SolMarket Presents:

“Spotting Fatal Flaws in Your Solar Projects”

August 28, 2012

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Agenda

1. Introductions

2. SolMarket Overview

3. Legal Fatal Flaws

4. Engineering Fatal Flaws

5. SolSnapshot

5. Q&A

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Introductions

Joe Song

Independent Engineer

Yuri Horwitz

CEO & President Sol Systems

Greg Schelble

Lawyer & Founder Solar Law PC

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Company Overview

Sol Systems SREC Aggregation & Finance

Largest SREC aggregator

Trusted partner to thousands of homeowners and businesses

350 developer and installer partners

PV and ST portfolio over 32 MW

Facilitated over $160 million in project financing through SRECs

SolMarket Project Development & Finance

Innovator in solar energy finance and development

250+ solar projects seeking financing

$2.63 billion in aggregate capital seeking projects

~600 SolMarket members

27+ MW of SolMarket projects financed or at term sheet

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For the Solar industry to scale we must… • Build an Ecosystem: Provide an ecosystem in which multiple new

developers and players can thrive and innovate. Competition is healthy.

• Reduce overall transaction costs: Bring down costs of developing, investing and architecting portfolios. Uniformity in the origination and vetting process, standardization in documentation.

• Create a standardized asset class: We must provide a level of standardization across the industry to create secondary markets, reducing initial investment risk and creating an opportunity for more advanced investment vehicles.

SolMarket Overview

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BETA

2010-2011 Solar Trends

SolMarket Overview

Larger projects are often DOE loan guarantee projects with limited replication possible.

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SolMarket Overview

The vast majority of solar (in volume) is in commercial space. These developers must succeed if the solar industry is to continue to scale. Providing them with the appropriate resources and information will be critical to this success.

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SolMarket Overview

U.S. Solar Expansion

Annual solar installations in the U.S. are expected to increase to 8 GW annually in 2016

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Legal Fatal Flaws

Greg Schelble Lawyer and Founder, Solar Law PC

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PPA Fatal Flaws: Off Taker Credit

Threshold question (won’t show up in contracts), but critical to keep in mind. Examples:

• Small systems (<$1m), Paydex > 65, credit classification > 4, financial stress > 3.

• Medium systems (>$1m), investment grade credit rating from national agency, or gov’t entity, or audited financials showing 2:1 debt:equity ratio.

• Utility off-takers, usually not an issue.

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PPA Fatal Flaws: Lender Rights

Collateral Assignment Rights: “ …may grant an interest (by way of collateral assignment, or as security) in its rights and/or obligations under this Agreement to any Lender.” Step-In Rights: “ …Lender shall have the right, but not the obligation, to perform any act required to be performed by Seller to prevent or cure a default by Seller … , and such act performed by Lender shall be as effective to prevent or cure a default as if done by Seller.”

Notice and Cure Rights: “ …Buyer shall provide notice of the occurrence of any Event of Default … to any Lender, and Buyer shall accept a cure performed by any Lender and shall negotiate in good faith as to the cure periods… ”

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PPA Fatal Flaws: Liability Cap

Example: “Limitation of Liability. …each Party’s aggregate liability to the other Party for all matters relating to the Project (whether of a contractual or other nature), including Seller Defaults and Buyer Defaults, other breaches of this Agreement and indemnity claims, shall not exceed the General Liability Cap.”

How big is GLC? Depends on DG vs. utility.

• If DG: go big – cap-ex of project, stepping down by some amt pegged to revenue.

• If utility: can go smaller – e.g. 1 yr PPA revenues instead (assuming you have ability to re-sell).

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PPA Fatal Flaws: Change in SREC Law

If bundling SRECs with power…

• Risk from change in SREC law, should be borne by Buyer.

• Seller bears responsibility and cost of compliance with SREC program as it exists at time of execution.

• Potential compromise: limit the $ amount of compliance costs that Seller must bear each year to some % of prior year’s revenue– e.g. 1%.

Solar Credit (SREC)

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PPA Fatal Flaws: Availability Guarantee

First preference: Availability Guarantee Structure: “Availability Damages. … commencing with the 3rd Contract Year, if Seller fails to meet the Availability Factor Limit, Seller shall pay Buyer, as liquidated damages …, an amount equal to the Availability Damage Amount, up to the Guarantee Cap.”

Make sure: To define “Available Hours” as any time when system is “mechanically capable of producing electrical energy,” which must include: • if it’s actually operating • there’s no sunlight • system emergency • FM event • scheduled maintenance

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PPA Fatal Flaws: Output Guarantee

Second preference: Output Guarantee Structure: “… beginning with the 3rd Contract Year, Seller shall either make payments to Buyer in lieu of performance for decreases in performance below the Estimated Annual Production, or provide Buyer with Substitute Energy…” Make sure:

• At most 70% to 80% of actual estimated production. • Use even lower % in outer years, especially if thin film. • Use 3 yr rolling average, or similar(longer = better). • Do not provide guarantee in 1st year – teething issues. • Carve-out exclusions for: maintenance, system emergencies, 3rd party disruptions, deviations from historical insolation, etc.

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EPC Fatal Flaws: Credit Support

If funding pre-COD, financer will want some assurance that Contractor can perform or pay.

Possible solutions:

• Parent Guaranty – will only work if parent has large balance sheet.

• Letter of Credit or Performance Bond – may be prohibitively expensive if contractor is small.

• Bankable Developer: Big contractor, no subsidiary, back-loaded

payment schedule.

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EPC Fatal Flaws: Title and Payment

Payment schedule needs to sync with title passage.

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EPC Fatal Flaws: Title and Payment

Because of front-loaded payment structure, passage of title becomes critical.

Avoid this:

“Title. … title to all Materials shall pass to Company upon the achievement of Substantial Completion and payment to Contractor of the Substantial Completion milestone payment. Pending the passage of title, Contractor shall, upon request by Company:

• rant a security interest to Company … in any Materials for which Contractor has received payment

• Execute and file any document or instruments to create and perfect such security interest. … In addition, upon an Event of Default by Contractor, title to all equipment for which payment has been made ... shall automatically be conveyed to Company.

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Legal Due Diligence vs. SolSnapshot

Due Diligence (legal “fatal flaw” analysis): a) Cost: $20,000+ b) Scope: 20+ pgs c) Information: full legal analysis and summary of each contract’s core

terms, including financeability of key provisions; full risk analysis of permitting status and risks; analysis of developer’s corporate structure, credit capability, parent entity, etc.

d) No analysis of market conditions, no industry experts.

SolSnapshot (business review): a) Cost: under $4,000. b) Scope: 5 pgs. c) Information: summary of key contracts and their commercial terms, with

background and insight from SolSystems on market conditions, SREC prices, panel pricing and reliability; summary of key permits and status of land rights, interconnection, etc.

d) Performed by: solar industry experts, with knowledge of market trends.

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Engineering Fatal Flaws

Joe Song Independent Engineer

Sol Systems Engineering Partner

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Technical Due Diligence Overview

Asset

Location

Utility

Program

Capacity

Technology

Incentive

Stakeholders

Milestones

General Approach

• Focused review in support of stakeholder interests • Thorough review of available resources to understand current status • Acknowledge site specific drivers and circumstances • Identify key risks and general feasibility • Identify other deficient areas in the interest of the client

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BETA Goals

Thorough and focused due diligence should accomplish the following:

• Key Risks: Identify risks related to development and EPC deployment

and translate the potential impact to what this means commercially

• Solutions: Provide mitigation efforts to help reduce uncertainty and risk, and provide the stakeholders tools to manage appropriately

• Alignment: Properly align EPC and O&M obligations with the terms of the PPA and the interests of the investor

• Expectations: Balance the performance of the PV system and timeline for execution with the base financial models

• Quality: Ensure the use of industry best practices for design and installation, and the appropriate site circumstances are included

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Key Technical Areas

Site Attributes – Review of site constraints, permitting and installation challenges, and primary design factors System Attributes – Review of technology, design approach, and performance Utility/Off-Taker – Interconnection scheme, requirements, scope & timing Schedule – Identify key milestones and areas of risk to achieving desired COD Agreements – Comprehensive review of key commercial, utility, EPC, O&M, and warranties

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Site Attributes

Climate Conditions Location

Site

1. Resource 2. Design 3. O&M 4. Performance

1. Capacity 2. Installation 3. Feasibility 4. Design

1. Permitting 2. O&M 3. Design 4. Cost

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System Attributes

PV Components

Balance of Systems

Design Code/Best Practices

Configuration/Type

Performance/Losses

Operations & Maintenance

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Interconnection

What does it take to close this gap? 1. Preliminary design and location 2. Interconnection Studies 3. Interconnection Agreements 4. Location, method, and responsibilities

a) Owner provided facilities b) Utility provided facilities/upgrades

5. Permitting and approvals 6. Design, Utility approvals, and

procurement 7. Field installation scheduling 8. EPC schedule alignment 9. Testing and approvals

Challenges

1. Market by market, utility by utility variances in requirements and process

2. Predictability in timing and alignment with project schedule (PPA, EPC, ITC, etc)

3. Scope, cost, and approvals 4. Field execution and procurement 5. The Utility controls every part of the

entire process

Due Diligence 1. Specific utility and program references 2. Assess current status and pending tasks 3. Identify any project attributes that would

lead to increased risk, schedule or cost 4. Identify any critical milestones that are

potentially in danger 5. Translate any additional factors that may

negatively impact cost or schedule.

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Schedule & Agreements

Schedule Due Diligence

1. Interconnection status 2. Design status 3. Permitting

Requirements/Status 4. Land Approvals 5. Procurement progress 6. Contractor Agreements 7. Scope of Work – PV 8. Scope of Work –

Interconnection 9. Commissioning and Testing

Agreement Review

1. Review EPC and O&M

agreements for project alignment and meeting industry standards for scope and provider obligations.

2. Review supply agreements and warranties to ensure they meet industry standards, and align with project goals.

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Questions & Answers

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Contact Info

Greg Schelble greg.schelble@solarlawpc.com

(571) 292-3008 www.solarlawpc.com

Joe Song joe@solsystemscompany.com

949-289-0469

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Contact Info

Sol Systems 888-235-1538

info@solsystemscompany.com www.solsystemscompany.com

SolMarket 888-SOL-1115

info@solmarket.com www.solmarket.com