A Standard Solar Contract Is Developed
- Written by Paul Schwabe and Travis Lowder
The U.S. solar industry represented a $11.5 billion market in 2012; more than 300,000 systems are in place. With new and more creative financing options, the market could grow even faster and be larger. A working group launched by the Energy Department through its National Renewable Energy Laboratory aims to lower the cost of capital for solar projects by standardizing contracts so that contractual elements like lease payments can be bundled and traded as investment products.
The solar industry currently utilizes a diverse set of contracts that can vary widely across developers or third-party finance providers. This can be confusing to consumers and a barrier for investors and the rating agencies that assess financial assets.
With those problems in mind, in October 2012 the Energy Department established under the aegis of the National Renewable Energy Laboratory, in Golden, Colo., a Solar Access to Public Capital (SAPC) working group. A three-year award under the department’s SunShot Initiative funds the project.
Last September the NREL working group issued standard contract templates. Having obtained input from stakeholders from the solar, financial and legal communities, the SAPC working group expects the templates to produce a range of benefits for solar developers, third-party finance providers and others.
The current template suite consist of three documents: a “residential lease, aggregated,” for developers with in-house installation practices; a “residential lease—disaggregated,” for developers using installation partners; and a “commercial power purchase agreement.”
Four primary benefits from the widespread adoption of standardized solar contract templates are anticipated. First, standardized contract templates should accelerate solar deployment by reducing the time and cost of the customer acquisition process—savings that can ultimately be passed on to the consumer. Second, standardized contract templates can reduce the due diligence requirements on both sides of the negotiating table by utilizing a familiar contract framework. Third, standardized contracts will improve customer transparency and inform the comparison of one contract offering from another. And fourth, the SAPC standardized contract templates aim to facilitate the pooling of cash flows into tradable investment vehicles desired by pension funds and other institutional investors critical to scale the industry.
As solar leases are increasingly “securitized” and traded in asset pools, like home mortgages, it would be difficult to evaluate the strength of the new financial instrument and ultimately the caliber of the underlying investments unless contracts are standardized.
Designated parts of the contract templates allow for limited customization to accommodate a variety of business models and unique contractual requirements of individual firms. This flexibility will also permit future contract versions to draw on continued innovations in business practices so as to reflect innovations and improvements.
The standardized contract documents are just one project of the SAPC working group, which includes more than 150 member organizations from the solar, legal, advisory and financial industries. The group aims to improve access to low-cost capital for solar through several activities designed to build investor confidence in the solar asset class. Additional risk reduction efforts to facilitate solar securitization and engage institutional investment include:
- Developing best practices in system installation and maintenance for consistency in build quality, operating performance and cash flow
- Constructing performance datasets to comprehend and enable mitigation of production risk
- Engaging the rating agencies to provide shadow ratings of mock residential and commercial portfolios to further the industry’s understanding of investor risk perception
To learn more about the SAPC contract templates and hear from three industry stakeholders leading the development of the SAPC contracts, see the Solar Energy Industries Association’s webinar: Hot off the Presses: Standardized Solar Contracts from NREL-Organized Working Group.