Unlocking billions in federal funding to jumpstart America’s clean energy transition, the Inflation Reduction Act (IRA) creates tremendous growth prospects for the solar market. However, this potential can only be realized when understanding how to maximize the opportunity. Installing 950 million solar panels by 2030 to help power homes, businesses and communities requires new solutions to finance, guarantee and build solar projects.
As such, accelerating solar EPC companies’ capacity to build community solar and utility-scale projects will be essential over the next two years to maximize their vital role in this energy revolution.
To succeed, EPC leaders must understand how IRA provisions can be leveraged, what financial tools can be used to increase capacity, and the partnerships necessary to ensure that EPCs can grow their pipeline.
Putting the right plan in place
The IRA extended the solar investment tax credit (ITC) for projects that begin construction before Jan. 1, 2025. Before starting any solar project, EPC leaders must consider maximizing available financial incentives.
For example, the ITC is subject to a bonus credit if certain domestic content requirements are met if the project is in an “energy community.” An additional bonus credit of 10% is available for projects less than 5 MWac located in “low-income communities” or 20% in the case of projects that are part of a low-income housing project.
Though solar developers receive the ITC and additional credits, EPC contractors’ understanding of the rules and regulations will allow them to better assess the feasibility and size of projects they seek to build. In addition, the ITC credit is based on specific prevailing wage and apprenticeship requirements. The composition of the labor force used by EPC contractors will dictate whether developers will be eligible for the ITC-based credit of 30%.
Minimizing project risk
The ability to place projects in service by December 21, 2024, will result in high demand and inherent value for EPC contractors with the capabilities and capacity to take on larger backlogs. To achieve this goal, an often-forgotten financial tool can help increase capacity: surety.
Surety provides performance guarantees to developers and their construction lenders that projects will be built on time and per the terms of the contract. Performance bonds have become an important facet for developers to not only ensure that financing can be secured but that in the case of default by an EPC, they have a third party (a surety) to either finance the firm through completion of the project, find another suitable EPC contractor, or provide compensation for the financial loss. Payment bonds, which often accompany performance bonds, ensure that first-tier subcontractors and suppliers will be paid for labor and materials incorporated into the EPC contract.
The ability to secure surety is based on an analysis of the EPC entity by the surety. Based on this assessment, a surety provides its client with a program that reflects a single project and aggregate program limit. In the case of an EPC firm, the aggregate limit is typically based on the cost to complete all projects (whether bonded or not).
Picking the right partner to accelerate growth
Though many variables dictate whether a surety will support the issuance of a bond for a specific EPC contract, the need for EPC contractors to obtain aggregate limits, which far exceed current surety programs, will likely increase due to the enactment of the IRA and the resultant two-year race to build new solar farms.
Solar EPC contractors can take the following steps to secure more extensive surety programs that grow with the needs of the firm:
1) Select a surety agent/broker specializing in developing surety programs for solar EPC contractors. An agent with this specialization will not only connect the EPC contractor with the appropriate surety company, but that individual will also provide additional services, such as contract language development (with developers and owners) and offer strategies to ensure the EPC firm continues to have surety support as its revenues continue to grow.
2) Use a CPA firm with the knowledge required to prepare solar EPC audits or “review engagement” financial statements. Sureties often recognize whether an EPC contractor works with a qualified CPA based on financial statement presentation, including backlog reports. The CPA firm can also consult on the implications of financial decisions, especially in cases where a key objective is to obtain additional surety credit.
3) Partner with a surety company with a deep understanding of, experience with and commitment to the renewable space. Many sureties have difficulty supporting fast-growing EPC contractors and become laser-focused on financial ratios and historical experience in deciding whether to support a contractor’s surety needs. Surety companies have traditionally been guided by the needs, growth, and structure of a standard construction company. Traditional underwriting metrics will not deter the appropriate surety partner. Those with a proper understanding of the current environment should be willing to look beyond the numbers and support EPC firms.
With the IRA catalyzing our country’s clean energy transition, acting with urgency and the know-how to take advantage of this paradigm-shifting moment is vital. EPC leadership has a tremendous responsibility to make strategic decisions that will help them realize growth for their companies. By constructing the right plan, opening the right doors and forming the right partnerships, the future is bright for EPC contractors—and part of that future is surety.
Karl Choltus is National Surety Practice Leader for Brown & Brown.
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