Solar Leasing with Governments: Key Issues for Developers to Keep in Mind

According to Secretary of Energy J.M. Grantholm, solar is our cheapest and fasting-growing source of clean energy. And, under a scenario outlined in the U.S. Department of Energy's Solar Futures Study, by 2035 the solar energy sector will have the potential to serve 40 percent of U.S. electricity needs.

There is no doubt about the demand for solar energy, but what about the supply? The centerpiece of the pared down, yet to be passed federal reconciliation bill is $300 billion in tax incentives for producers and purchasers of wind, solar, and nuclear power inducements intended to speed up a transition away from electricity generated by burning fossil fuels.

Although many incumbent utilities are moving down the renewable path, achieving the goal of large-scale solar will require many more new entrants. As with the deployment of cellular telephony nearly 50 years ago, creative, ambitious, and hard-driving entrepreneurs will be stepping up to deploy as soon as possible.

Key to success and scale will be siting solar facilities. Many of the desirable sites are owned by tribal, federal, state, and local governments. As the next generation of solar developers jump into the fray, they will need to enter into public-private partnerships with governments, usually in the form of long-term solar leases.

The process-oriented nature of government often creates friction with solar developers' need for speed. And while there is an emerging consensus about the burning need for carbon reduction, that has not yet resulted in the elimination or streamlining of governmental processes or regulations. Yuri Freedman, Senior Executive at SoCalGas involved in renewables, notes that until these issues are reconciled, solar developers will be challenged to act at the speed of climate change.

Dealing with government agencies can involve the developer, and also the government, in novel issues that can affect the execution of leases and the timing of approval. Issues for solar developers to keep in mind:

• RFP—government as regulator versus government as landlord: Generally, most governments require a fair and open public process, often beginning with a request for proposal (RFP), before leasing lands held in the public trust, although direct negotiations are allowed in some circumstances.

  Direct negotiations are often initiated at the request of a solar developer taking inventory of suitable sites or looking to expand from private lands onto adjacent public lands. The developer must plan for the RFP process and the potential that it may face other bidders.

• Special public sector conditions: Leases of public land may contain special conditions advancing certain public policies not found in leases of private property. These special conditions may include a requirement to pay prevailing wages in the construction of the solar facilities, robust covenants against discrimination; robust financial transparency; certain "green" construction requirements, and/or more. These special conditions are generally set forth in the RFP and may not be negotiable. For this reason, working early with the public agency, before it issues the RFP, may be important.
• Benefits: While projects on government lands require regulatory approvals just as those on private property, it is often helpful if the government owning and leasing the land is also the regulator—for example where a county's real estate department is leasing subject to permits to be issued by the county's planning department. In these cases, the government and developer are more aligned, and government may have a financial incentive to facilitate the process.
• Timing challenges: In addition to the RFP, a government will generally require a public hearing before approving a lease; in some circumstances, two readings may be required before a vote on approval. This could mean a lease must be added twice to government agendas, addressed in staff reports, and then reviewed (potentially twice) at a public hearing at which neighbors may voice opposition.
• Financeable leases: Solar developers require "financeable" leases with mortgagee protection. Such clauses typically prevent the landlord from terminating the lease without affording a solar-financing lender opportunities to cure, even following a tenant bankruptcy, the lender with the right to enter into a new lease. Governments are generally not familiar with providing a third-party lender with such protections.