PPAs AND CONTRACTS FOR LONG-TERM RENEWABLE ENERGY CREDITS North American Power Credit Organization September 2006 Meeting Presented by: William H. Holmes, Partner Stoel Rives LLP 900 SW Fifth Avenue, Suite 2600 Portland, Oregon September 15, 2006

Overview Project Construction Project Operation Defaults Damages Credit Support RECs

Features of Wind and Other Renewable Energy Agreements Wind is an “Intermittent Resource”: Hard to Forecast and Schedule, Low Capacity Factor Curtailment Risk Renewable Energy Credits (RECs) Long-Term (15-25 years) Production Tax Credits (PTCs) and Sunset Dates

Project Construction Tension: “Must Build” vs. “Put” Buyer Wants –Construction Milestones –Guaranteed Commercial Operation Date (“COD”) –Delay Damages – missed milestone or missed guaranteed COD –Partial Completion Damages (wind project)

Project Construction (cont.) Seller Wants –Force Majeure outs –No damages if milestone missed but COD is not affected –Delay Damages Caps –Damages Caps for Failure to Complete –Off ramps (e.g., inability to obtain permits, land rights or interconnection agreement) Right of First Refusal

Project Operation Output Guarantee –Seasonal (now rare) –Annual –Rolling Average Mechanical Availability Guarantee (annual) Shaping and Firming Services –Physical (agreement with load-serving entity) –Market-based Breach of Contract and Termination Termination Damages Caps

Defaults Non-termination Defaults Material Defaults –Buyer’s failure to pay –Seller’s failure to deliver –Defined flaw in credit support (e.g., credit rating reduction, guaranty repudiation or default) –Opportunity to cure

Damages Calculations Often based on “Cover” Damages (market vs. contract price) –Market index or other reference? –Cap on market price? –Cap on annual damages? –Cap on aggregate damages? –Caps will be important to Seller if there is an output or mechanical availability guarantee Liquidated (fixed) damages

Damages Calculations (cont’d) Termination Damages –Damages cap: important in project finance –Exceptions to cap: willful breach or fraud –Two-way termination and its hazards

Seller’s Credit Support Seller is usually a special purpose Project LLC Project LLC has few assets before construction Credit support is usually a parent guaranty, LC or cash deposit Developers strongly resist security interest in assets, even if subordinated Amount of credit support often differs before and after COD

Buyer’s Credit Support Usually tied to credit rating of Buyer or its Guarantor May be required at inception Important to Seller’s financing

Renewable Energy Credits (RECs) Aka “Green Tags,” “Environmental Attributes” or “Tradeable Renewable Certificates” (“TRCs”) RECs are often “Bundled” With Energy in PPA 1 MWh of energy = 1 MWh of RECs RECs can be sold separately for some purposes

RECs Features and Issues Consumers willing to purchase RECs voluntarily Value of RECs will vary with source (solar vs. wind vs. biomass) –“First class” carbon offsets vs. “second class” RECs RECs often command higher price than associated energy

RECs Features and Issues (cont’d) Product needs a standard definition (e.g., Green-e Certification) –Seller unwilling to warrant character of RECs – will disclaim warranties of merchantability/fitness for particular purpose –Buyer uncertain what it is getting –Allocation of change in law risks Accounting procedures needs to be centralized and standardized (WREGIS)

“Merchant Wind” or “Merchant Renewables” Possible in RTO/ISO markets Requires durable, long-term REC agreement that can be financed Standardized provisions (e.g., ABA’s model REC contract) Multiple buyers: Base load vs. peak sales of RECs

References See Law of Wind at See Law of Lava Law at See Law of Biofuels at William H. Holmes, Partner Stoel Rives LLP 900 SW Fifth Avenue, Suite 2600 Portland, Oregon