Lease Financing of Solar Power

Like other renewable energy, solar power projects are driven by a number of unique energy pricing, policy, and tax considerations. Significant advances in solar energy technology over the last 25 years have resulted in reductions in the cost of energy at productive solar sites. When tax credits are taken into account, the pricing for solar power financing compares favorably with natural gas, the largest source of power in the U.S. market. Solar energy pricing has become more competitive as natural gas prices have increased.

Additionally, at least 20 states, including New York, Texas, and California, have adopted renewable energy standards requiring utilities to generate a minimum percentage of electrical power from renewable energy sources, including solar power. The requirements for these programs differ by state, but the adoption of these renewable energy standards, particularly by the larger states, has significantly encouraged solar power development. For instance, Texas adopted a standard requiring 400 megawatts ('MW') of renewable power to be installed by 2003. In 2001 alone, however, 916 MW of new wind projects were installed in Texas. Many utilities have chosen to over-comply with renewable energy standards because renewable energy is cost-competitive with traditional sources of energy. However, federal tax incentives, including tax credits and accelerated depreciation deductions, have had the most significant impact on making the financing of solar power projects competitive with more traditional energy projects.

Solar Technology

There are many types of solar energy technologies. The two most significant types are photovoltaics and solar-thermal electric.

Photovoltaics

Photovoltaic ('PV') is the technical word for solar panels that create electricity. Photovoltaic material, most commonly utilizing highly purified silicon, converts sunlight directly into electricity. When sunlight strikes the material, electrons are dislodged, creating an electrical current that can be captured and harnessed. The photovoltaic materials can be several individual solar cells or a single thin layer, which make up a larger solar panel.

Photovoltaic cells power small calculators and wrist watches we use every day. More complex systems provide electricity to pump water, power communications equipment or highway construction signs, and myriad other small, off-grid uses, which almost always provide electricity for small and/or intermittent electricity needs that are cleaner and cheaper to operate than extending a power line or using liquid fuels.

Photovoltaics are also making inroads as supplementary power for utility customers already served by the electric grid. In the last two years, grid-connected solar systems have become a larger market than off-grid applications. Currently, compared with most conventional fuel options, photovoltaics are still a very small part of the energy makeup of any country. However, more and more individuals, companies, and communities are choosing PV for a variety of environmental, economic development, emergency backup, fuel and risk diversification, and economic reasons. The economics of a photovoltaic system for a home or business is a combination of the availability of solar resource, operating costs, electricity prices, and local and national incentives.

Solar Thermal Electricity

Solar thermal electricity technologies (also called concentrating solar power, or CSP) produce electric power by converting the sun's energy into high-temperature heat using various mirror configurations, which is then channeled to an on-site power plant and used to make electricity through traditional heat-conversion technologies. The plant essentially consists of two parts: one that collects solar energy and converts it to heat, and another that converts the heat energy to electricity.

Concentrating solar power systems can be sized to power a small town or military base or grid-connected applications (hundreds of megawatts). Some systems use thermal storage during cloudy periods or at night to produce electricity outside of the traditional solar daytime window. Others can be combined with natural gas, and the resulting hybrid power plants provide high-value, dispatchable power. These attributes, along with high solar-to-electric conversion efficiencies, make concentrating solar power an attractive renewable energy option in the southwest United States and other sunbelt regions worldwide.

Federal Tax Incentives

Investment in renewable energy property is eligible for a federal tax credit and accelerated depreciation deductions. The renewable electricity production tax credit ('PTC') is available for investment in wind, solar, biomass, geothermal, and other renewable energy assets. Solar and geothermal assets are also eligible for an investment tax credit or energy credit ('ITC'), in lieu of the PTC. The PTC is available only to the producer of electricity and would not be allowed to a passive owner of a project. The investment tax credit, however, is available to the owner of the property, whether or not the owner is actually engaged in the production of electricity. For institutional investors that prefer not to be involved in facility operation and production of energy, an investment in a solar project with the ITC benefit may be an attractive alternative to investment in other renewable assets (e.g., wind) where only the PTC is available. The ITC would be available to the lessor of a solar project under a net lease.

Section 45 Renewable Electricity Production Tax Credit

The renewable electricity production tax credit under '45 of the Internal Revenue Code is a dollar-for-dollar credit against U.S. federal income tax liability for electricity produced from qualifying facilities generating electricity from renewable sources. It is the most important of the federal tax advantages for wind power projects, as wind projects are not eligible for the ITC (described below). The PTC provides a margin that, combined with the proceeds of the sale of electricity generated by such projects, allows many wind power projects to provide investor returns that are competitive with other sources of electricity generation. As modified by limitations and adjustments discussed below, the PTC equals 1.5 cents multiplied by the number of kilowatt hours of electricity:

• produced in the United States by the taxpayer at a 'qualified facility' during the 10-year period beginning on the date the facility was originally placed in service; and
• sold by the taxpayer to an unrelated person.

A 'qualified facility' is any facility owned by the taxpayer that is originally placed in service (whether by that taxpayer or by a third party) after calendar year 1993, and before Jan. 1, 2009. Property is 'placed in service' when the property is in a state of readiness for its designed function. With the extension of the PTC to facilities placed in service through the end of 2008, significant new wind power financings in 2007 are likely, as the transactions are dependent on the tax credit in order to generate sufficient returns for equity investors.

The amount of the PTC phases out proportionately over a 3 cents-per-kilowatt-hour range as the national average price of wind-produced electricity exceeds a threshold amount. The phaseout of the PTC did not apply in 2005 or 2006, and is not expected to apply in 2007.

The PTC is also reduced on a proportionate basis for grants, tax-exempt bonds, subsidized energy financing, and other credits allowable with respect to the facility. However, the Internal Revenue Service has ruled that certain state incentives, such as lump-sum payments to a project to help pay its operating costs, production-based state tax credits, government loan guaranties, and 'enterprise zone' exemptions for sales and use taxes, do not reduce the PTC.

The PTC is part of the general business credit ('38 of the Code) and is subject to limitations that prevent a taxpayer from reducing its regular and alternative minimum tax liabilities below certain floor amounts. However, under tax legislation enacted in 2004, the PTC credit for electricity produced at a facility placed in service after 2004 can be used to offset (without limitation) both the regular tax liability and the AMT liability for the first four years of production.

Section 48 Investment Tax Credit

In lieu of the PTC, an owner of qualifying solar and geothermal property is eligible for a tax credit (the investment tax credit, or ITC) in the year the property is placed in service equal to 30% of the owner's cost basis for the property. The ITC is a dollar-for-dollar credit against the taxpayer's federal income tax liability. The 30% ITC is available for property placed in service in 2007 and 2008. Cost basis will include amounts paid to purchase and install the property.

Generally, qualifying solar property is equipment that uses solar energy to generate electricity, to heat or cool a structure, or provide solar process heat. Thus, virtually any photovoltaic or concentrated solar project, whether used to provide energy to a particular building, or to supply energy to the electric grid, should qualify for the ITC.

For purposes of calculating depreciation deductions (see below), the tax basis of property for which the ITC is claimed is reduced by 50% of the amount of the credit (i.e., the depreciable basis is reduced to 85% of original asset cost). ITC tax basis is also reduced proportionately by the amount of any tax-exempt private activity bond financing or any subsidized financing provided by the federal or any state or local government.

The ITC is subject to recapture in the event the property is disposed of or ceases to be qualifying property during the five-year period after the property is placed in service. Effectively, 20% of the ITC 'vests' in each of the five years following placement in service. In the event of a recapture event, the tax basis of the property is increased for depreciation purposes by 50% of the recapture amount.

The ITC is part of the general business credit and is subject to limitations that prevent reduction of tax liability below certain floor amounts. Generally, the general business credit (which includes the ITC) cannot reduce tax liability below the tentative minimum tax (under the AMT) and cannot reduce tax liability to an amount less then 75% of what the tax liability would have been absent the credits.

Depreciation Method and Recovery Period

Equipment that uses solar energy to generate electricity generally is five-year property eligible for MACRS accelerated cost recovery deductions over five years using the 200-percent declining-balance method (switching to the straight line method for the first taxable year for which using the straight line method will yield a larger depreciation deduction). As noted above, the tax basis for computing depreciation deductions is reduced by 50% of the ITC.

Expansion of Federal Tax Incentives

Given the strong bipartisan political support for action to reduce the nation's dependence on fossil fuels, it is not surprising that a number
of bills are now pending before Congress to lengthen and expand on the current federal tax incentives for investment in renewable energy projects. One bill (S. 590, H.R. 550) would expand qualified solar property to include energy storage systems, increase the amount of the ITC for solar property, extend the ITC through year 2017, and allow for an accelerated three-year recovery period for depreciation purposes.

State Investment Incentives

In addition to federal tax incentives, a variety of state governmental incentives promote the generation of electricity from renewable resources. Many such incentives go directly to developers of renewable energy projects, including direct subsidies, tax benefits, low-interest loans, net metering and simplified interconnection procedures. Increasingly, states have been encouraging retail electric utilities to increase their use of renewable energy generation by imposing renewable energy quotas known as renewable portfolio standard ('RPS') programs. At present, 20 states and the District of Columbia have RPS programs, and such programs are under discussion in other states. States with well-developed renewable energy incentives include Arizona, California, Colorado, Conn- ecticut, Hawaii, New Jersey, New Mexico, and Texas. Proponents of renewable energy have also been lobbying for a federal RPS, an issue that is garnering broader support.

One outgrowth of the emphasis on renewable energy is the development of markets for renewable energy credits or certificates ('RECs'), also known as 'green tags.' RECs are a commodity that reflects the environmental attributes associated with renewable energy generation. RECs are a vehicle that allows electric consumers, wholesalers, and utilities to purchase 'green power' on a notional basis without regard to the specific source of the generation. Many states also permit utilities to use REC purchases to satisfy RPS requirements. In a financing of solar energy property, the RECs generated by the project can be sold by the developer to a utility or other purchaser to reduce the overall financing cost.

Financing Structures

Because the 30% ITC is available to the owner of a solar facility whether or not the owner produces electricity, traditional secured financing techniques, including leasing, can be used to finance solar projects.

Under a sale-leaseback structure (see diagram at bottom), a developer and operator of solar assets would construct and agree to operate a solar facility and would agree to sell the electricity produced to a utility, or to a business or institution on whose property the solar project is built (e.g., a retail 'big box' store or a school) under a long-term power purchase agreement ('PPA'). The PPA would require the store or the school (the 'power purchaser') to buy all of the power produced, generally at a fixed price, thereby ensuring a stream of revenue over the term of the PPA.

The developer sells the solar property to a bank or other investor ('lessor'), which leases the property back to the developer ('lessee') under a long-term net lease. The lease requires the lessee to pay fixed rents over the term of the lease. To secure its rent payment obligations, the lessee grants to the lessor a collateral assignment of the PPA and other revenues (such as funds from the sale of RECs). At the end of the lease term, the lessor can realize the residual value of the property, and that residual, combined with the rents, the ITC, and the tax depreciation deductions will generate an after-tax yield to the lessor. The transaction can be structured to also generate a positive pre-tax yield and cash-on-cash return without regard to tax benefits.

Commercial Risk

An equity investment in a solar power project whether structured as a direct investment or as a lease carries with it certain identifiable commercial risks. Such risks include operational risk, electricity transmission risk, power purchase agreement risk, as well as credit risk of other participants, asset warranty risk, and asset residual value risk.

Solar plants generally have much lower environmental risks and impacts and require less maintenance than conventional power plants, and other renewable sources such as wind. A performance study may be useful to quantify typical risks such as shading, dust, conversion losses, and annual standard deviations in sunlight. Operational risks and costs may be further managed by an experienced operator-lessee, the use of trusted technologies, and a modular design that would allow some portion of the facility to be operational even while other parts may be down.

In addition to the value of the solar equipment itself, the key asset in the investment is the revenue stream under the PPA. In a lease structure, the lessor would look to the credit of the power purchaser under the PPA in addition to the credit of the lessee. The PPA may have termination provisions that would require an investor to consider certain step-in rights. The PPA normally would not require payment unless energy has been delivered. Furthermore, interconnection issues should be identified. As a practical matter, the risk of nonpayment due to failure to deliver power is mitigated by the fact that solar projects typically have less down time and fewer maintenance issues than conventional power generation facilities because of the nature of the equipment.

Lessors should negotiate for full inspection rights and rights to receive the reports under the PPA and other agreements. To mitigate certain commercial risks, parties may consider business interruption and casualty insurance.

[IMGCAP(1)]

Philip H. Spector is a tax partner in the New York office of Troutman Sanders LLP. His practice is focused on domestic and cross-border equipment and facility leasing and other asset-based finance and project finance. Troutman Sanders represents investors, lenders, developers, and utilities in a variety of asset finance and leasing transactions.

Hardly a day goes by without major media attention to global warming and the need to develop and invest in sources of alternative energy. Legislation to encourage investment in renewable energy has bipartisan support. Tax legislation passed in 2005 and 2006 extended the renewable energy production tax credit and the energy investment tax credit to facilities placed in service before Jan. 1, 2009. Further extension and expansion of these credits is expected from the current Congress. The extension of the tax credits, the adoption of minimum alternative energy requirements by many states, and greater public and political support for alternative energy resources have increased interest in the development and financing of wind, biomass, geothermal, and solar facilities. An active financing market has developed.

This article reviews the market and tax law background to financing solar power projects in the United States, focusing in particular on tax incentives for solar power development and opportunities to structure solar power financings as leases.

Solar Power Context

Like other renewable energy, solar power projects are driven by a number of unique energy pricing, policy, and tax considerations. Significant advances in solar energy technology over the last 25 years have resulted in reductions in the cost of energy at productive solar sites. When tax credits are taken into account, the pricing for solar power financing compares favorably with natural gas, the largest source of power in the U.S. market. Solar energy pricing has become more competitive as natural gas prices have increased.

Additionally, at least 20 states, including New York, Texas, and California, have adopted renewable energy standards requiring utilities to generate a minimum percentage of electrical power from renewable energy sources, including solar power. The requirements for these programs differ by state, but the adoption of these renewable energy standards, particularly by the larger states, has significantly encouraged solar power development. For instance, Texas adopted a standard requiring 400 megawatts ('MW') of renewable power to be installed by 2003. In 2001 alone, however, 916 MW of new wind projects were installed in Texas. Many utilities have chosen to over-comply with renewable energy standards because renewable energy is cost-competitive with traditional sources of energy. However, federal tax incentives, including tax credits and accelerated depreciation deductions, have had the most significant impact on making the financing of solar power projects competitive with more traditional energy projects.

Solar Technology

There are many types of solar energy technologies. The two most significant types are photovoltaics and solar-thermal electric.

Photovoltaics

Photovoltaic ('PV') is the technical word for solar panels that create electricity. Photovoltaic material, most commonly utilizing highly purified silicon, converts sunlight directly into electricity. When sunlight strikes the material, electrons are dislodged, creating an electrical current that can be captured and harnessed. The photovoltaic materials can be several individual solar cells or a single thin layer, which make up a larger solar panel.

Photovoltaic cells power small calculators and wrist watches we use every day. More complex systems provide electricity to pump water, power communications equipment or highway construction signs, and myriad other small, off-grid uses, which almost always provide electricity for small and/or intermittent electricity needs that are cleaner and cheaper to operate than extending a power line or using liquid fuels.

Photovoltaics are also making inroads as supplementary power for utility customers already served by the electric grid. In the last two years, grid-connected solar systems have become a larger market than off-grid applications. Currently, compared with most conventional fuel options, photovoltaics are still a very small part of the energy makeup of any country. However, more and more individuals, companies, and communities are choosing PV for a variety of environmental, economic development, emergency backup, fuel and risk diversification, and economic reasons. The economics of a photovoltaic system for a home or business is a combination of the availability of solar resource, operating costs, electricity prices, and local and national incentives.

Solar Thermal Electricity

Solar thermal electricity technologies (also called concentrating solar power, or CSP) produce electric power by converting the sun's energy into high-temperature heat using various mirror configurations, which is then channeled to an on-site power plant and used to make electricity through traditional heat-conversion technologies. The plant essentially consists of two parts: one that collects solar energy and converts it to heat, and another that converts the heat energy to electricity.

Concentrating solar power systems can be sized to power a small town or military base or grid-connected applications (hundreds of megawatts). Some systems use thermal storage during cloudy periods or at night to produce electricity outside of the traditional solar daytime window. Others can be combined with natural gas, and the resulting hybrid power plants provide high-value, dispatchable power. These attributes, along with high solar-to-electric conversion efficiencies, make concentrating solar power an attractive renewable energy option in the southwest United States and other sunbelt regions worldwide.

Federal Tax Incentives

Investment in renewable energy property is eligible for a federal tax credit and accelerated depreciation deductions. The renewable electricity production tax credit ('PTC') is available for investment in wind, solar, biomass, geothermal, and other renewable energy assets. Solar and geothermal assets are also eligible for an investment tax credit or energy credit ('ITC'), in lieu of the PTC. The PTC is available only to the producer of electricity and would not be allowed to a passive owner of a project. The investment tax credit, however, is available to the owner of the property, whether or not the owner is actually engaged in the production of electricity. For institutional investors that prefer not to be involved in facility operation and production of energy, an investment in a solar project with the ITC benefit may be an attractive alternative to investment in other renewable assets (e.g., wind) where only the PTC is available. The ITC would be available to the lessor of a solar project under a net lease.

Section 45 Renewable Electricity Production Tax Credit

The renewable electricity production tax credit under '45 of the Internal Revenue Code is a dollar-for-dollar credit against U.S. federal income tax liability for electricity produced from qualifying facilities generating electricity from renewable sources. It is the most important of the federal tax advantages for wind power projects, as wind projects are not eligible for the ITC (described below). The PTC provides a margin that, combined with the proceeds of the sale of electricity generated by such projects, allows many wind power projects to provide investor returns that are competitive with other sources of electricity generation. As modified by limitations and adjustments discussed below, the PTC equals 1.5 cents multiplied by the number of kilowatt hours of electricity:

• produced in the United States by the taxpayer at a 'qualified facility' during the 10-year period beginning on the date the facility was originally placed in service; and
• sold by the taxpayer to an unrelated person.

A 'qualified facility' is any facility owned by the taxpayer that is originally placed in service (whether by that taxpayer or by a third party) after calendar year 1993, and before Jan. 1, 2009. Property is 'placed in service' when the property is in a state of readiness for its designed function. With the extension of the PTC to facilities placed in service through the end of 2008, significant new wind power financings in 2007 are likely, as the transactions are dependent on the tax credit in order to generate sufficient returns for equity investors.

The amount of the PTC phases out proportionately over a 3 cents-per-kilowatt-hour range as the national average price of wind-produced electricity exceeds a threshold amount. The phaseout of the PTC did not apply in 2005 or 2006, and is not expected to apply in 2007.

The PTC is also reduced on a proportionate basis for grants, tax-exempt bonds, subsidized energy financing, and other credits allowable with respect to the facility. However, the Internal Revenue Service has ruled that certain state incentives, such as lump-sum payments to a project to help pay its operating costs, production-based state tax credits, government loan guaranties, and 'enterprise zone' exemptions for sales and use taxes, do not reduce the PTC.

The PTC is part of the general business credit ('38 of the Code) and is subject to limitations that prevent a taxpayer from reducing its regular and alternative minimum tax liabilities below certain floor amounts. However, under tax legislation enacted in 2004, the PTC credit for electricity produced at a facility placed in service after 2004 can be used to offset (without limitation) both the regular tax liability and the AMT liability for the first four years of production.

Section 48 Investment Tax Credit

In lieu of the PTC, an owner of qualifying solar and geothermal property is eligible for a tax credit (the investment tax credit, or ITC) in the year the property is placed in service equal to 30% of the owner's cost basis for the property. The ITC is a dollar-for-dollar credit against the taxpayer's federal income tax liability. The 30% ITC is available for property placed in service in 2007 and 2008. Cost basis will include amounts paid to purchase and install the property.

Generally, qualifying solar property is equipment that uses solar energy to generate electricity, to heat or cool a structure, or provide solar process heat. Thus, virtually any photovoltaic or concentrated solar project, whether used to provide energy to a particular building, or to supply energy to the electric grid, should qualify for the ITC.

For purposes of calculating depreciation deductions (see below), the tax basis of property for which the ITC is claimed is reduced by 50% of the amount of the credit (i.e., the depreciable basis is reduced to 85% of original asset cost). ITC tax basis is also reduced proportionately by the amount of any tax-exempt private activity bond financing or any subsidized financing provided by the federal or any state or local government.

The ITC is subject to recapture in the event the property is disposed of or ceases to be qualifying property during the five-year period after the property is placed in service. Effectively, 20% of the ITC 'vests' in each of the five years following placement in service. In the event of a recapture event, the tax basis of the property is increased for depreciation purposes by 50% of the recapture amount.

The ITC is part of the general business credit and is subject to limitations that prevent reduction of tax liability below certain floor amounts. Generally, the general business credit (which includes the ITC) cannot reduce tax liability below the tentative minimum tax (under the AMT) and cannot reduce tax liability to an amount less then 75% of what the tax liability would have been absent the credits.

Depreciation Method and Recovery Period

Equipment that uses solar energy to generate electricity generally is five-year property eligible for MACRS accelerated cost recovery deductions over five years using the 200-percent declining-balance method (switching to the straight line method for the first taxable year for which using the straight line method will yield a larger depreciation deduction). As noted above, the tax basis for computing depreciation deductions is reduced by 50% of the ITC.

Expansion of Federal Tax Incentives

Given the strong bipartisan political support for action to reduce the nation's dependence on fossil fuels, it is not surprising that a number
of bills are now pending before Congress to lengthen and expand on the current federal tax incentives for investment in renewable energy projects. One bill (S. 590, H.R. 550) would expand qualified solar property to include energy storage systems, increase the amount of the ITC for solar property, extend the ITC through year 2017, and allow for an accelerated three-year recovery period for depreciation purposes.

State Investment Incentives

In addition to federal tax incentives, a variety of state governmental incentives promote the generation of electricity from renewable resources. Many such incentives go directly to developers of renewable energy projects, including direct subsidies, tax benefits, low-interest loans, net metering and simplified interconnection procedures. Increasingly, states have been encouraging retail electric utilities to increase their use of renewable energy generation by imposing renewable energy quotas known as renewable portfolio standard ('RPS') programs. At present, 20 states and the District of Columbia have RPS programs, and such programs are under discussion in other states. States with well-developed renewable energy incentives include Arizona, California, Colorado, Conn- ecticut, Hawaii, New Jersey, New Mexico, and Texas. Proponents of renewable energy have also been lobbying for a federal RPS, an issue that is garnering broader support.

One outgrowth of the emphasis on renewable energy is the development of markets for renewable energy credits or certificates ('RECs'), also known as 'green tags.' RECs are a commodity that reflects the environmental attributes associated with renewable energy generation. RECs are a vehicle that allows electric consumers, wholesalers, and utilities to purchase 'green power' on a notional basis without regard to the specific source of the generation. Many states also permit utilities to use REC purchases to satisfy RPS requirements. In a financing of solar energy property, the RECs generated by the project can be sold by the developer to a utility or other purchaser to reduce the overall financing cost.

Financing Structures

Because the 30% ITC is available to the owner of a solar facility whether or not the owner produces electricity, traditional secured financing techniques, including leasing, can be used to finance solar projects.

Under a sale-leaseback structure (see diagram at bottom), a developer and operator of solar assets would construct and agree to operate a solar facility and would agree to sell the electricity produced to a utility, or to a business or institution on whose property the solar project is built (e.g., a retail 'big box' store or a school) under a long-term power purchase agreement ('PPA'). The PPA would require the store or the school (the 'power purchaser') to buy all of the power produced, generally at a fixed price, thereby ensuring a stream of revenue over the term of the PPA.

The developer sells the solar property to a bank or other investor ('lessor'), which leases the property back to the developer ('lessee') under a long-term net lease. The lease requires the lessee to pay fixed rents over the term of the lease. To secure its rent payment obligations, the lessee grants to the lessor a collateral assignment of the PPA and other revenues (such as funds from the sale of RECs). At the end of the lease term, the lessor can realize the residual value of the property, and that residual, combined with the rents, the ITC, and the tax depreciation deductions will generate an after-tax yield to the lessor. The transaction can be structured to also generate a positive pre-tax yield and cash-on-cash return without regard to tax benefits.

Commercial Risk

An equity investment in a solar power project whether structured as a direct investment or as a lease carries with it certain identifiable commercial risks. Such risks include operational risk, electricity transmission risk, power purchase agreement risk, as well as credit risk of other participants, asset warranty risk, and asset residual value risk.

Solar plants generally have much lower environmental risks and impacts and require less maintenance than conventional power plants, and other renewable sources such as wind. A performance study may be useful to quantify typical risks such as shading, dust, conversion losses, and annual standard deviations in sunlight. Operational risks and costs may be further managed by an experienced operator-lessee, the use of trusted technologies, and a modular design that would allow some portion of the facility to be operational even while other parts may be down.

In addition to the value of the solar equipment itself, the key asset in the investment is the revenue stream under the PPA. In a lease structure, the lessor would look to the credit of the power purchaser under the PPA in addition to the credit of the lessee. The PPA may have termination provisions that would require an investor to consider certain step-in rights. The PPA normally would not require payment unless energy has been delivered. Furthermore, interconnection issues should be identified. As a practical matter, the risk of nonpayment due to failure to deliver power is mitigated by the fact that solar projects typically have less down time and fewer maintenance issues than conventional power generation facilities because of the nature of the equipment.

Lessors should negotiate for full inspection rights and rights to receive the reports under the PPA and other agreements. To mitigate certain commercial risks, parties may consider business interruption and casualty insurance.

[IMGCAP(1)]

Philip H. Spector is a tax partner in the New York office of Troutman Sanders LLP. His practice is focused on domestic and cross-border equipment and facility leasing and other asset-based finance and project finance. Troutman Sanders represents investors, lenders, developers, and utilities in a variety of asset finance and leasing transactions.