Teal blue graphic

Private wire PPAs - why the focus now?

Private wire PPAs are not a new concept. Over the last decade we have acted for wind farm developers on dozens of private wire projects. More recently, we have advised both developers and landowners on private wire solar projects ranging in size from less than 5MW through to nearly 50MW.

There are various drivers for pursuing a private wire structure. We have acted for ethically driven developers who have seen an opportunity to install renewable energy projects on brownfield sites near to large sources of demand. On the customer side, corporate responsibility objectives have also played a part in building the business case for procuring green energy from a specifically identifiable, local source.

At a financial level, the key driver is the scope for the developer and the customer to share the value of avoided grid charges and policy costs that are applied to electricity imported from the grid. For example, in today's market:

  • under a standard grid export PPA a developer may be looking at a price per MWh of less than £50, even after the value of embedded benefits are added to the basic wholesale electricity price;
  • at the same time, a customer may be paying something in the region of £100 per MWh for electricity imported from the grid after grid charges and policy costs have been added to the basic wholesale price and supplier margin. 

There is a clear potential benefit here to both the developer and the customer of striking a deal on a private wire PPA price of (for example) £70 or £80 per MWh.

Where projects have been developed with support under the RO or FiT schemes, the premium secured under a private wire PPA may have been a nice to have, rather than being critical to the viability of the project. 

For developers looking ahead to a post-subsidy world, the opportunity to secure an additional £20 per MWh on electricity sales may be critical to the business case.

However, when measuring the benefits associated with a private wire deal, additional costs associated with the installation and maintenance of the private wire infrastructure need to be factored in. The additional complexity and risks associated with the contractual arrangements underpinning the private wire supply deal will also need careful consideration.

Private wire PPAs – the key considerations 

Grid connection

In all of the projects we have been involved with, there has been some form of sharing by the developer of the grid connection serving the customer's site. In most cases, the wind farm or solar park has been wired into the site's existing grid connection which is owned by the customer. This means there will be some dependency on the customer maintaining the grid connection for the benefit of the project. 

In our article next week we will consider in more detail the issues around grid sharing arrangements.

Minimum take

On FiT or RO supported projects, there may or may not be "take or pay" obligations imposed on the customer. These would be based on a certain minimum quantity of electricity that the customer is expected to take from the project.

In a post-subsidy context where the private wire premium is critical, obligations imposed on the customer to take or pay for all or at least a very high proportion of the generation will be essential. There will also be the potential for energy storage technology to be utilised as part of the mechanism for maximising the amount of private wire generation that can be allocated to meet the customer's demand over the day.

Supply licence exemption rules

The project company supplying electricity under a private wire PPA is likely to be acting as an unlicensed supplier. This means that its activities need to fall within the scope of an applicable exemption from the requirement for an electricity supply licence.

The relevant exemption rules are complex and can cause difficulties where the PPA customer is reselling electricity purchased under the PPA to third parties eg its tenants. We were recently involved on a potential private wire solar deal which failed to proceed due to concerns about complying with these rules. In other cases, developers and funders have had to take a pragmatic view on the potential risk of non-compliance with the rules.

Termination

An area that can be overlooked when drafting private wire PPA agreements is the consequence of the PPA being terminated early, for example as a result of a material breach or insolvency of one of the parties. Where the supply by private wire is premised on the shared use of a grid connection, careful thought and input from technical advisors will be needed to assess how the project company could continue to operate and export to the grid after "divorcing" from the customer.

Looking ahead to a post-subsidy situation, developers will also need to consider the likelihood that a replacement private wire deal cannot be set-up following termination of the original deal. In these circumstances, a project company may have to rely on being able to recover significant compensation from the outgoing PPA customer in respect of the difference between the revenue that would have been earned, had the private wire PPA continued, and the lower revenue achievable from exporting all generation to the grid.

Customer financial standing

A major challenge on a private wire deal will be finding a customer who can offer an acceptable financial covenant to stand behind its obligations under the agreement(s) with the project company. 

This challenge will likely be heightened on projects operating in a post-subsidy world. There it will be key that the customer takes a high proportion of the project's generation for the full term of the PPA, or is otherwise able to pay compensation to the project company to keep it whole on its expected revenues over that term.

Conclusion

The potential relevance of private wire PPAs in a post subsidy world was highlighted in the recent exchanges between the government and the Solar Trade Association. When government minister Lord Bourne alighted on earlier statements made by Lightsource as to solar projects being viable in 2016 without subsidy, the STA clarified in response that it was only projects built around a robust private wire PPA deal that were viewed as potentially viable on a subsidy free basis.

In this context, we expect many developers to be looking at potential private wire deals. The issues outlined in this article should highlight that, when doing so, developers will need to give careful consideration to the contractual arrangements underpinning the deal.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Insights & events View all