Deemed Generation: Who Pays for Power That Was Never Delivered

Curtailment can produce a technically available plant and no delivered MWh. Whether the seller is paid is not determined by a universal “buyer curtailment versus grid curtailment” rule; it is determined by the executed PPA and the market / interconnection allocation around it.

Public PPAs show materially different structures. One solar PPA requires the buyer to pay for energy when that buyer curtails delivery. Another renewable PPA pays defined Curtailment Energy net of Non-Compensable Curtailments and expressly excludes additional amounts for foregone tax benefits. The category definitions and exclusions therefore matter as much as the headline deemed-generation provision.

This is the second of the three PPA Standalones that close out Contracts & Legal. You will get the six curtailment types and who bears each, why deemed generation needs two separate payment components rather than one, how the calculation is actually performed, why the uncompensated allowance can swallow the entire compensated category, and how to model what curtailment really costs.

ℹ️ Note: This describes how these mechanisms work in practice. It is not legal, tax or investment advice — curtailment allocation is heavily negotiated and varies by market and offtaker.

What Are the Kinds of Curtailment?

Start with cause, because the PPA usually allocates curtailment by cause.

A practical cause map can include:

Cause	Example	Contract question
Grid / reliability	ISO or utility instruction	compensated or seller risk?
Congestion	transmission constraint	inside deemed generation?
Buyer instruction	economic / convenience curtailment	deemed energy payable?
Negative price / market rule	dispatch suppressed by price rule	floor / curtailment clause?
Project outage	plant unavailable	seller risk
Force majeure / emergency	external event	separate relief regime

Those labels are only a diligence framework. The signed PPA definitions control.

Which Curtailment Does the Buyer Actually Pay For?

Only the curtailment the PPA defines as compensable.

A filed solar PPA provides a clean example: if the buyer curtails delivery, the seller may sell the energy elsewhere, and if it does not, the parties determine the curtailed quantity and the buyer pays the amounts the seller would have received under the PPA.

Another filed renewable PPA is more granular. It defines Curtailment Energy, subtracts specified Non-Compensable Curtailments, and then pays the seller the amounts it would have received for the remaining compensable quantity.

Those examples support a contract-reading sequence:

1. identify the curtailment cause;
2. map it to the defined compensable / non-compensable bucket;
3. calculate the counterfactual MWh under the contractual methodology;
4. apply any allowance, threshold or cap;
5. apply the contract price and any expressly covered attributes or tax items.

The clause is therefore not valuable merely because it exists. It is valuable to the extent the events the project actually expects are inside the compensated bucket.

Who Bears Congestion Curtailment?

The executed documents decide.

Congestion can be seller risk, buyer risk, transmission-provider risk, or split through bidding and curtailment mechanics. Do not infer the answer from the point of delivery alone.

For financing, congestion should be analysed together with nodal basis because the same transmission constraint can reduce both price and deliverable volume:

constraint → wider node-to-hub basis
constraint → dispatch / curtailment loss

If the PPA compensates one leg but not the other, the model needs that asymmetry explicitly. The historical curtailment and congestion data should therefore feed one correlated downside case rather than two independent sensitivities.

What Is Deemed Generation, and How Is It Calculated?

An estimate of what the plant would have produced had it not been curtailed, used as the settlement quantity. Since no meter recorded the energy, the parties agree a method for reconstructing it.

The mechanics differ by technology but the principle is identical: take the resource that was actually available, apply the plant's known conversion characteristics, and net off the losses that would have occurred anyway.

For wind, the standard approach uses the turbine manufacturer's power curve together with measured conditions — wind speed, ambient temperature, barometric pressure and air density from the plant's own monitoring system — adjusted for the electrical losses that would have been incurred in delivering the energy to the point of delivery. For solar the analogue is measured plane-of-array irradiance applied against the guaranteed performance ratio.

Three details determine whether the calculation is fair, and all three are contractual rather than technical:

Whose data. The project's own met stations and monitoring system, or an independent source. A dispute about deemed energy is almost always a dispute about the input data.

Which losses are netted. Deemed energy should be net of the losses the plant would genuinely have suffered — availability, soiling, degradation — not gross of them. A gross figure overstates the claim and invites challenge.

What happens when the data is missing. Curtailment sometimes coincides with the outage that caused it. A fallback method, typically a reference period or a neighbouring plant, prevents the calculation failing exactly when it is needed.

Why Does the Tax Credit Need Its Own Provision?

Because an energy make-whole and a tax-credit make-whole are different contractual promises.

Section 45Y calculates the clean-electricity production credit from qualifying electricity produced and sold, consumed or stored under the statutory rules. A deemed-generation invoice can restore PPA cash without creating the physical production on which the production credit is based.

But the buyer does not automatically owe the lost credit.

One SEC-filed renewable PPA says this expressly: the buyer pays the seller the amounts it would have received for compensable Curtailment Energy, but is not obligated to pay additional amounts for foregone tax benefits.

That is the key diligence distinction:

Energy make-whole?                 yes / no
REC / attribute make-whole?        yes / no
Production-credit make-whole?      yes / no
Tax-effect / gross-up?             formula-specific

If a PPA expressly compensates lost production credits, the tax effect of that compensation should be modelled under the actual clause and tax analysis. Do not assume a universal gross-up formula. If the PPA excludes foregone tax benefits, the credit loss remains with the seller even when the energy price itself is made whole.

For an investment-credit structure, curtailment does not create a per-MWh credit loss in the same way, although it still reduces operating cash flow and can affect other contractual or tax assumptions.

What Is the Uncompensated Curtailment Allowance?

Some PPAs give the buyer a free band before deemed-generation payments begin.

If the agreement has one, model it directly.

Buyer-instructed curtailed MWh
- free allowance
= compensable deemed MWh

A generous allowance can absorb most of the volume that would otherwise be paid. The allowance therefore belongs on the commercial-summary page beside the deemed-generation price, not in a footnote.

How Does a Production Credit Affect the Self-Curtailment Decision?

A per-MWh production credit changes the economic threshold, but the threshold belongs in the model rather than in a generic rule.

On a simplified assumption that the project receives a production credit of C per MWh, earns a market price P, and the energy revenue is taxed at rate t, a first-order after-tax dispatch condition is:

P × (1 − t) + C > 0

or:

P > −C / (1 − t)

Using the article's illustrative $27.50/MWh credit and 21% tax rate produces a threshold of approximately -$34.81/MWh.

That is an illustrative economic threshold, not a universal operating instruction. Actual dispatch also depends on the applicable credit regime and vintage, PPA settlement, negative-price provisions, REC value, imbalance costs, operating constraints and the project's ability to use or monetize the credit.

An investment-credit project does not have the same marginal per-MWh tax incentive, but it can still have contractual or market reasons to continue or stop production at negative prices. The financing structure therefore changes one input to dispatch economics; it does not determine dispatch by itself.

How Do Curtailment Hours Interact With the Performance Guarantees?

They are excluded from both, which is correct in isolation and leaves a hole when read together.

Post 4 covered the performance ratio guarantee, which is weather-corrected and adjusted for non-production periods so the contractor is not penalised for an outage it did not cause. Post 5 covered availability, where curtailment sits alongside force majeure and scheduled maintenance in the standard exclusions, because the operator did not cause it either.

Both exclusions are right. Neither the EPC contractor nor the O&M provider should be liable for a grid constraint. But the effect is that curtailed hours are excluded from the PR guarantee, excluded from the availability guarantee, and — where they arise from congestion — uncompensated under the PPA.

Three contracts, three exclusions, one exposure. It is the series pattern in its purest form: every document is correct, and the hours fall through all of them.

How Do You Model Curtailment in Excel?

Split the volume by cause, apply the allowance before the compensation, and value the tax credit separately from the energy. Most models do none of the three.

The inputs

Assumptions, labelled as such — the PTC rate in particular should be set to the current inflation-adjusted value for the project's vintage:

P50 annual energy                     250,000 MWh
PPA price                             $45.00 /MWh
Assumed PTC value                     $27.50 /MWh   (assumption — verify vintage)
Marginal tax rate                     21%
Total curtailment                     6.0% of P50
  of which buyer economic             1.5%
  of which congestion / system        4.5%
Uncompensated allowance               3.0% of expected generation

Volumes by cause

Total_Curtailed      = 250,000 × 6.0%                      = 15,000 MWh
Buyer_Economic       = 250,000 × 1.5%                      =  3,750 MWh
Seller_Borne         = 250,000 × 4.5%                      = 11,250 MWh

The allowance test

Free_Allowance       = 250,000 × 3.0%                      =  7,500 MWh
Compensable          = MAX(0, Buyer_Economic − Free_Allowance)
                     = MAX(0, 3,750 − 7,500)               =      0 MWh

Zero. The buyer's entire economic curtailment sits inside the illustrative free allowance, so the deemed-generation provision pays nothing in this scenario regardless of whether the PPA also contains a separate production-credit make-whole.

What it costs

Energy_Loss          = 15,000 × 45                         = $675,000
PTC_Loss             = 15,000 × 27.50                      = $412,500
Total_Loss           = 675,000 + 412,500                   = $1,087,500

Recovered            = $0

The tax credit is 38% of the total loss. A model that tracks only the energy line understates curtailment cost by more than a third on a PTC project.

The sensitivity that matters

Run the free allowance down the rows and buyer economic curtailment across the columns, with recovery in the cells. The shape is a step function, not a gradient: recovery is zero everywhere the allowance exceeds the buyer's curtailment, then rises one-for-one beyond it. Negotiating the allowance from 3% to 1% is worth nothing in a year like the one above and a great deal in a year when the buyer curtails heavily.

Allowance_At_1%      = 250,000 × 1.0%                      =  2,500 MWh
Compensable          = MAX(0, 3,750 − 2,500)               =  1,250 MWh
Recovery             = 1,250 × (45 + 27.50/(1 − 0.21))     = $99,557

The final line assumes, purely for illustration, that the PPA promises an after-tax equivalent for the lost production credit. Do not use that formula unless the executed contract and tax analysis support it. A PPA can instead compensate only energy, compensate a fixed tax-credit amount without gross-up, or exclude foregone tax benefits entirely.

ℹ️ Note: Model congestion curtailment as correlated with nodal basis rather than as an independent variable. Both are driven by the same constraint, so a downside case that widens basis should also raise curtailment, and most models move only one.

To run the full version — curtailment split by cause from interconnection study data, the allowance applied on the contract's own measurement basis, and any production-credit compensation modelled exactly as drafted — prompt Dezzmond with your PPA curtailment provisions and nodal history.

What Do Lenders Actually Check?

Lenders read curtailment as a revenue haircut with a legal overlay, and they want the haircut sized from data rather than from the contract.

• What share of curtailment is compensable at all? Map every defined curtailment cause into compensable and non-compensable buckets under the executed PPA.
• How large is the free allowance relative to expected buyer curtailment? If it exceeds it, the compensation regime is inert.
• Is offer-strategy curtailment deemed economic? Otherwise the buyer can curtail by bidding.
• Does the PPA compensate foregone production credits at all? If yes, extract the exact formula and tax-effect language; if no, the tax-credit loss remains seller risk.
• How is deemed energy calculated, and whose data governs? Including the fallback when monitoring data is unavailable.
• What does nodal congestion history actually show? Study data and historical curtailment, not a modelled assumption of zero.
• How do PR and availability guarantees treat curtailed hours? Many structures exclude events outside the contractor or operator's control, but the actual guarantee definitions must be checked rather than assumed.

Frequently Asked Questions

Does the buyer have to pay for curtailed power?

Only to the extent the PPA makes the event compensable. Public PPAs show buyer-instructed curtailment being paid, but they also show expressly defined Non-Compensable Curtailments and even explicit exclusions for foregone tax benefits. Cause, definition and formula control.

What is deemed generation?

An estimate of the energy the plant would have produced had it not been curtailed, used as the settlement quantity. For wind it is typically derived from the turbine power curve and measured met conditions, net of the losses that would have occurred anyway.

Why can curtailment cost more than the PPA price?

A production-credit project can lose both energy revenue and the credit associated with qualifying output. A deemed-energy payment restores only the contractual amounts the PPA says it restores; it does not automatically replace a lost tax credit.

Can a buyer curtail without paying by bidding high?

In an organised market, yes, unless the PPA prevents it. Better drafting treats curtailment caused by the offtaker's bidding strategy as economic and therefore compensated.

How does the uncompensated allowance work?

It is a volume of curtailment the buyer may instruct before any payment obligation arises. Where the allowance exceeds the buyer's actual economic curtailment, the deemed generation provision never pays.

Closing: Correct Allocation, Uncovered Exposure

Curtailment is allocated sensibly. The buyer pays for what it chose; the seller wears what the grid did. Nobody drafted it badly, and no counterparty is behaving unreasonably by declining to pay for power the transmission system could not carry.

The consequence is still that the dominant category is uncompensated, that the compensated category is reduced by a free allowance that frequently eliminates it, that the tax credit sits in a separate provision which is sometimes simply absent, and that the same hours are excluded from the two performance guarantees that might otherwise have caught them.

That is now the tenth consecutive instance of the same structure. The contracts are individually coherent. The exposure lives in the interaction — here between a PPA that allocates by control, two performance guarantees that exclude by causation, and a tax credit that is indifferent to all of it and simply asks whether electrons moved.

One post remains in the contracts series: termination values and buyout schedules — what the number is built from, and who it is really designed to protect.

Related reading: Curtailment types and market risk · PPA credit support

Sources: SEC-filed Solar Energy PPA — buyer-curtailed energy payment · SEC-filed renewable PPA — Curtailment Energy net of Non-Compensable Curtailments and express exclusion of foregone tax benefits · 26 U.S.C. §45Y — U.S. House Office of the Law Revision Counsel · Dezzmond analysis; worked-example assumptions are illustrative.