1. Session 22 (R) Utility Scale Solar Development Power Purchase Agreements (PPAs) April 04, 2016

2. Session 22 - Value to class members We also heard from the First Solar spokesman that utility scale solar energy systems do not go beyond the planning stages until a Power Purchase Agreement has been established This session continues the examination of utility scale PV development with a review of PPAs 2

3. Utility Scale PV Systems Design Steps 1. Selecting an appropriate site and solving all land issues 2. Carrying out the permitting process for construction and operation 3. Selecting a financing approach including power purchase agreements or energy off- take agreements 4. Carrying out PV system and solar field engineering and design 5. Interconnection to the grid 3

4. Utility Scale PV Systems 4 The SEIA (Solar Energy Industries Association) webpage is another treasure trove of research articles, industry trends, current news, etc. concerning the national solar enterprise. http://www.seia.org/sites/default/files/reso urces/Major%20Projects%20List%20Ma r%202016.pdf

5. Utility Scale PV Systems The Power Purchase Agreement Resources A.Fong and J.Tippett, Project Development in the Solar Industry, CRC Press, 2013 SEIA factsheet http://www.seia.org/research-resources/solar- power-purchase-agreements http://www.seia.org/research-resources/solar- power-purchase-agreements NREL report (2014), To Own or Lease Solar http://www.nrel.gov/docs/fy15osti/63216.pdf http://www.nrel.gov/docs/fy15osti/63216.pdf NREL report (2012), SW Utility PPAs http://www.nrel.gov/docs/fy12osti/51137.pdf http://www.nrel.gov/docs/fy12osti/51137.pdf NREL report (2010), PPA Checklist http://www.nrel.gov/docs/fy10osti/46668.pdf http://www.nrel.gov/docs/fy10osti/46668.pdf 5

6. Utility Scale PV Systems The Power Purchase Agreement Importance to finance and valuation It is an essential milestone in a renewable energy project’s development The financial difference between a project with a PPA and a project without a PPM can be substantial It is a binding contract between an electric utility and a project developer It can be employed at the residential, commercial, and utility scales, with differences related to scale 6

7. Utility Scale PV Systems The Power Purchase Agreement Importance to finance and valuation The utility commits to buy renewable power from the developer’s PV system for a duration of 20-25 years It defines the cash flow for an energy project It is the reason why investors will evaluate the solar project for investment potential Initial capital investment Revenue over time Level of risk 7

8. Utility Scale PV Systems The Power Purchase Agreement There are two versions of a PPA A two party agreement in which one is a buyer of solar electrical power (the utility) and the other a seller of solar electrical power (the developer) A three party agreement with a developer of a PV system, a host customer, and a utility 8

9. Utility Scale PV Systems The Two Party Power Purchase Agreement The developer generally forms a limited liability company (LLC) The LLC owns the assets of the project: o Land site control o Permits o Solar generating equipment o Project engineering documentation o PPA contract The LLC sells the electrical energy (in kWh) bundled with Renewable Energy Credits (RECs) and/or some other “green” credits 9

10. Utility Scale PV Systems The Two Party Power Purchase Agreement The price of the seller’s kWh may be a fixed cost or may follow a “time of delivery” payment structure Seasonal, daily, hourly periods The buyer receives the electricity along with the RECs which it uses to demonstrate that it is meeting the Renewable Energy Standards (RES) that the utility’s regulators have established 10

11. Utility Scale PV Systems The Two Party Power Purchase Agreement The seller promises a type and quantity of energy to be delivered on an annual basis Specified generation location Specified interconnection location Certain period of time Specified pricing 11

12. Utility Scale PV Systems The Two Party Power Purchase Agreement The buyer promises to purchase the electricity under certain conditions Specified delivery location Specified quantity Duration of the PPA contract Specified pricing 12

13. Utility Scale PV Systems The Two Party Power Purchase Agreement Both sides stipulate that they are Good corporate citizens Creditworthy Capable of fulfilling their contractual obligations 13

14. Utility Scale PV Systems The Two Party Power Purchase Agreement Six key components of a PPA 1. The contract electricity price 2. The annual escalator 3. The term of the contract 4. The location of the generation station and the interconnection point 5. The description of the type of generation facility 6. Contract off-ramps (curtailment) 14

15. Utility Scale PV Systems The Two Party Power Purchase Agreement Financing considerations Credit rating of the off-taker Most utility companies have exceptional credit Some small, private, or inexperienced off takers – not so much Fatal financeability flaws Curtailment – buyer excused from paying for energy if transmission system unavailable Ambiguous regulation compliance payment terms – seller payments when regulations or laws change 15

16. Utility Scale PV Systems The Two Party Power Purchase Agreement PPA variables NREL System Advisor Model (SAM) example shown in Fong and Tippett 20 MWdc PV system, 20 year PPA, 0% escalator 17.4cents/kWh price needed to meet IRR 20 MWdc PV system, 20 year PPA, 2% escalator 13.4cents/kWh price needed to meet IRR Dropping PV component costs More competitive bids More entrants Adding an escalator or increasing contract term often produces lower energy prices than zero escalator or shorter term contracts – getting closer to grid parity 16

17. Utility Scale PV Systems The Two Party Power Purchase Agreement PPA commitments Two riskiest elements Guaranteed construction and operation dates Guaranteed annual energy output Delay clauses often included, but missing commercial operation date can trigger damage payments to the off-taker or lead to contract termination Similar penalties for falling short in energy performance, but “development securities” often required 17

18. Utility Scale PV Systems Utility PPAs (NREL 2012) 18

19. Utility Scale PV Systems Third Party PPAs (SEIA factsheet) 19

20. Utility Scale PV Systems Third Party PPAs (SEIA factsheet) 20

21. Utility Scale PV Systems Third Party PPAs (NREL 2010) 21

22. Utility Scale PV Systems Third Party PPAs (NREL 2010) 22

23. Utility Scale PV Systems The effect of escalator clauses 23

24. Utility Scale PV Systems 24