Community Solar Subscription Management Surety Bonds

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Community Solar Subscription Management Surety Bonds

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What Is Community Solar?

According to the U.S. Department of Energy, community solar is “any solar project or purchasing program, within a geographic area, in which the benefits of a solar project flow to multiple customers such as individuals, businesses, nonprofits, and other groups.”

Typically, the energy producing those benefits is being generated by solar panels at an off-site array. Community solar customers have the option of buying or leasing a subset of the solar panels in the array and receiving a credit on their electric bill for the power generated by those panels.

Not everyone can have solar panels installed on their own roof, usually because they are renters rather than homeowners, or because their home is not well situated in terms of exposure to sunlight, or because of the design or size of their roof, or for financial reasons. Community solar allows these folks to participate in and benefit from solar energy generation, nonetheless. There also are community solar projects that install rooftop arrays on apartment buildings for the benefit of the building’s occupants.

Community solar customers typically can sell or donate their shares if they move out of the area. If they move to another location in the area served by the same utility company, they can continue to save money on their electric bills due to their ownership of a portion of the community solar array.

What Community Solar Distribution Methods Are Used?

The most common method of community solar distribution involves a developer, investor, or independent power producer (IPP) selling the electricity generated by a solar generating facility to the local utility company in exchange for energy credits, which are then sold to a certain threshold number of homeowners and businesses through a subscription management company (SMC).

The SMC is contractually obligated to replace subscribers who drop off due to relocation, nonpayment, or some other reason, so that the threshold number is maintained. Other SMC responsibilities depend on the state and the SMC service contract and may include ongoing management of the relationship between the IPP, end users, and local power company, and in some cases handling billing and collection.

The next most common method involves the IPP contracting with a reseller company that will purchase the power credits at a certain price, typically for as long as the solar generating facility remains in operation. The reseller in turn resells the credits to homeowners and small businesses. Like an SMC, the reseller may have additional responsibilities under the contract.

Regardless of the distribution method used, a surety bond typically is required to ensure that the SMC or reseller lives up to its contractual obligations.

Why Is a Surety Bond Required?

A community solar subscription management surety bond is a type of performance bond. It provides financial protection for the IPP in the event that an SMC or reseller defaults on their contract or commits some contractual violation that causes financial harm to the IPP. The bond ensures that funds will be available for compensating the injured party.

How Do Community Solar Subscription Management Bonds Work?

There are three parties to the legally binding surety bond contract: The IPP (the “obligee”) requiring the bond, the SMC or reseller (the “principal”) purchasing the bond), and the bond’s guarantor (the “’surety”).  The obligee establishes the required bond amount and the requirements pertaining to the principal’s performance. The principal is legally obligated to pay all valid claims against the bond. And the surety investigates all claims and determines whether they are valid. The surety also guarantees the principal’s payment of valid claims by agreeing to extend credit to the principal if necessary.

How Much Do Community Solar Subscription Management Bonds Cost?

Community solar subscription management bonds are subject to underwriting to assess the likelihood of claims and the risk the surety will be assuming in agreeing to extend credit to the principal for the purpose of paying valid claims. The underwriters will look at such factors as the principal’s corporate finances, industry experience, prior claims history, and overall credit history. The more financially responsible the principal is, the lower the risk of the surety having a loss for advancing the funds to pay a valid claim. The lower the risk, the lower the premium rate and easier of an approval process.

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