Financing has been scarce for distributed generation. But as opportunities expand, commercial frameworks are solidifying. Power purchase agreements are paving the way to a bright future for DG....
PPAs for DG
What every real property owner should know.
both the developer and the host. In exchange for allocating the risk of construction operation and maintenance to the developer, the host under a PPA remains subject to liability ( e.g., damages for failing to accept power) that, while potentially detrimental, can be well managed with properly drawn PPAs. A well-drafted PPA can adequately protect the legitimate interests of both parties while achieving the level of bankability that is crucial for financing.
1. In this analysis, the typical distributed generation facility has a name-plate installed capacity of 2 MW or less. While many of the contractual and regulatory considerations examined are equally applicable to units sized above 2 MW, other unique contractual and regulatory considerations ( e.g., more complex interconnection procedures) could be triggered in connection with larger facilities.
2. At times, these zero capital-outlay packages are structured as leases under which the host makes a series of lease payments to the owner of the distributed generation facility in return for acquiring title to the electricity produced by the facility. Issues involving power purchase agreements are, for the most part, equally relevant to such a lease structure.
3. The PPA structure will typically permit the sale of energy products to be treated as a service and, hence, an off-balance sheet transaction. The factors that could affect the characterization of a PPA as a service contract for tax purposes are beyond the scope of this analysis. Please refer to the section titled “Purchase Options” for an examination of how purchase options can impact the tax characterization of a PPA.
4. Indeed, new financing products and arrangements are being considered by legislators and investors, including securitization, real estate investment trusts (REIT), master limited partnerships, and crowd funding, that have the potential to stimulate renewable energy development and the use of more standardized PPAs.
5. As discussed in the section titled “Regulatory Considerations,” the host’s eligibility to engage in net metering is an important consideration for both the host, and the developer or seller. If the host can’t engage in net metering ( e.g., because the distributed generation facility is too large), then the host won’t want to assume a purchase obligation that extends beyond its consumption needs at the time the electricity and thermal energy is delivered. Likewise, the developer or seller will need to consider options for disposing of excess electricity if net metering is unavailable to the host ( e.g., wholesale sales of electricity into available energy markets), several of which will trigger regulatory compliance issues, such as the need for Federal Energy Regulatory Commission approval to engage in wholesale sales of electricity. The disposal of excess thermal energy, while not as complex as the disposal of excess electricity, might also entail regulatory compliance issues.
6. A PPA pricing model that has been used in some cases is the fixed-discount structure, in which the PPA price is always set at a fixed discount ( e.g., 10 percent) from the otherwise applicable utility rate. The advantage of this structure is that the buyer knows it will always pay a discount from