What are some of the main risks considered by expert renewable energy professionals when negotiating a power purchase agreement (PPA)?
The three most fundamental risks are:
1) Basis Risk: the risk that the price of electricity where it is being generated (e.g., the solar or wind facility) might differ from the price of electricity where it is being delivered (e.g., a trading hub).
2) Shape Risk: the risk that a facility generates at different volumes and at different times than expected.
3) Economic Curtailment Risk: the risk that the price of electricity goes negative because electricity supply has outstripped demand.
Even if the seller is contractually taking most of these risks, it's still very important that the buyer is aware of how these risks are quantified and what could go wrong. If the costs of these risks are not properly estimated, the project's viability could be at risk, the seller could default on the PPA, and the entire deal could fail.
Another important risk with PPAs on new-build projects is development or construction delays. These delays can be very costly for the buyer, especially if the start date is just prior to a period of high energy pricing or volatility (e.g., summer in Texas), which tend to be most profitable for buyers.
Because of this, liquidated damages for commercial operation date (COD) or start date delays, including how these factors affect limits of liability and collateralization, have become critical considerations.
If delays happen and sellers are not subject to (material) delay damages, the buyers may suffer economically as start dates continue to be pushed out without much cost to the seller. On the other hand, if delay damages and credit requirements are prohibitively expensive, the seller may be at risk of defaulting on the PPA before delivery even begins.
And finally, if there is an event of default and ultimately the contract is terminated, the parties will need to assess damages, which will be owed to the non-defaulting party. The assessment can swing materially depending on market conditions and timing of the termination. If there is a limit of liability on those damages, the non-defaulting party may suffer tremendously.
Managing these risks tends to be the most difficult part of any structuring negotiation.
