The evolution of real-time locational marginal prices (LMP) in PJM Interconnection’s wholesale electricity markets demonstrates the characteristics of a well functioning and competitive market;...
Structuring renewable agreements to survive change.
contracts permit non-emergency curtailments if the seller is fully compensated for the energy it would’ve produced, including for lost PTCs.
When negotiating these provisions, the seller should concern itself with the frequency and duration of curtailment, including caps on the total number of hours, particularly if it won’t be compensated. If the seller doesn’t have the protection of an ISO or RTO and market monitor, it must protect itself from discriminatory curtailments by insisting on clear criteria under which curtailment is permitted, and access to information, after the fact, to monitor the buyer’s application of its curtailment rights to other generators, including its owned generation.
The problem of credit risk is far more complex, but history shows its importance. In a market that’s relying on power-purchase contracts, a seller’s creditworthiness depends on its buyer. Financial distress or bankruptcy of a single buyer, leading to delayed payments, can be devastating to projects from which the buyer purchases power. To address this risk and anticipate the concerns of lenders, sellers should look for assurance, if the buyer is rate-regulated, that it has received regulatory assurance for the pass-through of its power purchase costs. For example, the California Public Utilities Commission allows utility buyers to present renewable contracts for approval immediately after execution.
A more controversial issue is buyer-posted security. Buyers and their ratepayers prefer to avoid the higher costs associated with posting collateral to the sellers and instead rely on regulatory approvals and their investment-grade credit ratings. Sellers may be content to accept such assurances, sometimes coupled with a right to performance assurance, in lieu of an on-going obligation to post collateral. However, if the buyer suffers an adverse credit event, multiple demands likely will be made on the buyer simultaneously. Thus, negotiating a right for the seller to demand performance assurance based on early indicators of distress can enhance the financing of the purchase contract and facilitate development of a viable renewable project.
1. Cal. Indep. Sys. Operator Corp . 119 FERC ¶ 61,061 at p. 65, order on reh’g, 120 FERC ¶ 61,244 (2007).
2. The Future of the Grid: Proposals for Reforming National Transmission Policy: Hearing Before the Subcomm. on Energy and the Env’t. of the H. Comm. on Energy and Commerce , 111th Cong. (June 12, 2009) (Testimony of Jon Wellinghoff, Chairman, FERC).
3. Sw. Power Pool, Inc., 127 FERC ¶ 61,283 at p. 28 (2009).
4. Testimony of Jon Wellinghoff, Chairman, FERC, Before the Comm. on Env’t. and Pub. Works , 111th Cong. (Aug. 6, 2009).
5. 18 CFR § 292.304(f).