Finance

Finance

PPA – Key Legal Provisions

Jan Borchert, Current Hydro and Dana Hall, Esq.

The approach to key legal provisions in a PPA will vary by party, as with any commercial agreement. With a microhydro PPA, these parties include the developer or PPA provider; the site owner or host; and the offtaker or entity consuming the generation output; all of whom have different sets of interests. This post will focus on the key legal provisions of a PPA with brief descriptions of the varying perspectives of the involved parties.

But before we get into that, a short reminder: Permitting a hydroelectric facility is required under Federal, State and municipal law and regulations. Interconnection with the utility involves technical and procedural requirements necessary to safely and reliably interconnect a generating system to the electric grid. See Bard College’s Microhydro NY website legal page for a deeper dive into the permitting requirements in New York State.

Finance-ability

The developer or PPA provider wants to ensure that the PPA does not become too difficult or costly because excessive costs can affect finance-ability. Some debt lenders and equity investors prefer standardized terms to minimize transaction costs. The developer or PPA provider will need to demonstrate to investors that the host is creditworthy, which may require documentation from the host that shows investment grade credit (BBB- or better) and three years of audited financial statements.

Timing and Performance Flexibility

The developer or PPA provider wants to allow flexibility in the time allotted to get to performance because unanticipated delays may occur, which could be to local permitting, weather affecting construction or other issues. It can be difficult to control the exact timing of operational start and the developer wants flexibility with respect to performance requirements.

In contrast, the offtaker wants the system delivered exactly on time, as promised so they can accrue their revenue stream as planned. Offtakers may establish future budgets based on an expectation of energy savings when a PPA is involved, so the timing of performance is important to the offtaker.

Design and Placement Control

The developer or PPA provider wants to maintain control over the design of the system. They may require flexibility to adjust the design based on performance factors or other unanticipated changes that are not revealed until construction actually begins.

In contrast, the offtaker may be concerned about design changes along the way because they can cause delay. The offtaker may agree to flexibility, however they still want to ensure that the size of the system meets but does not exceed their load requirement. They may have other concerns about the design of the system related to their property, such as security, aesthetics, noise or access.

 Assignability

Assignability is the ability to legally transfer the rights and obligations that a party has to a contract to a new party, which usually happens if one party’s ownership interest is sold to another party. The developer or PPA provider may require collateral assignment, which is where ownership rights are transferred as an additional security for a loan and revert back to the assignor when the loan is repaid. The developer or PPA provider may seek to prohibit or significantly limit the offtaker’s ability to assign contract rights, while seeking to reserve an unlimited right to assign for itself.

The offtaker may want the ability to assign their rights in the contract with developer consent so long as that consent is not unreasonably withheld.

Termination and Buyout

The developer or PPA provider does not want the offtaker to be able to terminate unless there is a material breach of the agreement. However, the developer wants to reserve broad rights to terminate with or without cause. If the offtaker requests termination, the developer wants to make sure that their tax treatment and return on investment are recovered.

The offtaker will likely want to limit the developer’s right to terminate. This is because if the developer / PPA provider terminates the agreement, the offtaker will lose the benefits of the deal.

The site owner / host may want to have the right to terminate with buyout rights at defined times (i.e. year 6 or 10 or 20, etc…). This is because as the owner of the property, they may want to allow themselves an out down the road if they decide they want to sell or do something different with the property.

REC Rights and Values

State and local regulations can impose additional requirements on the nature of the project. The developer will likely base financing and project economics on assumptions about RECs and the value of the RECs. The developer needs predictable and steady cash flow or the deal may not get financed.

The offtaker doesn’t want to be bothered with the developer’s problems selling RECs or getting a long term REC contract. The offtaker does not want the PPA terminated or renegotiated because of issues with REC values.

In New York State, in order for renewable generation to count towards the state’s goals, NYSERDA procures RECs from eligible generators through the RES solicitations, effectively retiring the RECs and making them unavailable to private parties who wish to claim the REC and take credit for using renewable energy. This process has slowed voluntary corporate REC purchases in New York State as a result, because there is uncertainty as to how an offtaker can make a claim to use renewable energy (usually a driving factor in pursuing a PPA) if NYSERDA retires the RECs and takes credit.[1] With microhydro PPAs, if the parties are satisfied to allow NYSERDA to purchase and claim the RECs towards the state renewable goal, the PPA structure can incorporate an unbundled REC contract with NYSERDA and separate electricity contract with the offtaker.

Next Steps

At this point we’ve presented the involved parties in a PPA, when and how to set up a PPA, the economics and incentives, the investor-developer relationship arrangements and the key legal provisions (this post). We hope you feel comfortable moving forward with setting up your microhydro system as a PPA.

But if you think you can do more, and generate more energy than what you use yourself, consider community distributed generation (CDG) or if you’re looking for a simpler contractual setup, consider the ownership model, and follow the links in our financial models overview post. There you can also download our full Microhydro PPA Report.


[1] Voluntary and Corporate Renewable Energy in New York: Challenges to Maximizing Voluntary Benefits and Meeting State Goals. Available at: https://resource-solutions.org/wp-content/uploads/2017/10/PACE-III.pdf


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