The EIA estimates that the United States alone will add 51 Gigawatts of solar electric energy in 2025. Green energy development continues to increase across the country. But what happens to those power plants at the end of their life span? Solar farms have to be decommissioned and more states are requiring financial guarantees to make sure the decommissioning takes place. Learn more about Solar Decommissioning Bonds, including what they guarantee and how to obtain them.
A solar decommissioning bond is a financial guarantee that ensures that a solar energy project will be dismantled and removed at the end of its useful life and that the land will be returned to its original condition. Without a solar decommissioning bond or alternative, there is no guarantee that the owner or developer of the product will be able to restore the property.
Usually, an owner or developer of a solar project is the party required to decommission the project. This party is referred to as the principal on a decommissioning bond. The principal pays a third-party, known as the surety, to provide a financial guarantee of the decommissioning. The party that receives the financial guarantee is the obigee. This is usually a government entity or landowner. The obligee benefits from the bond by receiving a guarantee from the surety that money will be available to remove equipment and restore the land, even if the principal cannot afford to do so, or is bankrupt. Surety bond companies have vast resources and are heavily regulated. It is often easier to collect from a surety than from the principal, if a problem arises.
The amount of a solar decommissioning bond depends on the state in which the project is located. Many states now have defined laws regarding the decommissioning of solar and wind projects. However, a number of states still do not have any such legislation. The bond amount for states with legislation and requirements varies widely.
For example, Indiana requires a bond amount based on the project’s life. A bond must be in the amount of 25% of the decommissioning costs when the plant starts commercial operations, 50% of the decommissioning costs by the 5th anniversary of operations and 100% of cost by the 10th anniversary. New York on the other hand requires 100% of the decommissioning costs, plus an additional 15% in contingency. An excellent guide on state decommissioning requirements can be found here.
While Solar Decommissioning Bonds used to be difficult to obtain, Axcess Surety has a specialty program to issue them based on the project itself. No longer do investors, developers and owners need to indemnify if we can get them qualified for this program. In fact, in this program, we do not need to collect financial information from the principal. The bond is written on the strength of the project itself. The principal will need to provide the following:
A big benefit of this program is the lack of collateral. Many sureties will want the principal to post collateral to protect the surety from the long term nature of these bonds. However, our program allows these bonds to be written without collateral.
Keep in mind that not everyone will fit into this program. Additionally, principals with strong financials may want to consider going through one of our other programs with standard underwriting. The benefit to these other programs are possibly lower rates.
The cost of decommissioning bonds depends on the overall risk of the project. Generally, the bond will cost 1% - 5% of the bond amount for each year that the bond is in place. Keep in mind that these bonds are usually required to be in force for 10 - 30 years so the cost can add up. The stronger the financial strength of the principal, the lower the cost of the decommissioning bond.
Solar decommissioning bonds can be very long term in nature. Often, these bonds are written for 20 years or more. A lot can change over that time period. One of the most important considerations for getting these bonds is the bond form. Will the obligee allow a bond form that is renewable or non-cancelable? The decision is a double edge sword. By allowing a renewable bond form, the obligee makes it easier for the principal to obtain a bond. However, they also increase the chances that the bond can be canceled. Most bond forms require the surety to be replaced by another surety or letter of credit before the bond company can get off the decommissioning liability.
While each state has their own requirements for what financial guarantee they will accept, most will accept an Irrevocable Letter of Credit (ILOC), cash deposit, or other insurance product to guarantee decommissioning. The problem with cash and ILOCs is that they tie up resources for a long period of time. Cash and borrowing could be used by the principal to fund operations or additional investments. Surety Bonds generally do not prevent the principal from using their resources for other purposes. This is especially true if they can be written without collateral.
Many solar projects need other solutions in addition to decommissioning bonds. Lenders and owners may require solar performance bonds to guarantee a project’s completion. Additionally, power purchase agreement bonds may be needed to guarantee the delivery of power. Efficiency guarantees and insurance are also common in this field.
As solar energy becomes more utilized, decommissioning bonds are going to be needed by owners and developers. With Axcess Surety, these bonds can be obtained without collateral in many cases. This frees up the principal’s resources to use on other projects. Solar owners and developers can also learn more about surety bonds, including many frequently asked questions by visiting our Guide. Contact the solar bond experts at Axcess Surety today for all your solar and energy bond needs and solutions.
Axcess Surety is the premier provider of surety bonds nationally. We work individuals and businesses across the country to provide the best surety bond programs at the best price.
