Category: Mechanics

Off-taker Covenant: How Your Credit Rating Affects Your PPA Tariff

Why a £20m revenue business pays a different PPA tariff to a £200m business — and how to negotiate when your covenant is the constraint.

How off-taker covenant affects PPA pricing

PPA providers fund their SPV with senior debt (60-70% of capex) + equity. The debt provider underwrites the off-taker's 20+ year payment stream. The stronger your covenant, the cheaper their debt, the lower the tariff they can offer you.

The five covenant tiers

Tier	Examples	Tariff impact	Term flexibility
Investment-grade rated	FTSE 100/250, NHS Trusts	Headline tariff	25-year flexible
Strong unrated	Top-50 private cos with audited accounts	+0.5-1 p/kWh	20-year typical
SME with parental guarantee	Mid-size with strong parent	+1-2 p/kWh	15-20 year
SME no guarantee	Most £5-20m revenue	+2-4 p/kWh or shorter term	10-15 year
Sub-investment-grade	Loss-making, distressed, single-customer concentration	Usually no deal	—

How to strengthen your covenant

• Group guarantee from stronger parent — most common workaround
• Step-up tariff (lower year 1, rising — provider takes more risk later)
• Letter of credit or cash deposit (3-6 months expected payments)
• Shorter contract term to reduce provider risk window
• Investment-grade joint guarantor (e.g., council guarantor on SME deal)

What providers actually look at

Beyond the credit rating, providers underwrite:

• 3-year revenue trajectory (declining = red flag)
• Customer concentration (top 3 customers > 60% revenue = risk)
• Industry forward exposure (energy-intensive = strength if you NEED solar; commodity-priced = risk)
• Site lease/freehold tenure (must exceed PPA term + buffer)
• Management stability + governance