By Alan Pryor and Richard McCann
At the last City Council meeting, 22 people called in in opposition to the City of Davis entering into a lease option agreement with BrightNight to develop a solar project on a 235-acre City-owned parcel next to the City’s waste water treatment plan. After the controversy has 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.
We go through the Staff’s responses, question by question in their order. Our responses address the gist of the question. 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 four parts. This is Part 3 covering Questions 12 through 18 .
The questions posed in Parts 1 & 2 & 4 are posted at the end of this article
Q12. The option period and lease period seem long. Are they typical for this industry?
The City’s Answer: The option structure is customary for these types of projects and a five-year option period was requested to account for the uncertainty of project permitting, interconnection, and power sale process. The average time for developing and bringing a renewable project into operation in California is four to six years, and it is in the lessee’s interest to shorten this period of time. In addition, during the option period, the City has the right to use and rent the property for agricultural or other purposes allowed under Yolo County zoning.
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.
Q13. What are the City’s rights to decommission the site or restore it down the road?
The City’s Answer: The details of site decommissioning, site restoration, and security will be addressed through the Yolo County permitting process and will be a condition to the issuance of final project permits. Responsibility for decommissioning and restoration at the end of the term of the potential lease is addressed in the Term Sheet section titled, “Removal of the Generating Facility and Site Restoration.” BrightNight is required to restore the site to its original condition, at BrightNight’s sole cost and expense within three months of the end of the lease.
The City is correct, the details of site decommissioning, site restoration and security are not addressed in the agreement that the City and BrightNight signed on March 25th. Without specificity in the Term Sheet and little evident leverage on the part of the City, this raises significant concerns about what further requirements that the City can require.
Q14. What if the lessee defaults on the project?
The City’s Answer: The City and BrightNight have not entered into a lease, so there is currently no risk to the City at all under the Lease Option Agreement. The agreement the City entered into gives BrightNight the option to enter into a ground lease if certain conditions are met. The ground lease, with all of its myriad and complex terms, has yet to be fully negotiated. The specific conditions of default will be negotiated between the City and BrightNight during the negotiation of the ground lease.
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.
Q15. 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 City’s Answer: The agreement that was entered into only gives the City and BrightNight the option of entering into a ground lease in the future if certain specific conditions are met during the option period. It does not spell out all the terms of the possible future ground lease. The possible future ground lease could include more details about how the City or its residents will directly benefit from the solar farm, but it is too early in the process to define such details.
The benefits that could be defined at this stage in the process are detailed in the Term Sheet attached to the Lease Option Agreement. Those include a commitment to work in good faith with the City and Valley Clean Energy to facilitate the direct sale of energy from the solar farm to the City’s wastewater treatment plant under a net metering arrangement at the same rate and terms given to the primary buyer of the power. This provides the City an opportunity to procure clean energy to meet the power needs of the wastewater treatment plant at a substantial discount from retail pricing.
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 noguarantees 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.
Q16. What will happen to the deal if the lessee goes out of business?
The City’s Answer: BrightNight anticipates receiving financing for the solar field, and BrightNight’s lenders would likely step into the shoes of BrightNight should it default on the lease, which is referenced in the section of the Term Sheet titled, “Mortgage Provisions.”
Finally, as part of future lease negotiations, the City will likely require a set-aside fund or other similar mechanism that will ensure funds are available for decommissioning and restoration in the event that BrightNight goes out of business.
Again, the requirement to ensure a set-aside fund or surety bond for decommissioning is not in the Term sheet and we believe the City cannot demand it because it is not part of the “Solar Development details.”
Q17. It appears that the term sheet attached to the lease option agreement contains two conflicting assignment clauses. Can you clarify this?
The City’s Answer: There are two sections that reference assignment, which could be consolidated. The intent of the City and BrightNight agreement was that BrightNight would not be allowed to sublease, assign or otherwise allow use of the site, except that the City acknowledged allowing a potential arrangement with PVEL. It is important to note that in any circumstance, the City would retain approval rights over any arrangement, and the conditions of any such arrangement would be described in the lease agreement.
The City’s answer is doublespeak, and does not address the question. What the City’s answer does illuminate is wishful thinking, but no amount of wishful thinking will change the fat that the one assignment clause in the contract “allows for the transfer and assignment, with the City’s written consent that shall not be unreasonably withheld” while the other assignment clause does not allow assignment or transfer.
Q18. How is the City protected from any future claims made against this project?
The City’s Answer: BrightNight’s indemnification responsibilities are set forth in the agreement section titled, “Indemnity and Insurance.” The indemnification language is broad, excluding only claims caused by the City’s sole negligence or willful misconduct. BrightNight would also be required to maintain insurance and list the City as an additional insured party. “The Quiet Enjoyment” section of the agreement is a standard clause in leases and addresses only that the City will not do anything to interfere with or allow BrightNight’s use of the site to be disturbed. It is distinct and consistent with BrightNight’s obligation to indemnify the City.
Amazingly, the City is only requiring a $1,000,000 insurance policy from BrightNight. A non-profit Alan Pryor runs delivers about 5,000 tubes of toothpaste and toothbrushes/year to non-profit organizations in the City for distribution to their low income clients. This organization, Davis Oral Health Project, receives $5,800 this year of HUD money through the City to help procure these supplies. The City of Davis requires us to maintain $2,000,000 of insurance by the City for giving out toothpaste and toothbrushes while a lessee of 235 acres of City property that is putting a large scale high-voltage solar system on it is only required to have a $1,000,000 insurance policy in place. It seems there is a misplacement of potential risk priorities here.
Part 1. published on Thursday answered the following questions that exposed the City’s misguided efforts surrounding this lease and lease option agreement:
Q1. Did the City enter into a lease for a solar farm?
Q2. Is the lease rate at market value? Were all uses considered?
Q3. How was the lease rate determined?
Q4. The City did not utilize the RFP process for this solar deal. Why?
Q5. Is a sole-source procurement process consistent with the City’s procurement policy?
Part 2. published on Saturday answered the following questions that further exposed the City’s misguided efforts surrounding this lease and lease option agreement:
Q7. Were there other land uses that were considered?
Q8. Why is the City using a fixed-rate rental rate escalator?
Q9. What is the Term Sheet in the Lease Option Agreement?
Q10. Were there any other solar leases to comparable to the City’s deal with BrightNight?
Q11. How does the City solar deal compare to the County’s project at the Grasslands Regional Park?
The upcoming Part 4 will delve into the following questions:
Q19. What was the hurry to apply for connection to the California Independent System Operation (Cal ISO)?
Q20. What is BrightNight’s track record? Isn’t it a new company?
Q21. The negotiating party identified on the February 11, 2020, City Council closed session agenda is listed as Davis Energy Technology Center. What is that?
Q22. Are there potential conflicts of interest between BrightNight and its affiliates and PVEL and its affiliates?
Q23. 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 environmentally benign technologies. 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.