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Green Contracting

Structuring renewable agreements to survive change.

Fortnightly Magazine - November 2009

purchaser and a renewable developer in favor of the developer, but developers must compete against others for contracts. Thus, each negotiating party has incentive to maintain a competitive market position. Buyers need to think about how to secure long-term protection in an evolving market, despite the pressure to contract quickly for a large quantity of renewable energy, and sellers need to consider how to differentiate themselves from the market as the resource for now and the future.

Resilient Contracts

In many respects, a contract to purchase the output of a renewable resource is like any other unit-specific power purchase and sale agreement; it includes terms and conditions for price, quantity, term, place of delivery, creditworthiness and security, events of default and remedies, indemnifications, limitations on liability and dispute resolution. But some issues deserve special attention, including environmental attributes and transmission risk. In addition, the concerns of prospective project lenders should always be considered during contract negotiations in order to assure the final contract is financeable and, therefore, viable.

A key question involves whether a resource will count toward the requirements of a state program or a potential federal program. The answer depends on the applicable statutes and regulations. A renewable resource typically is defined to include solar, wind and geothermal, but other acceptable technologies vary substantially by jurisdiction. Many states limit the types of biomass and hydropower generation eligible to qualify under an RES. For example, unlike California or Washington, Arizona’s regulations don’t include any ocean technologies—not surprising given its non-coastal location. But Arizona’s regulations have very specific requirements for other types of qualifying hydropower. Arizona will include energy from certain hydropower facilities of 10 MW or less installed after Jan. 1, 2006, incremental energy from increased capacity resulting from efficiency or operational improvements at a pre-1997 hydropower facility, and the amount of energy from a pre-1997 hydropower plant of any size used to firm-up or regulate an intermittent resource.

The Waxman-Markey Bill would allow the federal RES to be met by more common forms of energy such as wind, solar, geothermal and renewable biomass, but also energy from several other specific resource types, including:

• Biogas and biofuels derived exclusively from renewable biomass;
• Energy from efficiency gains and capacity additions added after 1988 at pre-1988 hydropower facilities;
• Energy from generation capacity added after 1988 to a dam built before 1988 with no previous power production, if certain qualifications are met;
• Marine and hydrokinetic projects;
• Landfill gas, wastewater treatment gas, and coal mine methane used to generate electricity at or near the mine mouth; and
• Qualified waste-to-energy.

States are permitted under the House bill to impose requirements that are more stringent than the federal standard, but the details of how to reconcile conflicts in the programs, such as subtle differences in the types of projects that may qualify, will require attention.

To assure the resource meets the applicable requirements, the contract should contain representations and covenants regarding the characteristics of the facility. Omitting such provisions is unwise—although it happens, presumably by oversight—because those provisions are a necessary