.3 Ground Source Heat Pumps NREL has also presented data on installed costs and O&M for ground source heat pumps (GSHP) provided here in Table 3-3. Capital costs vary significantly depending on geographi- cal location, which dictates land preparation prices and horizontal versus vertical drilling for ground loops. These data can be directly compared to a wood-fired heat system in Section 3.2.4 to assess renewable thermal system options. GSHP is more costly to install than conventional heating and cooling systems. The benefits are in long-term savings which can be between 20 and 60% depending on the type of GSHP installed and existing price of heat and power (62). A recent study focused on the northeast United States provides support for the long-term benefits of converting to GSHP for residential units com- pared with existing oil boilers and upgrades to natural gas (63). Operations and maintenance costs have been reported to be less than conventional heat- ing and cooling systems (64), though start-up and optimization can be more expensive than expected (65). 3.2.4 Biomass Biomass can be used for both electricity and heating. Tables 3-4 and 3-5 present informa- tion from NREL respectively on biomass heat and power systems and wood-fired heat systems alone. As noted in Section 1.2.3, smaller on-site biomass has been demonstrated primarily for heat- ing while biomass electricity generation has been applied to larger utility-scale power plants. SWH, flat plate & evacuated tube $141 $82 0.5% 31 14 SWH, plastic collector $59 $15 0.5% 20 10 *This information is for commercial systems, while all other data is a mix of commercial and residential systems. Technology Type Average installed cost ($/ft2) Installed cost range ($/ft2) +/– Useful Life (yr) Useful Life Std. Dev. (yr) Annual O&M* (% times installed cost) Table 3-2. Costs of solar thermal technologies. Ground Source Heat Pump $7,518 $4,164 $109 (+/– $94) 38 25 $397 $392 Technology Type Average installed cost ($/ton) Fuel and/or water cost ($/ton) Fuel and/or water cost Std. Dev. ($/ton) +/– Installed cost range ($/ton) +/– Useful Life (yr) Annual O&M Useful Life Std. Dev. (yr) Table 3-3. Costs for ground source heat pump.

Conducting Financial Assessments of Airport Renewable Energy 89 3.2.5 Fuel Cells The thumbnail NREL data used for the other renewable energy technologies is not avail- able for fuel cells. However, NREL has developed a cost of renewable energy spreadsheet tool (CREST) which includes assumptions for installed and O&M costs for a number of technologies including fuel cells. These costs from CREST are presented in Table 3-6 for consideration (66). CREST is reviewed in detail in Section 3.6.2. 3.3 Levelized Cost of Energy The levelized cost of energy (LCOE) is the cost of owning, installing, and operating the system over its 25-year life. Key inputs to calculating LCOE include capital costs, fuel costs, fixed and variable O&M costs, financing costs, and an assumed utilization rate for each plant type. The LCOE is based on the annual after-tax cash flow for a grid-connected PV system that either sells all of the electricity it generates at a fixed price to an electricity service provider, or uses all of the electricity that it generates on-site to displace purchases of electricity that would be made from an electricity service provider without the system. Forecasting the LCOE is difficult because the future cost of fuel and predictions for public policy incentives are uncertain. Table 3-7 presents the LCOE for several renewable energy tech- nologies considered by airports. For additional insight into some of the cost assumptions behind the LCOE for solar PV, Table 3-8 presents the factors behind the PVWatts calculation. Biomass Combustion Combined Heat & Power* $6,067 $4,000 $91 $33 $0.06 $0.02 28 8 *Unit cost is per kilowatt of the electrical generator, not the boiler heat capacity. Technology Type Average installed cost ($/kW) Installed cost Std. Dev. ($/kW) +/– Fixed O&M ($/kW- yr) Fixed O&M Std. Dev. ($/kW- yr)+/– Variable O&M ($/kWh) Variable O&M Std. Dev. ($/kWh) +/– Useful Life (yr) Useful Life Std. Dev. (yr) Table 3-4. Costs for biomass heat and power systems. Biomass wood heat* $600 $361 $91 $33 32 8 $0.03 $0.01 * Biomass wood heat converted from thermal energy capacity (Btu/hr). Technology Type Average installed cost* ($/kW) Installed cost range ($/kW) +/– Fixed O&M ($/kW) Fixed O&M Std. Dev. ($/kW) +/– Fuel and/or water cost ($/kWh) Fuel and/or water Std. Dev. ($/kWh) +/– Useful Life (yr) Useful Life Std. Dev. (yr) Table 3-5. Costs for wood-fired heat system. Fuel Cells $4.75/watt $250/kW plus 2% inflation rate Technology Installed Cost O&M Table 3-6. Costs for fuel cell power generation.

90 Renewable Energy as an Airport Revenue Source 3.4 Funding Sources Funding sources include those that are available to airports and their partners. These include tax exempt financing, grants, and third party financing. 3.4.1 Tax Exempt Financing Airport operators in the United States are overwhelmingly state or local governmental entities with the power to issue debt on a tax exempt basis, thus reducing their financing costs. There- fore, the airport can often finance renewable energy projects that will benefit only the airport itself, such as a solar facility where the power generated will be used entirely by the airport, with the proceeds of tax exempt bonds. However, where the power is to be co-mingled with power provided by a private utility or “sold into the grid” through a net metering arrangement and applied to reduce the airport’s overall cost of energy, the private use by the third party utility may prevent the use of tax exempt financing for the project. Another cost-saving alternative may be for an airport operator to finance the purchase of a specified output of a renewable energy project over a period of years with the proceeds of tax exempt bonds. Such an arrangement is only available to an airport owner that is considered a “utility” acquiring such output for its retail electric customers within its service area. However, some airports are treated under local law as a wholesale utility providing retail electrical service to its tenants at the airport. Thus, such an airport could contract for a guaranteed delivery of power (such as 80% of the expected output of a rated facility) over a specified period (such as 20 years), pre-pay for such energy with proceeds of tax exempt debt, resell such electricity to retail customers within its service area (the airport), and the developer could use such funds to Solar PV $0.12/kWh PVWatts Calculator Geothermal Heat Pump $35/millionBTU Matley, RMI Wind (600 kW unit) $0.25/kWh Cost of Renewable Energy Spreadsheet Tool (CREST) Fuel Cells $0.128/kWh Cost of Renewable Energy Spreadsheet Tool (CREST) Technology Cost Factor Source Table 3-7. Levelized cost of electricity generated for various renewable energy technologies. Debt Amount 100% of installed cost Loan Term 25 years Loan Interest Rate 7.50% Analysis Period 25 years Inflation Rate 2.50% Real Discount Rate 8% Federal Income Tax Rate 28% per year State Income Tax Rate 7% per year Assumption Value Table 3-8. Assumptions for cost of electricity generated.

Conducting Financial Assessments of Airport Renewable Energy 91 pay costs associated with developing the project. A 2008 Internal Revenue Service (IRS) Private Letter Ruling (PLR) construed these requirements quite liberally, and it is possible that this method of financing acquisition of the output of a renewable energy facility would be accepted by the IRS (67). When an airport is considering constructing a large new facility, such as a terminal or parking garage, or undertaking a significant rehabilitation of such a facility, part of the planning process is often a review of energy requirements and, increasingly, an examination of the potential for incorporating renewable energy sources into the project. Where such renewable sources will be applied solely to heat, cool, light or otherwise provide energy to the project or the airport, espe- cially where such facilities are integrated into a new or rehabilitated airport facility, tax exempt financing for the entire project is often a good source of financing. Because the tax regulations relating to financing such projects are complex, it is often advisable to obtain expert advice at the early stages of planning such a project in order to preserve the ability to finance it in the most advantageous manner. 3.4.2 Grants Grants available to airports are made through the AIP. There are five current sources of AIP funding that may be used for renewable energy projects. A summary of these programs is pre- sented in Table 3-9. Each program is described in the following subsections. A detailed matrix of the funding programs is provided in Appendix C. Voluntary Airport Low Emissions Program (VALE) Reduce sources of airport ground emissions Airport clean infrastructure and airport dedicated vehicles Commercial service airports in air quality nonattainment and maintenance areas Chapter 6, Section 5, p. 6-26, and Appendix S, Table S-1 Airport Energy Efficiency Program (Section 512) Increase the energy efficiency of airport power sources Energy efficient on- airport electrical energy production: Solar, geothermal, hydrogen, etc. Eligible public use airports Chapter 6, Section 7, p. 6-29, and Appendix S, Table S-1 Airport Sustainability Plans Making sustainability a core element of airport planning Sustainability planning, either within an airport master plan or a stand-alone study. Eligible public use airports Chapter 3, Section 11, p. 3-53, and Appendix E, E-3, and Appendix S, Table S-1 Zero Emissions Vehicle and Infrastructure Pilot Program Zero-emission on- road vehicles and supporting fuel infrastructure Electric drive and hydrogen-fuel vehicles Stand-alone infrastructure included (e.g., recharging stations) Eligible public use airports in air quality nonattainment and maintenance areas. If insufficient interest, airports in attainment become eligible Chapter 6, Section 6, p. 6-28, and Appendix S, Table S-1 Airport Improvement Program (AIP) & Passenger Facility Charge Program (PFC) Airport development, more efficient operations, and reduced costs Related activities includes energy efficiency, LED lights, recycling, and energy assessments Eligible public use airports Entire AIP Handbook Program Program Purpose Eligible Activities Eligible Airports AIP Handbook Guidance Table 3-9. FAA grant programs.

92 Renewable Energy as an Airport Revenue Source 3.4.2.1 VALE Program VALE is designed to reduce all sources of airport ground emissions. Created in 2004, VALE helps airport sponsors meet their state-related air quality responsibilities under the Clean Air Act. Through VALE, airport sponsors can use AIP funds and Passenger Facility Charges (PFCs) to finance low emission vehicles, refueling and recharging stations, gate electrification, and other airport air quality improvements. It has been used to fund solar PV and GSHP projects. Figure 3-4 shows the required VALE label on a carport solar installation constructed at Albu- querque International Airport using VALE program funds. 3.4.2.2 Airport Energy Efficiency Program In fiscal year 2012, Section 512 of the FAA Modernization and Reform Act of 2012 (Public Law 112-95) added a program for certain projects that increase the energy efficiency of airport power sources. This legislation simply made these projects eligible for AIP, but did not make these projects eligible for any special set aside funding (including the noise and environmental set aside). As of early 2015, the FAA is in the process of developing guidance to advise airport sponsors on how to apply for the funds. The program includes PPA requirements for solar proj- ects on airport property as well as requirements for attaining and selling RECs. 3.4.2.3 Airport Sustainability Plans The FAA has been providing eligible airports across the United States with AIP grant funds to develop comprehensive sustainability planning documents. These documents include initiatives for reducing environmental impacts, achieving economic benefits, and increasing integration with local communities, and include identifying opportunities to develop renewable energy. To date, the FAA has provided grants to 44 airports. These grants are helping airports plan for future renewable energy projects and may be used to justify prioritization of future AIP funding requests. 3.4.2.4 Zero Emissions Vehicle and Infrastructure Program The FAA Modernization and Reform Act of 2012 created a new Zero Emissions Airport Vehi- cles and Infrastructure Pilot Program. This Pilot Program allows the FAA to award AIP funds for the acquisition of zero emissions vehicles at an airport and for making infrastructure changes to Figure 3-4. The VALE program funded several airport solar projects (Albuquerque).

Conducting Financial Assessments of Airport Renewable Energy 93 facilitate the delivery of energy necessary for the use of these vehicles. These could incorporate renewable energy charging options for airports. 3.4.2.5 AIP and PFC Program Airports can use the AIP and PFC funding programs to include renewable energy projects as part of larger infrastructure programs and apply AIP and PFC funding for the renewable energy infrastructure. These could include adding renewable energy to a proposed terminal, parking garage or other landside building project. 3.4.3 Third Party Financing Renewable energy projects can be financed in a number of different ways. However, they are often “project financed” on a non-recourse or limited basis, meaning that the construction of the project is financed off the balance-sheet of the developer or sponsor. In a non-recourse, or “project financed” project, the facility itself, including all of the rights to the revenue derived from the project, is used as collateral for the loan. In addition to debt finance, the renewable energy industry typically makes use of the various tax credits available to renewable energy developers. These include the production tax credit (PTC) for wind projects (which expired for projects commenced after December 31, 2013), and the investment tax credit (ITC), which has been widely used for solar projects. The ITC for solar is essentially worth 30% of qualifying expenditures used in developing the solar project though it will decrease to 10% on December 31, 2016. Other technologies such as fuel cells and small wind turbines are also eligible for the ITC at 30% and geothermal is eligible at 10%. Often, developers of renewable energy projects cannot use these credits themselves as they do not have enough taxable income to offset with the tax credit. Therefore, solar projects typically attract investment from larger financial institutions as joint venture partners that can use the tax credits and effectively monetize their benefit. Essentially, no matter the source of third-party financing, financing parties for renewable energy projects will want to ensure that the project has an uninterrupted revenue stream for the period of their investment and that there are unlikely to be unexpected cost issues during that period. Therefore, a carefully drafted PPA is a critical element of the financing and development of most renewable energy projects. 3.5 Financial Metrics There are a variety of financial metrics that can be used to assess the viability of a particular project. A few of the most common ones for airport projects are described below. 3.5.1 Benefit Cost Analysis The FAA announced policies in 1994 that establish the requirement for benefit cost analysis (BCA) to demonstrate the merit of capacity projects for which airport sponsors are seeking AIP discretionary funds. It subsequently produced guidance for airport sponsors in conducting such analyses (68). FAA considers capacity projects to include those involving new construction or reconstruc- tion of airport infrastructure intended to accommodate or facilitate airport traffic. The FAA policy requiring BCA does not apply to projects undertaken solely, or principally, for the objec- tives of safety, security, conformance with FAA standards, or environmental mitigation. The

94 Renewable Energy as an Airport Revenue Source BCA must be prepared for projects with capacity projects requesting AIP funds of $5 million or greater or any capacity project requesting a letter of intent (LOI) from the FAA. The BCA is used to justify the spending of public funds administered under the AIP program that has historically been funded through taxes imposed on aviation systems users. As such, all benefits and costs affecting the aviation public or directly attributable to aviation should be considered and evaluated in the BCA. Such benefits may include benefits realized in the form of monetary gains (e.g., lower operating costs), reductions in non-monetary resources (e.g., per- sonal travel time), or mitigation of environmental impacts. Therefore, the BCA considers not just cash benefits and costs, but also greater benefits to the proposed action on the flying public. Types of benefits from aviation projects include increase in capacity (and reduction in delays), improved safety and security, achievement of design standards, enhanced environmental ben- efits like noise reduction, and improvements to inter-terminal transportation. Evaluating renewable energy projects in the content of BCA can be challenging, given the strong emphasis of demonstrating that the benefits directly accrue to the aviation system and public. Renewable energy projects can provide immediate environmental benefits. They can also provide financial benefits in the form of cost savings over the long-term, but payback periods can be longer than for other energy cost saving benefits associated with improved energy efficiency. Renewable energy can also be part of a plan to modernize the grid and provide redundancy and resiliency, providing greater power reliability during unforeseen events. These types of benefits have been gaining some credence recently in the wake of increased frequency of hurricanes and coastal storms. 3.5.2 Net Present Value Net Present Value (NPV) is the most widely used and theoretically accurate economic method for selecting investment alternatives, and should be used for all analyses prepared for the FAA’s consideration. The NPV method requires that the alternative meet the following criteria to war- rant investment of funds: • Have a positive NPV; and • Have the highest NPV of all tested alternatives. The first condition insures that the alternative is worth undertaking relative to the base case (i.e., existing conditions) in that it contributes more in incremental benefits than it absorbs in incremental costs. The second condition insures that maximum benefits are realized when evaluating against the baseline condition. Because of its strict focus on financial benefits and less on non-financial, it is often considered a supplemental tool for airport projects. 3.5.3 Internal Rate of Return The internal rate of return (IRR) is defined as the discount rate that equates the present value of the stream of expected benefits in excess of expected costs to zero. In other words, it is the highest discount rate at which the project will not have a negative NPV. To apply the IRR cri- terion, it is necessary to compute the IRR and then compare it with an OMB-prescribed 7% discount rate. If the real IRR is less than 7%, the project would be worth undertaking relative to the base case. 3.5.4 Payback Period The payback period measures the number of years required for net undiscounted benefits to recover the initial investment in a project. One characteristic of this evaluation method is that

Conducting Financial Assessments of Airport Renewable Energy 95 it favors projects with near-term (and more certain) benefits. However, the payback period method does not consider benefits beyond the payback period. Nor does it provide information on whether an investment is worth undertaking in the first place. 3.6 Modeling Tools for Renewable Energy A number of renewable energy modeling tools are available to the public that can help users assess the potential viability of a renewable energy system for a particular project location. Mod- els can integrate site-specific information on expected renewable energy generation capacity based on geography as well as basic financial assumptions for typical renewable energy projects. The user can insert some baseline information on energy consumption levels and unit pricing to better evaluate the financial feasibility of a project at a specific building or load area. Tools produced by federal agencies have broad-scale applicability and provide generic infor- mation with some site-specific customization. Two often-used tools—PVWatts and CREST— were developed by NREL and are described in this section. A third model, EP&CBT, produced under ACRP Report 110 to evaluate the cost and benefit of airport sustainability projects, is also presented. 3.6.1 PVWatts The PVWatts Calculator is a web application developed by the NREL to estimate the electric- ity production of a grid-connected roof- or ground-mounted PV system based on a few simple inputs that allow homeowners, installers, manufacturers, and researchers to easily gauge the performance of hypothetical PV systems. To begin using the calculator, the user simply types in the address or geographic coordinates for a potential PV system. Based on the location, PVWatts automatically identifies applicable solar resource data for the system, which it translates into forecasted electricity generation. To represent the system’s physical characteristics, PVWatts requires a value for five inputs: • The system’s DC size, • Array type, • A DC-to-AC derate factor, • Tilt angle, and • Azimuth angle. Using an hour-by-hour simulation over a period of one year, PVWatts estimates the annual and monthly electricity production of a PV system, as well as the cost and value of the electricity produced by the system. The cost of electricity estimates are based on whether the PV system is on residential or commercial property, its installation cost, and the retail cost of electricity. Airport users should apply the commercial property case. PVWatts is suitable for very preliminary studies of potential locations for PV systems using typical crystalline silicon modules. However, the production estimates do not account for many factors that are important in the design of a highly efficient system and therefore should be used only as a screening tool to be followed up by a site-specific analysis. 3.6.2 Cost of Renewable Energy Spreadsheet Tool CREST is an economic cash flow model designed by NREL to allow policymakers, regulators, and the renewable energy community to assess project economics, design cost-based incentives (e.g., feed-in tariffs), and evaluate the impact of various state and federal support structures.

96 Renewable Energy as an Airport Revenue Source CREST is a suite of five analytic tools, for solar (photovoltaic and solar thermal), wind, geother- mal, fuel cells and anaerobic digestion technologies. CREST models are designed for use by state policymakers, regulators, utilities, developers, investors, and other stakeholders. The models allow users: • To estimate the Year One cost of energy (COE) and LCOE from a range of electricity genera- tion projects; • To experiment with the process of setting of cost-based incentive rates; • To observe the effects of different economic drivers on a given renewable energy project’s COE and LCOE; • To comprehend the relative economics of generation projects with differing characteristics, such as project size, resource quality, location (e.g., near or far from transmission) or owner- ship (e.g., public or private). 3.6.3 EP&CBT Modeling Tool 3.6.3.1 Model Overview ACRP Report 110: Evaluating Impacts of Sustainability Practices on Airport Operations and Maintenance provides an EP&CBT for evaluating sustainability practices considered by airport sponsors. The tool has the ability to look at both baseline and new practice costs in order to eval- uate the cost benefit of the initiative. The EP&CBT model was developed to include the O&M costs of a proposed sustainability practice as part of the life cycle assessment when determining the potential cost benefits. The EP&CBT model is designed to evaluate a variety of sustainable practices related to: • Water conservation; • Energy conservation; • Waste management; • Consumables and materials; and • Alternative fuels. The EP&CBT is a user friendly tool that does not require a lot of training or data. An analysis can be completed in less than an hour for any sustainable initiative, and provides practical results of likely impacts of the sustainable initiative. The tool was developed in Microsoft Excel®, which is familiar to many users in organizing data and developing spreadsheets and cost estimates. The tool is flexible and can be used for a variety of sustainable initiatives, including renewable energy projects like solar, geothermal, and wind. The goal of the EP&CBT is to produce results that help sponsors with planning and decision making when comparing baseline conditions to the pro- posed sustainable initiative, including total net costs or savings of the proposed practice, cumula- tive net present value over the analysis period as well as the return on investment over the period. The developers of the tool worked with numerous airports, both large and small, where sus- tainability projects had already been initiated. These included Albuquerque and Fresno, which host solar PV facilities; this information was used to validate the information it can generate for renewable energy assessments. The intent of working with the airports was to evaluate a large variety of project types as well as refining the model based on feedback from the airports in order to provide a tool that would be useful to airport planners. The model allows the user to input baseline and future costs for a range of years associated with the sustainable initiative for three categories: • Startup costs • Operational and maintenance costs • End of life costs

Conducting Financial Assessments of Airport Renewable Energy 97 The model takes all the costs entered by the user and creates output charts and graphical sum- maries of key impacts of the sustainable initiative such as NPV, total or net cost savings, and return on investment (ROI). A detailed budget view can also be generated, summarizing costs for: • Personnel; • Materials and supplies; • Contractual services; • Operational expenditures; • Capital outlay; • Interdepartmental; and • Other This can be a very useful way of viewing the costs in a standard method that can summarize the monetary impacts for key components to the initiative and can be useful when trying to develop a budget for the initiative. The graphical output provides cost summaries and graphics of key cost metrics including: • Total O&M costs; • Total net benefits; • Cumulative NPV over time; • ROI; and • Break-even point. To demonstrate the tool’s capability and applicability to renewable energy projects, a case study for solar PV is provided. In this case, the EP&CBT was used to determine cost metrics such as return on investment, payback period, utility impacts, and lifecycle costs using assumed costs and parameters typical for a 500 kW solar PV project. 3.6.3.2 Case Study Solar PV A case study was prepared to show the EP&CBT model’s capability of evaluating the cost benefits of a proposed renewable energy technology. The example is a hypothetical 500 kW roof mounted solar project at an airport on the mid-Atlantic coast. The project could provide up to two thirds of the airport’s electrical needs in the terminal at an expected total cost of $2.3M. The project would require an electrical grid interconnect to hook up to the terminal electricity connection and the majority of the costs would consist of the solar PV panels and installation. In addition to the panel and installation costs, project costs included the interconnection study, inverter replace- ment, O&M, solar glare and energy assessment, administrative/legal support, and a consultant engineer to provide project oversight for the airport. Other miscellaneous fees such as workman’s compensation, design fees and permits, and liability are typically included in the installation costs. For this analysis, the default discount rate of 7% was used which takes into account the time value of money. The discount rate is used in the NPV calculation to provide a present value of cash flow in the future. Also input to the model were the baseline electricity costs over 20 years, assuming the electricity usage would be the same but the costs of the electricity would increase by 5% each year. For the net benefit electricity costs from the solar PV project, the NREL PVWatts program was used to estimate the electrical generation from a proposed 500 kW system in the Atlantic City area, assuming a 180 degree azimuth and a 20 degree tilt angle. It was estimated that the system could generate 667,712 kWh of electricity per year. Over the 20-year life of the project, the amount of electricity generated by the project (assuming a 0.7% reduction in efficiency annually as the system ages) is estimated at 12,464,948 kWh. Based on the estimated annual cost of electricity, the system could save the airport approximately $1,903,243 over the 20 year period. As one of the many tasks when evaluating a new project, an airport sponsor needs to know from

98 Renewable Energy as an Airport Revenue Source a business perspective, what the ROI and break-even point of this project will be once all the costs are factored in. To assist other airport sponsors in filling out the necessary inputs for a typical solar project, guidance based on a review of other solar projects and installation costs has been provided. The EP&CBT model was run with the following inputs and assumptions in order to calculate the ROI and the project break-even point: • System Installation Costs–$2,025,000 • Future Inverter Replacement–$150,000 • Interconnection Study–$25,000 • Solar Glare Analysis–$4,000 • Energy Assessment–$20,000 • Administrative and Legal Support–$70,875 • Labor Operations and Maintenance–$5,296 • Consultant Fees–$75,000 It should be noted that there could be other costs associated with a solar system not included here, such as landscaping or paving costs, canopy costs if located over a parking garage, feasibil- ity studies, etc. Based on research, the eight parameters listed are the most common costs associ- ated with developing a roof mounted system at an airport. As shown in Figure 3-5, the results from the EP&CBT model for the hypothetical solar project over a 20 year period show the total installation and O&M costs of the project at $4,379,038, the Figure 3-5. Cost benefit analysis.

Conducting Financial Assessments of Airport Renewable Energy 99 Figure 3-6. Model output: electricity cost baseline vs project costs. total net benefits of the project at $580,854, the ROI (percent over period of analysis) was 13% and the payback period was 18 years. The performance and qualitative impacts of the project were deemed positive in terms of institutional tenant experience, the traveler experience, local community experience and would have both public and employee support. Figure 3-6 shows the baseline electricity costs compared with the future electricity costs with the solar PV project. It was estimated over the 20 year lifespan of the project, a total of approximately $1.9 million in avoided electrical costs could be realized by the project. Without the project, the airport could pay up to $4.9 million in electricity cost over the 20 year period. This is just one example of how the tool can be used to evaluate a renewable energy project and determine the cost effectiveness of the proposed alternative. The tool is flexible for a variety of project types and can also include end of life (i.e., decommissioning, removal and disposal) costs for the project if those costs are known. The tool is easy to use and provides output charts for key economic cost metrics, which can help the airport sponsor when evaluating the economic benefits of a proposed renewable technology over the life of the project.

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TRB’s Airport Cooperative Research Program (ACRP) Report 141: Renewable Energy as an Airport Revenue Source explores challenges airports may anticipate when considering renewable energy as a revenue source. These considerations include the airport’s geography and terrain, infrastructure, real estate, energy costs, public policy, regulatory and compliance requirements, tax credits, sponsor assurances, ownership, impacts to navigation and safety, security, staffing issues, and many others. The guidebook also includes detailed financial information on the cost and performance of projects that have been implemented by airports.

The guidebook also includes an appendix available online that provides sample a request for proposals.

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