Solar MBA: Contract Financing Language, Site/Land Leases and MOU’s

Chris Lord and Keith Cronin tackle student questions on the Solar Executive MBA Discussion board…

Power Purchase Agreement Financing Language

Student 1: I have a follow up question about Power Purchase Agreement (PPA) financing. You indicated agreements with penalties for failure to deliver power, or get the system built, are very difficult to finance. What is typical (and/or financeable) agreement language regarding system performance, uptime, annual kWhr production guarantees and the like?

Chris Lord: Good question, but do you mean for a PPA or for the System Owner under EPC (Engineering, Procurement and Construction)? Do you mean utility scale or distributed generation?

In all cases, the devil is in the detail… so, it’s sometimes hard to compare one project to another.

Ideally, the DG PPA is a simple obligation for the PPA Customer to take whatever power is made. No penalties, no guarantees, and no liquidated damages. For smaller projects this is critical because there just aren’t enough economics to justify making long and meaningful liquidated damage payments. Under an EPC, you will have a warranty, a performance test (typically at or around COD), and some commitment to uptime (though this is often no more than a “design” criteria). Starting with the latter, the uptime commitment is typically only worth anything if the O&M Provider is the same party as the EPC Contractor. (If they are different parties, you can bet there will be finger pointing.) For the performance guarantee, under an EPC, particularly on larger C&I projects, you may see a 95% or higher guarantee – but that guarantee usually just goes to conversion efficiency. This means that whatever insolation the panels will receive defines the base point, and the conversion of that insolation into electricity (system efficiency) will meet the System’s design target at the time that the test is performed. If you are the contractor, of course, you want the test earlier, before the punch list is completed. You might also have an availability target (again more of a design criteria than an actual warranty) but all of these are for delivery or in rare cases the under-warranty years (typically 2 to 5 years).

Utility projects are different and the bigger they are, the more likely you are to have a PPA with security deposits against COD, and annual production minimums (70% or so) averaged over one or two years during the PPA. Any investor, owner or lender for the project will want the EPC and O&M Agreements to have extremely similar requirements so that the project exposure is minimized. This is never completely achieved, as no EPC warrants beyond five years, and most will warrant for two or less.

Contract Document Explanations

Student 2: What’s the difference between main difference and purpose for the Site lease, Land Lease and the MOU?

Keith Cronin: Good questions!

They all have specific attributes and some have overlap. There are some terms within each one that can be seen in others.

1. A site lease can be for a specific piece of property with terms and conditions associated to the deal as it relates to the project and its connection with the covenants with the utility and any respective 3rd party authorities.
2. A land lease is (or can be) similar to a site lease. Sometimes a land lease is simply a document that is drawn up between you, the developer and the owner of the land. This might not have any attributes of item 1 above or item 3 below.
3. An MOU, or Memorandum of Understanding, can be used in many ways, depending upon the circumstances. An MOU can be used with or in conjunction with an LOI (Letter of Intent) to secure a piece of real estate for a solar farm. Often an LOI is a brief introductory document outlining the very basics to get interest of a land owner. An MOU would go into details about the relationship and the economics regarding the land owners compensation for the term of the agreement, etc.

As mentioned, sometimes entities use different documents or combine them into a document set. Often it depends upon who is doing the deal (for instance, real estate folks) and the kinds of agreements that they are comfortable using. From a developers “hunting” point of view, it is usually an LOI from their document set that starts the dialogue, before it blossoms into multiple directions.

Also, the MOU could be for a direct purchase of a piece of real estate for a solar farm, whereas a lease would not be necessary. However, an entity could buy a piece of land and lease it back to a specific LLC, but more on that another time.

Want to ask Chris Lord and Keith Cronin YOUR solar finance and marketing questions? Enroll in HeatSpring’s Solar Executive MBA Training course and spend 6 weeks gaining a deep financial modeling background and perspective often lacking in deal negotiations!

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About Instructor Keith Cronin – SunHedge LLC

Keith Cronin is an in-demand business consultant, speaker and founder of The Solar Business Blueprint, a life changing training program that assists business owners with the tools, resources and metrics needed to grow and manage their solar businesses. He has helped solar companies achieve their goals through his training, speeches, coaching sessions and products. Keith’s life changing message reaches people all over the US, Canada, Central and South America. Keith lives in Kailua Hawaii.

About Instructor Chris Lord – CapIron, Inc.

Christopher J. Lord is a lawyer with deep banking experience, and the Managing Director of CapIron, Inc., a firm he founded in late 2011, to provide advisory and consulting services to customers, owners, developers, utilities, suppliers, installers and distributors covering the full range of value-add in renewable energy and energy efficiency. CapIron has provided consulting and modeling services for waste-to-energy projects, advisory services to a large-scale distributed generation solar project, consulting and advisory services in the solar thermal industry and early-stage development of a startup wind energy company.