The greatest benefits of time-of-use pricing come from avoided costs of peaking power and T&D capacity—but only if hourly retail prices accurately model the true costs of delivered energy,...
Structuring renewable agreements to survive change.
determined by reference to an index or specific node; and 2) a REC price or liquidated damage amount to cover the environmental attributes’ value. Thus, buyers and sellers recognize the price as having multiple value components, but elect not to unbundle the contract price to make the components transparent. Presumably, this reluctance stems in part from the difficulty of valuing the environmental attributes in an evolving market. However, the current preference for bundled pricing might pose challenges for price reporting and regulatory oversight in the future.
Past issues posed by government incentives provide guidance for the future. In prior years, when the investment tax credit (ITC) and production tax credit (PTC) for renewables were established for limited ( e.g., two-year) periods, the continuing availability of the incentive as of the in-service date of a new facility, given the vagaries of project development, often was uncertain. Therefore, during those years, sometimes buyers agreed that if the tax incentives weren’t extended to include the in-service date of the facility, the buyer would pay the higher cost of renewable energy without a tax subsidy. In the more carefully-worded contracts, the negotiators limited applicability of the without-incentive pricing to cases in which the tax incentive wasn’t available, so as to preclude the possibility of the seller not availing itself of the tax credit and claiming the without-incentive pricing. Further, many of these same contracts provided for reversion to the with-incentive pricing, if the incentive was reinstated after operations commenced and, further, a refund of the difference between the without-incentive price to the extent it had been paid and the with-incentive price, if the incentive was reinstated after operations commenced and made retroactive. If the contract didn’t provide for a higher without-incentive price, and the project was at risk under its expected construction schedule for going into service after the date on which the PTC or ITC would expire, the seller might have been granted the ability to terminate without liability if an extension to the PTC or ITC program wasn’t granted by a date certain. Alternatively, it might have been granted a liberal right to extend its expected commercial operation date and other milestones so that financing and construction could be delayed until after Congress acted.
Under current federal tax law, the PTC and ITC have substantially longer lives, but the pricing uncertainty remains. The new Treasury program permitting tax incentives to be converted into cash grants requires the projects to be placed in service before Dec. 31, 2010 or to have started construction by that date and be in service by a future date that varies based on the technology. Given the many uncertainties of project development, some pending projects that hope to avail themselves of the grants, but aren’t quite shovel-ready, face the problem of appropriately pricing their product without knowing if they’ll meet the deadline for the grant program. Moreover, some projects might be eligible for other Department of Energy grants or loan guarantees, but won’t receive notification of the award or denial until after the power-purchase contract is executed. Thus, contracting