Bonds Address Catastrophic Financial Consequences Of Contractual Default Not Covered by Insurance
All parties involved in small commercial solar energy projects – including financiers/investors, developers, IPPs, EPCs, installers, and off-takers – are dependent on each other to fulfill their respective contractual obligations in order for these projects to succeed. Thus, should any party in a power contract be declared in default of their contractual responsibilities, it may have disastrous financial consequences for the other parties. Unfortunately, what these parties may not know is that contractual default is not covered by their insurance policies.
Small solar projects typically have an energy-generating capacity of 10 megawatts or less to address the needs of smaller commercial users. Even so, they still may involve multi-million-dollar investments that call for sound risk management. Accordingly, a surety bond can help avoid catastrophic financial loss in the event one or more participants in any stage of a power contract is declared in contractual default.
Understanding serious gaps in insurance and critical role of surety bonds
Even though parties involved in solar and renewable energy projects may purchase traditional property/casualty insurance policies to protect against the financial consequences of physical damage to a solar array and related exposures, they may not know that these policies offer no protection against potentially catastrophic consequences due to contractual default.
Only specially designed surety bonds offer protection against contractual default by guaranteeing the performance of the terms stipulated and agreed upon by all parties to a power contract.
When arranged and properly structured by an experienced and qualified solar surety bonding expert, such as Unique Surety and Insurance Services, LLC, these bonds can provide a critical risk management solution for all parties involved in solar energy development, operation/distribution and utilization.
Surety bonds: End-to-end solutions for solar energy
Here are descriptions of the various surety bonds for solar energy projects along with their key benefits:
– Decommissioning bonds. Property owners whose land is used for the construction of a solar array need to be assured that whenever the solar array is ready to be dismantled (which may be years or decades in the future) their property will be restored to its prior condition. To make sure that happens, they can contractually require the project developer and investor to purchase a decommissioning bond. Some community or county building departments require a decommissioning bond to be delivered prior to issuing any building permits.
– Performance bonds. These bonds provide assurance to the investor, IPP, and/or the project developer that EPCs and construction contractors will perform their duties as specified in their power construction contract. Under a performance bond, in the event of a contractual default, the surety must pay contractual penalties detailed in the contract and/or provide a contractor to restore completion of the project. In turn, EPCs typically will contractually require all subs to obtain performance bonds to protect EPCs from the financial consequences of a default by the sub. Similarly, off-takers may contractually require the purchase of these bonds by distributors to ensure they provide uninterrupted delivery of solar energy as stipulated in their service agreements.
– Payment bonds. These bonds are typically required by investors and developers to make sure EPCs and contractors can make payments for labor and supplies so projects don’t suffer delays if a contractor defaults due to the insolvency of the contractor. EPCs may require subs to purchase these bonds as well.
– Power supply contract off-taker payment bonds. Investors and developers may contractually require off-takers to obtain a payment bond to make sure they pay for the electricity generated by the solar array in accordance with the off-taker’s power payment contract with the IPP, each month for the duration of the power agreement – and certainly for the first six years to avoid investor tax credit (ITC) recapture as well as to lessen the impact of potential depreciation recapture.
– Operations & Maintenance (O&M) bonds. Once construction of a solar array is completed, the financier/investor, IPP and end users all depend on its uninterrupted operation. O&M bonds address potential exposures when an IPP or EPC contracts or subcontracts the responsibility to maintain and operate the project for the life of the array. The bonds guarantee faithful performance based on terms stipulated in the O&M contract, reducing future risk of potential cash-flow interruptions and contractor replacement costs due to an O&M contractual default. They also mitigate against the potential recapture of the ITC should a default occur (subject to the stipulations specified in the O&M’s power contract with the IPP). Specialty bonds, such as “Interconnection Bonds” and others, may also be required.
As in large-scale commercial solar energy projects, there are multiple interdependencies involved in the financing, development, construction and operation of any small solar energy project. (As mentioned, these projects typically supply a commercial user with a capacity of up to 10 megawatts.) By contractually requiring the use of appropriate surety bonds, each participant can reduce their risks and help ensure they receive the specific benefits they are entitled to as stipulated in their individual contractual agreements.
To find out how surety bonds can reduce the risks and quickly restore the construction completion, day-to-day operations, power supply and payments to all parties and help facilitate the financing and development of your solar or renewable energy project, call the Unique Surety Renewable Energy Bonding team at 1-833-BONDSOLAR (1-833-266-3765) or email aliciawalter@
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