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Green Contracting

Structuring renewable agreements to survive change.

Fortnightly Magazine - November 2009

predicate to addressing the more challenging question: namely, how to address the change in contract value if the applicable standard changes? Few contracts presently address this.

One contractual approach requires seller’s certification of the resource’s expected and continuing qualification under the applicable state law. In the event of a change in the applicable state law, the seller is protected from default for failure to meet the changed qualification so long as the seller uses “commercially reasonable efforts” to qualify under the changed legal standard. However, the contracting parties should also consider the impact of a shift from a state-defined to a federally-defined RES. If a federal standard is enacted, and that definition of a renewable resource fails to incorporate the technology of a facility that meets the applicable state standard, then the continuing value of the renewable energy credits (REC) generated by that state-qualified facility would depend on whether an independent state REC requirement, for which the state-qualified RECs have value, continues to exist.

The problem can be addressed contractually; for example, the parties could agree to a lower price applicable in the event the facility cannot generate RECs that meet a changed regulatory scheme ( i.e., reflecting its continuing value as a clean resource, even if not generating RECs), but the adjusted price will need to be sufficient both in amount and in definition to support financing. Under this approach, equity would absorb the difference. Legislatively, a possible fix is to grandfather into any federal program all contracts entered into in compliance with a state program. In the absence of a solution, the market simply might shy away from technologies that are sufficiently removed from the mainstream until the standard is clarified.

Environmental Attributes

Allocating the project’s RECs and other possible environmental attributes ( i.e., green attributes, environmental benefits, or similar terms; referred to here, inclusive of RECs, as environmental attributes) between the buyer and seller is another key component of a renewable contract that differentiates it from other types of power-purchase agreements.

Contracts commonly transfer environmental attributes to the buyer with the energy. However, a clear statement conveying the environmental attributes to the buyer or specifying that they remain with the seller is essential. Some states have enacted default provisions for state-created RECs that operate in the absence of a contrary contract provision. For example, in Rhode Island, the seller retains the “tradable emission credits” unless conveyed. In New Mexico, in the absence of a contrary contractual arrangement, the RECs are transferred with the energy if the project is a qualifying facility (QF) and sells energy to a utility purchaser, or the energy is sold under a contract in effect prior to Jan. 1, 2004. Otherwise, the seller retains them. The Waxman-Markey Bill provides that federal RECs generated by a facility placed in service prior to the enactment date of the proposed legislation will be deemed to remain with the owner of the facility unless a contract provides otherwise.

A fundamental step in transferring the environmental attributes is to define them. In today’s market, most contracts include a very broad