Net Output Recital Clause
(Power Purchase Agreement) (Downstream Energy)

Summary

This clause is a net output recital clause used in the downstream energy context within a power purchase agreement. It makes clear that a power buyer is relying on a power generator to provide a minimum amount of electricity per year. It sets the stage for the parties' other obligations This clause includes practical guidance and drafting notes. Power purchase agreements are used in the downstream energy context to obligate a power purchaser to buy, and a power generator to generate and sell, a set amount of electricity per year. These agreements are important because they lock in set rates for parties, provide certainty as to how much power will be generated and provided, and allow the power generating party financial certainty it can use to obtain loans to build or refinance its facilities. They are far superior to utilizing the spot electricity market, as price fluctuations and the possibility that power is unavailable can have disastrous effects on a power purchaser. It is common for commercial contracts such as a power purchase agreement to contain recitals near the beginning of the contract which set forth contract and counterparty expectations. Here, this recital is used to set the expectation regarding the net output of electricity which the power purchaser will buy, and the power generator will sell per year. This is important because it lays a foundation for the parties' other obligations throughout the remainder of the contract. While often overlooked as unimportant, counsel for each contract counterparty should be careful what is placed in recitals, as they can lead to misunderstandings if a contract dispute arises. For more information on drafting recitals, see Recitals Clauses and Term, Recitals, and Definitions. For more information on power purchase agreements, see Power Purchase Agreement Risks, Power Purchase Agreements in Renewable Energy Projects, Power Purchase Agreement Drafting Checklist, Termination and Cancellation Rights, Drafting Contractual Dispute Provisions Resource Kit, and Key Issues for Project Finance Lenders in Construction Contracts.