ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K . Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K , including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading Special Note Regarding Forward-Looking Statements following the Table of Contents of this Annual Report on Form 10-K . You should review the disclosure under ITEM 1A - Risk Factors in this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

Our solution, the Bloom Energy Server, is a stationary power generation platform built for the digital age and capable of delivering highly reliable, uninterrupted, 24x7 constant power that is also clean and sustainable. The Bloom Energy Server converts standard low-pressure natural gas or biogas into electricity through an electrochemical process without combustion, resulting in very high conversion efficiencies and lower harmful emissions than conventional fossil fuel generation. A typical configuration produces 250 kilowatts of power in a footprint roughly equivalent to that of half of a standard thirty-foot shipping container, or approximately 125 times more space-efficient than solar power generation. 250 kilowatts of power is roughly equivalent to the constant power requirement of a typical big box retail store. Any number of these Energy Server systems can be clustered together in various configurations to form solutions from hundreds of kilowatts to many tens of megawatts. 

We market and sell our Energy Servers primarily through our direct sales organization in the United States, and also have direct and indirect sales channels internationally. Recognizing that deploying our solutions requires a material financial commitment, we have developed a number of financing options to support sales of Energy Servers to customers that lack the financial capability to purchase our Energy Servers directly, who prefer to finance the acquisition using third party financing or who prefer to contract for our services on a pay-as-you-go model.

Our typical target commercial or industrial customer has historically been either an investment-grade entity or a customer with investment-grade attributes such as size, assets and revenue, liquidity, geographically diverse operations and general financial stability. We have recently expanded our below investment-grade customer base and have also expanded internationally to target customers with deployments on a wholesale grid. Given that our customers are typically large institutions with multi-level decision making processes, we generally experience a lengthy sales process.

Purchase Options

Aside from our direct sales channel targeting those potential customers who prefer to make an outright direct purchase, we have expanded our potential customer base by providing the ability to purchase an Energy Server by other financial vehicles, such as those incorporating third-party capital resources. We have a lease offering through one of our financing partners which we refer to as a Traditional Lease. Similarly, we offer a sale-leaseback sublease arrangement, which we refer to as Managed Services. Additionally, some of our customers have elected to purchase electricity produced by our Energy Servers through a financed offering which we refer to as a Power Purchase Agreement Program, whereby one or more parties are equity investors in financing the entities that purchase the Energy Servers. Our Power Purchase Agreement Programs include both the Bloom Electrons program, which includes an equity investment by us, and our Third-Party PPA programs, where we have no equity investment. For both the Bloom Electrons program and Third-Party PPA programs, we directly manage the end customer (electricity user) relationship from originating the sale to servicing the systems over the course of the deal term.

Depending upon the purchase option chosen by our customer, either the customer or the financing provider may utilize investment tax credits and other government incentives. However, the timing of the product-related cash flows to us is generally consistent across all of the purchase options. We generally receive all product-related payments by the time that the product is accepted by the end customer.

Our capacity to offer our Energy Servers through any of these arrangements depends in large part on the ability of the parties involved in providing payment for the Energy Servers to monetize the related investment tax credits, accelerated tax depreciation and other incentives, and/or the future power purchase obligations of the end customer. Interest rate fluctuations would also impact the attractiveness of any financing offerings for our customers, and currency exchange fluctuations may also impact the attractiveness of international offerings. The Traditional Lease, Managed Services and Power Purchase Agreement Program options are limited by the creditworthiness of the customer. Additionally, the Managed Services and Traditional Lease options, as with all leases, are also limited by the customer’s willingness to commit to making fixed payments regardless of the performance of the Energy Servers or our performance of our obligations under the customer agreement.

Under each purchase option, we provide warranties and performance guaranties for the Energy Servers’ efficiency and output. Under direct purchase, Traditional Lease, and Power Purchase Agreement program options, the warranty and guaranty is typically included in the price of the Energy Server for the first year. The warranty and guaranty may be renewed annually at the customer’s option - as an operations and maintenance services agreement - at predetermined prices for a period of up to 25 years. Historically, our customers have almost always exercised their option to renew under these operations and maintenance services agreements. Under the Managed Services program, the operations and maintenance performance guaranties are priced separately and included for a fixed period specified in the customer agreement. This period is typically either 6 or 10 years, which may be extended at the option of the parties for additional years with all payments made annually. Under the Power Purchase Agreement Programs, we provide warranties and performance guaranties regarding the Energy Servers’ efficiency to

the customer (i.e., the end user of the electricity generated by the Energy Servers), and we provide warranties and performance guaranties regarding the Energy Servers’ output to the entity that purchases the Energy Servers.

Acceptances

We use "acceptances" as a key operating metric to measure the volume of our operational activity from period to period. We typically define an acceptance as when an Energy Server is installed and running at full power as provided in the customer contract or the financing agreements.

The portion of acceptances in the year ended December 31, 2018 attributable to each purchase option was as follows: direct purchase (including Third Party PPAs) 88% , Traditional Lease 12% , Managed Services 0% and Bloom Electrons 0% . The portion of acceptances in the year ended December 31, 2018 attributable to each payment option was as follows: direct purchase (including Third Party PPAs and the Republic of Korea orders) 68% , Traditional Lease 16% , Managed Services 4% and Bloom Electrons 12% .

The portion of acceptances in the year ended December 31, 2017 attributable to each purchase option was as follows: direct purchase (including Third Party PPAs) 72% , Traditional Lease 7% , Managed Services 21% and Bloom Electrons 0% . The portion of acceptances in the year ended December 31, 2017 attributable to each payment option was as follows: direct purchase (including Third Party PPAs) 61% , Traditional Lease 7% , Managed Services 8% and Bloom Electrons 24% .

The portion of acceptances in the year ended December 31, 2016 attributable to each purchase option was as follows: direct purchase (including Third Party PPAs) 10% , Traditional Lease 6% , Managed Services 31% and Bloom Electrons 53% . The portion of acceptances in the year ended December 31, 2016 attributable to each payment option was as follows: direct purchase (including Third Party PPAs) 40% , Traditional Lease 18% , Managed Services 4% and Bloom Electrons 38% .

Backlog

The timing of delivery and installations of our products have a significant impact on the timing of the recognition of product revenue. Many factors can cause a lag between the time that a customer signs a purchase order and our recognition of product revenue. These factors include the number of Energy Servers installed per site, local permitting and utility requirements, environmental, health and safety requirements, weather, and customer facility construction schedules. Many of these factors are unpredictable and their resolution is often outside of our or our customers’ control. Customers may also ask us to delay an installation for reasons unrelated to the foregoing, including delays in their obtaining financing. Further, due to unexpected delays, deployments may require unanticipated expenses to expedite delivery of materials or labor to ensure the installation meets the timing objectives. These unexpected delays and expenses can be exacerbated in periods in which we deliver and install a larger number of smaller projects. In addition, if even relatively short delays occur, there may be a significant shortfall between the revenue we expect to generate in a particular period and the revenue that we are able to recognize. For our installations, revenue and cost of revenue can fluctuate significantly on a periodic basis depending on the timing of acceptance and the type of financing used by the customer.

Our product sales backlog was $772.8 million , equivalent to 1,384 systems, or 138.4 megawatts, as of December 31, 2018 . Our product sales backlog was $803.9 million , equivalent to 1,187 systems, or 118.7 megawatts, as of December 31, 2017 . Our product sales backlog was $489.6 million , equivalent to 871 systems, or 87.1 megawatts, as of December 31, 2016. We define product sales backlog as signed customer product sales orders received prior to the period end, but not yet accepted, excluding site cancellations. The timing of the deployment of our backlog depends on the factors described above. However, as a general matter, at any point in time, we expect at least 50% of our backlog to be deployed within the next 12 months. The portion of our backlog in the year ended December 31, 2018 attributable to each payment option was as follows: direct purchase (including Third Party PPAs) 98% , Traditional Lease 2% , Managed Services 0% and Bloom Electrons 0% . The portion of our backlog in the year ended December 31, 2017 attributable to each payment option was as follows: direct purchase (including Third Party PPAs) 61% , Traditional Lease 7% , Managed Services 8% and Bloom Electrons 24% . The portion of our backlog in the year ended December 31, 2016 attributable to each payment option was as follows: direct purchase (including Third Party PPAs) 40% , Traditional Lease 18% , Managed Services 4% and Bloom Electrons 38% .

Purchase and Lease Programs

Initially, we only offered our Energy Servers on a direct purchase basis, in which the customer purchases the product directly from us. In order to expand our offerings to customers who lack the financial capability to purchase our Energy Servers directly and/or who prefer to lease the product or contract for our services on a pay-as-you-go model, we subsequently developed the Traditional Lease, Managed Services, Bloom Electrons program and further, our Third-Party PPA Program. The Third-Party PPA Program carries many of the same obligations as a traditional Bloom Electrons program, except that we do not have any equity interest in the PPA structure. Therefore, the Bloom Electrons programs and the various Third-Party PPA Programs are collectively described here under the Power Purchase Agreement Program(s). The substantial majority of bookings made in recent periods are pursuant to Third-Party PPA Programs.

Traditional Lease

Under the Traditional Lease arrangement, the customer enters into a lease directly with a financier, which pays us for the Energy Servers pursuant to a sales agreement (a Financing Agreement, described below). We recognize product and installation revenue upon acceptance. After the standard one-year warranty period, our customers have almost always exercised the option to enter into operations and maintenance services agreements with us, under which we receive annual service payments from the customer. The price for the annual operations and maintenance services is set at the time we enter into the Financing Agreement. The duration of our Traditional Leases ranges from 6 to 15 years.

Under a Financing Agreement, we are generally paid the full price of the Energy Servers as if sold as a purchase by the customer based on four milestones. The four payment milestones are typically as follows: (i) 15% upon execution of the financier's entry into the lease with a customer, (ii) 25% on the day that is 180 days prior to delivery of the Energy Servers, (iii) 40% upon shipment of the Energy Servers, and (iv) 20% upon acceptance of the Energy Servers. The financier receives title to the Energy Servers upon installation at the customer site and the customer has risk of loss while the Energy Server is in operation on the customer’s site.

The Financing Agreement provides for the installation of the Energy Servers and includes a standard one-year warranty, which includes the performance guaranties described below, with the warranty offered on an annually renewing basis at the discretion of the customer. The customer must provide gas for the Energy Servers to operate.

Warranty Commitments

We typically provide (i) an Output Warranty to operate at or above a specified baseload output of the Energy Servers on a site, and (ii) an Efficiency Warranty to operate at or above a specified level of fuel efficiency. Both are measured on a monthly, cumulative, or other basis, as specified in the Financing Agreement. Upon the applicable customer making a warranty claim for a failure of any of our warranty commitments, we are then obligated to repair or replace the Energy Server, or if a repair or replacement is not feasible, to pay the customer an amount approximately equal to the net book value of the Energy Server, after which the Financing Agreement would be terminated. As of December 31, 2018 , we had incurred no obligations to make payments pursuant to these warranty commitments.

Performance Guaranties

Our performance guaranties are negotiated on a case-by-case basis for projects deployed through the Traditional Lease program, but we typically provide an Output Guaranty of 95% measured cumulatively from the date the applicable Energy Server(s) are commissioned and an Efficiency Guaranty of 52% measured cumulatively from the date the applicable Energy Server(s) are commissioned. In each case, underperformance obligates us to make a payment to the applicable customer. As of December 31, 2018 , the fleet of Energy Servers deployed pursuant to the Traditional Lease programs were performing at a lifetime average output of approximately 86% and a lifetime average efficiency of approximately 54% . As of December 31, 2018 , our obligation to make payments for underperformance against the performance guaranties for Traditional Lease projects was capped at an aggregate total of approximately $5.9 million (including payments both for low output and for low efficiency). As of December 31, 2018 , our aggregate remaining potential liability under this cap was approximately $5.5 million .

Remarketing at Termination of Lease

At the end of any customer lease in the event the financier or customer does not renew or purchase the Energy Servers, we may remarket any such Energy Servers to a third party, and any proceeds of such sale would be allocated between us and the applicable financing partner as agreed between them at the time of such sale.

Managed Services

Under our Managed Services program, we initially enter into a master lease agreement with the financing partner which holds title to the Energy Server. Once a customer is identified, we sell the Energy Server to the financing partner and enter into a project-specific operating lease with the financing partner and a service agreement with the customer. The duration of our Managed Services leases is currently either 6 or 10 years. We recognize revenue from the sale of the equipment to the financing partner once the Energy Server has been accepted by the customer. Under the service agreement with the customer, there are two payment components: a monthly equipment fee payable to the financing partner which covers the amount of the lease payment, which is guaranteed by us, and a service payment payable to us for our operation and maintenance of the Energy Server. The service payment may either be fixed or based on the monthly output of electric power produced by the Energy Server. Under the master lease with the financing party, the Company assigns it right to the monthly equipment fee to the financing partner in satisfaction of its rights to make the equipment lease payments.

Our warranty commitments under the Managed Services option are substantially similar to those applicable to the Traditional Lease program described above. Our Managed Services deployments do not typically include any performance guaranties above the warranty commitments, but the customer’s payment to us may include a payment that is proportionate to the output generated by the Energy Server(s) and our pricing assumes service revenues at the 95% output level. Since the customer’s payment is based on the Energy Server’s output, our service revenues are lower if output is less than 95% (and

higher if output exceeds 95%). As of December 31, 2018 , the fleet of Energy Servers deployed pursuant to the Managed Services program were performing at a lifetime average output of approximately 94% .

Power Purchase Agreement Programs

Our customers have the option to purchase electricity produced by our Energy Servers through a financed offering which we refer to as a Power Purchase Agreement Program, whereby one or more parties are equity investors in financing the entities that purchase the Energy Servers. Our Power Purchase Agreement Programs include both the Bloom Electrons program, which includes an equity investment by us and in which we recognize revenue as the electricity is produced, and our Third-Party PPA programs, in which we have no equity investment and we recognize revenue on acceptance.

          

^* Under the Third Party PPA arrangements there is no link with an investment company, as we do not have an equity investment in those arrangements.

In each Power Purchase Agreement Program, we sell our Energy Servers to an entity that owns the Energy Servers (an Operating Company) which sells the electricity generated by the Energy Servers to the ultimate end customers pursuant to a Power Purchase Agreement, energy services agreement, or similar contract. Because the end customer's payment is stated on a dollar-per-kilowatt-hour ("$/kWh") basis, we refer to these agreements as Power Purchase Agreements ("PPAs"). Our Bloom Electrons program involved an equity investment by us (through an Investment Company) in the applicable Operating Company.

Under our Power Purchase Agreement Programs, we perform many of the functions of a typical project developer, including identification of end customers, leading negotiations with such end customer regarding the PPA, and entering into an Energy Server sales, operations and maintenance agreement ("EPC and O&M Agreement") with the Operating Company that will own the Energy Servers for the full term of the PPA. In some cases, the applicable financier(s) assists with the identification of end customers, and the negotiation of the PPAs. The Operating Company then enters into the PPA with the end customer which purchases electricity generated by the Energy Servers at a price that includes the payment for the O&M services. The Operating Company receives all cash flows generated under the PPA(s), in addition to all investment tax credits, all accelerated tax depreciation benefits, and any other cash flows generated by the operation of the Energy Servers not allocated to the end customer under the PPA.

The sales of our Energy Servers to the Operating Company in connection with the various Power Purchase Agreement Programs have many of the same terms and conditions as a direct sale. Payment of the purchase price is generally broken

down into multiple installments, which may include payments prior to shipment, upon shipment or delivery of the Energy Server, and upon acceptance of the Energy Server. Acceptance typically occurs when the Energy Server is installed and running at full power as defined in each contract. A one-year service warranty is provided with the initial sale. After the expiration of the initial standard one-year warranty, the Operating Company has the option to enter into annual operations and maintenance services agreements with us at a price determined at the time of purchase of the Energy Server, which may be renewed annually for each Energy Server for up to 25 years.

Pursuant to the service warranty for Power Purchase Agreement Program projects, we provide efficiency and minimum output warranty commitments (see below) to the Operating Company (collectively, "Performance Warranties") and provide a backstop of the efficiency commitments provided by the Operating Company to the end customer under each PPA. In the event that the Energy Servers fail to satisfy these warranty levels, we may be obligated to repurchase the applicable Energy Servers if we are unable to repair or replace them during the applicable cure period. Across all Power Purchase Agreement Program projects, as of December 31, 2018 , we had incurred no repurchase obligations pursuant to such warranties. In addition, we guarantee minimum output and efficiency levels greater than the warranty levels and pay certain capped performance guaranty amounts if those levels are not achieved. These performance guaranties are negotiated on a case-by-case basis, but we provide an Output Guaranty of 95% measured annually or cumulatively from the date the applicable Energy Server(s) are commissioned and typically an Efficiency Guaranty of 52% measured cumulatively. In each case, underperformance obligates us to make a payment to the Operating Company, either to compensate the Operating Company for lost revenues under the applicable PPA or to reimburse the Operating Company for payments made to the end customer under such PPA. These payments are subject to caps set forth in the applicable PPA.

As of December 31, 2018 , the fleet of Energy Servers deployed pursuant to Power Purchase Agreement Programs performed at an average output of approximately 86% for three months ended December 31, 2018 , and a lifetime average efficiency of approximately 54% through December 31, 2018 . As of December 31, 2018 , our obligation to make payments for underperformance on these projects was capped at an aggregate total of approximately $55.5 million (including payments both for low output and for low efficiency). As of December 31, 2018 , our aggregate remaining potential liability under this cap was approximately $41.8 million .

Obligations to Operating Companies

In each Power Purchase Agreement Program, we and the applicable Operating Company enter into one or more EPC and O&M Agreements pursuant to which we perform certain manufacturing, design, installation, commissioning, operation, and maintenance obligations for the Operating Company for a term of up to 25 years.

Our obligations under the EPC and O&M Agreement(s) for each Power Purchase Agreement Program project include:

The EPC and O&M Agreement(s) obligate us to repurchase the Energy Servers in the event the Energy Servers fail to comply with the Performance Warranties or we otherwise breach the terms of the applicable EPC and O&M Agreement(s) and we fail to remedy such failure or breach after a cure period, or in the event that a PPA terminates as a result of any failure by us to comply with the applicable EPC and O&M Agreement(s). In some Power Purchase Agreement Program projects, our obligation to repurchase Energy Servers extends to the entire fleet of Energy Servers sold pursuant to the applicable EPC and O&M Agreement(s) in the event such failure affects more than a specified number of Energy Servers.

In some Power Purchase Agreement Programs, we have also agreed to pay liquidated damages to the applicable Operating Company in the event of delays in the manufacture and installation of Energy Servers, either in the form of a cash payment or a reduction in the purchase price for the applicable Energy Server(s).

Both the upfront purchase price for the Energy Servers and the ongoing fees for our operations and maintenance are paid on a fixed dollar-per-kilowatt ($/kW) basis.

The EPC and O&M Agreement(s) for each Power Purchase Agreement Program project generally provides for the following performance and indemnity obligations:

Efficiency Obligations - We warrant to the applicable Operating Company that each Energy Server and/or the portfolio of Energy Servers sold to such entity will operate at an average efficiency level specified in the O&M Agreement, calculated over a period specified in the O&M Agreement following the commercial operations date of such Energy Server. In some cases, we are obligated to repair or replace Energy Servers that are unable to satisfy the minimum efficiency level, or if a repair or replacement is not feasible, to repurchase such Energy Servers at the original purchase price, subject to adjustment for depreciation (Efficiency Warranty(ies)). In other cases, we are obligated to make a payment to compensate for the increased costs of procuring natural gas for the applicable Energy Server(s) resulting from the underperformance as against the minimum efficiency level, which payments are capped at a level specified in the applicable PPA agreement (the "Efficiency Guaranty").

Output Obligations - In addition, we warrant that the Energy Servers will generate a minimum amount of electricity during specified periods of time. Under O&M Agreements, our output obligations include: (i) the generation of a minimum amount of electricity on a monthly, quarterly, annual, or cumulative basis (as specified in the applicable EPC and O&M Agreement(s)), the failure of which obligates us to repair or replace the Energy Servers that are unable to satisfy such minimum output level, or if such repair or replacement is not feasible, to repurchase such Energy Servers at the original purchase price, subject to adjustment for depreciation ("Output Warranties"), and (ii) the generation of a minimum amount of electricity on either an annual or cumulative basis beginning on the commercial operations date of such Energy Server (as specified in the applicable EPC and O&M Agreement(s), the failure of which obligates us to make a payment to the applicable Operating Company based on the volume of the shortfall below the minimum output level, subject in some cases to a liability cap specified in the applicable EPC and O&M Agreement(s) ("Output Guaranties"). In some Power Purchase Agreement Program projects, these generation obligations are aggregated across the entire fleet of Energy Servers deployed pursuant to such project; in others, each Energy Server must satisfy the minimum generation obligations measured individually.

Indemnification of Performance Warranty Expenses Under PPAs - In addition to the efficiency and output obligations, we also have agreed to indemnify certain Operating Companies for any expenses they incur to any of the end customers resulting from failures of the applicable Energy Servers to satisfy any of the Performance Warranties set forth in the applicable PPA(s). In addition, in the event that a PPA is terminated by an end customer as to any Energy Servers as a result of our failure to perform any of our obligations under the applicable EPC and O&M Agreement(s), we are obligated to repurchase such Energy Server from the applicable Operating Company for a repurchase price equal to the original purchase price, subject to adjustment for depreciation.

Administration of Operating Companies - In each of the Bloom Electrons programs, we perform certain administrative services on behalf of the applicable Operating Company, including invoicing the end customers for amounts owed under the PPAs, administering the cash receipts of the Operating Company in accordance with the requirements of the financing arrangements, interfacing with applicable regulatory agencies, and other similar obligations. We are compensated for these services on a fixed dollar-per-kilowatt ($/kW) basis.

Obligations to End Customers

While the counterparty to the PPAs under each Power Purchase Agreement Program project is the applicable Operating Company, under the applicable EPC and O&M Agreement(s) we are obligated to perform each of the obligations of such Operating Company set forth in each PPA. These obligations include:

Each PPA is negotiated on a case-by-case basis, but the PPAs generally adhere to the following terms:

Term; Early Termination - The PPAs typically provide for an initial term of 15 or 20 years, and may be renewed by the mutual agreement of the end customer and the applicable Operating Company for additional periods at the expiration of the initial term. In the event that the end customer desires to terminate the PPA before the end of the contract term, or in the event that the PPA is terminated by the applicable Operating Company due to an end customer default, the end customer is required to pay a “termination value” payment as liquidated damages.

Energy Server Installation and Operation - The applicable Operating Company is responsible for the installation, operation and maintenance of the Energy Servers on a turn-key basis.

Take-Or-Pay Purchase Obligation - The end customer is required to purchase all of the electricity generated by the Energy Servers for the duration of the PPA. In the event that the end customer is unwilling or unable to accept delivery of such electricity or fails to supply the necessary fuel to the Energy Servers, the end customer is required to make a payment to the Operating Company for the amount of electricity that would have been delivered had the Energy Servers continued to operate.

Fuel Supply Obligation - The end customer is required to provide all necessary fuel for the operation of the Energy Servers.

Ownership of Energy Servers - The applicable Operating Company retains title to the Energy Servers at all times unless the PPA provides a purchase option and the end customer elects to purchase the Energy Server(s).

Financial Incentives and Environmental Attributes - As the owner of the Energy Servers, the Operating Company retains ownership of any tax benefits associated with the installation and operation of the Energy Servers. Additional financial incentives available in connection with each installation (such as payments under state incentive programs or renewable portfolio standard programs) and any environmental benefits associated with the Energy Servers (such as carbon emissions reductions credits) are allocated to either the Operating Company or the end customer on a case-by-case basis. In some circumstances, the Operating Company has also agreed to purchase and deliver renewable energy credits to the end customer in connection with the PPA.

Efficiency Commitments - The Operating Company makes certain warranties and guaranties regarding the Energy Servers’ efficiency to the end customer. Generally, these consist of (i) an Efficiency Warranty, where the Operating Company is obligated to repair or replace Energy Servers that fail to operate at or above a specified level of efficiency, and/or (ii) an Efficiency Guaranty, where the Operating Company is obligated to make payments to the end customer to cover the cost of procuring excess fuel if the Energy Servers fail to operate at or above a specified level of efficiency on a cumulative basis during the term of the PPA. Where an Efficiency Guaranty is provided, the Operating Company’s aggregate liability for payments (and, thereby, our indemnity exposure to the Operating Company) is capped. In certain circumstances, we may negotiate modifications to the efficiency commitments with the end customer, including different efficiency thresholds or providing for monetary payments under the Efficiency Warranty in lieu of or in addition to an obligation to repair or replace underperforming Energy Servers.

Output Commitments - Although our standard PPA offering does not include a minimum output commitment to the end customer, exceptions may be negotiated on a case-by-case basis if we believe the opportunity justifies such exception. These output commitments are at an output level lesser than or equal to the Output Warranty provided by us to the Operating Company under the applicable EPC and O&M Agreement(s), and provide either for a payment to the end customer for the shortfall in electricity produced or for an end customer termination right. In addition, where the end customer (as opposed to the Operating Company) is entitled to the benefits of an incentive program that requires a minimum output level, the Operating Company may agree to reimburse the end customer for any decrease in incentive payments resulting from the Energy Servers’ failure to operate at such minimum output level.

Defaults; Remedies - Defaults under the PPAs are typically limited to (i) bankruptcy events, (ii) unexcused failure to perform material obligations (including payment obligations), and (iii) breaches of representations and warranties. Additional defaults may be negotiated on a case-by-case basis. The parties are generally afforded cure periods of at least 30 days to cure any such defaults. In the event of an uncured default by the Operating Company, the end customer may terminate the PPA either in whole or in part as to the Energy Server(s) affected by such default, and may seek other remedies afforded at law or in equity. In the event of an uncured default by the end customer, the Operating Company may terminate the PPA either in whole or in part as to the Energy Server(s) affected by such default, and may seek other remedies afforded at law or in equity; in addition, in the event a PPA is terminated due to an end customer default, the end customer is obligated to make a termination value payment to the Operating Company.

The Operating Company in each of the Power Purchase Agreement Programs (other than PPA I) has incurred debt in order to finance the acquisition of Energy Servers. The lenders for these projects are a combination of banks and/or institutional investors. In each case, the debt is secured by all of the assets of the Operating Company (primarily comprised of the Energy Servers and a collateral assignment of each of the contracts to which the Operating Company is a party, including the O&M Agreement entered into with us and the offtake agreements entered into with the Operating Company’s customers), and is senior to all other debt obligations of the Operating Company. As further collateral, the lenders receive a security interest in 100% of the membership interest of the Operating Company. However, as is typical in structured finance transactions of this nature, although the Project Debt is secured by all of the Operating Company’s assets, the lenders have no recourse to us or to any of the other tax equity investors in the project. The applicable debt agreements include provisions that implement a customary “payment waterfall” that dictates the priority in which the Operating Company will use its available funds to satisfy its payment obligations to us, the lenders, the tax equity investors and other third parties.

We have determined that we are the primary beneficiary in the PPA Entities. Accordingly, we consolidate 100% of the assets, liabilities and operating results of these entities, including the Energy Servers and lease income, in our consolidated financial statements. We recognize the tax equity investors’ share of the net assets of the investment entities as noncontrolling interests in subsidiaries in our consolidated balance sheet. We recognize the amounts that are contractually payable to these investors in each period as distributions to noncontrolling interests in our consolidated statements of convertible redeemable preferred stock and equity. Our consolidated statements of cash flows reflect cash received from these investors as proceeds from investments by noncontrolling interests in subsidiaries. Our consolidated statements of cash flows also reflect cash paid to these investors as distributions paid to noncontrolling interests in subsidiaries. We reflect any unpaid distributions to these investors as distributions payable to noncontrolling interests in subsidiaries on our consolidated balance sheets. However, the PPA Entities are separate and distinct legal entities, and Bloom Energy Corporation may not receive cash or other distributions from the PPA Entities except in certain limited circumstances and upon the satisfaction of certain conditions, such as compliance with applicable debt service coverage ratios and the achievement of a targeted internal rate of return to the tax equity investors, or otherwise.

For further information about our Power Purchase Agreement Programs, see Note 12 - Power Purchase Agreement Programs , to our consolidated financial statements included in this Annual Report on Form 10-K .

Third-Party PPA Programs

With our Bloom Electrons program, we endeavored to assist our customers' purchases by directly participating in financing the purchase of their Energy Server. More recently, we have moved to providing the same service to our customers without our direct involvement in the capital financing and therefore, having no equity investment in the resulting PPA. We refer to this purchase option as Third-Party PPA arrangements, structured in a near-identical manner and with the same terms and conditions as our Bloom Electrons program (described above), only without our assuming an equity position in the PPA structure. This way, we retain the benefits for the marketability of our Energy Servers without the capital burden and without the potential financial liability.

International Channel Partners

Prior to 2018, we consummated a small number of sales outside the United States of America, including in India and Japan. In India, sales activities are currently conducted by Bloom Energy (India) Pvt. Ltd., our wholly-owned indirect subsidiary; however, we are currently evaluating the Indian market to determine whether the use of channel partners would be a beneficial go-to-market strategy to grow our India market sales.

In Japan, sales are conducted pursuant to a Japanese joint venture established between us and subsidiaries of SoftBank Corp, called Bloom Energy Japan Limited ("Bloom Energy Japan"). Under this arrangement, we sell Energy Servers to Bloom Energy Japan and we recognize revenue once the Energy Servers leave the port of the U.S. as Bloom Energy Japan enters into the contract with the end customer and performs all installation work as well as some of the operations and maintenance work.

In 2018, Bloom Energy Japan consummated a sale of Energy Servers in the Republic of Korea to Korea South-East Power Company. Following this sale, we entered into a Preferred Distributor Agreement with SK Engineering & Construction Co., Ltd. ("SK E&C") to enable us to sell directly into the Republic of Korea.

SK E&C Agreement

SK E&C has a right of first refusal during the term of the agreement, with certain exceptions, to serve as distributor of Energy Servers for any fuel cell generation project in the Republic of Korea, and we have the right of first refusal to serve as SK E&C’s supplier of generation equipment for any Bloom Energy fuel cell project in the Republic of Korea. Under the terms of the Preferred Distributor Agreement, title, risk of loss and acceptance of the Energy Servers pass from us to SK E&C upon delivery at the named port of lading for shipment in the United States for the Energy Servers shipped in 2018 and thereafter upon delivery at the named port of unlading in the Republic of Korea, prior to unloading. The Preferred Distributor Agreement has an initial term expiring on December 31, 2021 (the "Initial Term") and thereafter will automatically be renewed for three year renewal terms unless not so extended by either party (each, a "Renewal Term", and together with the initial term, the "Term"). Either party may terminate the Preferred Distributor Agreement by written notice under certain circumstances.

Under the terms of the Preferred Distributor Agreement, we (or our subsidiary) will contract directly with the customer to provide operations and maintenance services for the Energy Servers. We have established a subsidiary in the Republic of Korea, Bloom Energy Korea, LLC, to which we will subcontract such operations and maintenance services. The terms of the operations and maintenance will be negotiated on a case-by-case basis with each customer, but are generally expected to provide the customer with the option to receive services for at least ten (10) years, and for up to the life of the Energy Servers, with terms specified below.

Output Obligations - We commit that the Energy Servers will generate minimum amount(s) of output during specified periods of time. Our output obligations include the generation of a minimum amount of electricity on a quarterly, annual or

cumulative basis (as specified in the applicable agreement). As of December 31, 2018, the fleet of Energy Servers deployed pursuant to Power Purchase Agreement Programs performed at an average output of approximately 95% for three months ended December 31, 2018, and a lifetime average efficiency of approximately 52% through December 31, 2018. As of December 31, 2018, our obligation to make payments for underperformance on the direct purchase projects was capped at an aggregate total of approximately $2.9 million (including payments both for low output and for low efficiency). As of December 31, 2018, our aggregate remaining potential liability under this cap was approximately $2.9 million. Remedies for underperformance may include (a) the payment of “buy-down” liquidated damages (subject to a cap), for underperformance in connection with the commencement of operations or during an initial performance period following commencement of operations; (b) payment of liquidated damages (subject to a cap) based upon the amount of foregone electricity production; or (c) repair or replacement of the Energy Servers, or, if repair or replacement is not feasible, repurchase of such Energy Servers at a price equal to fair market value or the original purchase price, subject to adjustment for depreciation. As of December 31, 2018 , we have incurred no obligations to make payments pursuant to these warranty commitments.

Efficiency Obligations - We commit that the Energy Servers will operate at minimum efficiency level(s) during specified periods of time. Our efficiency obligations include operating at guaranteed efficiency on a quarterly, annual or cumulative basis (as specified in the applicable agreement). Remedies for underperformance may include (a) the payment of “buy-down” liquidated damages (subject to a cap), for underperformance in connection with the commencement of operations or during an initial performance period following commencement of operations; (b) payment of liquidated damages (subject to a cap) based upon the amount of excess natural gas consumed by the Energy Servers; (c) repair or replacement of the Energy Servers, or, if repair or replacement is not feasible, repurchase of such Energy Servers at a price equal to fair market value or the original purchase price, subject to adjustment for depreciation. As of December 31, 2018 , we have incurred no obligations to make payments pursuant to these warranty commitments.

Key Operating Metrics

In addition to the measures presented in the consolidated financial statements, we use the following key operating metrics to evaluate business activity, to measure performance, to develop financial forecasts and to make strategic decisions:

Comparison of the Years Ended December 31, 2018 and 2017

Product accepted increase d by approximately 187 systems, or 30.1% , for 2018 compared to 2017 . Acceptance volume increase d as we installed more systems from backlog as demand increased for our Bloom Energy servers, in addition to enhancing our ability and capacity to install more energy servers with our installation team.

Billings for product accepted increase d by approximately $210 million , or 84.7% , for 2018 compared to 2017 . The increase was primarily due to three factors.

First, product accepted increase d by approximately 187 systems, or 30.1% , for 2018 compared to 2017 .

Second, ITC was reinstated on February 9, 2018. ITC was not available to the fuel cell industry in 2017, so our billings for product accepted for 2017 only included $1.3 million in benefit from ITC. Due to the reinstatement of ITC in 2018, billings for product accepted now includes the benefit of ITC. For 2018 , billings for product accepted included $132.9 million in benefits from ITC, of which $45.1 million was retroactive ITC for 2017 acceptances.

Third, the adoption of customer personalized applications, such as batteries and grid-independent solutions, increased in 2018 compared to 2017 . Products that incorporate these personalized applications have, on average, a higher billings rate than our standard platform products that do not incorporate these personalized applications.

Billings for installation on product accepted decrease d $17.5 million for 2018 , as compared to 2017 . Although product acceptances in the period increased 30.1% , billings for installation on product accepted decrease d due to the mix in installation billings driven by site complexity, size, customer purchase option and one large customer in particular in 2018 where the installation was performed by the customer and therefore, we did not have any installation billing for that customer. In general, when we do not perform the installation function for a customer, such as SK E&C in the Republic of Korea, we will not have any installation billings for those orders.

When we analyze changes between the years ended 2018 and 2017 , we take into account the impact of ITC that was available in 2018 as a result of the reinstatement of the ITC through December 2021. The effect of the reinstatement of ITC was higher billings in the periods eligible for ITC. For 2018 , the combined total for billings for product and installation accepted was $537.2 million , an increase of 55.9% from the billings for product and installation accepted combined of $344.6 million for 2017 . The increase was significantly greater than the 30.1% increase in associated acceptances during the same periods due to the reinstatement of the ITC benefit, including the one-time FY17 retroactive ITC benefit recognized in 2018 that is included in the 2018 billings numbers.

Billings for annual maintenance service agreements increase d $3.0 million for 2018 compared to 2017 . This increase was driven by the incremental billings for new annual maintenance service agreement renewals as a result of our growing fleet of installed Energy Servers.

Product costs of product accepted increase d by approximately $80 per kilowatt , or 2.4% , for 2018 compared to 2017 . This increase in cost is primarily related to the reinstatement of the ITC program in February 2018 , in which we were required to repay certain suppliers for previously negotiated contractual discounts. This resulted in a one-time payment of $116 per kilowatt or $9.4 million, which was recorded to cost of product revenue.

Period costs of manufacturing related expenses decrease d by approximately $8.1 million , or 25.1% , for 2018 compared to 2017 . Our period costs of manufacturing related expenses decrease d primarily as a result of higher absorption of fixed manufacturing costs into product costs due to a larger volume of builds through our factory tied to our acceptance growth, which resulted in higher factory utilization.

Installation costs on product accepted decrease d by approximately $82 per kilowatt , or 6.5% , for 2018 compared to 2017 . Each customer site is different and installation costs can vary due to a number of factors, including site complexity, size, location of gas, etc. As such, installation on a per kW basis can vary significantly from period-to-period. In addition, some customers do their own installation, or, as is the case for SK E&C in the Republic of Korea orders, we have a partner who performs the installation. In those instances, we have little to no installation cost. 

Comparison of the Years Ended December 31, 2017 and 2016

Product accepted decrease d by approximately 65 systems, or 9.5% , for 2017 compared to 2016 . The decline was driven by extreme weather-related seasonality on both the U.S. East Coast and West Coast, which impacted our ability to install Energy Servers at our customer sites.

Billings for product accepted decrease d by approximately $274.4 million , or 52.5% , for 2017 compared to 2016 . The decrease was primarily due to two factors.

First, product accepted decrease d approximately 65 systems, or 9.5% , for 2017 compared to 2016 .

Second, the Federal Investment Tax Credit ("ITC") was not available to the fuel cell industry in 2017. Given that, our billings for product accepted did not include the benefit of the ITC in 2017. Our 2016 billings for product accepted included $159.8 million of ITC, whereas our 2017 billings from product accepted had $1.3 million associated with ITC. The ITC was subsequently reinstated on February 9, 2018.

Billings for installation on product accepted decrease d $18.2 million , or 15.9% for 2017 , compared to 2016 . Although product acceptances in the period decrease d 9.5% , billings for installation on product accepted decrease d due to the mix in installation billings driven by site complexity, size, customer purchase option and one large customer in particular in 2017 where the installation was performed by the customer and therefore, we did not have any installation billing for that customer. In general, when we do not perform the installation function for a customer, such as in SK E&C in the Republic of Korea, we do not have any installation billings for those orders.

When we analyze changes between the years ended 2017 and 2016 , we take into account the impact of ITC that was available in 2016. The effect of the loss of ITC in 2017 was lower billings in the period. For 2017 , the combined total for billings for product and installation accepted was $344.6 million , a decrease of 45.9% from the billings for product and installation accepted combined of $637.2 million for 2016 . The decrease was significantly greater than the 9.5% decrease in associated acceptances during the same periods due to the loss of ITC in 2017, which lowered billings for installations.

Billings for annual maintenance service agreements increase d $12.1 million for 2017 compared to 2016 . This increase was driven by the billings for new annual maintenance service agreement renewals as a result of a growing fleet of installed Energy Servers.

Product costs of product accepted decrease d by approximately $1,165 per kilowatt , or 26.1% , for 2017 compared to 2016 . The cost reduction was driven generally by our ongoing cost reduction efforts to reduce material costs, labor and overhead through improved automation of our manufacturing facilities, better facility utilization and ongoing material cost reduction programs with our vendors.

Period costs of manufacturing related expenses increase d by approximately $10.5 million , or 48.1% , for 2017 compared to 2016 . Our period costs of manufacturing related expenses increase d primarily as a result of lower absorption of fixed manufacturing costs into product costs due to a lower volume of builds through our factory.

Installation costs on product accepted increase d by approximately $37 per kilowatt , or 3.0% , for 2017 compared to 2016 . Each customer site is different and installation costs can vary due to a number of factors, including site complexity, size, location of gas, etc. As such, installation on a per kW basis can vary significantly from period-to-period. In addition, some customers do their own installation, or, as is the case for Republic of Korea orders, we have a partner who performs the installation. In those instances, we have little to no installation cost.