Solar Bond Demand Goes Up

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Solar Bond Demand Goes Up

Surety Bond Professionals is a family owned and operated bonding agency with over 30 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your solar bonding needs.

Is the Demand for Solar Energy Still Growing?

Unless you’ve been living under a rock, you’re probably aware that the demand for solar energy has been increasing steadily and, with the incentives created by recent legislation, is poised for explosive growth. One sure benchmark for growing demand for solar power in the residential market is the increasing popularity of solar bonds as an investment vehicle.

These are financial securities, debt instruments, backed by loans made by financing companies—not to be confused with solar surety bonds (more on those in a minute).  Investors are buying up solar bonds because they view the growth of the solar energy industry as an attractive investment opportunity with excellent potential for profit.

Drivers of Solar Energy Demand

For a long time, demand for solar energy was primarily the result of concerns about the environmental impact of emissions from burning fossil fuels. Now, there also are substantial financial incentives for moving toward electricity generated from renewable energy sources, with solar power significantly outpacing wind and geothermal energy in the residential market. The Inflation Reduction Act of 2022 establishes subsidies and tax credits for purchasing electric vehicles as well as home heating and cooling systems and appliances that run on electricity. There are many incentives for companies in the solar industry right now.

The increased household demand for electricity and the many financial incentives for using energy from renewable sources are, quite understandably, fueling the growth of the demand for solar energy, and a corresponding surge in the construction of solar generating facilities.

Risks Associated with Ownership of a Solar Energy Generating System

Larger companies that want to “go solar” may have the physical and financial wherewithal to have their own solar energy generating system installed. Homeowners and small business owners, who may not have the rooftop space or land to install solar panels or the funds to finance a solar installation can still enjoy the benefits of solar energy by participating in a community solar program.

The developer or owner of a community solar generating facility, commonly known as an independent power producer (IPP), may have a substantial amount of money invested in the project, and will bear the brunt of the construction and operational risks involved.

There are risks associated with working with solar contractors, just as there in other types of construction projects. There are also risks associated with contracting with a subscription management company (SMC) that sells the energy credits an IPP gets from exporting power to the local utility company.

Surety Bonds Mitigate Risks for Owners of Solar Energy Generating Systems

The following are various types of surety bonds that can come into play in the solar energy industry.

  • Performance Bonds protect the bond’s obligee (the project owner requiring the bond) against monetary loss caused by the contractor’s default or nonperformance. The bond ensures that funds will be available if it’s necessary to hire another contractor to complete the work.
  • Payment Bonds often are paired with performance bonds to ensure that the contractor pays subcontractors, workers, and solar equipment and materials suppliers according to the terms of the construction contract.
  • Community solar subscription management bonds are a specialized type of performance bond that provides recourse for the IPP if an SMC or energy reseller defaults on their contract or commits a violation that causes financial harm to the IPP.
  • Maintenance Bonds guarantee the performance of ongoing maintenance tasks of an operational solar generating facility.
  • Decommissioning Bonds guarantee proper decommissioning of a solar generating facility at the end of its useful life and the restoration of the site to its original condition.
  • Right of Way Bonds are required by local or state government entities that issue construction permits for solar generating facilities when work is to be done within public rights of way, such as roads, highways, or sidewalks. The bond’s principal (the contractor) must complete this work in compliance with the terms of the permit and repair and damage or disturbance to the right of way that occurs during construction.

One of the advantages project owners gain from requiring solar surety bonds is that the underwriting process through which bond applicants are approved helps ensure that only qualified contractors become bonded. That substantially reduces the likelihood of contractor default or noncompliance.

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