POWER June 2022 - 14

LEGAL & REGULATORY
Maximizing Surety to
Power Up New Renewable
Energy Projects
Karl Choltus
R
enewable energy is not the future; it is the present.
Nearly half the new electricity generation in the U.S.
this year will come from renewable sources. And after
last year's signing of the Infrastructure Investment and Jobs
Act (IIJA)-plus the extension of income tax credits related to
renewables-the proliferation of sustainable sources, technology,
and infrastructure is only going to accelerate as more federal
dollars are deployed.
Financing and Risk Management Instruments
For example, within the IIJA, more than $73 billion has been
earmarked for clean energy transmission. Another $6 billion is
targeted for battery technology and production, along with $7.5
billion for electric vehicle (EV) infrastructure. To accommodate
this level of investment, financing and risk management instruments
must be in place to enable these projects to progress
forward. However, are renewable developers and operators
ready to respond?
With a rush to bring new projects online, developers, renewable
energy contractors, energy storage companies, and others
must approach this current " building boom " strategically.
Enter surety bonds.
When developers typically post security to third parties to meet
regulatory and contractual requirements-including project interconnection,
power purchase, supply agreements/guarantees,
etc.-they often use cash or letters of credit. Surety bonds (also
known as performance bonds) are a stronger option to increase
development capacity and minimize financial exposure.
Why? Posting cash directly affects a developer's working
capital, while letters of credit also require some cash collateral
and increased debt obligations. As a contingent form of liability,
surety bonds do not have these negative impacts. However,
while a widely accepted instrument for construction, familiarity
with surety in the renewable sector remains nascent.
Understanding Surety's Advantages
To properly leverage surety, developers must understand the
clear advantages. Whether directly resulting from the IIJA or
overall expansion of renewable energy growth, the following
are examples of where these types of bonds can be applied.
Solar Module Procurement. Many solar developers are
currently faced with panel availability challenges, as suppliers
seek assurances for the large module purchase orders that will
account for a high allocation of their total production. Larger
suppliers of panels have been receptive to the use of surety
guarantees as an alternative to a cash security deposit, as a
way of navigating this dynamic.
Energy Storage. Battery storage is a rapidly emerging component
of energy supply, and some project developers require
completion assurances from parties building battery energy
storage system, or BESS, facilities. While the IIJA aims to cata14
lyze
domestic production, projects in the meantime will still
rely on batteries procured from outside the U.S.
This challenge translates to developers requiring guarantees
to adhere to build schedules and delivery timelines in
the face of global supply chain issues. In addition, start-ups
entering the space because of the IIJA will likely face these
same security requirements.
Decommissioning. Many public sector jurisdictions require
a form of financial assurance before removing installed power
generation equipment. Given the rapid growth of utility scale
and community solar projects throughout the U.S., towns,
counties, and cities are re-assessing their security policies.
Surety bonds can be one option, especially in cases where the
project owner holds the renewable asset through to useful end
date, having to forego cash or take on debt for decades.
Power Purchase Agreements. Utilities and large companies,
referred to as " off-takers, " contract with power producers
to purchase power at a specified rate. These contracts-also
known as power purchase agreements, or PPAs-require a
form of security as a backstop if the facility does not generate
power as promised. With required collateral often exceeding
seven figures, utilizing a surety bond can be a highly favorable
developer option.
Interconnection Agreements. Most renewable energy
projects in the U.S. are connected to traditional utilities via an
interconnection agreement. With the IIJA, thousands of miles
of new transmission lines are planned and will facilitate the
growth of renewable energy assets. To ensure utilities do not
take on unnecessary risk despite receiving funds for these
interconnections, financial guarantees are required to ensure
expenditures associated with connecting new solar and wind
farms to their grid are fully reimbursed. In some instances, utilities
will accept surety as that guarantee.
Electric Vehicle Infrastructure. To create a national EV
charging network, the IIJA supports the accelerated deployment
of chargers in residential and commercial buildings, and
parking systems, along with roadside options. Accordingly,
state and local governments, and utilities, are starting to post
performance bond requirements for installation projects.
As utilities, developers, and other players in the renewable
energy sector evaluate prospective work and their project pipeline,
they must have the financial tools at the ready to secure
new projects. Collaborating with an experienced surety broker,
taking the time to set up a renewable energy-specific surety
bond facility, and educating partners and off-takers on their viability
will pay off with reduced financial exposure, freed-up
capital, and greater security for all parties. ■
-Karl Choltus is National Surety Practice Leader for Brown &
Brown, an American provider of insurance, reinsurance products,
and federal programs services to general business, corporate,
governmental, quasi-governmental, institutional, professional,
trade association, and individual clients.
www.powermag.com
POWER | June 2022
http://www.powermag.com

POWER June 2022

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POWER June 2022 - Intro
POWER June 2022 - Cover1
POWER June 2022 - Cover2
POWER June 2022 - 1
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