1. 1 Power Sales from Solar Power Projects Lee M. Goodwin lgoodwin@nixonpeabody.com

2. 2 Power Sales for Solar Projects Background: Underlying philosophy of independent power Independent power is the creation of legislation –PURPA –State Initiatives Legislation still helps –ITC –RPS Legislation also creates context –Voluntary vs. Involuntary purchases –Municipal purchasers

3. 3 Power Sales for Solar Projects Even in the absence of legislation developers have a place because they will do what the customer either will not or cannot do for itself –Take equipment related-performance risk –Take construction risk Timing Quality –Development activities and development risk Permitting Land acquisition –Other development skills Development teams

4. 4 What Do Customers Act Like They Think the Developer/Owner is Here For? Virtual extended warranty –Equipment suppliers only provide limited warranties –PPAs with performance guarantees but without Force Majeure protection for equipment failure are difficult to distinguish from long-term equipment warranties Make the sun shine –PPAs with minimum delivery guarantees place developers in the position of writing long-term weather and climate insurance Significance of inadequate data

5. 5 What Do Customers Act Like They Think the Developer/Owner is Here For? Change-in-law insurance –PPAs without flow through of change-in-law costs place developer in the position of writing long term change-in-law insurance –Important for thermal projects due to greenhouse concerns –Solar projects have change-in-law risk too Operating standards Increased taxes from local municipalities

6. 6 Adequate Protection for Developers/Owners If contracts do not have adequate protection for developers, developers end up playing roles that they are not suited for and that they are not compensated for –If insolation is not adequate, or if laws change, that is a cost that the ultimate customer (ratepayers or consumers), not developers or power purchasers, should carry. –The developer is not in a position to pass that cost through; the power purchaser is –Similar considerations apply to utility and commercial projects

7. 7 Adequate Protection for Developers/Owners Developers can assume these risks –It is a business decision, not a legal decision –Assuming this risk does not make contract unenforceable –It can raise concerns with lenders and equity providers –Developers who assume risks should be sure they are compensated –Ability to price appropriately depends on when issues come up Issues that come up late in negotiations create unfunded mandates

8. 8 Key Take-Away Message If you are a developer/owner and you are assuming risks above and beyond the cost of producing power, make sure you are being paid for it! In other words, if you are going to be in the insurance business, make sure you collect your premium.

9. 9 Specific PPA Issues Common themes –Allocation of risk –Modularity

10. 10 Contract Structure Some risks are inherent in the way solar contracts are structured –For many technologies, power sales has an energy and a capacity component, but most solar PPAs are energy-only –In energy and capacity PPAs, capacity payments usually continue even if the purchaser experiences problems on its side of the delivery point unless the PPA provides otherwise –In an energy-only PPA, if the purchaser cant take the energy for any reason, the owner wont get paid unless there is a contractual provision that provides for payment –Eliminating capacity payment automatically shifts risk due to third party non-performance from the buyer to the seller Capacity payments for solar facilities –Theoretical support –Actual Experience –Trend toward energy-only for other renewable technologies

11. 11 Specific PPA Issues Development milestones –Intermediate milestones Permitting Contracting Make whole –Commercial operation Establishing deadline Partial commercial operation –Bad Equipment –Zoning Prorated damages

12. 12 Specific PPA Issues Development milestones –Delays Force Majeure –Day-for-day? Permits Delays by interconnecting provider –Deemed commissioning Lost ITC –Payment for test power Conditions precedent/subsequent –Permits/ PUC approval –Financial closing –Others

13. 13 Specific PPA Issues Transmission issues (utility projects) –Practical issues Availability –Responsibility for securing –Failure of transmission Remedies –Lost power sales –Foregone tax credits –Balancing/scheduling issues

14. 14 Performance Damages Production guarantees –Acceptability Double dipping of penalties –Basis for guarantee –Calculating of production (Rolling 12/24/36 month period) Credit for excused outages –Shake-out period –Consequences Damages Additional equipment

15. 15 Performance Damages Availability guarantees –Acceptability –Level of guarantee –Calculation of availability (Rolling 12/24/36 month period) Credit for excused outages –Cost of excessive monitoring –Consequences Replacement power Other amounts

16. 16 Defaults Seller defaults –Extended cure periods for general defaults –Representations and warranties Buyer remedies –Lifetime replacement power Pre commercial operation vs. post commercial operation –EEI contract settlement amount Buyer defaults –Payment default cure periods –Buyers failure to purchase Energy payments ITC Recapture Seller remedies for buyer default –Adequacy of settlement amount

17. 17 Force Majeure Misconceptions about Force Majeure Typical Force Majeure –Act of God –Change of law –Governmental action or failure to act –Unavailability of replacement equipment Equipment failure as Force Majeure –Virtual extended warranty –Warranty unavailable from manufacturers –Any failure or failure of properly maintained equipment –Adequacy of insurance Full or partial Force Majeure Termination for extended Force Majeure –Limit to material operational problems –Partial termination

18. 18 Assignment Lender issues –Finance assignment –Right to replace owner –Lender assumption of obligations –Further assurances Upstream ownership transfer as assignment

19. 19 Miscellaneous Issues Limit on liability –Dollar cap on liability Consequences of exceeding cap –ITC recapture as consequential damages Change-in-law risk –Operating standards –Tax Security –Cash security –Subordinated lien

20. 20 Miscellaneous Issues Bidding strategies –Exceptions Governmental vs. private bids –Generic model PPA Municipal/governmental purchasers –Bidding requirements –Sovereign immunity

21. 21 Alternatives Merchant power (utility projects) –Driven by several factors Reluctance of utilities to contract Desire to retain upside from RECs –Ability to hedge price for power Build-Own-Transfer –Alternative way to monetize tax benefits: sell entire project to customer –Differences from EPC IPP takes all development tasks, including tasks usually performed by owners –Acquire equipment –Assemble land –Secure permits

22. 22 Power Sales from Solar Projects Lee M. Goodwin lgoodwin@nixonpeabody.com