Surety Bonds & Renewable Energy Projects

Renewable Energy is here to stay – current projections indicate roughly half of the new electricity generated in the United States this year will be from renewable sources. Coupled with significant spending under the Infrastructure investment and Jobs Act (IIJA), Renewable Energy Developers (REDs) should consider how surety bonds can enhance deal structure and provide a more strategic use of company resources.

There are several ways in which a surety bond may come into play when developing Renewable Energy.  Below are some of the key areas where utilizing a financial instrument, such as a surety bond, may offer some assurances that make the deal more attractive for the parties involved.

Energy Storage Projects – developing ways to store and maximize newly-generated energy is a time-sensitive component in the shift to renewable energy. Not only is storing excess energy during off-peak hours cost effective, it also helps stabilize the energy grid overall. With the anticipated demands on the grid, these Battery Energy Storage Systems (BESS) need to be built quickly – and correctly. One way of doing that is to obtain Performance & Payment bonds from the Energy Procurement Contractor (EPC).  This ensures the storage system is in place in a timely manner for the energy being generated (Performance bond), allowing REDs to meet or exceed the output expectations of the overall project.  It also reduces the likelihood of a Mechanics’ Lien against the project (Payment bond).

Power Purchase Agreements – these agreements between the RED and purchaser of the energy (the “off-takers”) provide the basis for the amount of energy generated and the rate at which it would be purchased.  There is often some form of financial security required to ensure the necessary energy is delivered, which is most often cash or a letter of credit.  Surety bonds can be a more cost-effective option, while also preserving REDs’ cash with the reduction/elimination of collateral requirements typically seen in letters of credit. Established REDs should strongly consider having a Surety Program in place to provide them confidence in the terms they will receive for the bonds, as well as the overall capacity they have with the surety.

Decommissioning Bonds – Renewable Energy projects have a useful life, which means [theoretically] they will have to be removed one day.  Many state and local jurisdictions require some form of security as an assurance the project will be removed when no longer viable.  These obligations are far off, and tying up any capital for this type of security inhibits a REDs ability to continue building/growing their project pipeline. By using a surety bond, which is a “contingent” or “off-balance sheet” liability, both equity and working capital can be reserved for new projects.

Supply / Material Procurement – this can work in two ways: 1) a RED may require a supply bond from their vendor to ensure the materials (panels, batteries, etc.) are delivered timely to complete the project, or 2) the REDs may provide a surety bond to the supplier in lieu of a cash deposit for the order.  Given the overall demand and leverage suppliers currently have, the latter is the more likely of the two scenarios.

Interconnection Agreements – utility companies need to build and expand their infrastructure to support the addition of new Renewable Energy projects to the grid.  In addition to the fees they charge, financial guarantees are necessary to ensure the capital they invest in connecting these new projects is eventually reimbursed. Surety bonds are one form of financial security utilities might accept.

Surety bonds have long been used in construction, and it makes sense that this would extend to the construction of the new energy projects we require today.  Although the underwriting may differ slightly, it will still rely on the financial qualifications and creditworthiness of the party providing the bond as financial security.  In many cases, this will be the Renewable Energy Developers. Establishing a Surety Program today can benefit REDs in numerous ways:

Clarity on the amount of surety credit available both per project and in aggregate. Having this understanding allows REDs to strategically build their project pipeline and have the confidence they will have the capacity needed to provide the required financial securities.

Consistency in cost of providing financial securities. By establishing a Surety Program, REDs will have a clear understanding of the rate charged to obtain the necessary bonds. These rates are based on the credit profile of the company / owners, which can eliminate other factors a bank may consider when pricing a letter of credit (i.e. deposit balances).

Enhanced marketing to customers. Obtaining bonds from a surety evidences the company has been prequalified and approved by a surety. An experienced third-party providing an indication they have confidence the RED can successfully complete the project and perform their obligations could be the difference when an end user selects a new partner.

A surety’s involvement can make the claims process more efficient and provide protection to REDs. Surety bonds are not typically a pay-on-demand instrument like a letter of credit. The surety has an obligation to investigate any claim made against the bond, which means a RED may be better protected if a frivolous claim were to be submitted. The surety is also solutions-oriented, suggesting all parties will be more satisfied with the outcome if their ultimate goal is a finished project that performs as expected.

There are many factors to be considered when establishing a Surety Program.  Working with a surety professional that understands both credit underwriting and the unique obligations associated with Renewable Energy Development will help companies capitalize on opportunities today, while developing a strong business plan for the many years of development that lie ahead. As with most things, it’s better to start early to ensure the necessary support is in place when it is needed.

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