A long-term power purchase agreement (PPA) with a creditworthy buyer is the cornerstone of project financing for a utility-scale solar photovoltaic (PV) facility. These are facilities that directly convert solar radiation into electricity. PV PPAs share several similarities with traditional, thermal PPAs, but some differences are key to negotiating them successfully and properly allocating risk. What follows is a brief look at PV PPA risk allocation and selected, material provisions of which lawyers should be aware that are unique to PV PPAs in comparison to thermal PPAs.
The PV PPA is a critical document. The seller will want the PV PPA to allocate development and operational risks to the buyer; the seller seeks long-term, predictable revenue to support the project financing and an acceptable return on investment. The buyer wants a long-term, stable source of energy and renewable energy credits (RECs) at a fixed price to satisfy load demand and renewable portfolio standard requirements.
RECs are important because they are used to track whether the buyer has been meeting its renewable energy requirements. Those requirements, in general, mandate that some electric providers maintain certain levels of renewable energy in their portfolio of generation fuels, or they could risk financial penalties from the government. Project lenders and tax equity investors also will scrutinize the PV PPA when assessing their investment in the PV facility.
1. Incremental construction and project sizing. Achieving commercial operation under a PPA is typically a key milestone. Not only does the term of the PPA commence when commercial operation begins, the price of energy under the PPA usually increases from a lower, test energy price to the actual, contract price. Also, the seller is no longer subject to liquidated damages for delay, and there are potential adjustments to the security requirements under the PPA.
Unlike traditional thermal power-generation facilities, larger PV facilities commonly reach commercial operation in pieces; for example, blocks of PV panels, collection systems and inverters begin working in stages. Then, they operate through the remainder of construction and produce additional revenue. Accordingly, sellers commonly request that the buyer pay the full contract price for power produced by each block after that block achieves commercial operation, among other things. Sellers also ask to reduce any liquidated damages that would result from the entire facility not achieving commercial operation; the decrease is usually based on the megawatts that have achieved commercial operation.
Additionally, counsel for the seller should discuss with the client whether to request flexibility to reduce the size of the project to account for potential tax constraints. The pricing under the PPA will assume that the PV facility qualifies for applicable tax credits, which have an expiration date. Further, liquidated damages under the construction arrangements might not compensate the seller for lost tax credits in the event of a delay. As such, if the PV facility is not entirely in service in time to qualify for those tax credits, the seller may wish to reduce the size of the facility to the megawatts that do qualify for such tax credits. This may be an attractive alternative to terminating the entire PPA or requesting a price adjustment.
Similar flexibility may be necessary for interconnection to the electric grid or other development constraints, or if a casualty event occurs and rebuilding the affected portion of the facility will not qualify for those tax credits. If the seller requests the flexibility to resize the PV facility, the buyer may, under certain circumstances, require payment of liquidated damages on a per-megawatt basis or a right of first offer on any later expansion of the facility within a specified number of years. The parties also will want to consider how a reduction in capacity affects other aspects of the PV PPA, such as security requirements and performance guaranties.
2. Change in law. Change-in-law issues in PV PPAs generally pertain to the qualification for RECs and transfer of those credits to the buyer.
The buyer primarily is executing the PV PPA to obtain RECs to satisfy renewable portfolio standard requirements and is paying a premium for the RECs. Thus, the buyer might require one or more provisions to ensure that it receives the RECs. These provisions can include performance guaranties enforceable by liquidated damages, conditions to commercial operation, defaults and curtailment rights.
The seller, however, is concerned that changes in the law will render qualifying the facility for RECs or transferring those RECs to the buyer prohibitively expensive or otherwise prevent the qualification or transfer.
Accordingly, the lawyers should discuss a number of questions with clients when allocating the risk of a change in the law. What are the applicable RECs and other renewable energy benefits? Should there be an annual or overall cap (subject to an escalator) on the seller’s obligations to comply with the change in law? Should the cap include or exclude certain costs? Should the seller have to comply with the change in law if the buyer reimburses costs in excess of the cap? What happens if no amount of money will address the applicable change in the law?
3. Performance guaranties. One of three types of performance guaranties are common in PV PPAs.
In an availability guaranty, the seller guaranties that the facility will be available to generate power when the solar resource is available for an agreed-upon amount of time.
In an availability and efficiency guaranty, the seller guaranties the availability and efficient output of the facility but is excused for lack of solar resource, such as when there is too much cloud cover.
In a straight-output guaranty, the seller guaranties operating availability, the facility’s efficient output and the existence of the solar resource. This is the guaranty with the most risk allocated to the seller. Unless otherwise excused by the PPA, it requires the seller to produce the agreed amount of power regardless of external factors, such as cloud cover, or the seller might be required to pay damages to the buyer or be subject to other remedies.
In addition to choosing the appropriate performance guaranty, the parties will negotiate the guaranty’s measurement period and adjustments to avoid double counting in the case of rolling measurement periods, appropriate adjustments for panel degradation, applicable performance excuses (such as force majeure and emergencies), events of default, liquidated damages for REC or energy shortfalls and annual or overall limits on liability.
In addition to those described above, there are numerous unique, material issues for lawyers to consider when negotiating a PV PPA. Given the importance of the PPA to both the buyer and the seller, each party should consider all issues carefully when negotiating PV PPAs to appropriately allocate risk.