Solar Power Purchase Agreements & Leases

Conditions of Usage and Disclaimer 1 Estriatus Law grants the following copyright privileges and conditions of application and usage to this presentation: An unfettered license right is granted to all U.S. Green Building Council members to copy, reproduce, modify and utilize this presentation for the fulfillment of the legitimate business needs of their organizations. Estriatus Law retains an unfettered copyright license privilege to copy, reproduce, modify and utilize this presentation. All uses outside of those described above are strictly forbidden. Holders of this presentation failing to meet the above conditions are strictly forbidden by U.S. copyright law to copy, reproduce, modify and utilize this presentation in any format and by any method. This presentation is offered as is with no promise or commitment of legal support, completeness, applicability or accuracy. Estriatus Law makes no guarantees or warranties, explicit or implied, of any kind. 2

The mission of Estriatus Law is to expand the global market for solar energy. Ms. Lipanovich s experience includes drafting and negotiating solar-specific contracts from EPCs and PPAs to sales agreements to OEM agreements and IP licenses; lobbying for the successful uncapping of the residential solar ITC; assisting with the successful raising of over $44 million in financings; and drafting company warranties for solar products and services. 3

Overview of Topics 1 ONE: What Are Solar PPAs and Leases? TWO: People That Need to Be Involved to Make a Solar PPA Work THREE: What Contracts Are Needed for a PPA and What to Include In Them FOUR: How to Arrange a Solar PPA or Solar Lease 4

Power Purchase Agreement ( PPA ): An arrangement where one party generates electricity for the purpose of sale (the seller) and the other purchases the electricity (the buyer) over a set period of time. The PPA establishes the 1) financing, 2) relevant dates of the project coming into effect, 3) what happens if situations change, and 4) termination date. All sales of electricity are metered. Rates for electricity are structured to provide an economic incentive to creating the PPA. PPA company owns system, however, building/site owner gets LEED points. Solar Lease: Unlike under a PPA arrangement where a party sells each kwh produced from a solar system, under a solar lease, a party leases equipment (solar system) to the customer. PACE (Property Assessed Clean Energy): Customer finances the cost of solar and/or energy efficiency improvements through a special tax assessment on their property. Should they move before 20 years, unlike a loan, the new home owner takes over the payments. 5

PPAs Are A Driving Force Behind Solar 6

Benefits of Solar PPAs and Leases 1 Price stability and affordability LEED benefits Energy resources account for 17 possible LEED points, the largest point block among the different sustainability categories under review. No large capital outlay No need to become a solar project expert No hassles trying to collect incentives Solar PPA and leasing companies can be sales lead generators and provide co-marketing support. 7

Federal ITC/Cash grant - The Section 1603 cash grant program expired December 31, 2011, and it is uncertain whether it will be renewed. With the expiration, PPAs and solar leasing models need to rely on tax equity investors to fully monetize the ITC. However, the tax equity market is limited and integrating tax equity into deal structures is more complex than using the cash grant program. Each project needs to stand on its own financial legs Time consuming and costly to put in place For commercial PPAs Size Requirements - Typically the smallest project size that is attractive to investors is around 50kW to 100kW. Many deal constraints 8

Overview of Topics ONE: What Are Solar PPAs and Leases? TWO: People That Need to Be Involved to Make a Solar PPA Work THREE: What Contracts Are Needed for a PPA and What to Include In Them FOUR: How to Arrange a Solar PPA or Solar Lease 9

SOLAR CUSTOMER Customer who is buying the energy LOCAL UTILITY GOV T (FED, STATE &/OR LOCAL) SITE HOST Provides either roof or land space in exchange for rent EPC CONTRACTOR Solar contractor that designs, builds and sells the solar system Site Lease O&M Agreement EPC Contract PPA OWNER LLC ( PPA COMPANY ) Usually a special purpose entity who owns only one asset which is the solar system Purchase & Sale Agreement DEVELOPER People with expertise to design, structure and manage deal Developer secures financing, design, install, monitoring, and maintains the project [Stimulus Grant (30%)] or ITC LLC/ Sale- Lease Back Loan Documents TAX EQUITY INVESTOR Entity with ability to utilize the tax credits (ITC) generated by project Currently, must have someone who has tax appetite in order to make a PPA deal happen LENDER Entity wiling to provide cash financing for construction lending, and financing over the period of the project 10

Overview of Topics 1 ONE: What Are Solar PPAs and Leases? TWO: People That Need to Be Involved to Make a Solar PPA Work THREE: What Contracts Are Needed for a PPA and What to Include In Them FOUR: How to Arrange a Solar PPA or Solar Lease 11

Power Purchase Agreement Site Lease Engineering, Procurement and Construction ( EPC ) Agreement Operation and Maintenance Agreement Interconnection/net metering/transmission agreements LLC formation agreement/sale-lease back Purchase and Sale Agreement Performance/Surety Bond 12

Power Purchase Agreement Backbone to the Project Governs purchase/sale of electricity and key to financeability of project Between Owner of solar system and Customer (Energy User) Key PPA Terms to Negotiate 1. Pricing May be 1) fixed, 2) fixed with an escalator, or 3) tied to a discount of utility rate Typically set below electricity rate and have an escalator increasing on an annual basis over life of PPA to account for inflation Put pricing in exhibit so it can be modified and lay out in grid format for every year of service term to make sure clear to everyone what price is at each particulate time Tax issue: make sure price for electricity is within FMV. If average price per kwh being sold is too minimal, the issue arises as to whether customer really owns system from the get go. Thus, can t be extremely cheap even though typically lower than grid supplied electricity 13

Power Purchase Agreement (cont.) 2. Term & Renewals Long life and need to have predictable cash flows to allow project to be financed. Typically, 15, 20, and 25 years with 20 years most common and options to extend. Need to make that ownership of solar system is not transferred or leased to Customer by the PPA terms because PPA needs to be a service provider E.g., problem if Customer has rights for too long. General Rule: Make sure still 20% of useful life and 20% of residual value of project remaining at end of PPA Term. Commercial operation date (date host customer must buy electricity and PPA must sell) determines beginning of PPA s term, which occurs after construction ends. It s important to match this up with real property agreement (lease) so that lease is in effect for all Service Term. 3. Delivery Point 14

Power Purchase Agreement (cont.) 4. Termination Generally pretty tight as don t want PPA to be terminated easily since whole point is a steady stream of cash flow Events of Default If Owner is non-defaulting party, PPA should set out early termination fee on a schedule If Customer is non-defaulting party, PPA will include right to remove the system and/or right to exercise purchase option 5. Conditions PPA must include details related to transfer of ownership in the event the property is sold; for instance, good to include that Customer can assign PPA to a purchaser of Site without PPA Owner s consent Critical to ensure no obstructions allowed during Service Term Must prohibit Customer from permitting/installing anything which could cause effect of reduced output of system Should give Owner right to terminate PPA without liability if obstruction occurs Must address interruptions in service as expected and repair & maintenance 15

Power Purchase Agreement (cont.) 6. Performance Guarantee If customer wants assurance Owner can make its energy commitments then should offer to provide repair and maintenance. E.g. PPA company should always push back on these requests (as should EPC; and which EPC can argue if getting pressured by PPA) 7. Ownership of environmental attributes & financial incentives For tax purposes personal property not fixture or real property Need to ensure it remains eligible for tax incentives so don t want it to be considered party of building and want to prevent any underlying mortgage from having a claim on the system 8. Taxes Benefits & burdens analysis - Okay to shift burden on customer for taxes however goal is to ensure that any shifting would not result in shifting of ownership of system to the Solar Customer Generally tax professionals prefer PPA Owner pays taxes on sale of energy 9. Liquidated Damages 16

Power Purchase Agreement (cont.) 10.Right to Purchase Options Allows Customer to purchase system at various times as project goes forward Typically two times when Customer can exercise purchase option: If PPA Owner defaults; OR At expiration of service Term Usually, PPA s will also include a buy-out option on equipment, typically in the 6th or 7th year, in which the system is sold at FMV to the Customer. Most importantly, at time of Purchase Option the value of the sale price of the System must be FMV. Most common mistake in PPAs is not having a FMV pricing mechanism. Good to have tax expert check. FMV requirement meant to protect the rule against Customer not be the owner of the system from the get go. E.g., it must be a service agreement. Okay to have sale price set as the greater of the # or FMV, which will still ensure Owner is going to hit their return. Often sale price set by either mutual agreement or an appraiser. Don t want a PPA recalculated as a lease because creates an accounting and tax mess. 17

Power Purchase Agreement (cont.) 11.Lender protections Before Customer can exercise right to purchase in event of PPA Owner default, Lender will get option to cure. Lender will always want this provision. Note: For a lease, needs to be a true lease for tax purposes, so that you can lease the property to the Customer and the system owner has the tax or can still keep the tax benefits. Make sure host customer is one you can properly lease the system to and still maintain the tax benefits. For a lease, 50 to 100 kw system size is uncommon. 18

Use of Site Location Developer must usually prove it has Site control for purposes of financing Site host will usually have concern with long length of Site Lease agreement Can be a difficult negotiation if modest rent payments and high penalties Term & Renewals Term must match term of PPA; thus, usually long term Conditions Lease must be identified as personal property for purposes of preserving the tax benefits of the PPA; e.g., cannot be considered a fixture on the property Include covenants to maintain access to sunlight Due diligence prior to project to inspect surrounding structures If potential issues need to get some kind of agreement to protect sunlight access from neighboring property (agreement or easement) Rent usually fixed rent amount or percent of revenue Access developer needs access for testing/site investigation, construction, O&M Liquidated Damages 19

The Engineering, Procurement and Construction Agreement ( EPC ) is the solar installation agreement between the Developer and the Solar Contractor May be a single master EPC or an EPC signed for each project Important to not underestimate time and cost involved in negotiating and finalizing these agreements Key EPC Terms 1. Construction and Milestones Milestone payment process, engineer review, Site inspection 2. Specifications Important as used to determine projected energy output 3. Pricing Fixed-price, turnkey contract; change order process, structural and/or geotechnical surveys Termination for convenience 20

4. Warranties Materials and workmanship warranties length and details Performance (energy output) warranty may be asked to guarantee energy produced from the system. Typically required/requested by investors to minimize exposure. Contractor may be required to reperform if fails to meet energy output in specifications; e.g., redesign, etc. How to mitigate risks for EPC contractor: Make long term rolling average of power delivered Offset or bank if ahead of the curve to offset against lower output times Ensure have force majeure outs and outs that include if neighboring property or regulations change 5. Milestones and Liquidated Damages L.D. usually included to provide timely performance around construction for delay 6. Guaranteed Output and Liquidated Damages L.D. for performance amount of electricity delivered 7. Subcontracting 21

Typically entered into by EPC contractor Allows them to mitigate their own risk related to warranties, so advisable Pricing and expenses Usually fixed fee by month or year that cover routine items and separate pricing mechanism for any unusual things that might come up Term Matches PPA term Access Needed over life of PPA 22

Interconnection/net metering/transmission agreements LLC formation agreement/sale-lease back Between owner and tax equity investor Depend on how deal is structured Likely to be heavily scrutinized Covenants about Keeping everything in place for set period of time How the owner company is managed How distribution of money from PPA occurs Essential for ensuring that right person owns property from purposes of federal tax perspective Purchase and Sale Agreement Performance/Surety Bond 23

Overview of Topics ONE: What Are Solar PPAs and Leases? TWO: People That Need to Be Involved to Make a Solar PPA Work THREE: What Contracts Are Needed for a PPA and What to Include In Them FOUR: How to Arrange a Solar PPA or Solar Lease 24

What information needs to be submitted? All electricity information on existing buildings or electrical consumption assumptions on new buildings that have not yet been built. Information about the credit worthiness of the Customer, the specific property and type of PV desired to be installed. For some PPA providers, like SunRun, installers can get pre-qualified. Who to contact for solar leasing information? Residential solar lease providers: Sungevity, SunRun, Solar City Commercial solar lease providers: Sugevity, Technology Credit Corp. Who to contact for PPAs? Residential CA PPA providers: SunRun, Clean Power Finance, Heliomu PPA Commercial PPA providers: Tioga, Solar Power Partners, MMS Renewable Ventures, SunPower Corp. Private project basis: Attorneys with experience in PPA deals who will bring in accountants, etc. 25

Conclusion 1 In summary, solar PPAs and leases are a financial arrangements where a third-party owns and operates a solar system on someone else s property and someone agrees to either lease the equipment or buy all of the electricity generated by the system over a set period of time. Solar PPAs and leases continue to be of growing importance in helping customers pass the high upfront hurdle of purchasing a solar system as well as a key tool for solar contractors to increase their sales numbers. The legal framework is a barrier to implementation. However, business and legal professionals have developed expertise to make it possible for all solar contractors to successfully utilize solar PPAs and leases to finance projects. 26

Angela Lipanovich, Esq. 2222 East Cliff Drive, Suite 216 Santa Cruz, CA 95062 USA alipanovich@estriatuslaw.com 855.765.5297 27