New solar investors often ask us for guidance on how to approach due diligence for a solar project. We decided to create the plain English solar project diligence roadmap below. It’s more of a how-to-guide than a checklist. It outlines the issues that need to be confirmed, what document to ask for, and what to look for in each one.
The typical situation we see: An investor was presented with a solar deal they liked. After negotiating a term sheet, they are ready to vet the project. They know they need to confirm that the underlying project documents match up with the project described in the term sheet/model. Looking at the PPA price and EPC cost is obvious. But what else should they worry about? What documents should they ask for? What should they look for in those documents?
Our answer is the table below.
Understanding the Diligence Table
In the first column, we touch on the concept you (as the investor) should be trying to confirm. The second column lists which document to look at to find the answer. The third column lists a few issues to specifically look for in that document.
CONCEPT |
DOCUMENT |
WHAT TO LOOK FOR |
ENTITY OWNERSHIPMake sure that the entity you buy an interest in, or loan money to, is the actual entity that owns the project. |
||
| Make sure that the company/entity has been officially created. |
Articles of Organization |
Needs to be stamped by Secretary of State.
Make sure the name matches. |
| Make sure that the company will be run as promised in the term sheet. |
Amended Operating Agreement |
Lays out the ownership interests, distribution allocations, and governance rights. |
| Confirm that the company is authorized to enter the transaction with you (either admitting you as a Member or approving the Loan owed to you). |
Board Resolution |
Must approve the transaction and be signed by required Members |
| Make sure that the membership interests are officially transferred to you. |
Membership Interest Assignment Agreement |
Note – this typically only applies if you buy a % of shares from Developer who previously had 100% |
| Check that specific conditions are to be satisfied before you put your money in the company. |
Membership Interest Purchase Agreement
OR
Equity Contribution Agreement |
The CPs (conditions precedent) are listed.
Note – this can also be handled in the Operating Agreement.
|
| Check for outstanding debts or other senior secured interests in the projects. |
UCC & Tax Lien search.
UCC = Uniform Commercial Code
|
Lender’s publicly register secured collateral interests through UCC Filings. They can be searched via several services such as:
https://myctscorp.com/services/ ucc-nationwide/ |
PROJECT DOCUMENTSMake sure that the ProjectCo has the right to sell power, as well as the contracts in place to build, own, and operate the array for the project life. |
||
| Confirm that the ProjectCo has the right to connect to the grid. |
In front of the meterInterconnection Study Result, and/or Interconnection Service Agreement
Behind the meter Net Meter Agreement or other state/regulatory permission to sell power and connect to grid. |
Confirm that the agreement names the right ProjectCo.
Confirm that the interconnection address/location is the same as the project.
Confirm that the capacity matches the amount in the model/project description.
Check for any drop dead dates. |
| Make sure there is an Agreement to Purchase Energy.
|
Power Purchase Agreement |
Confirm the PPA’s key terms match project model. Look at the customer termination clauses. Confirm that contract is signed with the right ProjectCo. |
| SRECs – (Renewable Energy Credits)
Check if SREC’s are available to the project owner. (*currently relevant in MA) |
SREC Qualification letter |
Confirm that the project is authorized to create and sell SRECs. Confirm any drop dead dates and system size in qualification. |
| SRECs – Agreement to Purchase RECs for price reflected in project model.
Locking in the forward purchase price avoids revenue volatility |
SREC Purchase Agreement |
Check the price paid for REC and the duration of agreement. Confirm that the contract is signed by the right ProjectCo. Confirm the SREC buyer is a credit worthy.
|
| Real Estate – Site Control
Confirm that the project has the right to be on the Host Site for the life of the project. |
Site Lease
|
Confirm:
– duration of lease – name of Lessee – property defined in lease matches the project location – public access to array, or an easement for a road
Also conduct a Title Search to confirm that the Lessor is the actual Land Owner. (This is done as part of the Title Commitment process.) |
| Real Estate – Clear Title
Make sure no entity has the right to cancel the lease or take over the land. |
Title CommitmentTitle Insurance companies issue a policy guaranteeing you have clear title, subject to certain exclusions.
SNDA – Subordination & Non-Disturbance AgreementIf the Land owner has a mortgage from a bank, the bank must sign an SNDA. The SNDA says that if the bank forecloses on the property, it will honor the lease.
|
In the Title Commitment – look at the exclusions. If they reference an easement on land directly under the array, then the developer needs to get that easement removed and a new title commitment issued.
Look at the ALTA survey for the site to see where the exclusions are located in reference to the physical array. |
| Approval to Build the Array
The local authorities must issue permits before you can build the array (or anything). |
Conditional Use PermitThis is the permit issued by the county, after approval from a variety of agencies has been given. |
The CUP often comes with requirements, like landscaping. Confirm that the system building plans (and budget) include satisfaction of the CUP requirements.
|
| Make sure the system will be engineered, procured, and built.
|
EPC Agreement |
Confirm that the scope of work, the pricing, and the warranties match the project description. Also confirm that the construction schedule matches drop dead deadlines above, and any LDs back up those dates.
|
| Operating the Project – Asset Management
Make sure someone agrees to take care of the project during the asset life. |
O&M Agreement
AND/OR
Asset Management Agreement |
Confirm the scope of work and pricing. It must cover administrative responsibilities as well as in-the-field maintenance. |
| Operating the Project – Insurance
|
Property and General Liability Insurance |
The project should carry property insurance that covers the system replacement cost.
The project should also carry General Liability insurance.
Often debt/financing agreements require the project carry a minimum level of insurance coverage. Confirm that those requirements are met by the policies. |
| Operating the Project – Warranties
Look for a variety of warranties to keep early maintenance costs down.
|
20-year solar panel warrantyIssued by panel manufacturer. Assigned to ProjectCo by EPC Agreement.
10-year warranty on inverterIssued by manufacturer. Assigned to ProjectCo by EPC Agreement.
2-5 year workmanship warranty
|
Confirm all warranties are assigned to ProjectCo via the EPC Agreement.
|
If you’d like a couple more tips from Zenergy, check out Tax Equity Due Diligence Tips.
Our sister investment fund, SolRiver Capital, offers a complete diligence guide as part of it’s exclusive Developer Platform. The platform is free to use but requires approval to access. If you’re interested in taking a deeper dive, feel free to request an invitation.
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