Power purchase agreements enter the mainstream
For many years there was some caution about power purchase agreements (PPAs) as a bankable source of long-term income for renewable project owners in the UK. Whether because of long-term credit risks, operational or technical risks, investors were far happier with so-called “government-backed” subsidy revenue and regulated connection agreements.
Commentators have been predicting an upsurge in numbers of private PPA agreements (either as private wire direct supplies to an off-taker or through a sleeving arrangement with a DNO). These predictions are now, after some time, proving correct.
In terms of property law, power purchasers wanting a funder to install at their premises will be required to grant a long-term lease for the generating equipment. This, in itself, is fairly straightforward. Things get complicated where there are specific risks to insure and where there are third parties, such as mortgagees, involved. But such third parties are becoming increasingly comfortable with these risks, meaning less friction in practice.
As to contract law, the bargain is generally very clean: purchasers commit to buy a certain volume of power and the market now offers arrangements to secure a reasonable income (under the smart export guarantee) for any power not used.
Regulatory questions are less common, with OFGEM and other bodies generally taking a sensible approach. Tax issues, such as business rates, VAT and capital allowances, must be carefully considered in each case; but again, the risks and economics can be quickly understood.
At MDS Advisory, we have worked in recent months on PPA transactions with numerous private and public sector clients, at the micro scale and with the largest private networks. Adam Oliver was recently appointed solar advisor to Transport for London.