By Sarah Everhart
More and more farmers across Maryland are choosing to incorporate solar energy into their operations. But what are the important legal considerations when deciding how to use a solar energy system? The initial considerations for every potential solar energy project are who will own the solar system equipment, and who will use the energy? There are numerous ways that a solar energy system can be owned and used. Each legal ownership structure has its advantages and disadvantages.
Financing of a solar energy system in Maryland is another important consideration. The ownership structure and financing of a solar energy system should be analyzed together to ensure that the chosen ownership structure will allow the owner to use all available financial incentives; watch for a future post on this.
Another vital part of the solar legal framework is to make sure there are no local laws or homeowner’s association documents which would prevent or affect the installation of a solar energy project. A solar energy provider outside your town or county might not be aware of all local restrictions. Further, don’t forget that to connect to the electric grid, you must have an interconnection agreement approved by your utility. Ask your solar energy provider to assist you in the execution of this agreement.
Solar System Ownership Options
There are four basic ownership structures for solar energy systems (Cite-Alta Energy, Solar Analytics and Procurement, White Paper, April 2014). The first type of ownership is direct ownership of the solar energy system by the landowner, meaning the landowner contracts with a solar service provider for the cash purchase and installation of the solar energy equipment. Direct ownership gives the landowner the option to either consume the energy produced or sell it to others. This type of transaction is the simplest type of ownership structure and offers the most control for the landowner. However, installation costs for solar energy projects can be a substantial financial commitment. To defray these costs, the system owner can use the Federal Investment Tax Credit, tax depreciation, and state and Federal grants and rebates. Also, established solar service providers can not only help landowners with the purchase and installation of the system itself but can also offer assistance in applying for state and Federal grants to defray installation costs.
A downside to the direct ownership legal structure, other than the cost of installation, is the continued responsibility for the operation and maintenance of the system for the life of system (about 20-25 years). Most solar energy equipment comes with warranties both from the manufacturer and the installer, the length and terms of which should be analyzed and considered as a part of the overall purchase. Even though direct ownership of a solar energy system is fairly straightforward, the contract with the solar provider should be reviewed by an attorney familiar with this area of the law.
If purchasing a solar energy system directly is not an option, a landowner can finance a system via debt. Purchasing a solar system via debt will mean buying the equipment with a loan from a bank or financial institution. Whether or not this is the right legal structure will depend on the cost of securing and carrying the loan vs. the cost savings of the solar energy production. An owner of a system purchased with debt will also be responsible for future operation and maintenance costs. Financing the installation of a solar energy system does not disqualify the system owner from receiving Federal tax credits and state and Federal grants and does allow the owner to either consume the energy produced or sell it to others.
Another way to finance a solar energy system is through an operating lease, where the landowner leases the solar energy system from the bank or financial institution and categorizes the resulting payments as business operating expenses. The downside to this type of ownership structure is that the lender is actually the system owner, which means that the lender is eligible for the Federal tax credit and/or the State and Federal grants and rebates. The effectiveness of this type of ownership structure depends on the treatment of the lease payments by an accountant. Therefore, a tax professional should be consulted before this is implemented.
If a landowner does not want to own the solar energy system itself but desires to use the solar energy produced, the landowner can enter into a Power Purchase Agreement (PPA) with a solar energy developer which permits the developer to build and own the system and the landowner to purchase the energy at a set rate. The benefit of a PPA is that the landowner does not need to make any initial investment and is not responsible for the system’s operation and maintenance.
However, the landowner will need to carefully review the PPA and fully understand all terms, including the energy price terms and any escalation clauses which trigger price increases. PPAs are most often long-term agreements (10-20 years) and should include provisions to address what happens if there are changes in the laws the PPA is structured on. Further, the landowner must understand what the PPA provides in terms of the ownership of the solar energy system upon expiration of the PPA. Does the landowner have the right to buy the system, and/or who is responsible for removal? Given the complexity and potential legal implications of a PPA, landowners should have an attorney review a PPA before signing on the dotted line.
Lastly, if a landowner does not want to own or use a solar energy system but simply wants to use land to create a new revenue stream, renting their land for development, installation, and operation of a solar energy system is an option. This type of arrangement requires a lease which should include a specific term, monthly or annual rent, right of the tenant to access the property, allocation of liability for the solar energy system, and maintenance responsibilities, as well as default and enforcement provisions, etc. As with any lease, it is best to consult an attorney in drafting this type of document.
More information on these ownership structures is available at http://www.alta-energy.com/whitepaperswebinars/