With a power purchase agreement, commercial facilities can take advantage of solar power without up-front costs. But there are a few caveats. Here’s what you need to know.
Solar energy is a hot topic in the building and construction industries and will continue to grow in the years to come. The popularity of this topic creates a demand for understanding solar power purchase agreements in the context of commercial projects, and it justifies nuanced considerations for owners of construction and commercial real estate companies.
A Solar Power Purchase Agreement (SPPA), also known as a Solar Power Purchase Agreement (SEPA), is an agreement between a facility or commercial property, called the host, and a supplier solar service provider, in which the host agrees to use a photovoltaic (PV) system from the solar service provider. This system converts sunlight into electrical energy through solar panels installed on a rooftop or a host’s property, in exchange for using the energy produced by the PV system. In this scenario, the hosts are businesses, government agencies, and educational institutions using solar electricity with no upfront charge by SPPA.
An SPPA is a performance-based agreement where the host pays the solar service provider for the energy produced by their system, which is installed on the host’s property. The solar service provider purchases the solar panels and other equipment required for the project from a photovoltaic panel manufacturer. Typically, the PV manufacturer provides warranties for solar equipment, provided it is properly installed. The solar service provider will carry out or subcontract the design and installation of the PV system itself, and is responsible for specifying the appropriate system components and arranging for follow-up maintenance throughout the lifetime. of the PV system.
The solar service provider functions as the project coordinator who can organize the financing, design, licensing and construction of the PV system. Many solar service providers have outside investors or developers who will provide equity financing that will receive federal and state tax benefits for the system. This is how the benefits of an SPPA can be offered at no upfront cost to the host. It may happen that the investor and the solar service provider form a special purpose entity (SPE). This allows the project to function as the legal entity that receives and distributes payments to investors for tax benefits and the sale of system output. The SPPA should explain how the solar service provider is organized and operates with respect to the host system.
Typically, the local utility is responsible for the maintenance of the host. They are also the interconnection between the PV system and the grid, and they continue to provide electrical service with the host. This is done to cover times when the system is producing less than the host’s electrical demand. Some states have net meters, also known as net energy meters (NEMs), which allow a host to store energy in the electrical grid. NEM is needed if the PV system is producing more electricity than needed. If the photovoltaic system produces more electricity than needed, the additional energy can be sent to the grid in exchange for credits from the local utility. These credits can be used during times when a host’s solar panels are by-produced, such as at night, and the host can use the energy stored in the grid at that time, at no cost, rather than paying. the public service according to the accumulated credits.
Most states have mandatory net metering requirements, including a cap on the amount that can be kept, while other states allow the utility to provide credit for excess electricity produced from the PV system. Some SPPAs expect the solar service provider to receive all credits.
The SPPAs include several different key players within the agreement. The duration of most RCEAs, in the commercial context, generally varies between 15 and 20 years. The duration of the agreement is usually negotiated between the parties.
Business considerations for an SPPA
There are several benefits that a host receives when participating in an SPPA. First, by using renewable energy, many hosts can make a difference to the environment and be part of useful sustainable business practices. Second, there is usually no upfront fee associated with entering into an RCEA. Third, the SPPA hopefully allows a host to guarantee low energy costs, but just be aware that there may be an annual price increase of between 1% and 5% to account for the efficiency of the system. Currently, it is known that system efficiency decreases as the system ages due to cell and battery memory, but technology improves system efficiency. Finally, some SPPAs will include a buyout option that will allow the host to purchase the system before the SPPA ends.
A host should also consider the following risks associated with an SPPA.
1. Under an SPPA, a host is generally required to purchase the generated electricity at a predefined rate. If prices drop, a host may be forced to pay too much for solar power.
2. Consider if, as a homeowner, you potentially pay less and save more by purchasing your own solar system with a cash purchase or a capital improvement loan and receive the tax credits. This of course requires that the host have the capital to accomplish the same and still enter into a contract for the installation of the systems, as well as a long-term service agreement with a contractor for maintenance.
3. A host must grant an easement or license to the solar service provider to have access to the installation and maintenance of the photovoltaic system on a building or property. The host should also determine how to allow access to their building or property while keeping the site secure. Damage to a property during installation and maintenance is a consideration, although a well-written SPPA spreads these risks.
4. Any contract is only as good as the solar service provider that a homeowner contracts with. Under an SPPA, the owner or manager of a building or asset has no right of ownership or control over solar equipment. For this reason, the host depends on the solar service provider to repair and maintain the system, which can be frustrating if the system is not properly maintained. If there are any issues with the PV system, the solar service provider is likely hired to pay for the operation and maintenance costs. It is important to ensure that the solar service provider is reputable, financially sound and will exist for twenty years and beyond. As the host of a commercial building or property, consider in an SPPA what happens if the solar service provider is acquired by another company, goes bankrupt, or simply closes the doors.
This list of considerations is not exhaustive. This list is for educational purposes only and does not constitute legal advice.
While there are always various factors to discern for any type of agreement between the parties, an SPPA can be a great option for a host for the reasons stated above. However, there are also benefits for a host to have control of their own PV system and to receive the tax benefits for the PV system. If you are a business owner interested in exploring an SPPA, consult with an attorney who understands the intricacies of an SPPA and make sure your risks and rewards are properly allocated and accounted for.
Matthew E. Cox, Partner, and Raziye Andican, Partner, are lawyers with Smith, Currie & Hancock LLP, at the firm’s offices in Columbia, South Carolina, and Tysons, Virginia, respectively.