March 06, 2019

Managing Your Renewable Energy Power Purchase Agreements

by Stuart Hurst

A lawyer once said that if, when a contract is signed, and all parties are not already in default, it’s not a well-written contract! 

Now, I’m praying that that was a tongue in cheek remark, made after a long week at the office and a few soda pops as they headed into the weekend. 

However, the moral of the story is; that you must know every detail of the PPA contracts to which you have been entrusted. 

Know The Details.

These contracts are written by lawyers for lawyers so make sure you clarify anything that you don’t understand or are unsure about, as early as possible.  As with all things written, re: social media etc. the author(s) knew what they meant when they wrote whatever they wrote, yet as time goes by, the detailed whys and wherefores tend to fade into the blurred oblivion of the past.  So, with memories being what they are, not asking in a timely manner may result in missed or misunderstood deliverables. 

Now that you fully understand your power purchase agreement and have clarified all the grey areas to your satisfaction, the next crucial step is to list all your obligations and understand what potential risks come with each of those obligations.   Knowing what must be delivered, when it is due, to whom it must be delivered, in what format it is expected to be delivered and the ramifications of not delivering cannot be stressed enough.  Once you have all the clearly defined deliverables listed the next thing to look out for are the ancillary requirements.  These requirements, although not spelled out definitively in the PPA, make up a sizable amount of the obligations you are now responsible for.  So, make sure you identify and address these obligations with the same vigor as all the others.  A prime example, when it comes to renewable energy projects, are the environmental (impact) monitoring and reporting requirements, or the decommissioning planning requirements. 

Plan for the Life of Your Power Purchase Agreement

A complete understanding of these obligations and associated risks will help you map out and plan for the life of the PPA.  You need to figure out how you are going to make it all happen, year after year, to comply with the requirements over the long term.  So, with all these daunting deliverables swimming around your head, now is the best time to carry out your tool (software) selection process.  Having how you plan to address each obligation mapped out, step by step, will allow you to identify what kind of tools you are going to need keep everything on track and what will help you ensure that you don’t miss any key deliverables.   

Some aspects of the PPA that affect the obligations or revenue may change over time.  Things like escalation factors, and as such, need to be monitored closely.  If relevant, these items are usually well defined in the PPA and will detail how much of a change there is and when the changes take effect. Knowing when they occur and what impact they will have on your long-term revenue is vital.   

Another long-term impact concern is equipment life and usage. As the power plant ages components such as panels, inverters, gearboxes, bearings, converters, cables and switches etc. begin to wear out or deteriorate, resulting in increased servicing or replacement costs.  Knowing why panel performance deteriorates or why bearings brinnel or why certain cables wear out over time etc. is, although not crucial, useful in understanding the need to have adequate resources and funds to manage these events.  

Keeping to the ‘letter of the law’.

Do not allow yourself to be drawn into undocumented agreements that go beyond the contractual language, or worse, contravene the PPA.  It might sound like a minor issue, or even a good idea at the time, yet without it being thoroughly thought out, documented, and ultimately included in a revision to the contract, it will probably come back to bite you, so my advice is to stay well clear.  I have lost count of the number of times where during a due diligence audit the ongoing activities and deliverables in no way reflect the contractual language in the PPA (the movie doesn’t look anything like the book). Avoid those ‘secret deals’, they will only get you into trouble!   

Transparency, it’s a partnership not a battle.

Be transparent!  Ensuring that your stakeholders know or, even better see, what’s going on as much as possible will help keep them on your side and more accommodating in troubled times.  Recognizing that you are facing a potential hiccup and preparing your stakeholders for it, makes it less stressful and hopefully, less disruptive for everyone to deal with.   When the ‘unexpected’ happens, it tends to have a domino effect, causing stress, worry for everyone affected and, if repeated, ultimately a lack of confidence.  All of which requires a lot of added effort to mitigate, and should, be avoided as much as possible by simply being transparent. 

Finally, and reflecting the spirit of the lawyer’s remark at the beginning of this blog, ‘if all else fails, have great counsel on your team’. 

Want to get a bit more in depth?  Read up on corporate PPAs here.

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