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 decommission bond needs.
What Is Decommissioning?
Decommissioning is the process that occurs at the end of the useful life of a solar or wind energy system. Those systems may be built on private or public land, but in either case, the land must be returned to its original condition without cost to the private landowner or the taxpayers. Decommissioning can involve removing solar panels or wind turbines, digging up underground electrical wires, removing access roads and walkways, demolishing structures, regrading the land, and replanting it with sustainable vegetation to return the site to its original state.
Decommissioning rules and requirements exist primarily at the local level, though some state governments and the federal government also regulate the decommissioning of solar and wind energy systems.
Why Is a Decommission Bond Required?
A decommission surety bond, sometimes called a reclamation bond, is a type of performance bond required in order to be granted a contract, permit, or right-of-way to build a solar or wind energy system. The landowner or government entity with jurisdiction over the land is known as the “obligee” requiring the bond. (Some obligees may permit cash, securities, or a letter of credit in lieu of a bond, but most developers or contractors prefer to furnish a surety bond, which doesn’t require tying up their cash as collateral). Decommissioning surety bonds are typically written uncollateralized and are a better alternative to liquidity-intensive instruments such as cash/ILOC.
A decommission bond requires the developer or contractor (the “principal” required to purchase the bond) to provide a cost estimate up front, which will help the obligee determine the required amount of the decommission bond the principal must furnish.
How Does a Decommission Bond Work?
There is a third party to a decommission bond, in addition to the obligee and the principal. That’s the party guaranteeing the bond (the “surety”). The bond forms a legally binding contract among all three parties.
If the principal fails to return the land to its original condition during decommissioning, the obligee can file a claim for the cost of completing the work, up to the full amount of the bond. The terms of the decommission bond agreement legally obligate the principal to pay any claim the surety finds to be valid. However, in guaranteeing the bond, the surety has agreed to extend sufficient credit to the principal to pay claims, if necessary.
The usual practice is for the surety to pay a valid claim initially, creating a debt that the principal must repay to the surety. The surety has the right to take legal action against the principal if the principal does not repay the debt voluntarily.
Many decommissioning obligations can last over a 20-25 year duration. The surety company will always require these bonds to be written on an annual or bi-annual basis, renewing automatically unless cancelled. The bond must be written in this format, as no surety company will want to be on the hook for a 20+ year obligation. Surety Bond Professionals can be your partner in explaining this to the Town/State to align them with the Surety’s typical bond requirements and ensure there are no hold-ups in the permitting process.
How Much Does a Decommission Bond Cost?
The annual premium cost for a decommission bond is determined by:
- The required bond amount established by the obligee, and
- The premium rate set by the surety through underwriting.
The surety’s underwriters look at the principal’s financial standing and industry experience to determine the likelihood of a claim and repayment.
The best measure of a principal’s creditworthiness including financials (balance sheet strength) and credit score. A principal with a strong credit profile presents a low risk to the surety, which deserves a low premium rate. On the other hand, someone with a low credit score represents a higher risk and will pay a higher premium rate.
The average well-qualified decommission bond applicant will pay a premium rate in the range of 1% to 2%.
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