Scribd
Upload
717 views34 pages

PPA Structuring

This document summarizes key considerations for negotiating solar power purchase agreements (PPAs). It discusses the economics of solar projects and incentives available, as well as common PPA structures. The summary focuses on important issues in PPAs such as pricing, output guarantees, conditions precedent, and delivery points. Negotiating these terms requires understanding a buyer's electricity rates and tariffs to properly evaluate the price of solar power.

Uploaded by

Raj Tha
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
717 views34 pages

PPA Structuring

This document summarizes key considerations for negotiating solar power purchase agreements (PPAs). It discusses the economics of solar projects and incentives available, as well as common PPA structures. The summary focuses on important issues in PPAs such as pricing, output guarantees, conditions precedent, and delivery points. Negotiating these terms requires understanding a buyer's electricity rates and tariffs to properly evaluate the price of solar power.

Uploaded by

Raj Tha
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Commercializing Solar Negotiating Solar Power Purchase Agreements

Richard Horton, Partner, DLA Piper LLP Silicon Valley [email protected]

DLA Piper

US Energy Sector - Experience and Service


Sector experience includes: Energy sector services include: Solar Government/Regulatory Wind Bidding and RFPs Biofuels Commercial and Construction Clean Technology Documents Climate Change Corporate Structuring and Tax Advice Emissions Trading Financing Green Energy Intellectual Property Liquefied Natural Gas Licensing and Technology Transfer Oil & Gas Litigation and International Arbitration Nuclear Mergers and Acquisitions Power Generation Smart Grid
3

Solar as a Service Power Purchase Agreement Overview


Procuring solar power supply Outright purchase - expensive Power Purchase Agreement
SOLAR AS A SERVICE *Long term revenue stream is basis of debt servicing and financeability Driving force behind solar uptake (75% of all solar generated via PPA) Affordability with no capital outlay No operations and maintenance costs Very little performance risk only pay for what is delivered Price hedging
Long term fixed rates (15 20 years) Carbon scheme will make pricing more competitive

Chance to reduce peak load Environmental benefits and supports green economy

Solar Lease (residential) Minimize risk for Seller; potential upside (and downside) for Buyer 4

Solar Project Economics


Overview of Economics of Solar Projects High capital costs needs to be covered for each project lenders and tax investors cautious about construction phase Project complexity (PPA, EPC, O&M, interconnection, transmission, loan (construction and take out/term), tax equity, LLC Agreements, development services

Significant lender and investor due diligence


Despite apparent plethora of incentives, all available revenue and tax incentives must be optimized to make money
Power sale revenue Sale of RECs (value will increase if carbon priced) Federal ITC/Grant in Lieu MACRS Depreciation State and local rebates (CSI, San 5 Francisco Solar Incentive)

Solar Project Economics


Estimated that 50% cost covered by incentives in California

Project modeling needs to be done very carefully Despite certain cost of having crashed Entire solar sector went into supply-side overdrive Silicon, module prices crash Feed-in-tariffs in Europe make solar projects there much more attractive Breakthroughs needed
Breakthroughs in design, manufacturing, supply chain, installation and financing/incentives Maxed out Big breakthrough needed is in the fundamental cell technology

30 or 40% efficiency would **revolutionize life on earth**


Energy free and boundless Significantly but not proportionately advanced over last time (70s)

Combined with storage and wireless transmission **Opportunities in solar are boundless 6

Incentives - overview
Overview only

1603 Federal Cash Grant

hugely significant in most deals projects placed in service in 2009 or 2010, or with commencement of construction by Oct 2011 Hopefully will be extended Amount? - 30% of capital cost What is included no crystal-clear guidelines >500K requires accountant certification of cost basis Reduces depreciable basis of system by 50% of grant or 15% Timing? - Paid within 60 days of date system placed 7 in service

Incentives - overview
Risk? 100% audit risk all applications reviewed Recapture if Change in use Permanent closure Sale/transfer to disqualified owner (tax exempt, govt body, nonprofit) Foreclosure by lender does NOT result in recapture. Not taxable as income by Federal Govt; talk of California taxing doesnt get easier.

Incentives - overview
48 Federal Investment Tax Credit (alternative to Cash Grant)

Alternative to cash grant; 30% tax credit (reduces tax bill) Low audit risk (regular tax audit risk)

Federal Loan Guarantee Program Up to 80% of project cost Applications costly and time consuming Subject to and critical and qualitative/competitive evaluation by DOE Unlike cash grant which goes to everyone not viable for fast track or small projects Depreciation MACRS depreciation of system over 5 years (very short considering life of the system (25+ years) stimulus legislation allowed one time 50% bonus depreciation in year 2008 (i.e. 50% could be depreciated in 2008) 9

Incentives - overview
State Incentives
Example: California Solar Initiative

Performance Based Incentive (PBI) for > 50kW Based on actual output Paid monthly over 5 years
Currently at 15c per kWh for commercial

Local Incentives

10

Environmental Attributes
Environmental Attributes (credits, benefits, emissions reductions etc attached to generation of renewable energy) RECs 1 REC for 1 MWh green power Unbundled from the actual power PPA needs to specify ownership Include Reporting Rights
ability to publish use of green power E.g. This factory is powered by the sun. If no RECs, then buyer of solar power cannot publicly state that the power generated is green power
11

Example Solar Project Structuring Partnership Flip (wind safe harbor)


Pre-flip 1% interest Tax Equity Post-flip - 5% interest Pre-flip (first 5 years) 99% interest Owner LLC (Single Purpose Entity) Construction and/or Term debt Developer Land owner

Post-flip - 95%

PPA (and Site Lease) Off-taker/Host EPC Contract Operations & Maintenance Contract Installer O&M

Interconnection Net metering Transmission

Lender Local Utility


12

Structures
Structure of project Partnership Flip Sale Leaseback Inverted lease

13

PPAs Key Issues and Considerations Chronological order


Project participants Scale of project and parties Residential
Cover page
Decreasing Seller ability to negotiate Increasing creditworthiness

Commercial Utility Creditworthiness

Buyer - needs to sustain long term purchase cash flow Seller - larger scale, to stand behind output guarantees, curtailments, liquidated damages Needs to be monitored (downgrades)
14

PPAs Key Issues and Considerations


Off-Ramps and Conditions Precedent The first thing to do when getting into something is to work out how to get out of it! Usually PPA executed first, with other key contracts following later and as conditions precedent to effectiveness of PPA Must be met by Condition Deadline Waiver rights (beneficiary of CP) If not, termination without liability (i.e. walk-away right) Break fee? => utilities want security deposit up front - forfeited Notice to Proceed to EPC contractor

15

PPAs Key Issues and Considerations


Construction - EPC Contract (not usually part of PPA, but can be) Turnkey design, procurement, installation/construction, testing, permitting and commissioning, usually O&M Need to back to back many EPC provisions with PPA

Fixed price affects PPA pricing Guaranteed Final Completion date and liquidated damages Guaranteed output/capacity and liquidated damages Guarantees of performance
Performance Bond Labor bond

Contractor wants

Assurance of payment (parent guaranty, letter of credit etc) Grant of O&M contract
16

PPAs Key Issues and Considerations


Pricing Contract Rate (usually tied to current or expected utility rate) Fixed with escalator (usually between 3 and 4%) Fixed without escalator Tied to utility rate Pricing - Test Rate PPA may require buyer to take electricity if system producing some but not all expected electricity due to incompletion => Buyer may specify reduced price for such electricity RECs Prepayment Long term revenue stream not enough alone in current market Used as deposit for financing in return for power price discount
17

PPAs Key Issues and Considerations


Evaluating Price - Buyer **Need to understand how local utility charges for electricity Tariff is basic cost per kWh - may vary depending on Time of Use May also include Demand Charges additional cost based on peak demand average Also different tariffs Conduct evaluation of customer energy use patterns, system output and available tariff structures > what components of utility rates offset by solar energy Pricing based on net metering expectations most utilities (nearly all in California), but terms vary greatly Need to understand
credit rate (may be very low price) best if at least retail equivalent caps: may be a maximum: CA is 2.5% peak demand

**Cost of additional capacity exceeds benefits, so generally best to have system which does not exceed output requirements of host

In Europe FITs make systems profit centers; not in the US

18

PPAs Key Issues and Considerations


Output Purchase Standard Take and Pay Seller sells and Buyer buys all output from system Must be delivered to Delivery point to get paid Title and risk pass to Buyer Distributed delivered to point of interconnection of solar system and Buyers electric system (behind the meter) Utility or large scale**
Seller wants Delivery Point to be point of interconnection of system with transmission lines (like FOB) Buyer wants guaranteed delivery across transmission lines to point at which transmission connects 19 to Buyer system

PPAs Key Issues and Considerations


As Available or Output Guaranty? Seller argue as available since motivated by revenues Specify output schedule as targets only If power price below utility rate, Buyer may insist on Output Guaranty Often required in utility scale because power requirements of utility more complex and sourcing from multiple supply sources.
Utility may be relying on RECs for RPS too

Utility may even specify reduced rate for excess supply


20

PPAs Key Issues and Considerations


Output Guaranty Big risk item - Seller protections
Need ramp up and rolling average overlay to make up losses
Seek one or 2 years of performance to be able to fix problems before output guaranty imposed Annual target subject to 3 year rolling average and true up

Try to set low bar and build in annual degradation => reduction of guaranty over time
Seller to includes acknowledgement (based on manufacturer warranties) that output will degenerate by approx 1% p.a. (in line with manufacturer warranty)

Exclude Buyer curtailments or curtailments related to transmission problems Offer Availability Warranty
The panels will be available (i.e. ready and able) to produce solar power for a certain percentage of time (excludes maintenance etc) 21 weak guaranty.

PPAs Key Issues and Considerations


Output Guaranty - Seller protections contd
Seek back to back output guaranty from EPC Seek to rely solely on pass thru of manufacturers warranties
Standard warranties Understand scope often limited to repair or replace no damages

Try to hedge risk with commitments from EPC and manufacturers and pray for sunshine!

22

PPAs Key Issues and Considerations


Consequences of breach of Output Guaranty Liquidated Damages formula
supply shortfall x cost per mWh (usually based on incremental cost of alternative procurement may include lost value of RECs if going to offtaker

Seller wants cap on LDs Persistent failure to meet output guarantees => right of termination

23

PPAs Key Issues and Considerations


Curtailments Reduction or suspension of delivery or acceptance of energy Lost output reduces revenues and reduces benefits (PBI under CSI, RECs, TLAs, ETLAs etc) Seller wants to treat lost output as if generated => Buyer to pay price plus after-tax value of lost benefits Treatment should be based on underlying cause or allocation of risk

Transmission congestion Inability or unwillingness of Buyer to accept delivery Emergency Force Majeure

Other compromises

curtailed energy applied towards output guarantees Seller to mitigate loss - bypass Buyer and deliver to third 24 party or onto grid

PPAs Key Issues and Considerations


Force Majeure for the New Millennium (meteorites) "Either party's non-performance of this Agreement shall be excused to the extent that it is caused by any of the following events: (i) Alien abduction, invasion, possession or interference. As used herein, "alien" means a life form, whether or not carbon-based, from any other time, world, galaxy, universe, or dimension, and includes angels, Lucifer and his minions, Yeti (a/k/a Bigfoot), Mothman, Chupacabra, Gozer, Pukwudgies and the so-called "Grays." For avoidance of doubt, "alien" does not mean a foreign national without a work visa. (ii) A pandemic or plague, whether or not caused by an unknown virus released during an alien autopsy at Area 51. (iii) Seas boiling (whether or not the result of global warming), the rising of the dead (whether or not the dead appear as so-called zombies), mountains falling (but not earthquakes), the re-emergence of Atlantis, and dogs and cats living together. (iv) Destructive power unleashed by any of the following: the finding of the remaining crystal skulls, the reverse engineering of alien technology, or the discovery of the Ark of the Covenant. (v) The end of the world on December 21, 2012, according to the Mayan calendar. " http://contractualmusings.blogspot.com/2008/05/force-majeure-clause25 for-new-millennium.html

PPAs Key Issues and Considerations


Term PPA binding from Effective Date (subject to conditions precedent) Commencement of Term: Commercial Operation Date (COD)
Seller wants target COD (whereas wants fixed Date of Final Completion in EPC contract) Buyer usually wants fixed COD (especially if utility that needs (green) power) with liquidated damages if delay. Buyer may even want milestone schedule for individual components of project (financing, module purchasing, completion of permitting etc)

**Not to be confused with Placed in Service (PIS) date


Must be careful Note also interplay between COD and PIS and Substantial Completion and Final Completion in EPC contract 26

PPAs Key Issues and Considerations


Term of PPA Usually 15, 20 or 25 years, but can be less May be renewals (usually debt paid off so price should drop)

Seller beware continuing obligations re output or may have to replace modules without charge
End of term Seller usually required to remove system

In practice? Just cells swapped out and systems remain in place


Buyer Option to purchase Buyer usually has option to purchase after year 5 when tax benefits have been exhausted (cash grant/ITC, MACRS, CSI) May be options every year after yr 6, or every 5 years thereafter, at end of term only or no option at all no standard.
27

PPAs Key Issues and Considerations


Option Pricing IRS requires that price must be no less than Fair Market Value Usually greater of FMV and scheduled Termination Amount Forced buyout on termination for breach by Buyer will often include additional costs

28

PPAs Key Issues and Considerations


Termination
Drastic remedy, so significant opportunities to cure and real time liquidated damages Lenders and Tax Equity rights
Step in rights to cure Notice and extended cure periods

Uncured breach by Buyer


Forced buyout at greater of FMV and Termination Amount plus additional breach costs => liquidated damages

Sale of property by Buyer forced buyout at greater of FMV and Termination Amount
Uncured breach by Seller

Liquidated damages
Failure to meet COD Failure to meet Guaranteed Output

Termination for uncured material breach or chronic breaches 29 (death by a 1000 cuts)

PPAs Key Issues and Considerations


Walk away Condition Precedent walk away, maybe break fee (or forfeited down payment to utility)

**Utility Right of First Offer (ROFO) Termination for failure of condition precedent or extended Force Majeure

30

PPAs Key Issues and Considerations


Interconnection and Transmission Interconnection costs power usually payable by Seller Expensive and long cues Transmission: if project located on remote land, may require significant transmission of power from system to remote delivery point (e.g. substation) expensive and may involve payment of additional amounts for network upgrades to transmission provider Operations & Maintenance Simple Preventive Operation & Maintenance Services Annual inspections of modules, inverters, roof penetrations and supports Meter checks, system performance monitoring (real time using DAS) Cleaning remove dust, debris, power washing Repairs Inverter replacement (usually every 10 years) - expensive Usually granted to EPC contractor
31

PPAs Key Issues and Considerations


Real property rights Lease, Easement or License To be financeable, need long term site rights to build, operate and maintain the system include access rights unencumbered and unencumberable solar exposure rights to transmission of power from the property to transmission lines etc (if applicable) **flexibility for modifications (e.g. swapping solar panels for better panels in future and O&M Lease or easement bankable because both an interest in land secured on title Lease: broadest rights Easement: can be similar to a lease but usually for non-exclusive occupancy land rights
32

PPAs Key Issues and Considerations


License: mere personal property interest, not real property interest and may be revocable or breachable without specific performance

Need Buyer covenant to procure non-disturbance agreement with Buyer mortgagee (or master lessor)
Allows continuation of lease if bank forecloses/master lessor terminates buyer/lessee lease

Ownership of land may be necessary


Options for large scale projects or land identified for multiple projects

May need easements over adjacent property to ensure no activity which obstructs sunlight
33

The End

34
SANF368063.1

Common questions

Powered by AI

The primary financial incentives for solar project development include the §1603 Federal Cash Grant, providing 30% of capital costs, which was significant for projects placed in service in 2009 or 2010. It reduces the depreciable basis by 50% of the grant. Another incentive is the §48 Federal Investment Tax Credit (ITC), an alternative to the cash grant offering a 30% tax credit. The Federal Loan Guarantee Program can cover up to 80% of project costs but is costly and time-consuming to apply for. Additionally, the MACRS depreciation allows for a fast depreciation over 5 years. State and local incentives, such as the California Solar Initiative, offer Performance-Based Incentives (PBI), which pay based on actual output. These incentives are crucial as they can cover approximately 50% of costs in regions like California .

When negotiating liquidated damages clauses in a Power Purchase Agreement (PPA), sellers need to consider the extent of their liability for failure to meet guaranteed outputs. Liquidated damages are typically calculated based on the supply shortfall multiplied by the cost per MWh, which might also account for lost REC value. Sellers often seek to cap these damages to manage risk exposure and ensure financial predictability. They must also account for potential curtailments due to factors outside their control, such as transmission issues or buyer-induced restrictions, and negotiate for these circumstances to be excluded from damages calculations. It's important to align guarantees with manufacturer warranties and factor in system degradation over time to limit long-term liabilities .

Solar project developers face high capital costs, complexity in project execution including PPAs, EPC, O&M, interconnection, and significant due diligence from lenders and investors during the construction phase. To address these challenges, developers should optimize all available revenue and tax incentives like federal and state grants, ensure thorough project modeling, and secure a strong financial backing to mitigate high costs. The construction phase also requires careful negotiation of EPC contracts to ensure fixed pricing and guaranteed outputs to align with PPA terms. Effective risk management strategies like securing performance bonds and detailed contingency planning are necessary to meet lender requirements and mitigate risks .

The partnership flip structure benefits stakeholders in a solar project by allowing tax equity investors to receive the majority (usually 99%) of the tax benefits and project cash flows during the initial phase until a predetermined return is achieved. After this point, the ownership interests 'flip', increasing the developer's equity share, typically to 95%. This structure enables tax equity investors to maximize the utility of federal tax incentives like the ITC and MACRS depreciation while providing a clear path for project developers to gain control and higher revenue share after a significant portion of financial obligations are met. This model aligns incentives between developers and financial partners, enhancing project viability and attractiveness to investors .

A Power Purchase Agreement (PPA) mitigates risks for developers by securing a long-term revenue stream, making it the basis of debt servicing and financeability. It allows developers to sell energy at fixed rates for 15-20 years, reducing the risk associated with market price fluctuations. For buyers, PPAs eliminate capital outlay, operations, and maintenance costs, as they only pay for delivered energy. This model also hedges against future electricity price hikes and offers environmental benefits. Additionally, for sellers, it minimizes performance risk as revenue is only from delivered power, providing price stability and predictability .

Aligning solar projects with local utility billing structures and consumer energy use patterns is crucial for maximizing economic returns. Utility tariffs often include demand charges based on peak usage and time-of-use rates, which vary throughout the day. By understanding these factors, a solar project can be designed to optimize energy production during periods of high utility rates, offsetting expensive consumption charges for the consumer. Proper alignment ensures that the solar output effectively reduces the most costly parts of the electric bill, thereby increasing the financial benefit and making the project more attractive to potential buyers .

When determining the location for new solar projects, providers should evaluate factors such as solar insolation levels, available land space, and proximity to transmission infrastructure. High solar insolation areas maximize energy output, increasing project viability. Proximity to existing transmission lines reduces interconnection costs and potential delays, making the project more feasible. Regulatory environments, including zoning laws and local incentives, are crucial as they can significantly alter financial outcomes. Additionally, land ownership rights, environmental impact assessments, and community acceptance are strategic factors that influence the long-term success and sustainability of a solar project .

State incentives, such as the California Solar Initiative (CSI), enhance the adoption of solar projects by providing Performance-Based Incentives (PBI) for systems over 50kW, paying based on actual output at rates currently set at 15 cents per kWh for commercial projects. These incentives support projects financially, reducing initial hurdles and ongoing operational costs, thereby making solar investments more attractive. Such incentives complement federal incentives and can cover a significant portion of project costs, leading to increased financial feasibility and encouraging higher adoption rates of solar technology .

Renewable Energy Certificates (RECs) play a crucial role in the economics of solar power projects by allowing the separation of environmental attributes from the physical electricity generated. One REC represents the environmental benefit of generating 1 MWh of green power. In a PPA, the ownership of RECs needs to be clearly specified, as they can provide additional revenue streams or be used for compliance in Renewable Portfolio Standards. Selling RECs can offset project costs and make projects more financially viable. Without RECs, buyers of solar power cannot claim the environmental benefits of the power generated, impacting market appeal and financial returns .

The 'sale leaseback' structure offers benefits such as immediate lease payments and tax benefits to the lessee (usually the developer), while the lessor (usually a financial institution) benefits from ownership tax incentives. It provides immediate capital, enables developers to repay construction financing, and avoids the initial capital investment. However, drawbacks include a potentially complex arrangement where the lessor retains ownership, which can limit the lessee's operational flexibility. This structure also involves long-term lease obligations, and financial terms may be less favorable if the resale value of the solar system depreciates faster than anticipated. Regulatory changes could also impact the financial outcomes in the lessor’s tax position .

You might also like