Power Purchasing Agreements – Proceed with eyes wide open

Walt Vernon, PE, LEED AP, EDAC, FASHE, JD, LLM

Principal, Chief Executive Officer
11/20/14

A friend/client of mine recently reached out to me to discuss an offer he had received from a vendor. This vendor was selling their proprietary fuel cell through a power purchase agreement (PPA). This is a very common strategy these days, as organizations seek ways to augment their capital with off balance-sheet financing arrangements in order to make the investments they need to make, while simultaneously preserving their organization’s financial health.

The problem is, these deals seem to be too good to be true, and, for the unwary, they might be. On the surface, they look very simple. Somebody puts up some money, buys something that saves you energy, or produces energy, and you pay a fraction of the savings or for the energy produced to pay back the original investment. The devil, inevitably, is in the details.

I have now been involved in putting together and negotiating these kinds of deals, from both sides, and I have stumbled on some of the potential problems, all of which stem from the magnitude of complexity involved.

  1. They involve complex technical implementation, which will always have unanticipated impacts and unforeseen costs. e.g For one deal, the vendor and another project were competing for the same breaker space in a switchboard, causing no end of problems.
  2. They can involve complex legal issues, including planning issues with the local authorities and property rights. e.g In another deal, a healthcare owner tried to sell a building in which they had implemented a lighting retrofit through a shared savings agreement. They were prevented from doing so by the vendor who placed a lien on the property.
  3. And, the deals can involve complex financial issues, including ownership of environmental attributes, balance sheet impacts, unanticipated project costs, indexing of costs, etc.

PPA deals are relatively easy to enter into. And, very often, they can be a great way to get things done; I actually highly recommend them. Too often people are needlessly afraid of them. (I will delve into this in another post.) However, they also do pose potential issues for the inexperienced, and I would always recommend that these kinds of deals be (a) competed and (b) examined by people with the appropriate technical, legal and financial expertise

And, finally, select this kind of expertise carefully. Not all lawyers thoroughly understand the agreement details and the technical/financial intersections. And not all finance people understand the legal/technical impacts on finances. And ditto for technical people not understanding the legal/financial aspects of the deal.

Saving energy and cutting energy costs is an important objective for managers of any building. PPAs are great ways to do it. Just do it with eyes wide open.

I hope this helps. I welcome feedback from your own experiences.


Adam Sachs, PE

Associate, Mechanical Engineer

Amy Pitts, MBA, BSN, RN

Medical Equipment Project Manager

Andy Neathery

Technology BIM Specialist

Angela Howell, BSN, RN

Senior Associate, Medical Equipment Project Manager

Anjali Wale, PE, LEED AP

Associate Principal, Senior Electrical Engineer

Austin Barolin, PE, CEM, LEED AP O&M

Senior Associate, Senior Energy Analyst

Beth Bell

Principal, Chief Financial Officer

Bethany Beers, CCP, LEED AP BD+C

Associate Principal, Sustainability Practice Leader

Bilal Malik

Associate, Senior Electrical Designer

Brennan Schumacher, LEED AP

Associate Principal, Lighting Design Studio Leader

Brian Hageman, LEED AP

Associate Principal, Plumbing Discipline Lead

Brian Hans, PE, LEED AP

Associate Principal, Senior Mechanical Engineer

Brian J. Lottis, LEED AP BD+C

Associate, Senior Mechanical Designer

Brianne Copes, PE, LEED AP

Senior Associate, Mechanical Engineer

Bryen Sackenheim

Principal, Technology Practice Leader
TAGS:

Related Content

Subscribe

Interested in what you see? Subscribe to receive monthly news and information
more tailored to what you need.

    This site uses cookies to ensure you have the best experience and to analyze our traffic. Read more in out Privacy Policy.