Deemed Generation: Who Pays for Power That Was Never Delivered

Curtailment is the one operating risk that produces a perfect plant and no revenue. The equipment is available, the resource is there, the offtake is signed — and the electricity is not taken. Whether anyone pays for it depends entirely on why, and the categories are not allocated the way most sponsors assume.

The buyer pays when it chooses not to take power. It generally does not pay when the grid cannot move it. In a congested market the second is far more common than the first, which means the dominant curtailment risk sits with the seller, uncompensated, on top of an allowance of free curtailment the buyer negotiated separately.

This is the tenth post in the series and the second of the three closing singles. 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?

Six, and they are distinguished by cause rather than by effect. LevelTen Energy sets them out, and Stoel Rives' Law of Wind guide supplies the allocation.

Type	Cause	Typically borne by
System / reliability	Grid operator shuts generators for a system emergency	Seller
Congestion	Transmission overloaded; grid operator backs down local generation	Seller
Economic (buyer)	Buyer curtails "for convenience" during low-price periods	Buyer — compensated
Economic (market)	Offer priced above the clearing price, so dispatch declines it	Seller
Maintenance	Project disconnects for scheduled or unscheduled work	Seller
Environmental	Operations curtailed for temporary environmental reasons	Seller

One row is compensated. The rest are the seller's, and the allocation is not arbitrary — it broadly follows control. The buyer pays when the buyer decided; the seller wears what the grid or the plant did.

The difficulty is that "broadly follows control" describes the logic rather than the outcome. Congestion is not within the seller's control in any meaningful sense. The project did not build the transmission system, cannot relieve the constraint, and in most markets cannot even predict it reliably at the time the PPA is priced.

Which Curtailment Does the Buyer Actually Pay For?

The kind it instructs. Stoel Rives describes the provision: "the PPA may permit the buyer to curtail for convenience or what is often referred to as 'economic curtailment'," and where it does, "the PPA usually requires the buyer to pay the purchase price for the curtailed generation and the after-tax value of the production tax credits that the seller would have earned had the buyer not curtailed the plant's output."

Two components. The purchase price and the tax credit. Hold that thought — the second one is the section after next.

There is a useful extension in organised markets. Stoel Rives notes that "curtailments caused by the offtaker's bidding strategies are deemed to be economic, and therefore compensated, curtailments." That closes an obvious gap: without it, a buyer could achieve the effect of an instructed curtailment simply by bidding the output above the clearing price and letting the market decline it. Drafting that treats offer-strategy curtailment as economic prevents the buyer from curtailing by proxy.

Worth checking whether your PPA contains that extension. Its absence is not always deliberate.

Why Is Congestion Curtailment Usually the Seller's?

Because it happens beyond the point of delivery, and the point of delivery is where the buyer's obligation begins. Stoel Rives is direct: "facility curtailments caused by transmission congestion or conditions beyond the point of delivery are often allocated to the seller."

That allocation is internally consistent and commercially uncomfortable. The buyer contracted to take power at a node. If the grid cannot deliver power to that node, the buyer has not refused anything — the product never arrived.

For a financed project it means the largest curtailment exposure is structurally uncompensated. And it is the same exposure as basis risk, arriving through a different mechanism: congestion that widens the basis spread and congestion that curtails output are the same physical phenomenon measured two ways. A project in a constrained pocket faces both simultaneously, and a PPA settled at a hub rather than at the node leaves the sponsor carrying each of them.

The practical implication is about diligence rather than drafting. Curtailment allocation cannot be negotiated away — no buyer will accept congestion risk on a node it does not control — so the exposure has to be sized before signature and priced into the bid, using the interconnection studies and historical nodal congestion data rather than an assumption of zero.

ℹ️ Note: Model congestion curtailment and nodal basis together, from the same congestion data. Treating them as independent line items double-counts the good years and understates the correlation in the bad ones.

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 the production tax credit is earned on electricity actually produced and sold, not on revenue received. A deemed generation payment restores the cash. It does not create a kilowatt-hour, and therefore it does not create a credit.

This is the gap that makes curtailment more expensive than the price line suggests. The PTC is quantified per unit of output, so the credit earned is directly tied to what the project delivered. A curtailed hour produces no electricity, earns no credit, and no amount of contractual compensation for the energy changes that.

Which is exactly why well-drafted PPAs address it separately, and why Stoel Rives' formulation has two limbs: the purchase price for the curtailed generation and the after-tax value of the production tax credits the seller would have earned. The mechanism is usually a defined "PTC Amount" expressed on a dollar-per-MWh basis, calculated by reference to the deemed delivered energy — a gross-up sitting alongside the energy payment rather than inside it.

Two things follow that are easy to miss.

The gross-up is after-tax. The seller lost a tax credit, which is worth its face value to a taxpayer who could use it. The compensating payment is taxable income. Paying the face value of the credit therefore under-compensates, and the provision has to gross up accordingly — which is why the drafting says "after-tax value" rather than simply "value."

Its absence is silent. A PPA that pays deemed energy without a PTC provision looks complete. The seller receives a cheque, the invoice reconciles, and the shortfall appears nowhere except in a tax equity model that was built assuming a credit the project never earned. For a PTC-bearing project the credit can represent a substantial share of the all-in value of a megawatt-hour, so the omission is material rather than technical.

The same logic does not apply to an ITC project, where the credit is based on investment rather than output — one of the few places in this series where the structure chosen upstream genuinely changes the downstream exposure.

What Is the Uncompensated Curtailment Allowance?

A band of free curtailment the buyer negotiates before any payment obligation begins. Stoel Rives notes it plainly: "buyers often negotiate the right to a certain amount of uncompensated curtailment."

It is usually expressed as a percentage of contract capacity or expected annual generation, and it is the single provision most capable of neutralising the compensation regime entirely. If the allowance is larger than the volume of buyer-instructed curtailment the project actually experiences, the compensated category never pays out — the buyer curtails within its free band every year and the deemed generation clause is decorative.

That is not a hypothetical outcome. Economic curtailment by the buyer is typically a small share of total curtailment, while free allowances are negotiated as round numbers. The arithmetic below shows how easily one covers the other.

Why Does a PTC Project Keep Generating at Negative Prices?

Because the credit is earned on output, so a project will accept a negative price right up to the point where the loss on the energy exceeds the after-tax value of the credit. That threshold is further below zero than most people expect.

Resources for the Future gives the condition directly: "projects find it profitable to generate power even when electricity prices are negative, if the price is greater than (-PTC)/((1-tax rate))."

The arithmetic follows from how the two flows are taxed. Energy revenue is taxable, so a price of m is worth m × (1 − t) after tax. The credit offsets tax directly, so it is worth its face value. Generation is rational while:

m × (1 − t) + PTC > 0
m > −PTC / (1 − t)

On the assumptions used above — a $27.50/MWh credit and a 21% marginal rate — that threshold is:

Threshold = −27.50 / (1 − 0.21)                       = −$34.81 /MWh

A PTC project will rationally keep producing until the nodal price falls below roughly minus thirty-five dollars. An ITC project will not, because its credit was earned on investment and generating into a negative price is simply a loss. RFF observes exactly that asymmetry: "negative pricing for wind power has been prevalent, whereas solar projects under the ITC have been more likely to curtail generation when electricity prices fall markedly below zero," and cites a study finding negative prices "likely explain one-third of the generation difference between projects with production incentives versus investment incentives."

Three consequences for a curtailment model.

Your own self-curtailment threshold is a calculation, not a policy. If the project is merchant or has a merchant tail, the price at which it should stop generating is derivable from its own credit position and tax rate, and it is not zero.

Your neighbours set your nodal price. In a pocket with substantial PTC-bearing wind, surrounding generators keep producing well below zero, which deepens and lengthens negative pricing at the node you settle against. That is a curtailment and basis input, and it is driven by other people's tax structures rather than by anything in your contract.

The structure chosen upstream changes the operating decision. This is one of the few places in the series where the financing choice reaches all the way down into dispatch. An ITC project and a PTC project on the same site, facing the same prices, should behave differently — and a model that applies one curtailment assumption to both is wrong for one of them.

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 its free allowance, so the deemed generation provision — carefully drafted, with a PTC gross-up and an agreed calculation method — pays nothing at all this year.

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

Note the gross-up in that last line: the PTC component is divided by one minus the tax rate, because the compensating payment is itself taxable. Paying $27.50 of face value leaves the seller with $21.73 after tax against a credit that was worth $27.50.

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 the PTC gross-up computed at the project's marginal rate — 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? Buyer-instructed only, in most PPAs.
• 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.
• Is there a PTC gross-up, and is it after-tax? On a PTC project this is a material share of the loss.
• 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.
• Are curtailed hours excluded from the PR and availability guarantees? They usually are, which is why the PPA is the only place the exposure can be recovered.

Frequently Asked Questions

Does the buyer have to pay for curtailed power?

Only where it instructed the curtailment. Buyer economic curtailment is typically compensated at the purchase price plus the after-tax value of lost production tax credits. Congestion and system curtailment are usually allocated to the seller.

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 does curtailment cost more than the PPA price?

Because production tax credits are earned on electricity actually produced. A curtailed hour earns no credit, and a deemed energy payment restores cash without creating output — which is why the credit needs its own gross-up provision.

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.

Sources: Stoel Rives — The Law of Wind: PPAs and Environmental Attributes · LevelTen Energy — How to Manage Curtailment in a VPPA · Stoel Rives — The Law of Solar: Utility-Scale PPAs · Resources for the Future — Beyond Subsidy Levels: Tax Credit Choice for Solar and Wind