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the traditional business model for solar panel suppliers has been to sell PV panels to the user. under a leasing model, the supplier keeps ownership of the panels and either leases them to the customer or sells them to the customer under a power purchase agreement (PPa).

This approach has advantages for both parties. The supplier receives an ongoing revenue stream and can hopefully capture part of the energy cost savings, and the customer can access green power at competitive rates without up-front capital investment and system performance risk.

The engineering and economics of rooftop PV systems is well understood. In this article, we discuss how to address some of the legal and regulatory complications.

let’s start with the simple position

In the simplest model, the end user owns the premises, and consumes all electricity generated by the panels onsite. We show this schematically in Figure 1.

In this example, the solar PPA must cover the usual matters involved in supplying electricity, such as contract term, contract maximum demand, pricing, quality, reliability, risk, etc. But because the generating works are to be located on the customer’s premises, the solar PPA would also need some provisions not found in a conventional agreement.

First, the supplier would want to protect its ownership of the panels. Under the law of ‘fixtures’, when something is attached to a building, it becomes part of the building and as a result becomes owned by whoever owns the building. The solar PPA would need to prevent this, by noting that the supplier continues to own the panels despite them being affixed to the customer’s property. But this clause would only affect the parties to the solar PPA; it would not protect the supplier against a third party buyer of the premises who

has not been told about the clause. Steps can be taken to ensure that third parties know about this arrangement, for example by registering a caveat over the premises.

Second, the solar supplier would need an ongoing right to access the site to install, maintain and eventually remove the solar panels and related equipment.

Third, in addition to any normal provisions dealing with credit risk, the supplier would need to be able to stop supply if the customer failed to pay. This would require a right to enter the premises to disconnect the panels and, if required, to remove them completely.

A solar PPA has a few other differences from a normal electricity contract. For example it needs to determine whether the Supplier would charge for electricity generated or electricity consumed, and it would need to deal with what happens when the customer relocates. We have selected the above three issues because they are the ones which are most affected when other players enter the picture.

But life is rarely that easy

Unfortunately, other people’s interests can complicate this straightforward picture.

For example, if the electricity customer does not own the premises, the solar supplier would need the landlord’s consent for installation and ongoing site access, as well as the landlord’s agreement to the supplier retaining ownership of the panels despite them being fixtures. The supplier would also want to be able to enter the premises to reclaim the panels if the customer defaulted under their premises lease or was evicted.

Often, the premises will be mortgaged, and the bank will have rights as mortgagee over the whole premises including fixtures. These rights will normally prevail over the solar supplier’s access and title rights discussed above, and indeed the mortgage may prevent the borrower from giving such rights. Ideally, especially when there is a substantial value of panels involved, the customer or landlord (whoever granted the mortgage) and the solar supplier will need the bank’s agreement to the solar PPA and the supplier’s access and title rights.

The solar supplier may also have its own financier, who will probably hold a security interest over the panels. To protect this interest, the financier would likely want to verify that the supplier successfully retains ownership of the panels and rights (for either the supplier or the financier itself) to access the premises to retrieve them. These rights may compete with the customer/landlord’s bank’s mortgagee rights.

Thus, the apparently simple task of installing panels and selling the electricity can become more complex, as the number of people potentially affected by the transaction increases (Figure 2).

sOLar Leasing: nOT as simpLe as iT seemsBy Matthew Bowen and Katharine McKenzie, Jackson McDonald Lawyers*

Figure 1: A simple solar PPA

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grid connection

Our discussion of the regulatory issues focuses on Western Australia, but comparable issues will arise in each state or territory.

Western Power operates the electricity network in the south west of WA. If surplus electricity is to be exported to its network, Western Power would need to install a bi-directional meter and someone (the incumbent electricity retailer, the solar supplier or the end customer) would need to contract with Western Power for an ‘entry service’ or ‘bidirectional service’, to allow the electricity to be exported into the grid. The relevant offtaker would also need to find a buyer for the surplus electricity, or sell it into the Wholesale Electricity Market.

retailer reference number

Most solar PPA premises will already be connected to the network and be supplied by a conventional electricity retailer. The conventional retailer will usually have an access contract with the grid operator for delivery of electricity to the premises.

In WA, Western Power’s approval process to connect a solar panel system to its network requires a customer to first apply to the incumbent (conventional) electricity retailer for a ‘retailer reference number’. This requirement is controversial. Some observers feel that it’s a barrier to entry, designed to protect the commercial interests of Western Power and the incumbent retailer.

There are elements of truth on all sides in this controversy.

Certainly, incumbent retailers have in the past used the requirement for a reference number as an opportunity to re-negotiate their own electricity supply contract with the customer. Although the customer may feel aggrieved by this, from the retailer’s perspective, if the pricing and other provisions of the contract are based on certain load forecasts, it is reasonable to reopen those provisions if the customer forecasts a radical change in load due to its adoption of solar PV. Of course, retailers can avoid this controversy by including suitable provisions in their conventional electricity supply agreements in advance, avoiding the need for a

renegotiation when the customer asks for a reference number for a solar installation.

Similarly, although there are clear commercial drivers for the network operator and the incumbent retailer to resist solar installations, there are also genuine operational issues for the network operator. While there is scope for disagreement as to the absolute magnitude of the risks, an incorrectly installed or configured solar PV system can indeed impact on the quality of electricity received by customers nearby, especially if the relevant portion of the grid becomes ‘islanded’ (disconnected) from the rest of the network and so beyond the reach of voltage and frequency controls. Likewise the growth of solar PV makes it harder for the network operator to provide its personnel with a safe working environment, because it is harder to ensure that network sections are de-energised.

licensing

A solar supplier must also consider if any licenses or other permissions are required for the solar leasing arrangement. The default position in WA is that a license is required if electricity is being generated, distributed through wires or sold to an end customer. A solar PPA typically involves all three, but there are certain exemptions. Most relevantly, no generation licence is needed for generating works under 30 MW, and no electricity licences will be required for a ‘commercial’ premises if all electricity generated is consumed on

the premises and surplus electricity is not being exported to the grid. The solar supplier should always check whether its particular circumstances fit within the various exemption categories.

conclusion

Solar PPAs are a potentially valuable new business model for increasing solar PV’s market penetration. Although the engineering and economics of rooftop PV are well understood and quite straightforward, installing the generating plant in the customer’s premises raises contractual, risk management and regulatory issues that need to be worked through. All these matters can be addressed, and we have seen them dealt with effectively, so they need not be insuperable barriers. However, they do complicate the sales process for a solar supplier, because most end users do not need to consider these issues when negotiating a conventional electricity supply agreement.

As the market evolves, more and more financiers, landlords and others will be familiar with these issues and how to address them. But for the time being, to maximise the chances of winning business, a solar supplier will need to present the customer with a complete package that addresses these issues and makes the process as straightforward as possible.

* We would like to acknowledge Tessa Cramond for her first draft of this article during her vacation clerkship.

sOLar Leasing: nOT as simpLe as iT seemsBy Matthew Bowen and Katharine McKenzie, Jackson McDonald Lawyers*

Figure 2: The solar PPA landscape can quickly get complicated