Solar Bonds: Operations & Maintenance Bonds for the Duration of the Solar Project

Successfully delivering the output of energy becomes the contractual obligation known as Operations & Maintenance (O & M).

The IPP usually has a separate contract with the O & M company, who may be part of the EPC who constructed the site, or a company that exclusively practices O & M. It is up to the IPP and often its investors to decide upon the penal sum of the bond as the actual annual cost of the O & M company is often a modest sum. Penal sums can be in the amount equal to 1 year’s purchase of energy. Penal sums stipulate the payment is for lost income, legal fees, and other soft costs incurred in the event of a contractual default. If the project is a C & I project, penal sums may stipulate a cost to disassemble the project since the parts can be used on another project in the event that the O & M contractual default causes a termination of the PPA with the end user/offtaker. These unique decisions are itemized and the terms stipulated in the O & M contract.

The performance bond guarantees the faithful performance of these stipulations or the carrier assumes liability in the event of contractual default. If the contract stipulates the prompt restoration of the project, which many do to avoid an ITC recapture, especially during the first 5 years of the life of the project, the carrier, in addition to paying penal sums, will also attempt to promptly restore the performance of the project by replacing the defaulted O & M group.