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Green Contracting

Structuring renewable agreements to survive change.

Fortnightly Magazine - November 2009

on others. As Chairman Wellinghoff recently explained to Congress, “This reform was important because intermittent resources have a limited ability to control their output, and must therefore be assured that imbalance charges are no more than is required to provide appropriate incentives for prudent behavior.” 4

One marked trend in recent years is an increase in the number of contracts that include highly specific requirements for meteorological data to be collected from the project site and transmitted directly to the buyer or grid operator. In California, the installation of such data-collection equipment is required of resources that avail themselves of CAISO tariff provisions designed to help manage intermittent resources’ deviations. The cost of data collection equipment typically is allocated to the seller in a power-purchase contract, since it becomes a part of the facility.

When schedule deviations are incurred, sometimes the cost is allocated to, or shared by, the buyer, rather than routinely placed on the seller as it usually is for fossil units. The allocation of responsibility for settling deviations in a renewable contract, however, is challenging and, consequently, sometimes handled awkwardly. In the case of under-generation, the difference between the contract price and the imbalance power price includes a green-price and brown-price differential, because the imbalance power delivered to the buyer to make up the shortfall doesn’t have associated environmental attributes. For over-generation, the environmental attributes associated with over-generation have to be allocated. Thus, deviations require careful attention.

Lessons Learned

Like the growth of qualifying facilities (QFs) in the late 1980s to mid-1990s, the growth of the current renewable market is spurred by legislative or regulatory mandates; utilities must purchase renewables, without particular regard to whether the new resources are needed to meet their load growth or load shape. Care must be taken to avoid some of the same pitfalls as occurred with QFs.

Purchase contracts must anticipate and allocate the risk of a negative value for renewable power. Periods of low demand combined with a lack of buyer control over deliveries can result in over-generation or, if renewables are concentrated on certain parts of the grid, regional or localized congestion. In the 1990s, some utility purchasers used the protection included in the Public Utility Regulatory Policies Act regulations that permitted curtailments when the purchaser’s cost of QF power exceeded its alternative. 5 Even so, disputes ensued over curtailment priority, frequency and duration, underscoring the need to clearly define curtailment rights in today’s contracts. The buyer and seller both have an interest in assuring that the power-purchase contract allows the seller to comply with its operational obligations under its interconnection agreement, applicable reliability standards and directives of the grid operator.

In markets with locational or nodal pricing, some buyers and sellers have agreed that the seller will curtail its output in periods of negative prices or compensate the buyer for the price differential between its contract price and the locational price. In other cases, the buyer simply has an absolute right to curtail for various operational conditions that threaten the reliability of the buyer’s facilities or the transmission grid. Many

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