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.
- 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.
- 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.
- 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.
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