Originally published in The American Lawyer, November 2011
Renewable energy projects differ from traditional power generation facilities. Wind farms, for example, can be spread over thousands of acres of land and across multiple county and local jurisdictions, and most renewable projects are dependent on federal and local incentive programs.
As renewable energy becomes a more popular choice, energy attorneys will find themselves engaged in negotiating transactions between investors, purchasers and developers. A key part of such transactions is the due-diligence phase.
Investors and purchasers of a project want to ensure there will be no unexpected surprises, and owners of the project want to prove their project really is as good as advertised. An energy law attorney can assist all of these groups as they work toward an agreement. The following are issues that attorneys should keep in mind when performing diligence on a renewable energy development project.
- Commercial operations date (COD). Typically the power purchase agreement (PPA) will require the project to reach COD by a certain date. In addition, many incentive programs, notably federal tax credits and cash grants, have strict requirements for COD to occur by a certain date for the project to qualify. If a project misses a required COD date and loses out on expected cash flow, it can impact the economics of a deal. Therefore, schedules and required completion dates in various construction and supply agreements are critical.
When reviewing these agreements, examining key project contracts is not always enough. Purchase orders, invoices, certificates of completion, lien waivers and similar types of ancillary documents also help tell the story and can provide insight into the status of the project.
The interaction between various project agreements also can have an impact on the final COD. For example, the engineering, procurement and construction (EPC) contractor may require a day-for-day extension of its deadlines for any delays in turbines or other major equipment ordered from other parties. As a result, delivery date provisions in the turbine supply agreement are important, and guaranteed delivery dates are preferable.
Likewise, a guaranteed delivery date is preferred for the main project transformer that will go in the project substation. These transformers often have a lead time of up to a full year, and because they are necessary to deliver power to the grid they are a critical path item for the project. Counsel should also check to make sure there is leeway in the schedule for the construction of interconnection facilities, which are built where the project interconnects with the electrical grid and which rarely have a guaranteed completion date.
A final point on scheduling is the concept of wind days for the construction of wind farms. Turbine erection requires large cranes to lift the tower sections and rotors to hub heights of 80 meters to 100 meters. Contractors erecting turbines typically will negotiate for extensions of any guaranteed completion date if it is too windy to use the cranes, and given that these projects are purposefully built in windy areas, wind days can be a frequent occurrence.
- Liquidated damages. Liquidated damages (LDs) may mitigate the potential schedule concerns explained above. If the PPA requires the project to pay LDs if it doesn't reach COD by a certain date, then the project can require the EPC contractor and equipment suppliers to pay LDs if those dates are missed. LDs, however, will not be sufficient to make up for any tax credits that may be missed if schedule delays cause a project not to qualify for a federal incentive program.
- Contractor interfacing. Attorneys should ensure that the responsibilities of each contractor are clearly delineated and that there are no gaps between the various scopes of work. Often, an EPC contractor and the turbine supplier are the main contractors. Either party may be responsible for erecting the turbines. If the turbine supplier is responsible for erection, the success of the project depends upon cooperative interaction between them and the contractor responsible for the foundations, electrical gathering system and other balance of plant work. All construction contracts should include a provision requiring cooperation to ensure the timely completion of the project.
- Environmental attributes. The PPA must be specific about who will receive the environmental attributes associated with the electricity that will be generated. Renewable energy credits, used to meet state renewable portfolio standards, are the most valuable environmental attributes. Most commonly a PPA will provide that the renewable project will sell all of the electricity and environmental attributes associated with the project to the purchaser of the power. However, some contracts only provide for the sale of the electricity, and then the project owner enters into a separate agreement for the renewable energy credits or sells them on the market.
In the past, litigation has arisen in cases where the PPA was silent on whether the renewable energy credits were included with the purchase of electricity. The best practice is for the PPA to make it clear which environmental attributes are transferred along with the electrical energy produced by the project, including any that are not yet defined, because future regulatory programs that create new types of attributes are likely.
- Curtailment. Another issue that has led to recent litigation in the renewables industry is curtailment. Renewable projects are limited in where they can be sited, as they must be located where it is windy or where the sun shines and where the topography is appropriate, as well as where there are willing landowners. Prime areas tend to attract multiple developers and projects, and the transmission lines quickly become congested. As a result, the grid operator will issue curtailment instructions to limit the amount of electricity certain projects can generate.
The PPA should specify who takes the risk of curtailment. Will the utility be responsible for paying for power that could have been generated but for the curtailment instruction, or will the project owner lose revenue? PPAs typically require a minimum amount of generation every year — will the project owner be in default if curtailment instructions keep it from meeting its minimum requirements? Litigation has resulted over these exact questions in several cases, the drafting attorney should be as precise as possible in writing the contract.
Since energy regulatory and environmental permitting requirements vary widely from state to state, one final consideration for attorneys reviewing renewable projects is to utilize counsel familiar with the issues described above, as well as local counsel where appropriate. When reviewing a project from another jurisdiction, local counsel can be invaluable in helping to determine if all of the correct filings have been made and to analyze any potential issues.
Likewise, given the importance of tax issues to the economics of these types of transactions, review by a tax attorney with renewables expertise can be invaluable. In addition to the legal diligence issues mentioned, diligence will be required on items such as wind analysis and financial modeling.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.