“Constraint Benefits” Re-defined: PPA Payments for Credited Energy Treated as Rent-Linked Income under Scottish Windfarm Leases

1. Introduction

In Glenfiddich Wind Ltd v Dorenell Windfarm Ltd ([2025] CSOH 62) Lord Sandison delivered a lengthy Outer House opinion resolving how “constraint” revenues arising under the Balancing & Settlement Code (BSC) interact with a sophisticated rent-sharing lease for a commercial windfarm. The pursuer/landlord (Glenfiddich) claimed substantial under-payments of rent from the defender/tenant (Dorenell) for the 2022-2024 rent years, asserting that:

PPA payments received when turbines were curtailed ought to be included as “Constraint Benefits” (or alternatively “Loss of Revenue Claims”) within the defined concept of Gross Income—the trigger point for a top-up rent formula; and
Warranty payments should be brought into account in the year to which they relate, not the year of cash receipt.

The decision creates an important precedent on the meaning of “relief … received from the Transmission System Operator” in renewable-energy leases and on the valuation of such benefits.

2. Summary of the Judgment

Lord Sandison found largely for the landlord:

PPA payments referable to Period BM Unit Balancing Services Volume (credited energy) are “Constraint Benefits”, even though energy is credited to the offtaker’s account (EDFE) because Dorenell executed an MVRN. The benefit still “accrues” to the tenant and flows “from” the TSO’s constraint instruction.
The value to be included in Gross Income is the net amount actually received by Dorenell under the PPA (i.e. after EDFE’s 6.5 % management fee). Using the System Imbalance Price was rejected.
Warranty receipts constitute “Loss of Revenue Claims” but are to be allocated on an accrual basis (rent year of revenue loss), not on cash-receipt basis.
Parties were ordered to compute the precise sums payable in light of these rulings.

3. Analysis

3.1 Precedents Cited

Lord Sandison surveyed key Scottish and UK contract-construction authorities:

Ashtead Plant Hire v Granton Central Developments – emphasised contextual and purposive interpretation, warning against “brutal literalism”.
Rainy Sky SA v Kookmin Bank – where wording admits more than one meaning, select that which accords with commercial common sense.
Aberdeen CC v Stewart Milne Group – illustrates reading contract against commercial purpose; cited to legitimise including diverted value streams.
Wood v Capita, Arnold v Britton, Investors Compensation Scheme – iterative, holistic construction.
Defender relied on Lagan Construction, FES Ltd, Scanmudring to argue for strict textualism, but the court distinguished them.

3.2 Legal Reasoning

Context & Purpose – The lease’s evident commercial purpose was to ensure landlord shared in all monetary benefits derived from the windfarm, whether generated during normal operation or under constraint.
Meaning of “Constraint Benefit”
- Definition required a “relief, payment, reduced charge or avoided charge … received by the Tenant from the Transmission System Operator”.
- Though credited energy never physically “belongs” to the TSO, Lord Sandison adopted a purposive reading: the benefit originates in the TSO’s instruction and BSC mechanisms it triggers; that suffices for “from”.
- MVRN diversion to EDFE cannot defeat landlord’s entitlement; otherwise tenant could self-contrive avoidance.
Receipt & Valuation – Income recognised is what actually lands with the tenant; net PPA proceeds therefore quantify the benefit. A System Imbalance Price proxy is inappropriate because it measures system cost, not tenant gain.
Warranty Timing – Accrual basis aligns with accounting norms and avoids distorted rent triggers; parties provided clauses (3.3.6 proviso) to true-up once amounts are known.

3.3 Impact

The ruling will reverberate across UK renewable leasing and PPA structuring:

Lease Drafting – Drafters must now clarify whether PPA receipts tied to constraint volumes are included or excluded from rent or royalty calculations. Silence will likely be construed against the generator.
PPA & MVRN Strategy – Moving credited energy to an affiliate offtaker via MVRN will not shield the generator from rentalisation obligations where lease wording mirrors Glenfiddich.
Valuation Methodology – Net receipts approach endorsed; parties should expect scrutiny of management-fee deductions, especially if above market norms.
Broader Energy-Market Jurisprudence – Lord Sandison’s criticism of “expert arms races” may temper future resort to extensive technical evidence where construction issues turn on law, not disputed fact.

4. Complex Concepts Simplified

Balancing & Settlement Code (BSC): The rulebook ensuring electricity supply equals demand every half-hour. When imbalance arises, financial and energy adjustments are made.
Constraint / Curtailment: The Transmission System Operator (TSO) instructs a generator to reduce output to maintain grid stability. Generators are compensated through “bids”.
Period BM Unit Balancing Services Volume: A notional quantity of electricity allocated to the generator (or its offtaker) to offset lost generation and preserve trading positions.
MVRN (Metered Volume Reallocation Notice): A bilateral instruction redirecting credited energy volumes from the generator’s account to an offtaker’s trading account.
PPA Management Fee: Charge levied by the offtaker for handling imbalance risk, market access, and settlement services; deducted from sales proceeds.
Accrual vs Cash Accounting: Accrual records income/expense when earned/incurred; cash accounting waits for actual payment or receipt.

5. Conclusion

Glenfiddich clarifies that, where a renewable-energy lease links rent to “constraint benefits”, courts will adopt a purposive, commercial approach: any monetary advantage ultimately flowing to the tenant as a direct consequence of the TSO’s curtailment instruction—however circuitous the settlement mechanics—falls within the landlord’s sharing clause, unless the contract expressly says otherwise. The decision underscores the need for meticulous drafting and transparent valuation mechanisms in energy leases and PPAs, and signals judicial disapproval of linguistic formalism that would allow generators to pocket constraint-related windfalls to the detriment of landlords.