understanding legal issues in solar ppas
DESCRIPTION
Presentation at Pace University\'s Climate and Energy Law Center\'s Conference on Illuminating Solar FinancingTRANSCRIPT
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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
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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
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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.
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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).
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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
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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.
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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