Specialist Corporate and Commercial Lawyers
Green hedging through Power Purchase Agreements: 3 property law questions to consider upfront
A demand for stable energy prices together with a dramatic fall in renewable energy costs has driven a significant uptake in Power Purchase Agreements (PPAs) in Australia over the past 18 months. At SWS Lawyers, we have seen businesses of all sizes explore the benefits of PPAs with solar energy generating companies as a way of “green hedging” (ie taking control of their electricity costs) and achieving sustainability goals. In this article, Elizabeth McDonald, Principal of our property and planning team explains what PPAs are and discusses 3 property law questions to consider when entering into a PPA.
A PPA is a contract between an energy generator and a customer for the sale and supply of energy. A PPA with a corporate customer (otherwise known as a corporate PPA) may be structured in several different ways. A “Behind the Meter” PPA involves a renewable energy project being installed on the customer’s premises (eg rooftop solar panels) with the customer buying all or some of the energy generated by that project. Other structures, such as virtual and sleeved PPAs, do not involve the physical delivery of renewable energy to the customer, but instead allow the customer to buy or hedge electricity from a specific energy.
In recent years, we have seen a growing interest in PPAs from large energy users in regional and rural New South Wales. Companies who have ample roofspace or unused land can use PPAs as a method of funding the installation of a solar photovoltaic system (PV System) at their place of business. PPAs can also open a renewable energy option to companies who do not own the premises from which their business operates.
All renewable energy projects require land agreements. Our lawyers have advised on property, planning and environmental law issues arising during the development of solar and wind projects of all sizes.
In respect of projects involving PPAs, the following 3 key property law questions need to be considered.
- What land is required for installing the PV System?
As a first step, we recommend the parties identify the preferred location of the PV System (Installation Area) and the preferred areas to be used for accessing the PV System during installation or maintenance (Access Area). Survey plans and town planning advice will generally be needed.
- Who owns the relevant land?
Proper searches and inquiries need to be made to ascertain who has legal tenure over the Installation Area and Access Area. This step involves more than simply asking the customer or ordering a title search. We recommend a careful review of the terms of any lease, sublease, licence or easement be carried out as each of these may affect who the energy generator needs to approach.
- Should a lease or licence be used?
The next question is what kind of agreement should the energy generator enter into with the owner of the Installation Area and Access Area.
We often see licences being used for these arrangements. From a legal perspective, we note that licences only give the generator a contractual right with the current owner of the property. They do not give the generator an interest in the land. This means that, if the property is sold, the generator will need to enter into a licence with the new owner in order to access the PV System. Some generators seek to deal with this by including a requirement in their licence agreements for a property owner to ensure the new owner enters into a similar licence, however, there is always the risk that the outgoing owner fails to do this (by accident or otherwise). If this happens, the generator may lose its right to access the solar PV system.
To mitigate this risk, the generator could register a security interest on the PPSR. Alternatively, the generator could enter into a lease of the Installation Area. A lease would be registered on title and would be enforceable against future owners and mortgagees.
Similar considerations may apply when deciding whether to use a licence or easement for an Access Area.
Parties should also seek accounting and power price forecasting advice when considering a PPA arrangement. SWS Lawyers work closely with our clients’ other advisers to ensure contract documents meet all of the clients’ needs as we are conscious of the complexity of engaging in the energy market.
With technological advances bringing the cost of renewable energy projects down, PPA costs are coming down quickly, making them a competitive option for businesses seeking contracts for energy supplies. Given the long-term nature of these arrangements, correct structuring is crucial to maximising the benefits to customers and generators alike.
SWS Lawyers have advised on many of these projects and, through our interest in this evolving industry, have become familiar with various types of renewable energy arrangements. We have experience in advising on tenure and access requirements, drafting and negotiating the relevant lease and access agreements and liaising with surveyors regarding the plans and easements which need to be prepared. Our expertise in this area enables us to advise the landowner, the customer (if different to the landowner) and the energy generator.
This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact our Property team if you require advice on matters covered by this article.