Community Solar and C & I Projects should have Construction Performance and Payment Bonds AND Operations & Maintenance Bonds in place to mitigate the risk of contractual default and fill the gap not otherwise covered by traditional property and casualty insurance. It may also facilitate monetization and securitization of projects.
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.
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 upon themselves similar tasks to the SMC as outlined above.
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 and to avoid an investment tax credit recapture during the first 5 years of the project.
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