Anatomy Of A Utility-Scale PPA For Solar Or Wind

Editor’s Note: EarthTechling is proud to repost this article courtesy of Greentech Media. Author credit goes to Herman Trabish.

Utility-scale renewables’ power purchase agreements (PPAs), the LA Times recently wrote, are “confidential agreements between solar developers and utilities” that “lock in power prices two to four times the cost of conventional electricity” which ultimately “line the pockets of banks, insurers and utility companies.”

What such reports miss, said Milbank, Tweed Partner Karen Wong, is how competitive the PPA bidding process has become. Utilities’ requests for proposals and request for offers (RFPs/RFOs), Wong said, “are typically closer to ‘take it or leave it’ offers.”

Solar Panels

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In today’s California market, the utility has the leverage, Wong said. “There is a huge market of parties who want to sell power and a virtually monopolistic set of buyers who can name the terms and pick the price.”

Utilities say “this is the power purchase agreement you will be bound by. Name me a price on these terms. If you want to change any of my terms, please red line what you want to change.”

But a bidder doesn’t “want to come across as being difficult,” Wong said. A redlined bid “may not be considered as favorably as one signed on the dotted line without any changes.” Some bidders, she explained, accept the utilities’ standard, just to get a PPA, “without knowing what’s financeable.” This makes it, she added, “difficult for someone who is a real player.”

Wong described six key PPA items: (1) price, (2) certainty of revenues, (3) curtailment, (4) conditions precedent and timing, (5) cure and lender step-in rights, and (6) interconnection.

First, Wong said, a developer “has to get a price that will cover its cost and earn a reasonable return on investment.”

A developer must be certain of payment. “You don’t want to have events of default or triggers that could essentially take the PPA away from you.” Developers must have “adequate cure periods, objectively written, so you don’t find yourself thinking you have a twenty-year PPA, only to find out two days after you sign that the utility can terminate the agreement for default you didn’t even know you triggered.”

PPAs typically allow a project to be curtailed (that is, disconnected from transmission) for reliability or safety reasons. The negotiated term, she said, is about “economic curtailmentand what the compensation is.” Aside from some wind developers’ problems with curtailment issues in Texas, she noted, unfair and inadequately compensated curtailment in California does not yet seem to have become widespread.

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