understanding legal issues in solar ppas

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Title Line 1 Line 2 1 Solar Power Purchase Agreements: Shedding light on long-term off-take contracts as financing tools. Stephen J. Humes Morten Lund Solar Finance Conference September 10, 2009

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Presentation at Pace University\'s Climate and Energy Law Center\'s Conference on Illuminating Solar Financing

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Page 1: Understanding Legal Issues in Solar PPAs

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Solar Power Purchase Agreements:Shedding light on long-term off-take contracts as financing tools.

Stephen J. HumesMorten Lund

Solar Finance ConferenceSeptember 10, 2009

Page 2: Understanding Legal Issues in Solar PPAs

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Introduction

Power Purchase Agreements Defined Summary of Typical Solar Project Transaction

Overview Hypothetical for Discussion Top 10 Issues: Off-taker and Developer

Viewpoints – Analysis of Deal Tensions Ancillary Considerations Conclusions Q&A

Page 3: Understanding Legal Issues in Solar PPAs

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Power Purchase Agreement Defined

A long-term (15-25 years typically) contract in which off-taker (often site host) commits to buy 100% of the energy produced at a set price (subject to escalation) or to pay for the energy produced. PPA may include solar site lease terms, but ground or roof rights must be detailed in PPA or inter-related lease agreement.

Page 4: Understanding Legal Issues in Solar PPAs

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Power Purchase Agreement Varieties

PPA structure and transaction structure can differ significantly depending on whether off-taker is a utility. For this presentation we are focusing on retail (non-utility) transactions.

Location matters. Local regulatory schemes affect the motivations and economics of all participants. A PPA in California can be quite different from a PPA in New Jersey.

PPAs can be energy-only, or may be for energy and Renewable Energy Credits/Certificates (RECs/SRECs).

Page 5: Understanding Legal Issues in Solar PPAs

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Summary of Solar Project Structure

Tax-Equity Investor

Developer Host/Off-taker

PPA/Roof or ground lease

Loan Agmt

Lender (if any)

Forbearance Agreement

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Example of typical electric grid

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Examples of Distributed Energy Resources

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Developer’s Top 10 Issues

Financability Creditworthy Host Timing flexibility Performance flexibility Design and

Placement control

Assignability Financing

Cooperation Buy-out option Termination/$ at end Interaction with lease

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Host’s Top 10 Issues

Warranties System Design and

Cooperation System Maintenance Timing and

Completion Guarantee

Performance Guaranty

Remedies for Failure to deliver energy

Termination and buyout rights

Regulatory Risk and Impact on REC value

Defaults/Remedies Assignments

Page 10: Understanding Legal Issues in Solar PPAs

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Hypothetical Deal Structure

Hospital (Host) in NJ wants solar P/V system, but wants to pay only for energy, seeks long-term energy contract at a discount compared to utility cost.

Hospital needs at least 5 MW energy. Willing to buy output of 2 MW system. Developer commits to build system and 15

year delivery at contract price.

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Key Issue: Financability

Developer Concerns– Essential that PPA not

become too difficult or costly or will impair financability

– Some debt lenders and equity investors prefer standardized terms to minimize transaction costs

– Lender protection key

Host Concerns– Rigid inflexibility to

negotiating terms can discourage Host from dealing with Developer

– Some developers use master deals with financiers, then offer “take it or leave it” terms to host

– Lender performance on default?

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Key Issue: Timing and Performance

Developer– Timing: Lots of moving

pieces and PPA is usually signed early in the process, so ample time needed

– Performance: Difficult to control system output; specific performance requirements need to be lenient

Host– Timing: Host wants

system delivered on time, as promised, so energy savings can accrue

– Performance: Since counting on savings, delivery of promised capability is key to plans and budgets

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Key Issue: Termination

Developer– Host cannot terminate

unless material breach of agreement

– Developer wants broad rights to terminate with or without cause

– If host wants out, tax treatment and ROI recovery essential

Host– If developer

terminates, host loses deal benefits; prefer limited termination right

– Host may want to terminate or seek limited buyout right at defined times (e.g., year 10 and 20)

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Key Issue: Termination Payments

Developer– Can be actual or

liquidated, but must be predictable

– If host credit at issue, credit support may be needed

Host– Must be predictable– Buyout value should

be discounted for developer breach and can be at FMV+ if host terminates for convenience

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Key Issue: System Size/Design

Developer– Seeks to maintain

control of design and placement

– Vendor flexibility needed

– Need to design to maximize solarity and other performance factors

Host– Size matters: Needs to

be sized to meet, but not exceed host requirements

– Design and location layout must work with other host property concerns, including security

– Maximize performance

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Key Issue: Assignment

Developer– Collateral assignment

essential– Seeks prohibition on

host assignment and unlimited developer assignment right

– Unlimited inter-company assignment key

Host– Consents to collateral

assignment and allows for lender to cure developer defaults

– Seeks consent to assignment outside developer corporate family, which consent is not unreasonably withheld

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Key Issue: REC Regulatory Change

Developer– Needs will depend on

whether PPA includes RECs, and the terms of the separate REC contract, if any.

– Ultimately, developer needs predictable cash flow, or deal will not be financed.

Host– Host doesn’t want to

be bothered with developer’s problems.

– Doesn’t want its PPA terminated or renegotiated because of issues unrelated to delivery of solar energy from the facility.

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Other Important Deal Points

Net metering rule (both size and whether project can exceed host needs) is key element of design consideration

State and local regulation can impose additional specific requirements on the nature of the project – zoning, licensing requirements, etc.

Page 19: Understanding Legal Issues in Solar PPAs

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Q & A

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Panel Members

Stephen J. HumesMcCarter & EnglishHartford, Connecticut(860) 275-6761 [email protected]

Morten LundStoel Rives LLPSan Diego, California(858) 794-4103 [email protected](Only admitted in Wisconsin)

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Thank You