Concern over greenhouse gas emissions (GHGs) has produced a new phenomenon – leases of rooftop space for the installation and operation of solar power facilities.
Last May Ontario passed the Green Energy Act. One of its main objectives was to establish a feed-in tariff program (a “FIT” Program) whereby the Ontario Power Authority (the “OPA”) committed to purchase, at very favourable rates, all of the green energy produced in the Province. In response to this incentive, owners of buildings are likely to be approached by solar power companies wishing to lease rooftop space to install and operate green energy systems.
Pros and Cons
Once an application is approved by the OPA, the applicant must sign a power purchase contract with the OPA for a term of 20 years. An important component of that contract is the transfer to the OPA of all of the environmental attributes associated with the project. As a consequence, any carbon credits and renewable energy credits belong to the OPA and not to the solar power company or the landlord of the property on which the solar power facility is installed.
Carbon credits arise under “cap and trade” systems such as that which Ontario intends to impose. Under a cap and trade system, energy generating plants, commercial buildings, factories and other facilities are restricted to a prescribed annual allotment of permitted tonnes of GHGs emitted by their operations. If the annual allotment is exceeded, the facility owner must pay a fee or fine to the regulating authority unless it is able to purchase carbon credits. Carbon credits arise where a facility succeeds in keeping or reducing the GHGs that it emits below its allotment. Carbon credits can be bought and sold on a commodities market.
Renewable energy credits occur where an authority imposes a requirement that a stated percentage of energy used must be provided by renewable energy sources such as solar power, wind power, biomass and similar renewable energy facilities. To meet annual targets, users of energy can purchase renewable energy directly from a supplier or they can purchase credits that are used to fund renewable energy products. Twenty-nine U.S. states and the District of Columbia have established regulatory schemes mandating that the energy production of the state must be from renewable energy. U.S. federal legislation is expected to establish a national program and Canada will almost certainly follow suit.
At this time, environmental attributes do not have a large value, but it is anticipated that their value will increase (perhaps very dramatically) within the not too distant future. Accordingly, before leasing out a roof to a solar power company, consideration should be given to the potential value of those environmental attributes. In the absence of favourable tax treatment, government grants or other forms of incentive, the cost of installing a solar power facility on a roof might make the investment unfeasible. Typically, a building, even one with a large roof, would provide no more than 20% of its energy consumption through rooftop solar panels. Furthermore, at present, the cost of electricity purchased from the grid is still relatively low. However, as the volume of solar power facilities production increases and anticipated developments in technology take hold, it is expected that the cost of installing solar panels will reduce substantially. It may be in the interest of a building owner to hold off signing away the ability to install its own solar panels and to use its own electricity so that it can benefit directly from the carbon credits and renewable energy credits that the project gives rise to.
On the other hand, the time frame during which environmental attributes are likely to become valuable, and the extent to which they become valuable, is uncertain. It may take several years before the markets mature and trading produces substantial benefits.
Also, at the end of the term of the rooftop lease (typically a 20 year period), a building owner may find that the ownership of an intact and functioning solar power facility represents a substantial benefit, particularly when the building owner has not itself been required to contribute to the cost of the installation or maintenance. Solar power facilities will normally have a useful life well in excess of 20 years. The building owner will be able to deal with the environmental attributes in whatever way it wishes at the end of the lease and at the same time will enjoy the benefit of an essentially free form of renewable energy on its roof. Alternatively, the building owner may choose to itself enter into a power purchase agreement with the OPA at the end of the term of the rooftop lease, assuming the FIT Program still exists.
A further benefit flows from the fact that the solar panels will normally reduce energy costs in the building due to the shading effect of the panels. Also, depending on the type of installation, the panels may extend the useful life of a roof by serving as a buffer from the elements.
Some Special Concerns
Assuming a building owner has elected to lease its roof to a solar power company, several concerns must be addressed:
• Non-disturbance agreements, consents or acknowledgements may be needed from mortgagees of the building or from ground landlords.
• The solar equipment may be subject to a personal property security interest or lien in favour of a lender. The rooftop tenant’s lender will seek agreements from the landlord and the owner of the building as well as the mortgagees of the building to the effect that the solar power facility will not be treated as a fixture and will remain the property of the rooftop tenant. The lender will also seek an opportunity to cure defaults of the rooftop tenant to avoid cancellation of the lease. A forbearance commitment and an opportunity to assign or transfer the rooftop lease to the purchaser of the solar power facility may also be required.
• The production, review and approval of detailed engineering drawings, inspection rights, supervision rights and adherence to approved plans as well as all governmental requirements will be important elements of the rooftop lease, particularly with regard to the integrity of the roof and structure of the building.
• Alteration rights will also be contentious. The tenant will need to limit changes to the landlord’s property that would interfere with sunlight, while the landlord will be concerned about alterations that might affect its building.
• Particular attention to maintenance and repair obligations must be taken to ensure that the solar power facility is always maintained properly and safely. Solar power facilities will normally have a life expectancy well beyond the term of the lease and the landlord will be concerned about asset preservation.
• A sizeable deposit will be needed to protect against damage to the building, and possibly the cost of removing the solar panels and restoring the building at the end of the term.
• There are specific insurance requirements, such as environmental damage and environmental impairment coverages, as well as boiler and machinery insurance. Risk transfer clauses, such as releases and indemnities, must also be specifically tailored.
• The need to relocate the solar power facility, or components of it, in order to allow the landlord to maintain and repair the roof or to make alterations to the building must be negotiated.
• Snow removal and snow disposal will be a concern.
• Damage and destruction and rebuilding obligations associated with the building and the facility, and various other concerns need to be addressed.
These items represent a small sample of specific concerns related to this type of lease. Daoust Vukovich LLP is able to assist in addressing all of the relevant concerns as it has investigated all leasing aspects of this emerging business opportunity.
Source : www.articlesbase.com