If you are considering a solar energy project for your home or business, it’s probably because you want to generate your own electric power, secure electricity price predictability, lower your environmental impact, or take advantage of financial incentives that have never been better.
In the long-term, obtaining those benefits will depend on many factors, including a sound financial model, quality components and installation, and skilled operation and maintenance — all of which should be spelled out in the project’s contractual terms.
Those terms need to address all the key issues that may arise and must be clear, fair and reasonable. Agreement terms and deal structures can vary widely, so here are some important factors to be aware of when considering a solar energy project:
Amount of power generated: Systems can be sized to meet some or all of a user’s needs, and even to generate more electricity than a user’s annual consumption. Many installers will estimate, but not guarantee, a certain amount of production. If the system generates more in a day than the user needs, the remainder can often be net-metered onto the electric grid, giving the generator a credit from the utility company, or batteries may be installed to store power for later use.
Owner of the power: Typically, the generated power belongs to the system’s owner. However, there are instances in which the property owner owns the system but agrees to pay for it over time by purchasing the electricity generated from the installer at a negotiated cost.
Owner of the system: The owner of the property on which a system is installed will usually own the system, but the system could be leased to the owner by the installer (sometimes with an option to purchase), or owned by the installer, and the user pays for the power generated during an agreed period (a “power purchase agreement”).
System components, installation, interconnection and warranty: Most systems are designed and customized for the specific site (e.g., an existing roof or wall, or a new ground-mounted rack), and will have a specified number of panels whose wattage, manufacturer, size and appearance are all specified, along with what inverters will be used to convert the direct current (DC) power generated by the solar panels into alternating current (AC) power suitable for home or business use. Typically, the installer will obtain all necessary interconnection and building permits, and provide warranties on the installed equipment and the installation itself.
Financing and financial incentives: System purchasers can usually pay in full, take a financing option offered by the installer, or get other types of financing. Solar and other qualified renewable energy projects may be eligible for federal and state tax incentives such as accelerated depreciation, installation or production-based tax incentives, or investment tax credits, rebates and subsidies. Depending on qualification requirements, these incentives can often cover a substantial portion of the initial capital cost of a system (typically 30% or more), thus reducing the time period until the system pays for itself and starts generating “free” power.
Environmental attributes: Whether through a state program or private markets, solar projects may be eligible for financial benefits based on the amount of greenhouse gas emissions they help to offset or avoid. A system’s environmental attributes, such as renewable energy credits, carbon credits, or emissions allowances could add to a project’s cash flow, thereby enhancing the return on investment.
Property taxes: In some states, certain solar projects may be eligible for property tax exemptions — the availability of which may depend on the deal structure chosen.
Insurance: The installation of a system on a building can potentially be added to the building’s existing property and casualty pol icy, while free-standing and larger systems may necessitate a separate policy. The nature and extent of such policies and actual coverages may vary.
Operation and maintenance: In many instances, solar systems require only occasional maintenance and cleaning. However, when a system goes down, because of the life safety dangers inherent in electrical generating equipment, it is important to have ready access to a qualified technician to diagnose the problem and make repairs.
Other options: Consider whether the right option for you or your business is to buy into a community solar project if your own property isn’t suitable for a system. Or consider whether leasing your undeveloped or underdeveloped land for a solar project that can generate a potential revenue stream for you is of interest.
Installing a solar system is a great way to help the environment, and can be a good investment as well. The potential savings to the end user can be substantial, especially for projects that qualify for the many available financial incentives available. Carefully negotiated agreement terms can help ensure that your solar project delivers on its promises.
Tom Burack, Jon Liland and Lynn Preston are shareholders at Sheehan Phinney, often collaborating on environmental and energy projects for business clients.
