Solar Power Performance Bonds

A solar power performance bond is a solar contractor’s guarantee to complete the project in accordance with contractual requirements. If the contractor should default and not complete the work, or produce unacceptable results, the project owner (the bond’s “obligee”) can file a claim against the bond. They will be compensated for the cost of hiring another contractor to complete the project or remediate the construction flaws.

Any solar contractor can be required to purchase a solar power performance bond as a condition for being awarded a contract. As the obligee, the project owner establishes the required bond amount, which typically is at least equal to the total project cost.

Some examples of projects that may require this bond are:

• Commercial Solar Panel Installations
• Municipal & Government Solar Projects
• Solar Infrastructure Developments
• Corporate & Industrial Solar Energy Systems
• Utility-Scale Solar Farms

Recently, the U.S. has increased efforts to promote cleaner energy alternatives and reduce infrastructure-related environmental impacts. Because of this, many state and federal programs support solar development and require performance bonds to make sure a contractor stays compliant with project standards and obligations. 

Some policies the U.S. government has implemented include tax incentives, grants, and regulatory measures that encourage solar projects. Initiatives such as carbon emission reduction goals and phasing out fossil fuel subsidies also aim to promote better alternatives to energy production. Some examples of federal programs that support solar energy include:

• The Solar Investment Tax Credit (ITC): Provides tax incentives for businesses and homeowners installing solar energy systems.
• The Department of Energy (DOE) Loan Guarantee Program: Supports large-scale renewable energy projects, including solar farms.
• Federal Energy Regulatory Commission (FERC) Guidelines: Oversees the interstate transmission of electricity and wholesale electricity markets, which impacts the integration of solar power into the grid.

States nationwide are also on board to help construction projects of all kinds stay eco-friendly, such as:

• Mandating renewable energy bonds to ensure long-term system performance and maintenance.
• Enacting renewable portfolio standards (RPS) that require utilities to generate a certain percentage of their electricity from renewable sources, incentivizing solar project development. 
• Implementing building codes that encourage or mandate solar panel installations on new construction.
• Providing tax credits and grant programs that support solar energy expansion.
• Enforcing solar decommissioning bonds to guarantee the proper removal and disposal of solar installations at the end of their lifecycle.

Solar power performance bonds make sure the solar energy project is successfully completed. This goes beyond simple financial security. It also supports relationships between project owners and contractors, building trust, compliance, and high-quality standards within the solar industry.

Large-scale solar projects require significant investments, and unexpected defaults can result in devastating financial consequences. A solar power performance bond mitigates risks such as weather-related delays, grid connection issues due to permitting, utility approvals, transmission constraints, technological failures, and compliance issues. When a contractor can secure a solar power performance bond, it is a sign of financial responsibility and reliability, reducing risk exposure for all involved.

A solar power performance bond also guarantees that the project will meet quality standards with materials and construction, follow contractual requirements, and promise that defects or performance issues will be addressed. These bonds help support the long-term success of solar energy investments. 

There are three parties to the surety bond agreement for a solar power performance bond. In addition to the obligee, the two other parties are the solar contractor (the bond’s “principal”) and the company that authorizes the bond (the “surety”).

The agreement spells out the terms that the principal must abide by to avoid a violation that could result in a claim against the bond. It also makes the principal solely responsible for paying any valid claim against the bond. But while the principal is legally obligated to pay valid claims, most often the surety will expedite matters by paying the claim initially and then being repaid by the principal.

In authorizing a solar power performance bond, the surety is agreeing to extend credit to the principal to cover the cost of a claim if the principal is unable to pay it immediately. That carries the risk of not being repaid by the principal and having to take legal action to secure repayment.

Consequently, the premium rate a given solar contractor will pay depends largely on how creditworthy the underwriters find the principal to be. The biggest factor is the principal’s personal credit score. With good credit, the principal should be eligible for a premium rate that’s in the range of .5-3% of the bond amount. The annual premium for a solar power performance bond is calculated by multiplying the required bond amount by that percentage.