As governments and businesses alike look to renewable energy projects to help reduce their carbon footprint and meet clean energy goals, the need for a sharp eye on contracts remains critical. The renewable energy industry is growing exponentially and with that, project goals and client needs are changing often. While each project and client is unique, there are common themes that impact how well a project comes together. Before you move forward with signing the dotted line on a renewable energy or electric vehicle infrastructure project, consider the following tips to ensure your contract is set up for success.
1. Project Location: Suitability, Ownership and Infrastructure
This one might seem obvious, but sometimes in our excitement to save on energy costs and build out carbon free solutions for our clients, the suitability of the proposed project location can be overlooked. It is vital to ensure the selected location can meet both the goals and legal requirements of the client and project. Important questions to ask are:
a) Suitability: Does the project site need the energy that is expected to be generated by the project, or can the project serve any excess energy to those who need it (e.g., electric vehicles)? This is important to ask because if a site can’t use or sell all the energy being generated then complications can arise with utility interconnection and project return on investment. The size and location of your project may also require an Environmental Assessment or Environmental Impact Statement from state or federal agencies. Be certain to connect with your California Environmental Quality Act and National Environmental Policy Act experts before deciding on your location, as the process for these assessments can be expensive and time consuming.
b) Ownership: Who owns the project location? If a project site is under a lease, then the site owner will very likely need to be included in any conversation and possibly become a party to the contract. Other details to look out for are whether the property is held in a trust or administered by a government entity. Any of these factors could have major impacts on whether the project can break ground.
b) Infrastructure and Utility Interconnection: In most U.S. cities, the local utility owns and operates the poles and wires that distribute electricity to our homes and business. Accordingly, you need the utility’s permission before you can connect your renewable energy project to the grid. The costs of connecting your project to the grid, as well as how much revenue can be generated for exported electricity, may depend on the capacity of your planned project, as well as the project site’s energy demand and usage. Sometimes the utility requires grid updates to facilitate the project which can exceed the entire cost of the project itself. In some rare instances, the utility might not even allow you to connect the project to the grid at the chosen location. Many projects have been stalled or stopped because things were set in motion before getting utility feedback. Make certain the utility factor is known before moving forward with a project and getting others under contract.
2. Parties to the Agreement
Even the most careful attorney or project manager can sometimes get surprised here. The renewable energy industry, while far more mature than just five years ago, is still a place of innovation and development. Sometimes multiple entities and individuals are required to meet the expectations of the client. While this has created enormous job growth and lightspeed development, it can also create uncertainty when you’re trying to ink a deal. Before anything is committed to paper make certain you know exactly whose participation in the project is required and who needs to be part of the contract. For example, are you going to hire subcontractors for all or part of the work? Will they be hiring subcontractors? Depending on the source of funding or initial contract, you may need to rope all these parties under one contractual umbrella.
Once you know who needs to be part of the contract, make certain all parties to the deal are well informed and sufficiently sophisticated to see a project through. If dealing with affiliates or subsidiaries, make certain these entities are sufficiently capitalized and authorized to participate in the contract. In addition, if a party is new to the energy space or is introducing a novel product, don’t be afraid to require references, financial statement and/or a bond to ensure that they are both committed and trustworthy. Above all, make sure that everyone, from landowner to consultant, is on the same page from the very beginning regarding timelines, expectations and payment.
3. Project Incentives
Fortunately, the cost savings and environmental benefits of renewable energy are well known, and many jurisdictions offer incentives, rebates, or tax breaks to encourage the construction of renewable energy projects. Savvy renewable energy entrepreneurs will usually build these incentives into their financial models to ensure the maximum value is achieved for all parties. Unfortunately, even some experienced players can take for granted outside factors that affect the availability of these incentives. For example, it’s not unusual for a project to experience substantial delays. If these delays are too long, then incentive or rebate funds may no longer exist by the time a project is finished. Alternatively, incentive or rebate programs often have very specific and sometimes complicated eligibility criteria. If these eligibility criteria are overlooked, then it may come as a nasty surprise for a developer to learn it is not able to collect funds it needed to finish a project halfway through. Wherever possible these incentive funds should be secured and/or alternate plans made in the event an incentive or rebate potentially disappears.
These tips scratch the surface of what may be considered before entering any contract for a renewable energy project. However, if you have considered and addressed the items noted above then you will have established a solid foundation to tackle more complicated issues as they develop.