With a power purchase contract, commercial facilities can use solar energy without upfront costs. But there are a couple of caveats. Here’s what you should 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 makes it necessary to understand sales contracts for solar power in the context of commercial projects and requires nuanced thinking for commercial property owners and construction companies.
A Solar Power Purchase Agreement (SPPA), also known as a Solar Energy Purchase Agreement (SEPA), is an agreement between a commercial establishment or property called a host and a solar service provider, with the host agreeing to use photovoltaic (PV ) System of the solar service provider. This system converts sunlight into electrical energy through solar panels installed on a host’s roof or property in exchange for using the energy generated by the PV system. In this scenario, hosts are corporations, government agencies, and educational institutions that use solar power with no upfront cost per SPPA.
An SPPA is a performance-based arrangement in which the host pays the solar service provider for the energy generated by its system installed on the host’s property. The solar service provider procures the solar modules and all other devices required for the project from a PV manufacturer. Normally, the PV manufacturer gives guarantees for the solar system, provided that it is properly installed. The solar service provider either carries out the planning and installation of the PV system himself or commissions it as a subcontractor, and he is responsible for specifying the suitable system components and arranging for post-maintenance over the life of the PV system.
The solar service provider acts as a project coordinator who can organize the financing, planning, approval and construction of the PV system. Many solar service providers have outside investors or developers who provide equity funding that receives the state and federal tax breaks for the system. This allows the host to be offered the benefits of an SPPA with no upfront costs. It can happen that the investor and the solar service provider form a special purpose vehicle (SPE). This allows the project to act as a legal entity that receives and distributes payments from tax breaks and the sale of the system service to the investors. The SPPA should explain how the solar service provider will be organized and operated in relation to the host’s system.
Generally, the local utility is responsible for maintaining the host. They also establish the connection between the PV system and the grid and continue to provide the power service with the host. This is done to cover the periods when the system is producing less than the host’s electricity needs. Some states have Net Metering, also known as Net Energy Metering (NEM), which allows a host to store energy on the grid. NEM is necessary if the PV system produces more electricity than is required. If the PV system produces more electricity than required, the additional energy can be fed into the grid against credits from the local energy supplier. These credits can be used at times when a host’s solar modules are producing too little, e.g.
Most states have some mandatory net metering requirements, including a cap on the amount withheld, while other states allow the utility to provide credit for excess power from the PV system. Some SPPAs stipulate that the solar service provider receives all credits.
SPPAs include several different key players within the agreement. Most SPPAs typically run for between 15 and 20 years in a commercial context. The duration of the contract is usually negotiated between the parties.
Commercial Considerations for an SPPA
There are several benefits a host can get when attending an SPPA. First, by using renewable energy, many hosts can do something for the environment and participate in helpful sustainable business practices. Second, there are generally no up-front costs involved in completing an SPPA. Third, the SPPA will hopefully enable a host to have low energy bills, but just know that there can be an annual price increase of between 1 and 5 percent to account for system efficiency. Currently, it is known that the system efficiency decreases as the system ages due to the cell and battery storage, but the technology improves the system efficiency. Finally, some SPPAs include a buyout option that allows the host to buy 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 electricity it produces at a predetermined price. When prices go down, it is possible that a host is paying too much for solar energy.
2. As the owner, consider whether you could pay less and save more by purchasing your own solar system with a cash purchase or a capital improvement loan and receiving the tax credits. Of course, this assumes that the host has the necessary capital and still has a contract to install the system and a long-term service contract with a contractor for maintenance.
3. A host must grant the solar service provider either an easement or a license in order to gain access to the installation and maintenance of the PV system on a building or property. The host must also determine how to provide access to their building or property while keeping the site secure. Damage to a property from installation and maintenance needs to be considered, although a well-written SPPA will map these risks.
4. Any contract is only as good as the solar service provider with which an owner concludes a contract. Under an SPPA, a building or land owner or manager has no ownership or control over the solar system. Because of this, the host relies on the solar service provider to fix and maintain the system, which can be frustrating if the system is not properly maintained. If there are problems with the PV system, the solar service provider will likely be charged with assuming the operating and maintenance costs. It is important to make sure that the solar service provider is reputable, financially sound, and will last twenty years and more. As a commercial building or real estate operator in a SPPA, consider what happens if the solar service provider is taken over 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 is not intended to provide legal advice.
While there are always various factors to consider in any type of agreement between the parties, an SPPA can be a good option for a host for the reasons listed above. However, there are also benefits for a host to be in control of their own PV system and get the tax benefits for the PV system. If you’re a commercial owner interested in exploring an SPPA, reach out to an attorney who understands the intricacies of a SPPA and make sure your risks and rewards are properly assigned and settled.
Matthew E. Cox, Partner, and Raziye Andican, Associate, are attorneys at Smith, Currie & Hancock LLP based in the firm’s offices in Columbia, South Carolina and Tysons, Virginia, respectively.