Brief Anatomy of a Geothermal Power Purchase Agreement

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A geothermal resource differs from other energy sources in that it is both renewable and reliable. When it comes to a geothermal power purchase agreement (PPA), certain basic features exist. For starters, a seller is usually the project developer; whereas, the buyer is often a utility that purchases a plant's output to serve load or to comply with a renewable portfolio standard (RPS).

Because a PPA term is often defined by reference to a commercial operation date – a date on which all portions of the project necessary to put it into operation, along with the interconnection facilities to the transmission system, are both authorized and able to operate and deliver energy – it sets a point at which the PPA price switches from a "test energy rate" to a higher "contract rate." Accordingly, a PPA must carefully define the commercial operation date.

PPAs often include off-ramp provisions that enable one or both parties to terminate the agreement without penalty (ex. a party's inability to obtain a key agreement or permit). Termination rights require careful negotiation, and both parties will want to limit the other party's right to terminate. Furthermore, a PPA should carefully define a delivery point at which energy will be sold. In a busbar sale, this point will be the high side of the transformer at the project substation. (In a busbar transaction, a buyer provides the transmission required to transmit energy from the plant to the point where the buyer intends to use it, or deliver it, to another party in a resale transaction). The PPA may also require a seller to deliver energy to a specific point on the transmission system, in which case the seller will be responsible for obtaining transmission to the delivery point. Transmission ancillary services, which can be costly, should be specifically allocated in the PPA.

The contract price is also a very important part of a power purchase agreement. This price may be flat or escalate over time. An escalating price sometimes begins to rise with reference to the commercial operation date; thereby, encouraging a seller to achieve commercial operation as soon as possible. Since geothermal energy is a reliable base-load resource, a buyer may sometimes pay a separate price for the plant's capacity. This capacity charge is usually stated in dollars per kW-month, or kW-year.   

In addition, geothermal energy is considered to be renewable and, as a result, comes with renewable energy credits (RECs). A power purchase agreement should clearly state whether or not RECs are bundled with the sale of electricity – PPAs that are silent on this point have been embroiled in disputes about whether the project owner, or buyer owns the RECs. A PPA should also make it clear that state and federal tax credits, as well as incentives are not included in RECs.  

Geothermal plants differ from wind and other resources in that they may have significant station service requirements for extracting, re-injecting, processing, or otherwise using the geothermal resource. A seller should clarify that it retains RECs associated with the station service, in case there is an imbalance between RECs delivered electricity.

Generally, a seller prefers a PPA that requires selling the project's output only if this project is actually built; a buyer tends to view such a PPA as a "put," and will usually insist a seller makes a binding commitment to build the project. Therefore, the PPA often includes a schedule of certain project milestones (for example, a "notice to proceed" date, or a guaranteed commercial operation date). If a seller fails to achieve a milestone, the buyer may have a right to terminate the PPA, collect damages, or require the seller to post additional credit support. A seller will want to limit the number of milestones and bargain for flexibility.

A PPA may further require a seller to guarantee that a project will meet certain performance standards. For instance, an output guarantee requires a seller to pay a buyer if the output during a specified period fails to meet a minimum level. A seller's data regarding the project's geothermal resource will be crucial in determining the right level for an output guarantee. If the resource is expected to degrade, the PPA may adjust performance standards downward during the term. If a guarantee is not met, the PPA calculates damages owed to a buyer as a result of this shortfall. A shortfall is usually multiplied by a price per megawatt hour determined by reference to an index or other objective price. The PPA may also include an adjustment to account for an assumed value of environmental attributes. The amount of liquidated damages is usually determined periodically, and a seller will often press for annual or aggregate damages caps.    

A power purchase agreement often describes circumstances in which either party has a right to curtail output. A seller may have a right to curtail if the plant suffers an emergency, or a buyer may be permitted to curtail for convenience – in which case a PPA usually requires a buyer to pay for the curtailed generation, plus the after-tax value of any lost production tax credits.    

A PPA's force majeure clause is very important and should carefully distinguish between events that are "excuses" (which relieve the affected party from the duty to perform), and those that are "risks" (which are allocated to one party or the other). For geothermal projects, sellers may want a force majeure clause to address unexpected depletions of the geothermal resource. Buyers will insist that normal resource degradation does not excuse a seller's performance. The power purchase agreement will list events that constitute defaults. If a default is not cured within an agreed-upon period, a non-defaulting party can terminate the agreement. A seller may seek to limit its aggregate damages in case of default. If the PPA is based on forms commonly used in trading and short-term transactions, care must be taken to override termination payment components that are not desirable in a long-term PPA.  

The PPA for a geothermal plant will resemble a PPA for any other generating facility, and the metering, invoicing and boilerplate provisions from a conventional PPA can be readily imported into a geothermal one. There are, however, some unique issues involving RECs, resources degradation, capacity charges, station service, and operational force majeure events that must be dealt with differently in a geothermal PPA than they are in other renewable energy agreements.

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