Top Legal Risks in PPA Contracts (And How to Avoid Them)
Power Purchase Agreements (PPAs) are powerful tools for locking in renewable energy at predictable prices. But while they offer major sustainability and financial benefits, they’re also legally complex contracts that can expose businesses to significant risks if not carefully structured.
Here are the top legal risks in PPA contracts—and how your business can avoid them.
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1. Ambiguous Contract Terms
Risk:
Poorly defined or vague language in the contract can lead to disputes over pricing, delivery obligations, and performance standards.
How to Avoid It:
Engage experienced legal counsel with PPA expertise. Ensure all key terms—such as start date, pricing structure, capacity, and penalties—are clearly defined and mutually understood.
2. Credit and Counterparty Risk
Risk:
If the project developer or off-taker (you) defaults or goes bankrupt, the contract may collapse, and you could face significant financial losses.
How to Avoid It:
Perform thorough due diligence on your counterparty’s financial health. Include clear credit support mechanisms such as parent guarantees, letters of credit, or performance bonds.
3. Change in Law or Regulation
Risk:
New policies, taxes, or energy regulations could impact the cost or legality of the PPA terms—especially over the 10–20 year lifespan of a typical agreement.
How to Avoid It:
Incorporate a robust “Change in Law” clause that outlines how regulatory shifts will be handled and how risks are shared between the parties.
4. Termination Clauses and Penalties
Risk:
Unexpected events (e.g., force majeure, underperformance, corporate restructuring) might require early contract termination—which can trigger severe penalties if the terms are one-sided.
How to Avoid It:
Negotiate fair and balanced termination provisions and clearly outline what constitutes breach, remedies, and conditions under which early termination is allowed without penalty.
5. Grid Access and Delivery Risks
Risk:
For physical PPAs, transmission issues or grid congestion could prevent power from being delivered, disrupting operations and triggering financial consequences.
How to Avoid It:
Work closely with your energy provider and grid operator during contract development. Include provisions that cover grid connection timelines, responsibilities, and contingencies.
6. Environmental Attribute Ownership
Risk:
If ownership of Renewable Energy Certificates (RECs) or Guarantees of Origin (GOs) isn’t clearly defined, you may not be able to claim the carbon reduction benefits.
How to Avoid It:
Ensure the contract explicitly states that you (the buyer) retain full ownership of the environmental attributes linked to the renewable energy generated.