Solar energy supply agreements

Solar energy supply agreements

By Allan McDougall

February 13, 2013

Many electrical and building contractors are entering the burgeoning photovoltaic (PV) system supply industry as a result of government policies favouring energy conservation and efficiency. A new business opportunity presents in a slow economic environment burdened nonetheless by rising energy costs. The PV supply industry is particularly attractive due to the lure of legislated incentives and industry rebates intended to mitigate the charges the customer pays to its electricity retailer.

A key question for new solar energy players and their customers is how to absorb the relatively high up-front cost of acquiring and installing the PV system. This is because most customers in the primary target market are home owners or small businesses that are not necessarily able or willing to meet such an expense.

For business customers at least one solution for the supplier is a typical goods rental agreement, modified for energy supply and use. This means that like any other item of plant the panels are leased to the customer for a period of time sufficient to pay out the supplier’s investment.

It may be that the supplier chooses to realise its investment early, by on-selling the PV system to a financier which then becomes the lessor of the equipment to the customer. Involving a financier will solve the investment problem for the supplier as well as avoiding the regulatory requirement of a credit licence to lease to households and potentially small business. On the other hand, the amortisation profile of PV systems necessitates lengthier terms than are typically found in consumer leases, making for a potentially more complicated credit contract.

The contract’s terms and conditions must also be supplemented by special conditions concerning the owner/installer’s right of access to monitor, service and where necessary, retrieve the PV system. This will require the terms of a licence, or even a sub-lease so that the owner has the right to enter onto the premises on which the panels are installed in order to lawfully deal with them.

Legal issues arise if there are other parties with an interest in the land, like a mortgagee or even a landlord. Further, where a financier would most likely register its lease on the Personal Property Securities Register (PPSR), the question arises as to whether installing the panels turns them into fixtures hence taking them outside the comfort zone afforded by the PPSR. This leads on to the question of whether such a risk could be addressed by registering a caveat on the relevant land title. Doing so could conflict with the terms of any prior ranking real property mortgage registered against the land.

A potential solution is the Solar Power Purchase Agreement (SPPA), under which the host customer pays for the energy generated by the PV system, rather than purchasing or leasing the panels themselves. In Australia SPPAs are still in their early stages, with technical and contractual issues yet to be resolved.

The supply of PV systems presents business opportunities for suppliers and potential cost savings to their customers, but also uncertainty about the level of legal risk for both parties as well as any financier.

Allan McDougall

February 2013

Pigott Stinson can assist you with asset protection, drafting credit agreements and compliance with your obligations to consumers.

For more information contact partners@pigott.com.au

This article is intended to provide general information in summary form on a legal topic, current at the time of publication.  The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.