Renewables developers are often faced with complex technical issues that can be compounded by legal documentation.
A renewables developer with a signed Power Purchase Agreement (PPA) may sit back and relax but if they require external funding, the lender might want to take a close look at the PPA, which could lead to a protracted re-negotiation with the power purchaser.
PPAs may, from the outside, appear complex, but simply put they are commodity purchase agreements. The difference being the commodity is electricity, which has its own peculiarities.
So, when entering a PPA, what are the key points that lenders usually focus on?
A lenders needs to be certain that if the developer "goes under" then it can "step in" and continue to operate the asset - that is why lenders end up operating all kinds of assets, from hotels to power stations.
In order to ensure that that the lenders interests are protected, lenders may bypass the operator and seek to use a so-called "direct agreement" with the buyer.
Lenders also normally require that the PPA should contain an entitlement to transfer the rights of the agreement by way of security to a lender without the need for consent by the buyer. Otherwise the buyer could frustrate the securing of external finance and lenders will generally seek after such a transfer.
Lenders want to be satisfied that there will be an adequate income stream for the operator over the life of the PPA to provide comfort that the operator will not default under the lender’s facility agreement.
Any provisions in the PPA, which could jeopardise that income stream, are bad news. In that category are clauses, which allow the buyer to unilaterally, terminate the PPA.
It is therefore essential to involve the lender early on in the negotiation or re-negotiation of a PPA. Don't present the lender with a PPA it cannot change or influence. The response from an unwise developer may be that there are plenty of lenders out there able to fund. The words "sub-prime" may mean that lenders are not so willing to take the same optimistic view of a developer’s prospects.
James Saunders is the head of energy at UK law firm Shepherd and Wedderburn