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Understanding PPA Legal Aspects: A Deep Dive

May 29th, 2024
Solar PPA

Purchase Power Agreements (PPAs) are legally binding agreements securing long-term procurement and sales of energy. They’re a successful method of obtaining fixed-price energy for a long period (e.g. 10 years or more) and raising long-term, guaranteed capital for energy projects. 

As with all long-term investments, acquiring a PPA can come with risks - these include elements like performance guarantees, which deal with how much an energy seller can output in relation to the contracted amount, as well as adherence to legislative changes which could unsettle a PPA as energy regulations change. The energy procurer and the lender, e.g. a bank, will assess these risks and negotiate with an energy seller to create the most suitable PPA. Explore PPA legal aspects as well as contractual obligations of each party in this article.

PPA Legal Aspects of a Contract

A document drafted between energy sellers and buyers, best practice dictates that a PPA contractual agreement can take a number of different forms; one example is in the structure laid out below:

  • An energy project is created: an energy seller produces a renewable energy project, or seeks finance for an existing energy project.

  • Contract is created:  an energy seller structures a PPA project according to their preferences.

  • Seek buyers of the PPA:  a call for interest is put out into the marketplace to ascertain who might want to invest in the energy project from a PPA perspective. 

  • Buyer offers are ranked: once offers are received from potential buyers, the energy seller ranks the PPA offers by preference. 

  • Decide pricing: the energy seller will begin to negotiate the pricing of a PPA contract after offers have been received, compared and streamlined.

  • Contract signed between energy seller and buyer: once negotiations are complete, a PPA contract will be finalised and signed.

  • Risk management and sales: risk and sales needs to be determined and managed throughout the lifecycle of the project.

Negotiation Strategies and Dispute Resolution for PPA Agreements

Negotiation of PPA agreements aim to reach the best value for the energy procurer and energy seller. They might examine factors such as current and predicted market conditions, predicted risk exposure and terms of contract. 

Projected performance and how the project will meet the expected supply might be addressed, as well as disputes that may arise should the project not perform as expected. The impact elements might be considered, such as the effect the method of energy will have on this expectation – for example the expectations of solar vs wind.

Contract terms might also be negotiated, taking into account elements that might cause disputes during the lifetime of the contract. This might include the length of the PPA, how fluctuating prices might impact variable pricing in relation to pricing structures and the approaching of volume risk - for example how weather might impact volume and how this dispute might be dealt with.

Legal Contractual Obligations, Risk Mitigation, Critical Elements and Clauses in PPAs

Before seeking a purchaser of a PPA, it’s reasonable to expect certain milestones should be reached by the renewable energy seller in order to mitigate the risk of PPA investor and lender. Here we’ll dive into some of critical elements of a PPA that should be in place before the PPA is drawn up and officiated. 

  • Consents: planning and consents should be in place 

  • Grid connection: while a connection doesn’t necessarily have to be approved, an application should be in place 

  • CfDs: A Contract for Difference is a governmental scheme to facilitate low power infrastructure, determining a set cost price for electricity - a seller should have at least begun the process of applying for a CfD.

  • Seller Counterparty Details: contracting Company Name, Company Description and Project Structure should be finalised at this stage.

  • Project Details: details including location, name of project, technology details, estimated install capacity, expected output, and energy usage generated should be finalised at this stage.

  •  Project Progress: date of planning consent as well as estimated financial close, grid-live, commissioning and commercial operations dates should be finalised at this stage.

  •  Credit/Finance Aspects: requirements for the direct agreements should be finalised at this stage. 

  •  Key Commercial Terms Required: the duration of the project should be determined, as well as the pricing structure for the PPA and power imbalance risks addressed.

For more information on expected requirements, please visit your government repository for PPAs. The information above applies to the UK market and has been taken from UK PPA documentation.

Future Legal Developments in PPA Structuring

Increasing corporate commitments, a rise in energy pricing and approaching government decarbonisation policies mean that PPAs are becoming an increasingly attractive option for some businesses. 

Negotiation of higher pricing structure may emerge thanks to increased pricing of materials. For example the cost of solar has uplifted slightly due to the increase of the cost of producing photovoltaic panels, which may impact on the negotiation of pricing structures within contracts specifically for solar PPAs. 

Initially, behemoths like Microsoft, Amazon and Google were the early adopters of sustainable PPAs, but as the market opens up to smaller companies with different requirements for PPAs, the legal structure of PPAs may shift. Smaller companies may be nimbler, with more room for adjustment in relation to contact variables - should there be price fluctuations, output adjustments or legislative changes, these companies could be better positioned to deal with risk compared to larger organisations. 

The economy can also have a direct impact on the legal development of PPAs in the future. Higher interest rates have affected the cost of financing the projects that underpin PPAs, which could potentially have an affect on factors of future PPA contracts such as risk, pricing structure and lending criteria.

Looking for more guidance on PPAs?