The process involved in generating, purchasing or selling solar power can be quite complex. Many times, legal counsel can be helpful in understanding a broad range of issues and can help guide their client through the project to maximize opportunities and to avoid potential pitfalls. Attorneys with the environmental and energy law firm of Manko Gold Katcher & Fox shared 10 fundamental topics that may need to be addressed in the course of a solar project in an article that originally appeared in “The Legal Intelligencer”1 (June 2011, Volume 243, No. 113, which can be found at www.mankogold.com). Updated excerpts from the original article can be found below:
Transaction Structure
The majority of consumer-scale solar projects are structured in three typical ways, each of which has its own benefits, costs and complexities: (1) power purchase agreements (PPA), under which an energy consumer purchases the solar power generated by a solar energy system physically located at such consumer’s property, but which solar energy system is owned, operated and maintained by a third-party; (2) solar energy system ownership, where an energy consumer purchases, owns and maintains a solar energy system and uses the generated solar electricity for its power needs; and (3) solar energy system leasing, a financing alternative to ownership.
Incentives
The largest and most widely used incentives include tax credits, which may provide qualifying entities with a tax credit equal to a certain percentage of the eligible costs of a solar energy system, grants, rebates and/or attractive loan programs for qualifying solar projects. Often, a combination of incentives is used to increase the economic returns on a solar project.
Financing
Purchase money for solar energy systems is typically a mix of existing and new equity (e.g., cash on hand and new cash raised for the specific project), and debt. There is no one-size-fits-all financing solution, and most projects are completed using a combination of both equity and debt.
Siting, Zoning and Permitting
It is important to ensure that the project can be constructed in compliance with all applicable environmental, land-use and zoning requirements and that all necessary permits to construct and operate the system can be obtained in a timely manner. The availability of liability protections from environmental regulatory agencies may also need to be assessed. In addition, it may be necessary to secure leases, easements and other access rights when a solar project is hosted on a third-party’s property.
Engineering, Procurement and Construction
Since large solar energy systems can easily cost in the tens of millions of dollars, EPC contracts should be drafted and negotiated to clearly set forth both parties’ respective obligations and responsibilities.
Energy Regulation
The point at which private individuals or entity generating solar electricity becomes a regulated utility may depend on whether such an individual or entity consumes the power it generates, sells power to third-parties under a PPA or to the public generally through the grid. These questions can be jurisdiction-specific, and it’s important for a solar power provider to evaluate and resolve these and other similar regulatory questions up front. Likewise, physically interconnecting a solar project with an energy customer’s electrical infrastructure or the grid can be highly regulated and the parties involved must understand the regulatory framework, the RTO interconnection rules and the requirements of the local public utility.
Renewable Energy Credits (RECs)
If intending to use a REC for purposes of meeting above-code programs such as for LEED-certified green building projects, it will be important to ensure compliance with those program requirements. As with all commodities, monetizing REC values can require both business and legal expertise.
Allocation of Risk
A solar energy system’s failure to perform as predicted can have significant economic effects, and anticipated cost savings can quickly vanish. In addition, if the regulatory programs or incentives fueling the REC market are modified or revoked, the assumed financial benefits may not be realized. While these and other iterations of operational and regulatory risk cannot be eliminated entirely, informed participants in the solar industry should identify and evaluate such risks, contractually allocate them accordingly and strive to ensure that deal pricing accurately reflects such allocation.
Operations and Maintenance
System owners may seek to engage a third-party contractor to perform operations-and-maintenance services. The ongoing costs of such services should be factored into the owner’s financial models. Further, maintenance responsibilities should be accounted for in addressing the allocation of operational risks.
Market Conditions
Solar energy development and regulatory programs are linked. Counsel can assist by staying up to date on developments in the solar marketplace and the legislative and regulatory arenas. As conditions change, counsel can help consult on the potential effects to solar projects. This can be a key factor in making reasonable predictions regarding the future of the solar market and to maximize opportunities for solar success.
Article was originally written by Manko, Gold, Katcher & Fox Partner Brenda Gotanda, Esq, LEED AP and now revised by MGKF’s Brett Slensky, Esq.
Tell Us What You Think!