Solar Energy for Community Associations – Contract Formation and Risk Management

It is important for any community association considering pursuing a solar lease or power purchase agreement (PPA) to budget for the cost of two important preliminary matters, a feasibility analysis and legal costs.  Skimping on either could ensure the ultimate failure of your efforts, costing the association considerably more money in the long run. 

With respect to a feasibility analysis, I am not talking about the relatively simple analysis performed by single family residential solar installers, comparing a home’s annual electric power use and applicable tariff rates to the anticipated cost and rate reductions of a solar system.  A community association’s solar power needs will be the equivalent of a larger scale commercial solar system, and the cost/benefit analysis for such a system is considerably more complex.  Investors (the prospective system owner for the lease or PPA) will want to see a detailed feasibility analysis in order to determine whether the numbers work for them from an investment standpoint.  Project scale and net metering challenges must be addressed in such a study, so that it can then be used as the basis for the financial terms of a proposed PPA.  Typically, a project which cannot achieve close to a zero balance net metering result is not economically feasible.  As the cost of solar energy system installations drops, and with the passage of AB 920 requiring utilities to roll over or buy surplus production credits effective January 1, 2011, investors will likely be placing less emphasis on achieving zero balance and more emphasis on tax incentives and other benefits of the investment, so exact scaling should become a less critical factor, but investors will still be unwilling to fund a system the feasibility of which has not been determined by a qualified professional.  Unfortunately, unlike our neighbors in Canada, there is currently no funding available to help subsidize the cost of a multi-unit residential solar project feasibility study (with the exception of affordable housing projects).  Nevertheless, it may be necessary for an association to incur the cost in order to attract investors.  A large scale solar installer may be willing to share in the cost, however, and some large scale installers have their own in-house professional engineering staff to perform detailed feasibility studies. 

When it comes to negotiating and drafting the lease or PPA itself, board members must understand and appreciate that, unlike the vendor, maintenance and repair contracts they are accustomed to, a solar power lease or PPA will by no means be a “one size fits all” or “industry standard” contract.  The array of issues which must be addressed, just a few of which I will touch on below, and the very long term nature of the agreement, will require careful negotiation and drafting.  Missing or inadequate contract terms will be fertile ground for future disputes between the parties, undermining the viability of the parties’ long term relationship.  Any association interested in pursuing solar power should, therefore, budget for the necessary legal costs associated with the formation of a complex legal agreement such as a PPA. 

The very long contract duration will also require the careful selection of contracting “partners” (the system installer and owner), and the maintenance of  a cooperative and collaborative relationship over the term of the contract.  Because of the length of the contract, due diligence regarding the financial health and long term viability of the system owner will also be vital.

With respect to the terms of the agreement itself, the scope and complexity of a PPA is much more akin to the construction agreements for a new development than to any contract the board of directors will have previously entered.  Installation, maintenance and operation risks will need to be identified, managed and insured.  In addition, the agreement will have to address such financial issues as buy out options and costs at the end of the contract term, warranty coverage and costs, system performance and monitoring (and how attendant risks are allocated between the parties) and dispute resolution mechanisms.  Liability risks and insurance coverage (both property and liability) must also be addressed, and in a way which accommodates the fact that risk exposures for solar power projects and, therefore, the commercial insurance market to cover such exposures, is evolving, and will likely continue to evolve over the term of the agreement.  The insurance issues in particular will need to be carefully considered since, while property and liability insurance coverage for owners, maintainers and users of solar power systems has become increasingly available since insurers first began issuing “green” commercial insurance endorsements in 2006, such coverage is often provided via “manuscript” as opposed to standard form policy provisions, and not all insurance brokers understand the risks or available coverage options. 

Finally, issues specific to community associations will need to be understood by all parties and carefully addressed.  Membership approval will be required due to the long term nature of the lease or PPA, and easement or license agreements will also be required, both of which will require time to achieve.  Since government granted financial incentives are as important (or more so) to system investors than expected revenues from sale of the power produced, and some incentives are time sensitive (requiring completion of the project within a specified time frame), failure to address the time required to satisfy these community association specific legal requirements may not only undermine the relationships between the parties, but resulting damage to the financing entity may expose the association to potential legal liability for which no insurance coverage is available.  This risk must, therefore, be adequately identified and managed by the parties.

The good news is that all of this is achievable, and has been successfully navigated in the context of PPA agreements for commercial and institutional building solar projects.  There is no reason why these issues cannot be addressed for community association solar energy projects as well, if community associations are careful to work with investors and installers who are familiar with such projects, and have legal representation to help them through the process.

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