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5 Things You Need to Know About Signing a Corporate PPA

In recent years, with the society’s increasing awareness of environmental protection and the rapid development of the renewable energy industry, the Corporate Power Purchase Agreement (CPPA) has attracted much attention as an essential tool to promote the consumption and development of renewable energy, which not only is a cooperative agreement between power consumers and power generation enterprises but also encourages the development of renewable energy. In this newsletter, we will discuss the essence, significance, and some legal issues of CPPA and give you a full picture of the CPPA.


With this article, we will help readers get a first glimpse of the CPPA and grasp the relevant legal and commercial points and provide strong support and practical references for enterprise’s enhancing in the field of green power trading.


1

What is the Corporate Power Purchase Agreement (CPPA)?


CPPA is an agreement signed between a power consumer (such as a large enterprise or factory that needs to use green power) and a new energy power generation enterprise (such as wind power or photovoltaic power generation enterprise) to purchase renewable power (i.e., green power) for a medium or long-term and obtain the corresponding Green Certificate.


CPPA originated in western countries, e.g., the United States, Northern Europe, and the United Kingdom, etc. Signing CPPA is a common model of green power procurement in developed western power markets. Along with the gradual advancement of China's power trading reform, the applications of such business model are more common to see in China in recent years, which shows the market’s positive response to the Chinese government's promotion of green power trading pilot work. There is no uniform template in the market or provided by the power trading centers, so buyers and sellers usually draw on the CPPA used in Europe and the United States to tailor it to their project needs.


2

What is the role/purpose of signing the CPPA?


As the underlying transactions are medium or long-term green power purchases, CPPAs are usually of long duration and often cover framework arrangements for green power purchases between power consumers and power generation enterprises for more than ten or even twenty years.


From the perspective of power consumers, by signing a CPPA, power consumers can secure a long-term and stable supply of green power, so CPPA is often favored by large multinational companies, especially those with clear carbon reduction targets. For power generation enterprises, the CPPA can guarantee a long-term demand for green power.


The development of China's power market is still in its early stages, and power trading rules and policies are constantly evolving and changing. By signing a long-term CPPA, power consumers and power generation enterprises are able to seek stable purchases and cooperation between the two parties in an unstable market, bind the long-term purchase and supply of green power on both sides, and work together to handle the changing market trend and increase the ability to resist risks.


3

What are the companion ancillary agreements of CPPA?


In China, power consumers purchase green power directly from power generation enterprises, and after signing the CPPA, they also rely on grid corporations to deliver the power. Therefore, in addition to signing a CPPA with a power generation enterprise, power consumers need to sign an Electric Utility Contract with a grid corporation, and the power generation enterprise also needs to sign a Power Purchase and Sale Agreement and a Power Dispatching Agreement with the grid corporation. These ancillary agreements focus mainly on elements such as security and technical terms for grid corporations, power generation enterprises, and electricity consumers, while the commercial and legal terms related to the purchase and sale of power and transmission and distribution associated with green power trading are mainly specified in the CPPA.


In addition to the ancillary agreements mentioned above, power consumers and power generation enterprises will also sign an Annual Power Purchase Agreement at the end of each year for the supply and purchase of green power in the following year, thus determining the specific amount and price of green power to be purchased in the following year (for cases where no fixed price is agreed in the CPPA). As CPPA generally will set forth  a long-term framework arrangement without accurate estimate of  the actual annual demand of the power consumers over the term of the agreement, the power consumers and the power generation enterprises mainly agree on how to estimate the amount of power generation and demand in the CPPA. The specific amount of green power purchased for each year will  be separately agreed upon in the Annual Power Purchase Agreement. Annual Power Purchase Agreement  shall be filed with the power trading center, so the power trading center usually formulates the template of the Annual Power Purchase Agreement.


4

What are the key elements and provisions of the CPPA?


In general, the CPPA should specify the purchaser, the seller, the annual estimated or guaranteed amount of trading power, the price of power and green certificates, the supply period, the agreement between the buyer and the seller on the forecast and determination of the annual trading power, curve or the principle of curve decomposition, the settlement method, the remedial measures and liability for breach of contract for failure to deliver the green power and green certificates in full and on time, as well as the arrangements, compensation and termination clauses in the event of shutdown, forced reduction, force majeure and change of law.


From the above, it is easy to know that CPPAs usually include many commercial, technical, and legal provisions, and even one provision sometimes is combination of legal, technical, and/or commercial issues; therefore, when drafting and negotiating a CPPA,  inhouse counsels or lawyers need to be familiar not only with the legal requirements and transactional rules but also with the commercial and technical requirements.


5

What are the main legal issues of the CPPA?


5.1 Determination of trading power


Trading power is the amount of green power purchased by power consumers from power generation enterprises under the CPPA and Annual Power Purchase Agreement.


Power generation enterprises deliver green power to consumers according to the contractually agreed trading power and settle the purchase price with power consumers. The power consumers and the power generation enterprises determine the amount of trading power based on power demand and generation capacity. At the same time, the transmission capacity of the grid corporation is also taken into account  in case the agreed trading power cannot pass the security calibration of the power dispatching organization.


Both parties can agree on an explicit forecasting mechanism in the CPPA, for example,  power consumers forecast their green power demand on a monthly, quarterly, or annual basis and power generation enterprises forecasts their generatable/tradable power accordingly. Based on the projections of both or one of the parties, the annual trading power volume specified in the signed Annual Power Purchase Agreement will ultimately prevail.


5.2 The risk that power generation enterprises cannot supply power  on time and in full


Currently, the target of China’s green power trading is mainly the on-grid power of non-hydro renewable energy, such as photovoltaic and wind power generation. However, restricted by natural conditions, the power generation of photovoltaic and is unstable. As mentioned above, the main purpose of signing the CPPA is to ensure the long-term supply of green power for consumers, so if a power generation enterprise fails to supply green power on time and in full, it could be “disastrous” for power consumers. Such circustance is often considered a material breach of contract by the power generation enterprise (excluding the situation of failure to supply green power on time and in full due to force majeure and other factors beyond the control of power generation enterprises).


In this case, the power consumers may agree in the CPPA that the power generation enterprises shall forthwith notify the power consumers and supply green power to the power  consumers as far as possible through other renewable energy generation projects other than those it owns or contractually controls, and compensate the power consumers for all the damages it has suffered. In regions where spot power trading is available, if the power generation enterprises are unable to meet the power demand of the power consumers, the power consumers may also agree in the CPPA to procure green power from the spot market or a third party under such circumstance.


5.3 Downtime risks


The maintenance or destruction of generating units of power generation enterprises often results in downtime, which disrupts the continuous or timely supply of green power. In the face of such circumstances, it is usually recommended that both the power consumers and the power generation enterprises should anticipate and agree in advance in the CPPA on the time, frequency and duration for planned downtime of the generating units and facilities during the supply period or in each year, and both parties may also draw up a schedule of planned downtime as an annex to the CPPA for clarity.


It is important to note that allowing planned downtime often does not mean that the power generation enterprise is permitted to have a supply cut-off or shortfall, in which case consumers with strong bargaining power will also require the power generation enterprise to endeavor to find other remedies to make up for the shortfall, e.g., supplying green power to the power consumers through other renewable energy generation projects other than those it owns or contractually controls, as described above.


As for unplanned downtime due to unforeseen circumstances, CPPA generally will set out clear remedial arrangements. For example, the power generation enterprises should notify the power consumers as soon as possible of the time, frequency, duration, and reason for such unplanned downtime, the possible affects, etc., and endeavor to find other remedies to make up for the shortfall in power supply, and to compensate for the losses suffered by the power consumers as a result.


5.4 Risk of changes in trading rules and policies


Green power trading is still highly policy-driven, as it is conducted in practice mainly according to the trading rules and requirements of the Power Trading Center, which promulgates new trading rules every year, including new benchmark price, fluctuation range and trading requirements. Therefore, changes in trading rules and policies may be an “invariant” in green power trading, and how to ensure the stability of trading and the supply of green power using the CPPA has been an important issue for large power consumers..


This brings us to the “Change in Law” clause. Usually, in the CPPA, the “law” or “applicable law” will first be agreed upon and interpreted in a more special and more enormous scope, including not only laws and regulations but also trading rules and policies promulgated and updated by Power Trading Center and government departments from time to time. Second, it will be clearly stated in the “Change in Law” clause that if there is a significant change in the “law” or “applicable law” agreed above, such as to the effect causing either party to the agreement to be in a very disadvantageous position and unable to achieve the expected economic benefits, in order to maintain the long-term stability of the CPPA, instead of the termination of the contract, the power consumer will often request to negotiate with the power generation enterprises to change the relevant contract terms, so that the CPPA can enable both parties to achieve the benefits anticipated at the time of signing.


We hope that readers will better understand CPPA and realize the significance of signing a CPPA for both enterprises and the renewable energy industry through this article. When signing a CPPA, enterprises should fully consider their development strategies and clean energy consumption goals, choose the right partner, and carefully review the contract terms to reach an agreement to the satisfaction of both parties.


At the same time, we hopefully expect the joint efforts of the government, industry associations, and professional organizations to improve the legal and commercial environment of the CPPA and to provide more stable and sustainable support for the healthy development of the renewable energy industry. We look forward to discussing with you on how to utilize the CPPA to develop a broader green energy market for your business and provide you with legal support and solutions.

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