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Green Contracting

Structuring renewable agreements to survive change.

Fortnightly Magazine - November 2009

contracts, guarantees of a minimum quantity of energy over a specified period ( e.g., annually) are ubiquitous. Such provisions provide at least two benefits to the buyer. First is usefulness as a planning tool. The minimum-performance guarantee serves as support for the reasonableness of the buyer’s treatment of the resource in its resource plan. Also, it provides reasonable assurance that the time spent negotiating the contract will result in measurable progress toward the buyer’s renewable energy target. Second, it provides a basis against which damages can be measured if the resource fails to perform or, in some cases, for termination, so the buyer can limit its further obligations to the non-performing (or low-performing) resource and clear the way for a replacement resource.

The benefit to the seller is less direct, but important. A seller’s willingness to make such a commitment, and to stand behind it with damages, is a marketing advantage. The minimum-performance guarantee also will become a benchmark for lenders in their due diligence review and provide all the parties—buyer, seller and lender—with a clear expectation that can reduce the potential for misunderstandings and later disputes.

However, when setting minimum-performance guarantees, the seller should try to protect itself from the risk of financial liability to the buyer when the performance failure results from measures beyond its direct control. Points for negotiation may include performance levels that include a sufficient margin to accommodate reasonably expected variations in weather conditions, measurement periods of sufficient length to allow volatility or temporary abnormalities to be averaged out, excused performance for force majeure , excused performance or extended cure periods for failures due to manufacturer’s defects, and a form of remedy ( e.g., liquidated damages and replacement power) geared to make the buyer whole, without undue gain. Sellers may seek the right to adjust the minimum-performance guarantee prior to commercial operation. For example, a geothermal plant may readjust after test wells are drilled, a solar or wind facility after the completion of more specific site evaluation, or an emerging technology after a specified period of performance at a demonstration facility is completed.

Pricing Issues

Contract prices for renewable resources differ from prices for conventional resources primarily due to the issues of: 1) productivity; 2) the premium cost for clean power and environmental attributes; and 3) government incentives.

Renewable energy typically is purchased solely on a per-megawatt hour (MWh) basis, rather than with separate rates for capacity and energy, as is typically found in a unit-specific fossil-resource contract. The buyer usually claims the capacity value and any associated capacity attributes of the project, including the right to count the resource toward a resource-adequacy or installed-capacity requirement, but does not pay a separate price for capacity.

In the current market, the rolled-in per-MWh price is a bundled price measured by the energy scheduled or delivered, but also includes full payment for any environmental attributes transferred to the buyer. However, in the contracts that permit some type of replacement-cost pricing for shortfalls, the replacement price typically is determined by a two-part formula consisting of: 1) an energy price