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Energy Purchase and Sales
A community renewable developer can recoup some, if not all, of its costs by entering into agreements with utilities to purchase the output of the project. In addition to energy, a utility may place value on, and hence be willing to pay for, capacity, identified distribution or transmission benefits, and environmental benefits. Some typical arrangements are described in more detail below. For more on the value of renewables to utilities, click here.
Power Purchase Agreements
Power Purchase Agreements (PPAs) are legal contracts between buyers and sellers of energy and capacity, and specify important details of the transaction, including the term of the contract and price paid for energy. When negotiating a PPA, environmental attributes, often called Green Tags or Renewable Energy Credits (see detail below) may be sold with the power, but this must be specified in the PPA, or it will be assumed that they are owned by the project owner. Additional considerations, specified and agreed to for the protection of both parties, include development timeline, permitting, interconnection, performance, operation, and billing. Given the complexity and importance of PPAs, project developers and utilities often use legal counsel when negotiating these contracts.
Whether selling to an IOU or a COU, sellers of energy (as well as
buyers) need to demonstrate creditworthiness, for the protection of
both the buyer and the seller, to ensure on the one hand that the
project will remain in operation and continue to deliver electricity to
the utility, and on the other that the power will be purchased as
agreed. For example, to establish creditworthiness, Portland General
Electric requires a written acknowledgement that the seller is current
on all existing debt obligations and that it was not a debtor in a
bankruptcy proceeding within the preceding twenty-four months.
Preferably, the term of the PPA should be at least as long as the
period during which the owners will be making loan payments. Ideally,
the term of the PPA will extend beyond the amortization period, to
cover potential financial difficulties in later years.
When negotiating a PPA, environmental attributes, often called Green Tags or Renewable Energy Credits are
usually sold with the power, but this must be specified in the PPA or
it will be assumed that they are owned by the project owner. Additional
considerations, specified and agreed to for the protection of both
parties, include development timeline, permitting, interconnection,
performance, operation, and billing. Given the complexity and
importance of PPAs, it is highly recommended that project coordinators
secure legal assistance in negotiating the terms of PPAs.
PURPA and Avoided Costs
The 1978 federal Public Utility Regulatory Policy Act (PURPA) requires utilities to purchase power from certain types of energy producers, termed Qualifying Facilities, at a price up to the utility’s “avoided cost.” The avoided cost is the incremental cost to a utility for capacity or energy or both that, but for the acquisition of energy or capacity from another source, the utility would have to incur. Oregon and Washington regulators establish avoided cost levels periodically for their regulated utilities. Publicly owned utilities are free to set their own avoided cost levels.
In May 2005 the Oregon Public Utility Commission (OPUC) issued an order
related to PURPA policies (Public Utility Regulatory Policy Act
policies). Under OPUC Order 05-584, the power purchase price and terms
are likely to be much better when selling power to an IOU. Under this
Order, IOUs are directed to purchase power from Qualifying Facilities
(QF) (less than 10 MW) at their current avoided cost, the term of the
Power Purchase Agreement (PPA) is 15–20 years, and many additional PPA
details are standardized, lowering transaction costs and substantially
increasing revenue for generators. Consumer-Owned Utilities in Oregon
are governed by the federal and state PURPA laws. But they are not
bound to Order 05-584. COUs must purchase from QFs at their current
avoided cost, but this is typically the current Bonneville Power
Administration (BPA) rate, which is much lower than the currently filed
avoided costs for IOUs.
At this time, there is some uncertainty as
to the impact of the PURPA provisions in the new federal energy bill,
but it is possible that IOUs will no longer be obligated to purchase
under PURPA. Also, as load increases for COUs, and BPA steps back from
its historic role in providing power, COUs may be in the market for new
supplies at full marginal cost. Transmission constraints may also steer
them to consider small-scale, in-territory projects. Given these
variables, it is possible that either IOU or COU territory could
provide a viable location for community energy projects, and project coordinators
should consider current utility needs when initially siting a project.
Net Metering
Most utilities have a policy or regulatory requirement to offer “net metering” for smaller renewable facilities. Under net metering, the utility nets the production from a customer’s renewable installation against the purchases it made from the utility. The effect is that, up to that customer’s consumption level, the utility is essentially “paying” the retail rate for the power. The result is a subsidy for smaller scale projects since utilities typically purchase power at wholesale rates and mark it up for resale to include administrative, transmission and distribution, and other costs. Washington law requires utilities to offer net metering for solar, wind or hydropower installations under 100 kW. Some utilities voluntarily offer net metering for larger installations. Net metering is typically not available for community scale (e.g., over 1 MW) installations.
Environmental Attributes/Green Tags
Some utilities will purchase and then make Renewable Energy Credits (also known as Green Tags) available to customers in lieu of purchasing or developing renewable resources on their own. Renewable Energy Credits therefore have a separate, added value that can either be packaged along with a purchase and sale from a developer to a utility, or can be sold separately.
VERY IMPORTANT: A developer and utility negotiating a price for renewable power need to reflect in explicit contract language their agreement on whether the Renewable Energy Credits will be included in the power sale or marketed separately by the developer.
