The central contract in the PPA structure is a service contract between the developer of the micro-hydropower plant and the offtaker or buyer (in most cases also the owner of the hydro-site) of the electricity output (as discussed before). These two parties negotiate an agreement where the developer will build the project and the offtaker will purchase the output for an agreed upon price. However, the PPA structure often involves numerous contracts and agreements, with five essential participants involved in most PPA structures; these are:
- Offtaker / Purchaser
- Site owner (if not the same entity as the offtaker)
- Developer / Microhydro Provider
- Investor / Lender
To clarify, we refer to the owner of the physical property with microhydro potential as the (hydro-)“site owner” and the entity who is interested in purchasing the output of the microhydro plant as the “offtaker.” Sometimes, those two may be the same entity.
The offtaker is an entity that needs electricity and desires to purchase the output of a microhydro project. The offtaker does not own the system and is only interested in using the electricity generated from the plant. To enter into a PPA, the offtaker needs to be creditworthy, which may require documentation that reflects investment grade credit (BBB- or better) and 3 years of audited financial statements.
SITE OWNER / HOST
The site owner or host is the entity that owns the property (real estate, structure, dam) where a microhydro will be located. The site owner does not necessarily have to use the electricity that is generated on their site. Instead, they can arrange with a separate offtaker who is interested in buying the electricity output to sell the power. Under current rules in New York, if the site owner wishes to enter into a power purchase agreement with an offtaker on a separate site, they can use remote net metering to structure the agreement.
DEVELOPER / PPA PROVIDER
The developer will assess, design, engineer, and install the microhydro system. In many cases the developer will also own the system. The developer obtains regulatory permits and rebates or incentives, and assumes responsibility for operating, maintaining and monitoring the plant and assuring peak system efficiency.
The developer will be an expert in microhydro construction, who may also contract separately with a system installer and buy the equipment from respective equipment makers. The developer should have expertise in financing and solid relationships with experienced investors. An experienced developer should help keep transaction costs to a minimum and may offer the offtaker a “Standard Offer” contract, allowing them to minimize legal costs.
The developer will have relationships with equipment manufacturers and should have a strong record of developing and permitting hydroelectric projects and working with state and federal approval processes. The developer is also referred to as the “PPA Provider” because they are the central figure that coordinates the PPA structure.
Important Characteristics for a Microhydro Developer
- Experience and a good track record with microhydro design, permitting, construction and financing.
- Offers ongoing services to operate and maintain the microhydro plant.
- Experience with regulatory requirements including permitting, dam safety, environmental impacts.
- Good relationships with low impact microhydro technology manufacturers.
- Strong presentation on economics including savings analysis.
- Personal references.
- Works with strong financial partners or investors who believe in microhydro.
INVESTOR / LENDER
To finance the construction of the plant on behalf of the developer, there may or may not be a third-party investor or lender, who provides funding with a loan agreement to the developer. A Special Purpose Entity (SPE) with limited liability may be established, with the only asset it owns being the microhydro project. The relationship between the investor / SPE and the developer may be a sale-leaseback or a partnership-flip.
The agreements are usually not a concern for the offtaker, who is more interested in renewable energy, low or no up-front costs and a fixed predictable price of electricity for a long term. Nevertheless, it is important for an offtaker to be aware of the relationships that the developer has with other parties in order to verify that the project has solid financial backing.
The microhydro project will likely be connected to the power grid, unless the system is physically located close enough to the offtaker’s building and electrical system to connect directly and be “off-grid.” Where the system is connected to the grid, the relationship with the utility typically involves net metering. The utility also impacts other elements of the project, including time of use rates, peak demand, demand charges and other factors.
As you can see, there are multiple iterations of complexity possible when using a PPA. From the site-owner’s point of view, who is simply interested in utilizing their on-site hydropower potential to supply their electric needs, it may still just be one simple contract with a developer.
So when does it make sense to use a PPA? What are ideal circumstances to have your microhydro system developed as a PPA? Our next blog post will look at these and other related questions, continuing our PPA overview.
Or you download our full Microhydro PPA Report.