PPA – When, What and How?

Jan Borchert, Current Hydro and Dana Hall, Esq.

We’ve seen that PPA’s can look rather complex if you consider all participants. But when does it make sense to use a PPA? What are ideal circumstances to have your microhydro system developed as a PPA? How do we set up a successful PPA?

When to Use a PPA

There are various circumstances which suggest that a PPA structure is the best way to develop a project. Here are a few:

• The developer of a project is looking for a long-term purchaser of the energy output to assure investors that the project has a guaranteed revenue stream. A PPA is useful when the projected revenue of the project would otherwise be uncertain, and the participants desire a guarantee of quantity purchased and price paid in order to make the project viable;
• There is one purchaser (offtaker) that will be taking the bulk of the product.
• The purchaser (offtaker) is looking for a guaranteed amount of power at a long-term guaranteed price.
• The offtaker has limited financing options, uses a lot of electricity and prefers to pay for electricity through their operating budget rather than all at once with a capital investment;
• The developer wants certainty of revenue and the offtaker wants price stability.

Ideal Parameters for a Microhydro PPA in New York

• A creditworthy[1] customer (offtaker) with enough electricity demand and a desire to enter into a contract with a microhydro PPA developer.
• Physical proximity between the offtaker and the generation source allowing for a “behind the meter” configuration; OR an offtaker interested in purchasing unbundled RECs only; OR a remote net metering eligible property owner who has microhydro potential in one location and energy needs in other locations in the same service territory with all accounts owned by the same customer.
• An environmentally appropriate and technically feasible site owned by a party willing to allow a microhydro to be installed and operated for an extended period of time (typically the property owner will lease the site to a developer.)
• A site owner with full control of the property where the plant will be installed who is willing to give the developer access and rights to develop the project.
• The availability of renewable energy certificates (RECs) to investors as a revenue stream.
• The availability of tax credits and other incentives that investors can monetize.[2]

What possible PPA structures are available

PPA arrangements can be used even where there is no physical connection or proximity between the purchaser and the project site. Either by selling RECs separately or by using remote net metering.

Bundled and Unbundled PPAs

While selling both electricity and the associated environmental attributes – Renewable Energy Certificates (RECs) – together is referred to as a “bundled” contract, a microhydro owner may choose to sell RECs and electricity separately (if they have a buyer interested in the RECs only), setting up an “unbundled” PPA. In case of the latter, the owner of a renewable generation plant sells the electricity to their distribution utility in one contract and sells the associated RECs for the generation separately to NYSERDA (or some other third party interested in RECs only). NYSERDA would claim the RECs towards the state renewable goal.

It may be more profitable in certain situation to sell the RECs to NYSERDA under the Tier 1 solicitation price and sell the electricity to the utility at whatever price the utility is offering (the owner normally doesn’t have negotiation power with the utility with respect to the electricity rate, they are simply subject to the utility’s standard offer rate, as permitted in the tariff).

PPA and Remote Net Metering in New York

In a simple PPA structure, as is used with rooftop solar for example, the generation equipment is installed on the property of the offtaker and is directly connected to the offtaker’s meter so that the generation is “behind the meter” and consumed on-site. With microhydro in New York, that structure may not always be feasible, because the location where hydro potential exists may be too distant from the meter where electricity is consumed to physically connect them. However, despite the lack of physical proximity, a PPA can still be set up.

Under New York’s remote net metering (RNM) rules, the account to which the renewable energy system is connected is called the “Host Account” and must be a commercial or a farm account, which means that residential customers cannot take advantage of remote net metering as the host turbine site.[2] RNM allows a project built on one site to allocate the energy output to receiving accounts in the same service territory, where all the accounts involved (host and receiving accounts) are owned by the same customer.

That means a microhydro site can be developed by setting up a new commercial account as the host and with the receiving account holder applying for the commercial host meter in their name. While the host account is connected to the generator, the electricity can be consumed consumed via other meters, using New York’s remote net metering (RNM) program.

How to set up a Successful PPA

For a site owner who has already determined that their site is environmentally appropriate for microhydro, and who is interested in exploring the potential for a PPA as the right economic model, here are a few suggested steps:

1. Research the feasibility and production potential of your site, head and flow potential, permitting and approvals. (See https://microhydrony.org/category/technology/ for more information about microhydro project feasibility.)
2. Determine whether you have a creditworthy offtaker who can consume the full output of your feasible project.
3. Evaluate the price of electricity that the potential offtaker currently pays, to understand the baseline for the project economics. To succeed, a PPA will likely need to keep the kWh price at or below the price the offtaker currently pays.
4. Discuss the potential for energy efficiency measures and costs with the offtaker before deciding on the appropriately sized microhydro system to meet your needs.
5. Find a microhydro provider with engineering, design, permitting and construction experience who can develop your project.
6. Negotiate the PPA structure.

Next Steps

Before you go ahead and start calling PPA providers, read more about PPA economics (including RECs) in our upcoming blog post.

Or you download our full Microhydro PPA Report for more information.

[1] The offtaker must demonstrate creditworthiness in order to attract a third-party investor or lender to finance construction. Creditworthiness requires documentation that reflects investment grade credit (BBB- or better) and 3 years audited financial statements.

[2] As of this writing, the federal tax credits for hydroelectric power expired, however a new bill in the Senate would extend them retroactively for all of 2018 through the end of 2019.