PPAs for renewable energy and CHP power plants: Old wine in new bottles?

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New buzzwords can be regularly heard in the realm of energy management: terms, as imprecise as possible and studded with as many Anglicisms as possible, herald technical or economic developments which are then called a "mega-trend” if their occurrence is highly probable. Certain buzzwords indeed accurately prophet important future trends and strategies. Other pass by without even leaving a trace of significant economic success. Recently the press has increasingly reported about "the first PPAs" for the subsidy-free financing of renewable power plants. Similarly, press releases of large industrial companies teem with reports about their climate policy commitment pursued through so-called "Corporate PPAs" and one seminar event follows the next. Whether it’s a buzzword or “old wine”, one thing must be established first:

 

What is a PPA?

PPA stands for Power Purchase Agreement. In contrast to electricity supply contracts, the designation as a purchase agreement reflects the focus of the arrangement on long-term sales interests, without the reciprocal supply and offtake obligations (on which every exchange relationship is based) actually having to be structured in any different way than that in a supply contract. This approach was shaped above all by project financing concepts for power plants where essential inputs and outputs must be legally safeguarded to sustainably guarantee the economic profitability and thus the bankability of a project. As a prerequisite for the bankability and thus the feasibility of the project, PPAs are typically negotiated and concluded long before the start of the construction and the commissioning of the power plant. Therefore, PPAs are often closely interlinked with the power plant construction and other project contracts. For a project to be economically profitable, for example, the start of the supply and the availability guarantees must be accordingly regulated in the financing, power plant construction and maintenance contracts.

 

Old wine?

In this respect, the significance of PPAs for a power plant project is not a new and, above all, not a German phenomenon. For example, conventional power plant projects have always been financed on the basis of PPAs. And in the international power plant business in particular, the fact that similar conflicts of interest are frequent among project participants has resulted in PPAs becoming a cross-jurisdictional contract type. Since the input side of wind turbines and PV power plants is secured by the largely free-of-charge use of natural resources such as solar radiation and wind, and since ongoing operating costs are low, PPAs are of paramount importance for the long-term refinancing of the capex. Therefore, a standard regulatory framework for PPAs has been developed, especially in countries where wind turbines and PV power plants have to be operated without state subsidies. Particularly mentioned here should be the USA, the southern European states and developing and emerging countries with no conventional power supply infrastructure.

 

New wine in old bottles?

In this regard, in legal terms, the phenomenon of PPAs can probably be described as new wine in old bottles. For PPAs concerning renewable power plants, on the one hand, the contractual standards, historically derived from large-scale power plant construction, should be combined with the newer structures for power plants subject to the direct marketing regime. In the case of this special, partly volatile, generation technology, considered should thus be new marketing strategy components (e.g. the marketing of flexibility, the marketing of electricity generated using a residential solar power plant assigned to specific land plots or of electricity generated for own consumption, certificates, etc.), new organisational forms (e.g. citizen utilities) or the special regulatory framework under energy and environment law (e.g. due to downstream requirements arising from the CHP District Heating Promotion Act [KWKG-Wärmenetzförderung], the Renewable Heating Act [EEWärmeG] or the Energy Saving Ordinance [EnEV]).

 

Legal framework for PPAs arising from contract law

Every contract is based, first of all, on the general law of obligations (§§ 241 German Civil Code [BGB] et seq.) and contract law (§§ 311 BGB et seq.). In this regard, electricity supply contracts are generally classified as purchase agreements (§§ 433 BGB et seq.). Due to the strict requirements that must be met for a contract to qualify as an individually negotiated contract, electricity supply contracts must also comply with the general consumer protection standards arising from the law concerning standard business terms (§§ 305 BGB et seq.), subject to certain restrictions also in the area of contracts concluded with entrepreneurs (§ 310 (1) BGB).

Although PPAs do not have to meet the special energy law requirements arising from § 41 of the Electricity and Gas Supply Act [EnWG] and § 310 (2) BGB, because PPAs are wholesale and redistribution electricity contracts, also such contracts are often based on contractual standards for mass consumer supply arising from the regulatory frameworks of the Regulation on General Conditions for the Basic Supply of Electricity to Household Consumers and the Auxiliary Supply of Electricity from the Low-Voltage Grid [StromGVV] and the Low-Voltage Connection Regulation [NAV] so typical clauses can also often be found in PPAs. In particular, clauses on metering, recording and processing of production and supply related data, billing and access rights normally correspond largely to the general standards, whereas individual deviations are permissible up to the relatively broad limit of being contrary to public policy (§§ 138, 242 BGB).

 

 

 

 

After all, decentralised, renewable power plants must be operated in a regulatory environment that has become very complex by now and is shaped mainly by subsidies, taxes and levies. Also within the framework of subsidised direct marketing, long-term electricity marketing agreements can form the basis for investments in power plants. Thus, direct marketing agreements already play an important role in the financing of offshore wind farms, since the statutory price to be applied as minimum remuneration offers a high degree of refinancing security, but it is the value added arising from the supply of electricity to the direct trader that is decisive at least for the project yield. The price to be applied is only the statutory minimum remuneration. Since the level of the minimum remuneration to be achieved under the auction system is just an estimate by the EEG power plant operator, it is to be expected that incorrect forecasts will be offset in future only through direct marketing contracts to close the gap in the refinancing beyond the price for which a contract was awarded during the auction. In this case, PPAs should include comprehensive provisions known from the EEG and CHP direct marketing agreements to regulate the rights and obligations arising from the statutory subsidy system.

Due to their financing character, important are instruments of property law for security purposes (e.g. §§ 93 et seq. BGB in conjunction with § 946 BGB, easements, charges on land, and pre-emption and heritable building rights), as well as the provisions of suretyship law (§§ 765 BGB et seq.) and insolvency law (e.g. § 119 of the German Insolvency Act [InsO]).

Finally, PPAs partly reflect regulations already known from the power plant construction agreements so also the recently amended regulations of §§ 651a BGB et seq. and other building law requirements arising from the law on standard business terms and the VOB/B (i.e. Construction contract procedures (VOB) - Part B: General conditions of contract relating to the execution of construction work) must be often observed.

 

 

Outlook: Individual PPA structuring or auctioning of standard agreements?

How far renewable and highly efficient power generation projects will actually go without any subsidies is currently still difficult to predict in the German market. The energy market continues to be highly dependent on political and general economic developments, which can only be predicted to a limited extent. One thing is certain though: the reality check will come sooner or later. Therefore, the long-term refinancing periods for investments in power plants allow betting that grid parity will be achieved during the refinancing period. In addition, electricity-cost-intensive companies, power plant constructors, banks, electricity suppliers and traders should find a new market niche in time – a niche that will be likely to develop into a substantial segment of the market in the long term. Therefore, for renewable, efficient but also only decentralised electricity or heat generation projects, the development of PPAs is inevitable, even in the German power plant market which has so far been shaped by the principle of guaranteed purchase and feed-in tariffs under the Renewable Energy Sources Act (EEG) and the Combined Heat and Power Act (KWKG). Thus, there is much to suggest that PPAs are not only a buzzword in the realm of energy management but rather “new wine” – albeit still very young – with a lot of potential for the further economic development.

 

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