“We can unlock the potential of the commercial and industrial (C&I) solar market if we only had form legal documents!” says everyone, all the time. If only it were that simple.
Rule number one: commercial solar is not residential. The residential sector often utilizes boilerplate offtake agreements. These “take-it or leave-it” form documents are standard, just as in other retail industries, and as such, residential solar consumers often willing to sign on the dotted line. Unlike residential, where homeowners rarely have the ability to revise an agreement, commercial offtakers generally do not sign a PPA without first making a pass at a redline. Frequently they engage their own counsel or outside legal assistance. Moreover, they negotiate because they are accustomed to doing so, and to having negotiating power.
While commercial offtakers may always expect some level of negotiation, there are ways that a developer can make a commercial offtaker more comfortable with form legal documents and minimize the urge to redline, thereby reducing transaction costs:
- Present the offtaker with a form agreement from your investor as the basis of the negotiations. Frame the conversation and build confidence in your form. Set expectations by telling the host that it is a form document that has been used in countless negotiations, and that solar energy systems around the country have been operating for years under this legal agreement. Give them confidence in the agreement that you are presenting, and shape the discussion in a way that lets them know that you have presented something fair and highly widespread.
- Educate your host customer about third party ownership and the respective ownership interests of the parties. Remember that solar is a new concept for them, and the host customer is not in the solar industry. Their different background means they have their own assumptions for how the deal should proceed, and how they need to protect their businesses. They may view the solar deal as a construction project rather than a third-party financed asset purchase. Explain that though the system may be on their land, it will be owned by someone else. This is key. A successful way to frame this is to explain that a third party will build the system, expend all the up-front capital and take all the ownership risk. The host then receives the benefit of the onsite clean energy.
Though boilerplate form documents may not work across the commercial solar market for hosts, the industry could agree on market terms for agreements (i.e. all energy must be purchased), as well as some basic no-no’s (no obstructions, mortgagers or anyone with interest to the land can’t claim interest to the solar system, etc.). And, while host customers may never accept standardized documents, already, developers and EPCs are beginning to accept their financiers’ form documents, and that’s a great step in the right direction toward standardization. Use of forms reduces the costly legal negotiations and transaction costs that these relatively smaller deal sizes simply cannot bear, especially when developers and financiers work together on repeat transactions using the same legal documentation each time.
This is an excerpt from our Solar Project Finance Journal, a monthly electronic newsletter analyzing the solar industry’s latest trends based on our unique position in the solar financing space. To view the full Journal or subscribe, please e-mail firstname.lastname@example.org.
About Sol Systems
Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 180MW solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. Inc. Magazine named Sol Systems on its annual Inc. 500 list of the nation’s fastest-growing private companies for a second consecutive year, ranking it No. 6 in the nation’s top solar companies in 2014. For more information, please visit www.solsystemscompany.com.