PPAs AND CONTRACTS
FOR LONG-TERM
RENEWABLE ENERGY CREDITS
North American Power Credit Organization
September 2006 Meeting
Presented by:
William H. Holmes, Partner
Stoel Rives LLP
900 SW Fifth Avenue, Suite 2600
Portland, Oregon 97204
503.294.9207
whholmes@stoel.com
September 15, 2006
Overview
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Project Construction
Project Operation
Defaults
Damages
Credit Support
RECs
Features of Wind and Other
Renewable Energy Agreements
• Wind is an “Intermittent Resource”: Hard to Forecast
and Schedule, Low Capacity Factor
• Curtailment Risk
• Renewable Energy Credits (RECs)
• Long-Term (15-25 years)
• Production Tax Credits (PTCs) and Sunset Dates
Project Construction
• Tension: “Must Build” vs. “Put”
• Buyer Wants
– Construction Milestones
– Guaranteed Commercial Operation Date (“COD”)
– Delay Damages – missed milestone or missed guaranteed
COD
– Partial Completion Damages (wind project)
Project Construction (cont.)
• Seller Wants
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Force Majeure outs
No damages if milestone missed but COD is not affected
Delay Damages Caps
Damages Caps for Failure to Complete
Off ramps (e.g., inability to obtain permits, land rights or
interconnection agreement)
• Right of First Refusal
Project Operation
• Output Guarantee
– Seasonal (now rare)
– Annual
– Rolling Average
• Mechanical Availability Guarantee (annual)
• Shaping and Firming Services
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Physical (agreement with load-serving entity)
Market-based
• Breach of Contract and Termination
• Termination Damages Caps
Defaults
• Non-termination Defaults
• Material Defaults
– Buyer’s failure to pay
– Seller’s failure to deliver
– Defined flaw in credit support (e.g., credit rating reduction,
guaranty repudiation or default)
– Opportunity to cure
Damages Calculations
• Often based on “Cover” Damages
(market vs. contract price)
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Market index or other reference?
Cap on market price?
Cap on annual damages?
Cap on aggregate damages?
Caps will be important to Seller if there is an output or
mechanical availability guarantee
• Liquidated (fixed) damages
Damages Calculations (cont’d)
• Termination Damages
– Damages cap: important in project finance
– Exceptions to cap: willful breach or fraud
– Two-way termination and its hazards
Seller’s Credit Support
• Seller is usually a special purpose Project LLC
• Project LLC has few assets before construction
• Credit support is usually a parent guaranty,
LC or cash deposit
• Developers strongly resist security interest
in assets, even if subordinated
• Amount of credit support often differs before
and after COD
Buyer’s Credit Support
• Usually tied to credit rating of Buyer or its Guarantor
• May be required at inception
• Important to Seller’s financing
Renewable Energy Credits (RECs)
• Aka “Green Tags,” “Environmental Attributes” or
“Tradeable Renewable Certificates” (“TRCs”)
• RECs are often “Bundled” With Energy in PPA
• 1 MWh of energy = 1 MWh of RECs
• RECs can be sold separately for some purposes
RECs Features and Issues
• Consumers willing to purchase RECs voluntarily
• Value of RECs will vary with source (solar vs. wind
vs. biomass)
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“First class” carbon offsets vs. “second class” RECs
• RECs often command higher price than associated
energy
RECs Features and Issues (cont’d)
• Product needs a standard definition
(e.g., Green-e Certification)
– Seller unwilling to warrant character of RECs – will disclaim
warranties of merchantability/fitness for particular purpose
– Buyer uncertain what it is getting
– Allocation of change in law risks
• Accounting procedures needs to be centralized
and standardized (WREGIS)
“Merchant Wind” or
“Merchant Renewables”
• Possible in RTO/ISO markets
• Requires durable, long-term REC agreement that
can be financed
• Standardized provisions (e.g., ABA’s model REC
contract)
• Multiple buyers: Base load vs. peak sales of RECs
References
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See Law of Wind at http://www.stoel.com/Files/LawOfWind_06.pdf.
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See Law of Lava Law at http://www.stoel.com/Files/LavaLaw_06.pdf.
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See Law of Biofuels at
http://www.stoel.com/webfiles/Final_BiofuelsLawBook_6-19-06.pdf.
William H. Holmes, Partner
Stoel Rives LLP
900 SW Fifth Avenue, Suite 2600
Portland, Oregon 97204
503.294.9207
whholmes@stoel.com
www.stoel.com