Renewable Energy, Storage & Distribution Bonds

In the event of being declared in contractual default by the developer/IPP, the carrier issuing the bond must pay all unpaid penalties as stipulated and restore the completion of the project. Since the carrier is assuming this liability, they have the right to replace the contractor or work with the existing contractor to complete the project. This bond protects the investor, developer, and IPP from loss of their investment and also prevents potential ITC clawbacks while safeguarding the end user/offtaker rights in their contract (PPA) to receive the energy they contracted for.

Payment Bonds, aka Labor and Material Bonds, guarantee that the contractor will pay certain subcontractors, laborers, and materials suppliers involved in the project for labor and materials in the event of contractual default.

Requiring a performance and payment bond makes it easier to finance a solar project for the EPC, developer, and offtaker and can assist an investor when monetizing or securitizing a single solar project or a portfolio of solar projects. Surety is not a credit enhancement. Surety is a contract performance guarantee that mitigates risk and fills an important gap, protecting the project from contractual default not otherwise covered by general property and casualty insurance.

Storage brings down the KWH cost and creates more value in the project asset. Energy storage makes a solar project more attractive for financing by adding reliability to energy output while also contributing to the ease of selling a more attractive solar project product to an offtaker/end user.

Successfully delivering the output of energy becomes the contractual obligation known as Operations & Maintenance (O&M).

It is up to the IPP and often its investors to decide upon the penal sum of the bond as the actual annual cost of the O & M company is often a modest sum. Penal sums can be in the amount equal to 1 year’s purchase of energy. Penal sums stipulate that the payment is for lost income, legal fees, and other soft costs incurred in the event of a contractual default. If the project is a C & I project, penal sums may stipulate a cost to disassemble the project since the parts can be used on another project in the event that the O & M contractual default causes a termination of the PPA with the end user/offtaker. These unique decisions are itemized and the terms stipulated in the O&M contract.

The performance bond guarantees the faithful performance of these stipulations or the carrier assumes liability in the event of contractual default. If the contract stipulates the prompt restoration of the project, which many do to avoid an ITC recapture, especially during the first 5 years of the life of the project, the carrier, in addition to paying penal sums, will also attempt to promptly restore the performance of the project by replacing the defaulted O & M group.

It may also facilitate monetization and securitization of projects.

Community Solar Distribution: The Two Most Common Methods

Method One:
Often, an investor, developer, or IPP sells the energy directly to a local power company and receives energy credits. These energy credits are sold to local homeowners and main street businesses by a Subscription Management Company (SMC). The SMC is contracted to initially subscribe a certain threshold of residential and small business end users. After the initial subscription, some of the original end users will need to be replaced due to attrition, lack of payment, relocation, or other reasons. The SMC is contractually required to replace these end users. They usually continue to manage the relationship between the IPP, end user, and local power company in order to satisfy any service issues and to assure the continued cash flow on behalf of the IPP. In some states, the SMC actually bills the power payment and collects it on behalf of the IPP. In other states, the local power company handles all or part of the billing and collection. All of the responsibilities expected to be faithfully completed are stipulated in the SMC service contract. The performance bond guarantees the faithful performance of the SMC contract in the event of contractual default.

Method Two:
The second most used method of energy distribution is where the IPP decides to sell the power credits to an offtaker/energy reseller company who contracts to purchase these credits, usually for the next 20-25 years at a certain price. The energy reseller, in turn, resells those credits to end-user homeowners and small businesses. The energy reseller also takes on similar tasks to the SMC as outlined above.

Solar Industry Performance Surety Bonds
Unique Surety offers a service performance bond for situations employing these two methods, as well as other custom contractual requests for community solar energy distribution. These bonds can be purchased on a 1-year, annually renewable basis (subject to annual underwriting review by the carrier) or can be purchased for up to a 5-year period on a non-cancellable basis during the 5-year period and renewable (subject to underwriting) at the end of the period. Carriers require bond premiums to be prepaid before the bond can be issued. The 5-year period is often requested in order to mitigate the risk of contractual default over a longer period.