1. Antitrust/Competition Commercial Damages Environmental Litigation and Regulation Forensic Economics Intellectual Property International Arbitration International Trade Product Liability Regulatory Finance and Accounting Risk Management Securities Tax Utility Regulatory Policy and Ratemaking Valuation Electric Power Financial Institutions Natural Gas Petroleum Pharmaceuticals, Medical Devices, and Biotechnology Telecommunications and Media Transportation Copyright © 2011 The Brattle Group, Inc. www.brattle.com Align Interests of Developers and Consumers Through Long-term Power Purchase Contracts Presented to: 2011 NASUCA ANNUAL MEETING St. Louis, Missouri Presented by: Judy W. Chang November 14, 2011

2. 2 Agenda Introduction Case Example from Offshore Wind Contract Observation

3. 3 Introduction Price and Non-Price Provisions of PPAs are Both Important ♦ Long-term power purchase agreements (PPAs) are commonly used by utilities and states to meet renewable energy standards and requirements ♦ Solicitation are used to procure the least-cost options ♦ However, resulting contract price is not the only measure for the true “cost” of the contract ♦ Some non-price provisions can sometimes be even more important to consumers and project developers Escalation factors Interconnection and transmission cost responsibilities Project and financing cost responsibilities Arrangements at the end of the contract term

4. 4 Introduction PPAs Can Help Align Developers and Consumers Interests ♦ As an renewable industry, developers should consider the long-term viability of renewable energy. ♦ Back-lash due to high prices will not serve consumers or investors well. ♦ Policy-makers want long-term energy solutions that ultimately benefit all citizens ♦ Thus, aligning the long-term interests of consumers, policy makers and developers in contracts provides the best approach.

5. 5 Introduction How to Align Interests? ♦ Consumers want low cost, low price volatility, and environmental sustainability May be willing to pay a premium for the latter two But will need to be convinced that they will get what they pay for ♦ Policy makers want long-term sustainable energy sources, low price volatility, and reduced emissions Should consider contracts in light of policy objectives ♦ Developers and Investors want to be compensated for uncertainties and risks Construction costs Tax credits Financing Costs Changes in public policies and regulations Changes in demand, market design, and competition

6. 6 Brief Case Example Offshore Wind Contract in MA Designed to Align Interests ♦ Features of the Contract A “base price stream,” on assumption of 468 MW of off-shore wind Price increases if project size must decrease Price increases if assumed tax credits not available to investors ■ Risk of losing tax credits shared by consumers and investors Price decreases if actual project cost including financing costs are lower than anticipated in the base price ♦ Rationale for the above features: PPA is negotiated before the project is built Assuming that policy makers (and consumers) want to the project built – but will support it only if they will not over-pay Investors face significant uncertainties about costs and benefits, and will need some protection There are economies of scale, thus costs are reduced for a larger project

7. 7 Observations ♦ Developers and investors should be encouraged to consider the long-term viability of the renewable industry ♦ Contracts should be designed to protect consumers while compensate for the risks and uncertainties investors face ♦ Finding ways to balance the interests through PPAs require the following: Identify and recognize the interest of each party Identify and quantify the risks faced by each party Assign risks to parties that can best bear them, and property compensate them for bearing those risks

8. 8 Some Recent Experiences in Renewable Energy ♦ Estimation of financial damages associated with wind curtailment ♦ Evaluation of renewable energy long-term contract procurement. ♦ Strategic planning, developing future energy market scenarios. ♦ Long-term regional planning, estimating the impact of various levels of renewable energy deployment ♦ Assessed the transmission benefits associated with renewable energy deployment ♦ Wind integration analysis by developing an analytical method to evaluate the operational impact of various levels of wind penetration ♦ Regional renewable energy analysis for the New England renewable energy market ♦ Regional transmission and renewable development analysis ♦ Renewable integration analysis and model development ♦ Energy storage analysis ♦ Regional job and economic development assessment for renewable and transmission investments ♦ Policy analysis relating to community wind development ♦ Renewable energy financing assessment for an international organization ♦ Renewable energy policy and strategic analysis for The Government of India

9. 9 About The Brattle Group Climate Change Policy and Planning Cost of Capital Demand Forecasting and Weather Normalization Demand Response and Energy Efficiency Electricity Market Modeling Energy Asset Valuation Energy Contract Litigation Environmental Compliance Fuel and Power Procurement Incentive Regulation Rate Design, Cost Allocation, and Rate Structure Regulatory Strategy and Litigation Support Renewables Resource Planning Retail Access and Restructuring Risk Management Market-Based Rates Market Design and Competitive Analysis Mergers and Acquisitions Transmission The Brattle Group provides consulting and expert testimony in economics, finance, and regulation to corporations, law firms, and governmental agencies around the world. We combine in-depth industry experience, rigorous analyses, and principled techniques to help clients answer complex economic and financial questions in litigation and regulation, develop strategies for changing markets, and make critical business decisions. Judy Chang (judy.chang@brattle.com)judy.chang@brattle.com 44 Brattle Street, Cambridge, MA 02138 617-864-7900 (www.brattle.com)www.brattle.com