CSP Project Power Purchase Agreements: The Landscape and Key Deal Points To Obtain A Financeable PPA

Transcription

1 CSP Project Power Purchase Agreements: The Landscape and Key Deal Points To Obtain A Financeable PPA Presented to the 4 th Annual Concentrated Solar Power Summit USA 24 June 2010 Todd Glass Wilson Sonsini Goodrich & Rosati, PC

2 An Overview Key Elements of CSP Project Deals A Common CSP Project Structure A Few Observations about Utilities, RFOs/RFPs, Form PPAs, the RPS Markets, and Results to Date Key PPA Deal Points to Make Your PPA: Practically feasible Commercially viable Approvable, and Financeable

3 Key Elements of CSP Project Deals - 1 Allocating the benefits... the energy output (amount and price) environmental attributes (i.e., renewable energy credits (RECs)) tax credits, accelerated depreciation, and other benefits ancillary services residual value utility credits and other potential goodies buy-out potential at the end of the contract* * NOT LESS THAN FAIR MARKET VALUE

4 Key Elements of CSP Project Deals and the risks and costs: Construction Performance Insolation Creditworthiness/security Diminution of environmental attributes Scheduling/Imbalances Equipment failure/ warranties O&M Removal costs/site restoration Change in law risk Other key deal points: Ownership Term Site/Location/Security Financing terms Conditions precedent Regulatory status Property and other taxes Insurance O&M duties and costs ULTIMATE QUESTION: Is the project financeable?

5 A Basis PPA Structure Utility Buys Energy and RECs Utility Energy + RECs PPA $$$ $$$ EPC Contractor EPC Contract Owner/ Project Company Engineering, Procurement, Construction Services $$$ Debt Debt Payments Typical Project Finance Documents ROI $$$ Lease $$$ Equity (tax benefits) Landowner

6 A Few Observations about Utilities, RFOs/RFPs, Form PPAs, the RPS Markets, and Results to Date Utilities have signed hundreds of PPAs to comply with RPS requirements; more than 50 utility scale solar PPAs in the US Yet very few utility-scale solar projects have been financed (< 5) Utilities now seem to be focusing on utilityowned and distributed generation PV projects and financing schemes What are independent evaluators doing? See CPUC updated table of RPS projects: A02EAAD2-7C72-4C3D-B4E5-92DEC /0/ RPS_Project_Status_Table_2010_June.XLS. CPUC RPS Quarterly Report on June 22, which is available here:

7 A Few Observations about Utilities, RFOs/RFPs, Form PPAs, the RPS Markets, and Results to Date Using significant market power (oligopsony), utilities are creating RPS RFO/RFP programs that are onerous and difficult for CSP and other utility scale solar developers Form PPAs (and utility negotiators) are pushing more and more risk onto developers (e.g., SCE s Buyer Curtailment, PG&E s CAISO availability standards) From Chinese PV manufacturers to unsophisticated new developers willing to sign anything, competition is driving PPA contract prices down significantly -- to the point of slim or even negligible returns The results: Fewer PPAs Unfinancable PPAs RPS compliance penalties?

8 Key PPA Deal Points Conditions Precedent None, except for PUC approval and perhaps ITC availability (placed in service after 2016) 2. Development Schedule Key Milestones Only: CSD, GCSD, COD and GCOD Progress Reporting: fine, but pass thru to EPC Contractor Extensions: Force Majeure, transmission upgrades (outside control) 3. Development Security/Delivery Term Security/Counterparty Credit Development Security: ~$30-50/kW of installed capacity Delivery Term Security: ~$ /kW of contract capacity Know thy seller/buyer (do you have a European bank?) 4. Interconnection; Point of Delivery Utility scale issues relating to schedule, cost, who pays POD should be a physical location, not some ephemeral, potentially moving point on the CAISO system (e.g., P-Node)

9 Key PPA Deal Points Term 20 year is typical; 25 years is better for utility scale projects No termination rights, except for default, long-term FM events Buy-out options (FMV, valuation, terms of buyout can be difficult) 6. Energy Product Parameters Energy ($/MWh) TOD Factors/Seasonal Pricing Storage, Shaping and Capacity Payments (utilities say that energy price usually includes capacity/resource adequacy attributes) Test power/initial operating period No separate price for capacity... yet 7. COD vs Placed in Service PPAs generally define and use commercial operation date, but IRS s placed-in-service date does not equal commercial operation date in all cases (IRS follows a 5-factor test); define COD equal to PIS Caution: Provision in PPA which provide that the COD is deemed to be a certain number of days after notice/testing/etc.

10 Key PPA Deal Points Performance Guarantees Insolation Risk & Production Guarantees: Bottom line: 24 month rolling, 70-80%, excluding FM, curtailments, and forced outages Capacity Guarantees are coming in the form of CAISO s New Availability Requirements 9. RECs, Environmental Attributes, GHG Emission Reductions Lots of possibilities, but usually sold as part of the energy Note: compliance risk and costs borne by Seller CPUC s recent TREC Decision is wreaking havoc on CA market and fundamental understanding of RECs 10. Governmental Charges/Taxes Buyer should bear federal, state, local sales, use, real property, personal property taxes, duties, assessments, public benefit charges, etc. (but not income taxes), but utilities do not usually do so

11 Key PPA Deal Points Good Industry Practice, Force Majeure, and Destruction of System Good Industry Practice, NOT Good Utility Practice FM: expressly include volcanic eruption, require actual notice of FM event, and allow for contributing factors leading to a FM event If project is completely destroyed, Seller should have option of whether to rebuild; if Seller does not rebuild, PPA is terminated; ROFO perhaps, but no ROFR 11. Assignment/Financing Consents, Cooperation and Assurances Buyer must agree to not unreasonably withhold, condition, or delay consents, estoppels, certificates, opinions of counsel, provided the foregoing does not materially change rights, benefits, or burdens.

12 Key PPA Deal Points Change in Law; Costs of Compliance Change in law should not be a FM event Price and whole PPA must be fixed regardless of change in law Costs of Compliance: Seller must bear the following burdens/costs for term of PPA: WREGIS requirements, GHG Emissions reporting requirements, Green Attributes requirements, Resource Adequacy benefits, and PIRP/EIRP costs. Most of these laws and programs are still under development and are subject to change; what if it becomes costly or impossible to comply? Answer: meaningful, financeable compliance caps and no default for commercially reasonable efforts to comply New Buyer Curtailment Provisions demonstrate how utility imposed openended commitments can make projects unfinanceable.

13 PUC Nevada Solution - 1 On March 22, 2007, the PUC of Nevada resolved this question of risk correctly and thereby enabled Nellis AFB Solar Project to be financed by MMA Renewable Ventures:

14 PUC Nevada Solution - 2 Application of Nevada Power Company..., Docket No (PUC Nevada Order, March 22, 2007)

15 The California PUC Solution STC [Standard Term and Condition] 1: CPUC Approval CPUC Approval means a final and non-appealable order of the CPUC, without conditions or modifications unacceptable to the Parties, or either of them, which contains the following terms: (a) approves this Agreement in its entirety, including payments to be made by the Buyer, subject to CPUC review of the Buyer s administration of the Agreement; and (b) finds that any procurement pursuant to this Agreement is procurement from an eligible renewable energy resource for purposes of determining Buyer s compliance with any obligation that it may have to procure eligible renewable energy resources pursuant to the California Renewables Portfolio Standard (Public Utilities Code Section et seq.), Decision , or other applicable law.

16 The California PUC Solution STC 6: Eligibility Seller, and, if applicable, its successors, represents and warrants that throughout the Delivery Term of this Agreement that: (i) the Project qualifies and is certified by the CEC as an Eligible Renewable Energy Resource ( ERR ) as such term is defined in Public Utilities Code Section or Section ; and (ii) the Project s output delivered to Buyer qualifies under the requirements of the California Renewables Portfolio Standard. To the extent a change in law occurs after execution of this Agreement that causes this representation and warranty to be materially false or misleading, it shall not be an Event of Default if Seller has used commercially reasonable efforts to comply with such change in law. Order Instituting Rulemaking to Implement the California Renewables Portfolio Standard Program, CPUC Docket , Decision (November 16, 2007)

17 Todd Glass Wilson Sonsini Goodrich & Rosati, PC