Private Wire Power Purchase Agreements explained
While Private Wire Power Purchase Agreements (PWPPA) have enjoyed popularity overseas, they have to date been uncommon in New Zealand. However, given the increasing importance placed on renewable energy sources, the desire to have energy sources secured and located near a business and the fiscal benefits that PWPPAs can offer, we anticipate that they will soon be growing in demand.
What is a PWPPA?
A PWPPA is an agreement between two private companies in which one (Producer) provides electricity to the other (Offtaker) to power the operation of a commercial operation (Facility). What makes this arrangement ‘private wire’ is that the power supplied does not pass through a utility grid, but is produced from a renewable source – typically solar, wind, geothermal or hydro – onsite or close to the Facility (System). For these reasons a PWPPA is a particularly effective means of reducing the climate impact of energy production.
The terms of a PWPPA will prescribe the System, including its location, delivery points and total rated capacity.
Why use a PWPPA?
A PWPPA can be a mutually beneficial arrangement for both the Offtaker and the Producer. One of the more significant benefits arises from the ‘off the grid’ nature of PWPPAs, as this severs the fluctuating marketplace pricing relationship of electricity production and electricity transmission. Instead, a PWPPA sets a fixed price for the purchase of the power by the Offtaker.
As a result, the Offtaker has access to a reliable source of power at a set price, on which an Offtaker may rely to purchase an agreed quantity of power pursuant to the PWPPA (Guaranteed Capacity). If this is not sufficient, an Offtaker may purchase any available additional power at an agreed cost, or, where the Offtaker has the capacity, to purchase additional power and store the excess. If the Offtaker does not purchase additional power, the Producer may sell that power on the open market and thus benefit from market rate prices.
What obligations arise from PWPPAs?
Since a System must be implemented if there is a PWPPA, there must be a significant level of buy-in from the Producer as it is the Producer who is responsible for the implementation and subsequent maintenance of the System. As the supply of power is integral in a PWPPA, terms imposing this obligation may require the Producer to install a high quality metering system and provide the Offtaker access to this, to ensure there is a high level of certainty regarding the quantity and quality of the power produced.
Additionally, a Producer is obliged to repair a faulty System at short notice or in the event of an emergency or natural disaster. In practice, a Producer must carefully schedule maintenance to prevent faults from arising and should consult with the Offtaker to ensure the Facility is not disadvantaged.
Funding for maintenance is typically provided by the cashflow that comes from the ongoing sale of a minimum quantity of power at the contracted price.
This responsibility for the System means that at the end of a PWPPA’s term the Producer will often be responsible its removal and may be required to return the location to its pre-agreement state. However, given the benefits of local power production, provisions allowing for the option to purchase, perhaps at a pre-agreed purchase price, will often be included. This provides a measure of security where there is a risk of the Producer defaulting or otherwise becoming incapable of maintaining the System.
Drafting a PWPPA
The impact of the obligations described above is that each party has a high level of reliance on the other – a Producer makes a significant investment to implement and maintain a System, and an Offtaker requires a high level of certainty about the quality and quantity of power produced. As a result, a PWPPA may have a term of 10 years or more, with considerable adverse consequences for early termination. Examples of these are multi-year stand down periods before the PWPPA actually ends and the imposition of early termination fees.
The flexibility to determine how the power is sourced also emphasises the need to plan ahead. The ability to commit to renewable energy sources through a PWPPA is often highlighted as an attractive feature of these arrangements.
The potential for changes in energy use should also be contemplated by a PWPPA. These may be as a result of technology innovations in renewable energy that may encourage or even necessitate a System upgrade, or the adoption of future energy policies involving subsidies, taxes or credits that affect the benefits gained or burdens imposed on each party.
Given these factors, PWPPAs require careful drafting to ensure there is a balance of obligations imposed, as the consequences of these agreements are long term and significant to the operation of a business.
If you are interested in entering a PWPPA, or wish to discuss whether this might be an appropriate arrangement for your power supply, please do not hesitate to get in touch.