PPAs AND CONTRACTS FOR LONG-TERM RENEWABLE ENERGY CREDITS North American Power Credit Organization September 2006 Meeting Presented by: William H. Holmes,

PPAs AND CONTRACTSPPAs AND CONTRACTSFOR LONG-TERMFOR LONG-TERM

RENEWABLE ENERGY CREDITSRENEWABLE ENERGY CREDITS

North American Power Credit OrganizationNorth American Power Credit OrganizationSeptember 2006 MeetingSeptember 2006 Meeting

Presented by:

William H. Holmes, PartnerStoel Rives LLP

900 SW Fifth Avenue, Suite 2600Portland, Oregon 97204

[email protected]

September 15, 2006

OverviewOverview

• Project Construction• Project Operation• Defaults• Damages• Credit Support• RECs

Features of Wind and Other Features of Wind and Other Renewable Energy AgreementsRenewable 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 ConstructionProject 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 Project Construction (cont.)(cont.)

• Seller Wants– 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 OperationProject Operation

• Output Guarantee– Seasonal (now rare)– Annual – Rolling Average

• Mechanical Availability Guarantee (annual)• Shaping and Firming Services

– Physical (agreement with load-serving entity)– Market-based

• Breach of Contract and Termination• Termination Damages Caps

DefaultsDefaults

• 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 CalculationsDamages Calculations

• Often based on “Cover” Damages (market vs. contract price)– 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 Damages Calculations (cont’d)(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’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 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)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 IssuesRECs Features and Issues

• Consumers willing to purchase RECs voluntarily• Value of RECs will vary with source (solar vs. wind

vs. biomass)– “First class” carbon offsets vs. “second class” RECs

• RECs often command higher price than associated energy

RECs Features and Issues RECs Features and Issues (cont’d)(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 Wind” or “Merchant Renewables”“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

ReferencesReferences

• See Law of Wind at http://www.stoel.com/Files/LawOfWind_06.pdf.

• See Law of Lava Law at http://www.stoel.com/Files/LavaLaw_06.pdf.

• See Law of Biofuels at http://www.stoel.com/webfiles/Final_BiofuelsLawBook_6-19-06.pdf.

William H. Holmes, PartnerStoel Rives LLP900 SW Fifth Avenue, Suite 2600Portland, Oregon [email protected]

www.stoel.com