What Contractual Documents Are Essential For Long-Term Financing of Large-Scale Solar Power Systems

Financing of large-scale projects is generally quite complex and involves numerous parties. Some of the important issues that form essentials of the projects include establishment of the contractual framework, engineering, procurement and construction documents, operation and maintenance procedures and agreements, concession deeds, a shareholder agreement, agreements between lenders and owners, loan agreement conditions, intercredit agreement among multiple lenders, and much more. Essentially all major project financing contractual documents consist of three fundamental categories, namely, shareholder or sponsor documents, project documents, and finance documents.

Engineering Procurement Construction (EPC) and Contractual Documents

The main purposes of engineering, procurement, and construction documents as they relate to sustainable and solar power energy generation projects must include guidelines and obligations for engineers and contractors for design, construction, and delivery of turnkey projects that include predefined performance specifications.

  • Project specification, which must include a thorough feasibility study, which must be substantiated by EPC contractors
  • Outline of expected project finance ceiling
  • Payment methodology
  • Completion of engineering and construction schedule
  • Completion of guarantee date and liquidation damages
  • System performance guarantee

System Operation and Maintenance Guarantee Agreement Document

  • Definition of operation and maintenance services
  • Responsibilities of O&M contractor
  • Nature and provision of services
  • Liquidated damages
  • Schedule of fees

Shareholder Agreement

  • Percentages of capital injected funds
  • Voting requirements
  • Resolution of disputes and jurisdiction of law
  • Shares and dividend policy
  • Management of special purpose venture (SPV)
  • Disposal and preemption rights

Off-Take Contractual Agreement

  • Off-taker’s payment obligation for energy received
  • Definition of PPA entity responsibilities
  • Long-term sales contract agreement as regards the price of a unit of energy and amounts of energy produced (subject to agreed market index)
  • Agreement as regards energy cost escalation, O&M cost inflation, and system power output degradation
  • Variability of energy supply
  • Availability and consistency of energy supply

Loan Agreement

  • General loan conditions
  • Conditions required for each capital drawdown
  • Conditions under which the loan obligations must be paid
  • Payment mechanism and methodology
  • Interest payment
  • Financial obligations and covenants
  • Dividend restrictions
  • Warranties

Creditor Agreements

  • General terms and conditions
  • Order of drawdown of capital
  • Cash flow
  • Limitations and liabilities of creditors, their rights and obligations
  • Voting rights
  • Notification of defaults
  • Order of applying the proceeds of debt recovery
  • Subordination principles that may apply between senior and junior debt providers (also referred to as mezzanine debt providers)

Term Sheet

  • They take advantage of federal and state tax incentives, which may otherwise have no value for public agencies, municipalities, counties, nonprofit organizations, or businesses that do not have significant profit margins.
  • Properties where renewable energy systems equipment and materials such as solar PV power support structures are installed must be leased for the entire duration of the contract agreement, which may exceed 20 years.
  • Solar power or the renewable energy system must be connected to the electrical grid.
  • Power generated by the renewable energy system must primarily be used by the owner.
  • Depending on the lease agreement, excess power produced from the power cogeneration system is credited to the third party owner.
  • Equity of the leased property must have liquidity value exceeding the value of the project.

Power Purchase Agreement

In the United States, the Solar Power Purchase Agreement (SPPA) contracts are contingent upon the federal solar investment tax credit, which under the Emergency Economic Stabilization Act of 2008 was extended to fiscal year 2016. In general, SPPA financing benefits profitable entities that are subject to taxation, which can take advantage of the federal tax credit. To take advantage of the credit, groups of investors, solar power providers, finance and lending organizations, and solar power contractors create special purpose PPA entities that finance, design, install, monitor, and maintain solar power system installations for the duration of the PPA contractual life cycle.

The American Recovery and Reinvestment Act, which was passed in 2009, permits the solar investment tax credit to be combined with tax exempt financing, which allows significant reduction in capital investment in PPA type projects.

Power Purchase Financing

Under PPA contracts, the electrical energy provider assumes total responsibility for funding, engineering design, construction, maintenance, and monitoring of energy production. The PPA provider also assumes complete responsibility for the sale of electrical energy at an agreed contractual price for the term of the contract, which may extend for 20–25 years. In some instances, the purchaser of the electrical energy is offered various options to renew the PPA contract at the end of the contract or to purchase the solar power system at a predetermined fair market value.

Power purchase contract agreements are considered as legally binding throughout the terms of the agreement. In general, the power purchaser is obligated to buy the power generated by the solar power system; likewise the power provider agrees not to sell the power to other clients.

PPA Termination Date

As mentioned, PPA contract agreements expire upon completion of their agreement life cycle. However, under certain circumstances both parties may be allowed to terminate their contract under certain conditions, which may include system underperformance, degradation of energy delivery, or unavoidable natural disasters such as earthquake, hurricane, and flooding. PPA contracts may also include terms that allow buyers to reduce their energy use in the event that the after tax value of electricity is changed to the purchaser’s disadvantage. In some instances, PPA contracts may also include terms that may allow parties to negotiate a force majeure to mitigate the issue.

In PPA type agreements electrical energy either can be delivered either on the high side of the entrance service transformer (also called a bus bar sale) or to the distribution side of the transformer.

Power Purchase Price