A Commercial & Industrial (C&I) Power Purchase Agreement (PPA) should be a simple contract whereby a host agrees to purchase power from a system owned by a project company – this should include project company’ obligations that naturally relate to providing such a service, like installing the system and a meter and maintaining insurance. A Net Metering Credit Purchase Agreement should look exactly like a PPA, except that instead of purchasing power, the host purchases net metering credits – and the system will not be co-located with the host (so no access rights, installation requirements, or any other provision relating to the site will be included).

The two main PPA’s are whether the PPA is a true service contract and, if so, whether it is otherwise financeable. Any provisions that would cause the host to play an ownership role in the equipment or that would put pressure on the host to exercise a purchase option will be problematic – the PPA should include “service contract” language showing the intent to be a service contract, and why permitting the host to operate or maintain the system or have more than a few purchase options or an end-of-term bargain purchase option would be a fatal flaw. Further, the host might have rights to get out of paying for electricity – whether through shutting down the system for any reason without paying for estimated lost power or through being permitted to terminate the contract for any reason other than project company default or force majeure – will be problematic from a financing perspective. Also, any obligation the project company might have outside of installing, operating, and maintaining a solar system and typical related service obligations should be noted as a potential problem. Any provisions that could impact economics, like site upgrades, credit support requirements, onerous site restoration obligations or any mechanics that could cause pricing to go down will be red flags that a Financing Party will need to evaluate.

PPA points to discuss:

  1. State permitted – some states have legal roadblocks in place to prevent solar PPAs from being used there. Furthermore, a net metering credit purchase agreement depends on a utility accepting net metering credits to offset a customer’s bill – this structure must be permitted in the state and/or the specific utility.
  2. Parties – who are the parties of the PPA? Is the host is the same entity as the credit financing party? Is the power provider being the project company?
  3. Project – does the description, capacity, and location of the project match the other project documents and the financing documents?
  4. Milestones – Is there a guaranteed date for commencement of construction ot commercial operation?
  5. Credit support – what type of credit support will be required from the project company? The financing party may require reserving this amount in cash or provide a LOC outside of the financing package, which may be costly.
  6. Term – what is the contract term? It is preferred that the contract term does not extend beyond 80% of the expected life and value of the equipment. This is a particular concern where the host is the landowner. The risk is that, if the host is taking the credit of the system for its entire useful life and essentially paying for the system in full over time, then the PPA could be characterized as a loan and the host seen as the true owner of the system.
  7. Renewal – what are the renewal terms? Automatic renewal term is counted as part of the base term unless either party has the right to terminate within a certain amount of time prior to the automatic renewal. Renewal terms at fixed prices are counted as part of the base term for the purpose of the 80% test, so the renewal term price should be re-set to market value.
  8. Quantity – The PPA should define the portion of the stie generation to be required by the Host. On C&I projects, the host should agree to purchase no less than 100% of the power generated by the system. Any cap on the amount of power the host is to receive will be marked as a revenue risk by the financing party and could impact transaction economics. Host should not be required to pay for power it does not receive (meaning that project company cannot require host to pay a fixed amount regardless of whether it receives power) unless it is not receiving power due to its own actions or inactions.
  9. Interconnection – is net metering available? If not, the interconnection agreement should still provide that the power may flow onto the grid. Otherwise, the system’s production will be curtailed if it can produce more power than the host is able to use. If there is any indication the power cannot be put into the grid, it is viewed as a potential risk. If the host is party in the interconnection agreement (and not the project company), then the host should be responsible for the maintaining of the interconnection and the interconnection agreement (this is always preferred, and the financing party will want to know if it is not the host’s obligation to maintain)
  10. Pricing – how is the pricing structure? Typically, there is an initial price per KWh with an annual escalator, or at least gradually increasing pricing over time. If the PPA calls for prepayment, fixed periodic fee, uneven pricing, or adjustments to pricing in certain events, then there must be a tax exposure that would need to be discussed.
  11. Outages – how many outages is the host permitted per year? Typically, there are 24-48 hours of outages permitted without penalties. Anything above the agreed time of outages will trigger the project company’s right to reimbursement for downtime, estimated based on historical production.
  12. Environmental attributes – unless negotiated otherwise, environmental attributes will only be included in the sale of power if the host is the only entity that can use them. The PPA should specifically state that such environmental attributes for not include any tax incentives or credits (and grants in lieu of these), which will always remain with the project company. Determine what the business deal is with respect to state and local or utility rebates/incentives, the PPA should reflects the business deal. If the definition of environmental attributes is so broad as to include tax benefits, then the environmental attributes should accrue to the project company. tax benefits should not be read as accruing to the host.
  13. Metering - Project company should agree to install and maintain a utility grade kWh meter to measure the electricity output for billing purposes. Host should grant the right to remotely monitor the meter and install any communication devices necessary for the monitoring. Host should be required to maintain a consistent internet connection at the site for this purpose. Mechanics are typically included in the PPA to provide for meter auditing, and if the meter reading is inaccurate by more than a certain percentage, PPA should define the arrangement parties will agree on the proper price adjustment. The main meter on the site stays in the name of the host, and host generally agrees to arrange with the utility to have project company named as an agent of host so that it may receive copies of invoices for monitoring purposes. The meter is typically the PPA delivery point – the point where the transfer of title to the electricity produced by the system takes place. If the project company is party to the interconnection agreement, this should match the delivery point specified in the interconnection agreement. If the host is party to the interconnection agreement, then there may be two meters – one to measure the project output to the host, and one to measure power going to and from the grid, and therefore the PPA delivery point and the IA deliver point may not match.
  14. Reg out clause - Is there a reg-out clause? This will permit the project company (not the host) to modify the contract price or terminate the PPA if a change in law or regulation imposes a requirement on the project company that materially affects its ability to perform.
  15. System transfer and purchase option - There should not be a reasonable likelihood that the host will end up with the system at the end of the PPA term. The more purchase options make it more likely that the host will own the system. Most investors get concerned when the number of host purchase options exceeds 1-3 throughout the term. Continuous purchase options are common, but hard to sell to investors and could require an amendment down the line since multiple purchase options put additional tax pressure on the transaction. To preserve the tax benefits, there should be no purchase option available to the host prior to the sixth anniversary of the commercial operation date of the system. Any transfer in the first five years of operation will likely cause an ITC recapture. The purchase option price should be at least fair market value (FMV). PPA are often includes floor price (e.g., to ensure any debt can be paid off) in addition to the FMV option, in which case it should be the greater of the floor price and FMV (although it should be noted that anything, but a straight FMV purchase price will add tax pressure to the transaction). The host should not get credit against the purchase price for amounts it has paid for power under the PPA, unless it has not yet received the power for which it paid. Confirm that there is no circumstance that suggests the host is reasonably expected to exercise its purchase option, such as a regulatory or legal requirement for the host to buy the system. Removal requirements by the project company should be presented as an economical option.
  16. Early termination rights – In general it is highly recommended that the PPA will not include any early termination provisions other than once related to the project company default. If the PPA is terminated due to a host default or any other right of Customer to terminate the PPA in the absence of a project company default, then project company should have the right to terminate the PPA and require the host to pay a scheduled Termination Value, which should be calculated to provide the project company with its expected yield, and include the value of any lost tax benefits as well as the cost of dismantling and removal of the system. Project company may have the unilateral right to terminate the PPA before construction and without liability if (I) it is unable to obtain all interconnection approvals or any other government approvals or permits, (ii) it is unable to get zoning approval for the system, or otherwise is unable to install the system at the site, (iii) net metering is not available, (iv) it is unable to receive expected rebates or grants, (v) it is unable to procure financing, or (vi) upgrades are required to Customer’s existing electrical infrastructure and Customer will not pay for such upgrades. Any project company rights to terminate the contract are likely not problematic as these are within the project company’s (or financing party’s) control.