Understanding Power Purchase Agreements

 

Understanding Power Purchase Agreements

 

Understanding Power Purchase Agreements – Version 1.3 Published Under the Creative Commons Attribution-Noncomm Attributio n-Noncommercial-Share ercial-Share Alike 4.0 International Internatio nal License (CC BY NO SA) PDF and EPUB Editions Available Available Here: http://go.usa.gov/FBzH Please contact Mohamed Badissy (CLDP) at [email protected] with any questions regarding this publication

 

Understanding Power 

 

Purchase Agreements

 

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FOREWORD

Foreword

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INTRODUCTION

Introduction

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THE PPA IN CONTEXT

Power Generation Markets

14 11

The Power Purchase Agreement (PPA)

24 23

Financing of Power Projects

35 34

Environmental & Social Requirements

43

Summary of Key Points

46

FINANCIAL PROVISIONS

Introduction

49

Tariff Structures Procurement of Electricity

50 64 63

Invoicing and Payments

72 70

Credit Support for Offtaker Obligations

73 75

Credit Support for the Project Company's Obligations

79 82

Tax Exemptions

84 87

Summary of Key Points

85 88

 

RISK ALLOCATION AND MITIGATION

Introduction

91 88

Development and Construction Phase Risks

89 93

Operational Phase Risks Other Risks

104 100

Force Majeure

123 127

Insurance

127 131

Summary of Key Points

129 133

113 117

OTHER PPA PROVISIONS

Introduction

136 132

Resolving Disputes

137 133

Local Content

142 144139

Confidentiality

140 145

Boilerplate Provisions

141 146

Summary of Key Points

143 149

DEFAULT AND TERMINATION

Introduction

151 145

Buyer Default

152 146

Seller Default

154 148

Post-Termination Obligations

156 150

Non-default Events

162 156

Lender Rights

163 157

Summary of Key Points

163 168

 

APPENDIX

Glossary

171 166

Acronyms

183 178

Other Resources

187 182

 

Foreword   the engine of opportunity  nity in the modern world. It allows Electricity t  ricity dri ves  ers the innovation in our factories.  tories. our children to study by light. It pow ers From telecommuni to transportation, power is essential to virtually    cations          pect of our increasingly  ingly dynamic and interconnected world. As a every aspect  sult, investment  ment in power infrastructure must be a part of any strategy   egy  result,   for economic de velopment. This is true for both broad economic growth  tiatives in emerging  ing countries and targeted rural growth initiatives  tiatives in initiatives   de veloped countries. The transformational  formational nature of power projects does, how ever,  ever, come with risks. Given that power projects are most essential  sential where there is a power shortage  age in the market, these projects often represent  sent a pioneering  oneering level of          invest and place financial complexity in these markets. As acere haspre be- come ment common to adopt a durable agree  ment that ment  msult, ments entsitthe dictability and durability that is needed for any long term business  ness venture. This agreement  ment is called the Power Purchase Agreement  ment (PPA) and has helped to drive the growth and de velopment   of independent  pendent power pro jects around the the world. This handbook is intended to provide an overview of PPAs and the obliga ations, risks and remedies  dies that are found within them. Our group of au thors, all whom contributed their time on a pro-bono basis, includes contributors  tors from governments, de velopment   banks, pri vate   banks and leading international law firms. Our hope is that by providing perspectives from all sides of the PPA negoti  gotiation  ation process, we can present  sent the reader with a balanced understanding of the challenges involved in PPAs and an insight into the practi  tical  cal reality  ality of overcoming these challenges when ne gotiat  ating  ing these complex agreements.  ments. More than anything, we want to communi  nicate  cate to the reader that the key to a success ful  ful PPA is to abandon the assumption  sumption of an adversarial process and to adopt instead a strategy  egy of cooperation and coordination.  nation. It is only through this balanced approach that the risks can be mit igated  gated and the rewards  wards realised  alised for all parties involved.   7

 

FOREWORD

The  handbook was produced using the Book Sprint (http://www. booksprints.net/) method, which allows for the drafting,  ing, editing  ing and publishing  ing of a complete product in just five days. Our journey began with a spirited discourse  course and quickly progressed to a furi  rious  ous pace of writing  ing with occasional  casional interruptions for the introduction of brilliant ideas and crit ical  cal insights. There was a surprising i  ng amount of consensus on some topics and an unexpected level of debate  bate on others.  ers. The outcome  come is a product that re flects this teamwork rather than the personal opinions of the authors  thors or the institu  tutions  tions that they represent.  sent. We would like to thank our Book Sprint facilitators Faith Bosworth and Laia Ros Gasch for their patient guidance and unwavering leadership. We would also like to thank the offsite Book Sprint team, including Henrik van Leeuwen (illustrator), Raewyn Whyte (proofreader) and Juan Carlos Gutiérrez Barquero and Julien Taquet (Technical Support). We are especially thankful for the strategic planners that helped conceive this program: René Post (Book Sprints), Toyin Ojo (African Legal Support Facility) and Mohammed Loraoui (Commercial Law Development Program). We would also like to recognise the funding and support of the United States Agency for International Development and the African Legal Support Facility. This handbook is intended to reflect  flect the vibrant  brant nature of the Book Sprint process and serve not simply as a ref erence  erence but also as a jumping-off point for further discus  cussion  sion and scholarship. The handbook is issued  sued under the Creative  ative Commons Attri  tribu  bution-NonCommercial-Share  tion-NonCommercial-ShareAlike  Alike 4.0 International License c  ense (CC BY NO SA) which allows anyone to copy, excerpt, re -  work, translate  late and re-use the text for any non-commercial purpose with out seeking permission  sion from the authors,  thors, so long as the result  sulting  ing work is also issued  sued under a Creative  ative Commons License.  cense. The handbook is available in electronic form and printed form (English  lish and French). It can be used as an online interactive resource.  source. Many of the contributing  ing authors  thors are also committed  ted to working within their institu  tutions  tions to adapt this handbook for use as the basis for training courses and techni  nical  cal assis  sistance  tance initiatives.  tiatives.

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FOREWORD

Bringing  ing electricity to underserved communi  nities  ties is a rare example of a uni  versally-held ambition  tion in a world filled with competing  ing de velopment   pri  orities.  ties. Governments, pri vate   companies, pri vate   banks and de velopment   institu  tutions  tions are all working tirelessly  lessly towards the goal of electrifi  fication.  cation. If  this handbook can in any way move us towards the shared goal of greater energy access,  cess, then we will consider it an unqualified  fied success. Sincerely, The Con tributing  tributing Authors 

 

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FOREWORD

Mohamed Badissy Attorney Advisor (International) U.S. Department of Commerce United States

Mahib Cisse Chief Investment Officer  Chief  African Development Bank  Cote D'Ivoire

Patrick M. Dougherty

Alex Evans

Senior Counsel  The World Bank  The United States

Assistant General Counsel Overseas Private Investment Corporation United States

Nnaemeka Ewelukwa General Counsel and Company Secretary Nigerian Bulk Electricity Trading PLC  Nigeria

Jay Govender Director – Projects and Infrastructure Cliffe Dekker Hofmeyr  Inc.  Inc. South Africa

Ryan T. Ketchum Partner Hunton & Williams LLP United Kingdom

Allen B. Leuta (formerly) Head - Legal: Africa Standard Bank  South Africa

Anastas P. Mbawala Director of Electricity Energy and Water Utilities Regulatory   Energy  Authority  Tanzania

Eluma Obibuaku Vice President - Power  African Finance Corporation Corporation Nigeria

Michael Tam  Partner Partner Berwin Leighton Paisner LLP Hong Kong

Tim Scales Partner  Allen & Overy LLP United Kingdom/France

Amir Shaikh

Toyin Ojo

Chief Legal Officer Counsel  African Legal Support Facility  Côte D'Ivoire

Senior Legal Counsel  African Legal Support Facility  Cote D'Ivoire

 

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Introduction Electricity  tricity is fundamental to economic de velopment   and enhancing  ing social welfare. Businesses,  nesses, industries,  tries, homes, schools, hospi  pitals,  tals, and other crit ical  cal infrastructure all require electricity to function ef fectively. In many emerg-        ing markets, there is a signif   nif  icant  cant gap between  tween the demand  mand for and supply  of electricity. A huge increase in power generation capac ity ity is needed to bridge this gap. This will re quire quire invest ments ments in the billions of dollars. National governments are increas ingly ingly recog nis nis ing ing that part nering nering with pri  vate sector investors is crit i cal cal for sat is is fying fying this capi tal tal re quire quire ment. ment. The Power Purchase Agreement,  ment, or PPA, is the central contract for any inde pendent pendent power generation project, espe  pecially  cially in emerging  ing markets. This handbook explains the context for the PPA and sets out the key considera-

 

 

   

 

 

 

tions foradraft ingcross-section and negotiating the PPA. It repre collec tive wis dom of broad of prac  titioners ti  tioners whosents havethe been engaged inpower project de velopment   around the world for decades. This handbook is intended to provide governments, utili ties,  ties, investors and other interested stakeholders h   olders with a guide to understand: The power market and contractual framework of a PPA that operates in that market, The considerations involved in securing financing for a power project, The tariff structure, purchase obligations and other key financial provisions of a PPA, Credit support and security issues for both the seller and buyer under the PPA, The risks associated with an independent power project and how such risks are typically allocated and mitigated under the PPA, and Other key provisions in the PPA, with a particular focus on provisions related to default and termination.

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INTRODUCTION

At  its heart, the goal of this endeavor is to provide the reader with an insight not only into those issues that matter  ter most to them, but also a glimpse into the perspectives and moti vations   of other stake holders. holders. Often, the most ef  fective fective means of reach ing ing agree ment ment is putting yourself in the other party's shoes. Such insight can make reaching agree ment ment a far simpler task.  

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The PPA in Context Power Generation Markets The Power Purchase Agreement Financing of Power Projects Environmental & Social Requirements Summary of Key Points

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THE PPA IN CONTEXT

Power Generation Markets This chapter provides an overview of how our homes and businesses  nesses are supplied with the electricity generated by power plants. It highlights the dif ferent types of power generation facilities and explains how electricity is     bought and sold. It also explains the dif ferent  ferent players who are involved in the power generation market and the lifecycle  cycle of a power plant. The diagram  agram below highlights the dif ferent  ferent segments  ments of the power market.  Those segments  ments are: (1) power generation, (2) power transmis  mission,  sion, and (3) power distri  tribu  bution.  tion. Power generation generation is the process of generat generating  ing electri cal energy from various  ous sources of primary  mary energy. Transmis  mission  sion is the movement  ment of this energy at high voltage  age over long distances  tances from produc ers to distri  tribu  bution  tion companies. Distribu  bution  tion companies then transport  port the             energy distribution networks and finally deliver the energy to homes and busiover  nesses. nesses.

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POWER GENERATION MARKETS

Types of Power Generation Electricity may be generated by renew   new able  able resources  sources (such as wind, solar, hydroelectric,  tric, biomass, and geot  othermal  hermal resources)  sources) or from non-renew   new able  able         re sources (suchelectricity as petroleum, ural gas, clear). Power plants that generate fromnat non-re new  able fuelsnu(other than nu clear  new coal,  able and  clear power plants) are generally referred  ferred to as thermal power plants.

Renewable Sources Wind Solar Hydro Biomass Geothermal

Non-renewable Sources Thermal (Carbon-Ba (Carbon-Based) sed) Oil/Petroleum Gas Coal Nuclear

For the purposes of this handbook, many of the is sues  sues discussed  cussed will apply  to power plants that generate electricity from both renew   new able  able and non-re new able  able resources.  sources. When possi  sible,  ble, the handbook will note dif ferent  ferent considerations that may be required  quired in relation  lation to the fuel type. While nuclear  clear power is also a potential source of power, due to its complexity and the de gree of speciali  cialisation  sation required,  quired, it has not been included within the scope of  this handbook. There are a number of information resources detailing dif ferences in the     technologies generation. These  nologies and types of technologies  nologies  used in power dif ferences  ferences are important. Each technology  nology will have dif ferent  ferent implications  cations for the structure of the PPA and the prices paid. paid . Information about some of  these technologies  nologies can be found in the list of additional  tional resources  sources at the end of this handbook.

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THE PPA IN CONTEXT

Wholesale & Retail Markets There is a distinction  tinction between  tween the bulk power purchase market and the re tail electricity electricity purchase market. Power is purchased in bulk by off tak takers (buyers) thetrans power at or near generation.  This power from is then mit ted trans mis sion linesofand distri  mitproducer  ted through  misthe  sionpoint  tribu  bu tion systems consumers and and other end-users. There may be a  tems to retail  tail consumers number of changes in the "ownership" of the power be fore  fore it reaches retail  tail consumers. How much energy can a power plant produce?

Power generation plants are measured by the number of megawatts ( MW) that they are capable of produc ing.  ing. A megawatt is a unit of measurement  ment equal to 1,000,000 watts. A kilowatt (kW) is equal to 1,000 watts of energy. How is power bought and sold?

A kilowatt hour (kWh)  is equal to one thousand  sand watts of electricity  used continuously  ously for one hour. Similarly,  larly, a megawatt hour (MWh) is equal to one million watts of electricity used continously  nously for one hour. Capacity  ity is purchased and sold in MW and in many cases is paid for regard gardless of whether the capacity  ity is actu  tually  ally used. Energy is purchased and sold in MWh or kWh and is paid for only when consumed. What does this all mean? Here is a brief example: If a power generation plant is rated as having a capac ity ity of 10 megawatts, it can be expected to generate up to 10 megawatts of power at any given given time. If a 10 MW plant is operated operated at full capac ity ity at a steady rate for 1 hour, it will produce 10,000 kWh kWh of electricity. If the tariff is US$0.10 per kWh, the plant can generate power to the value of  US$1,000 for every hour that it operates.

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POWER GENERATION MARKETS

How does the power get from the power plant to the power customers?

Responsi  sponsibility  bility for transmitting  ting the power to, and interconnecting  ing with, the power grid will vary from juris  risdiction  diction to juris  risdiction  diction and power plant to power plant. Who will be the responsi ble party often depends on whether   plant   will the system operate is a  bundled system  tem within which the power  tem or unbundled system.  tem. What's the difference between bundled vs unbundled electricity industry structures?

Depending  pending on the legal and reg ulatory  latory frameworks  works and the nature of the electricity market reforms  forms taking place in a country, there are typically  cally two dif ferent  ferent types of electricity industry  try structures: bundled and unbundled.

  A bundled system comprises one in which the market roles of power purchasing, transmis  mission  sion and distri  tribu  bution  tion are all "bundled" into one entity: the buyer. In a bundled system,  tem, the buyer usually  ally bears responsi  sponsibility  bility for trans mitting  ting the power that is produced and sold by the seller. Similarly,  larly, the buyer in this system  tem will have the obligation  ation to connect the power plant with the power grid by a certain date so that power can be sold when ready.  

An unbundled system  tem is one in which one or more of these roles is not the responsi  sponsibility  bility of the buyer, and is handled by a dif ferent  ferent entity. The extent of this separation is dependent  pendent on the specific  cific electricity reform  form path adopted in a particular   juris   dic   tion.  

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THE PPA IN CONTEXT

Bundled Distribution + Transmission

Generator

Uti tili lity ty

Unbundled Distribution + Transmission

Trans nsmi miss ssio ion n

Dis istr trib ibut utiion

Factory

Consumer

Why is this all rele vant?   It matters  ters because  cause of the number of parties in volved in each sys tem. t  em. The more parties involved in the system, t  em, the more risk has to be appropriately  ately allocated amongst the parties. This will impact on how the project is structured and where the risks may reside.  side. It should be noted that the electricity structure in dif ferent  ferent countries may  not fit neatly into the above-mentioned cat egories.  gories. Depending  pending on the re form path that has been adopted, there are usually  ally dif ferent  ferent stages in the de velopment of a power market, often starting    ing with a single government off  taker, taker, moving towards a greater role for independent  pendent power producers,  ers, investor-owned utili ties ties and other pri vate sector partic i pants. pants. Eventu ally, ally,  

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POWER GENERATION MARKETS

a spot market should de velop.   In a spot market, the project company can sell power directly  rectly at the current market price, without  out a fixed contract. In some juris  risdictions,  dictions, there may be hybrid market arrangements  ments where     produc ers with PPAs may still have the right or obligation to sell to the spot markets.

Roles of the Actors Who are the various  ous people, the actors, involved in the negoti  gotiation  ation of a power purchase agreement,  ment, and what are their primary  mary roles? Primary Actors

Secondary Actors

Offtaker (Buyer) Power Producer (Seller)

Government Regulator Customers / End User Transmission Company Distribution Company Lenders Construction Company Plant Operator Fuel Supplier System Operator

The primary actors are usually an off taker and a power producer. Depend        ing on the legal and reg  ulatory  latory context, some of the secondary actors  tors  may  also be signatories  natories to the PPA.

Primary Actors Power Producer (Seller) The power producer or generator is the owner of the power project and the seller of power. This party is also sometimes  times referred  ferred to as the IPP (in  dependent power producer) or project company. 19

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THE PPA IN CONTEXT

Offtaker (Buyer)

The off taker  taker or power power purchaser is the the buyer of power. This will usu usually   ally  be a utility, which is often state-owned.

Secondary Actors Government

The host country government is often involved in various  ous phases of the negoti  gotiation  ation of the PPA. PPA. The role of the government varies widely, widely, based on each country's legal and reg ulatory  latory framework.  work. The primary  mary government actor involved is usually  ally the ministry of energy  which sets policy for the energy sector of the host country. Other government actors involved may include the ministry of finance,  nance, ministry of planning, investment m t  horities, t  ies,   ent promotion agencies, central bank, revenue authori ministry of environment  ronment or natural  ural resources,  sources, ministry of land, ministry of  archaeology, o   logy, attorney  torney general, and the legis  islature.  lature. Regulator

Electricity sector regulators are usually required to approve any PPA before the offtaker can enter into the agreement. The regulator is responsible for setting or approving tariffs and ensuring that industry standards are complied with across the market. Regulation often involves a delicate balancing act of protecting consumer interest on the one hand, while also ensuring that IPPs are reasonably incentivised to develop power projects in a country. Customers / End-Users

Small voltage  age customers/end-users  tomers/end-users are not directly  rectly involved in the negoti  gotia ation of a PPA because  cause they typically  cally receive  ceive their power through the local distri  tribu  bution  tion network.  work. How ever,  ever, they are certainly af fected  fected by the PPA, as the costs of building and operating  ing the power plant will (or should) ulti mately be passed through to the end-users through the retail  tail tariffs (or, in other words, the price) charged to the end-users.

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High voltage  age customers  tomers may negoti  gotiate  ate a PPA directly  rectly with the seller if they  are taking power directly  rectly from the seller. Transmission Companies

        Trans mis sion companies are re sponsi ble for moving generated  age to the country's  tribu  buthe  tionpower  works. by the seller at high voltage distri tion networks. In a bundled framework,  work, this will generally be the same entity as the off taker.  taker. In an unbundled framework,  work, depending  pending on the nature of unbundlin unbundling, g, as discussed  cussed above, the transmis  mission  sion company may or may not be directly  rectly in volved in the PPA negoti  gotiations.  ations. Distribution Companies

  ution  tion companies are responsi  sponsible  ble for delivering  livering the power to the Distribu b end-user and collecting  ing the tariff. Again, in a bundled bundled framework,  work, the off  taker may also be responsi s  ponsible b t  ribu b t  ion. In an unbundled frame-    le for distri   ution. work, distri  tribu  bution  tion companies may may also purchase power directly  rectly from the seller. Lenders

Independent  pendent power producers  ers are rarely able to finance  nance 100% of the project costs alone. IPPs will usu usually  ally borrow money from lenders to finance  nance power projects. The lenders are are often in the background background of the negoti  gotiations.  ations. If  the PPA is not accept  ceptable  able to the lenders, it may have to be renegoti  gotiated  ated be fore the lenders agree to make their loans. There are several types of lenders. There are commercial commercial banks that are  marily for commercial  mercial returns.  turns. DFIs lend for commercial and lending primarily    eral or bilat  lateral  eral (i.e., they can de velopment impact. DFIs can be multi-lateral have several countries as their members or have just one country as their  nancing for equipment. owner). Export credit agencies often provide financing Fuel Supplier

This is the company that supplies fuel to the power plant.

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THE PPA IN CONTEXT

Construction Company (EPC Contractor)

The construction company is responsi  sponsible  ble for building the plant to the spec fications  cations that are defined  fined in the PPA. ifi Plant Operator The plant operator is responsi  sponsible  ble for ensuring that plant is operated and maintained in accordance with the obligations  ations under the PPA. System Operator

The system  tem operator manages the operation of the electricity grid.

Lifecycle of a Power Generation Project

The follow ing  ing graphic provides an overview of a power generation project including the preparation, procurement/ne  ment/negoti  gotiation,  ation, construction, and implementation.  mentation. The PPA is a crit ical  cal part of the procurement  ment phase of the project. Even though a PPA may take considerable time to negoti  gotiate,  ate, it will govern the project for the next 25-30 years and establishes  tablishes the foundation for the financ  nancing,  ing, de velopment,   construction, operation and maintance of the project. Power Generation  tion Project  ject Lifecycle diagram:  gram:

 trative and may overlap. The timelines reflected in the diagram are diagram are merely illustrative

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THE PPA IN CONTEXT

The Power Purchase Agreement (PPA) What is a PPA? The agreement  ment that governs the sale and purchase of power is known as a PPA or PPA  or power purchase agreement.  ment. A PPA is a contract between who  produces or generates  tween two parties, one who  power for sale (the seller/producer/pro  ducer/project  ject company) company) and one who seeks to purchase power (the buyer/offtaker buyer/offtaker). ). This contract is some times referred to as an offtake  agreement. offtake agree    

Origins of a PPA A PPA is merely an instrument  ment intended to facilitate  tate the sale and purchase of electrical  cal power. As such, it only comes into being once the prospective buyer (the offtaker offtaker)) has made a series  ries of important deci  cisions.  sions. These deci  cisions  sions can include the need for power, the available sources of power, the buyer's economic ability to purchase power, the power generating  ing tech nology desired, and the location of the power plant.  

Power Demand Before  fore anything else, the off taker  taker will need to assure  sure itself  self of the demand  mand for power. A study will need to be undertaken undertaken to as ascertain  certain not only current power demand,  mand, but also any anticipated  pated changes in demand  mand over time.

Budget and Technology After identifying  fying the need for power, the off taker  taker must identify potential sources of power. This determi  termination  nation will depend  pend on the approximate  mate tar-

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THE POWER PURCHASE AGREEMENT (PPA)

iff at which it can af ford  ford to purchase power, the fuel and technology  nology to be used, and where where the power power generation facility should be located. located. The de termination  nation regarding  garding the off taker's  taker's budget will go hand-in-hand with the selection  lection of power generating  ing technology.  nology. Certain technologies  nologies are more       expensive othsources ers, butwhen may de bemand sirable dueest, to or their supple ment theirthan power is great because ause ofto their per- mdeand  est,  cability ceived environmental  ronmental benefits.  fits. Government policy on the appropriate  ate overall energy mix for the country may also af fect  fect the deci  cision.  sion.

Location Finally,  nally, the off taker  taker will also need to determine  termine where the power source should be located. The location is typically  cally determined  termined on the basis of  which regions  gions of the country need additional  tional power. If possi  sible,  ble, the location will be near substations and transmis  mission  sion lines that can carry that power most ef fi  ficiently  ciently to the end-user. Ultimately,  mately, off takers  takers (and produc ers) will want to locate the power source as close as pos si  sible  ble to a connec tion point on the power grid to avoid the cost and risk of building trans  mission  sion infrastructure and the transmis  mission  sion line losses. losses. Other equally equally important issues  sues that will determine  termine location are: easy access  cess to the fuel source to the plant, the potential social and envi ronmental  ronmental impact of any  power plant on local communi  nities,  ties, and whether ef fi  ficient  cient or low-cost mit i gants are available. A gas-fired power plant, for example, would be of little  tle use in a remote  mote area where there is not an economically ef fi  ficient  cient source of  gas. Certain renew   new able  able energy resources,  sources, such as solar or wind, may be more appropriate  ate for remote  mote locations and will have the added benefit  fit of  not adding to carbon emissions. These power sources, how ever, do not   offer the same predictability  dictability of thermal power sources (both wind and solar are by nature more unpredicat  catble  ble power sources). The choice of power generating  ing technology  nology is an important one for the off taker.  taker. It will have a direct  rect impact on the cost and reli  liability  ability of power, as well as the envi ron ronmental and social impacts of the project.

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Power Procurement and Tariff Considerations Armed with the knowledge gained from making these de ci c  isions, s  ions, the off -  taker will be able to reach out to market partic i  pants to seek solici  tations of      interest and price esti  timates.  mates. There are generally two ways in which this can be done. The preferred  ferred method is via a solicited bid which takes the form of a compet itive  tive procurement  ment process. This will often involve a formal request  quest for proposals  als (RfP) which will identify, amongst other things, the amount of  power being sought, the generation technology  nology to be used, and the area where the power is needed. Using this information, produc ers  ers will bid against each other to highlight their qualifi  fications,  cations, their ability to pay for the upfront cost of building the power plant, and to offer the best tariff  they can. The off taker  taker will compare prices, financial  nancial capacity  ity and qualifi  fica cations to ensure that the chosen proposal obtains a source of power that will function t  ion reli l  iably a  bly over time at a price that is most advantageous to the enduser. This method is generally seen as producing  ing a more compet itive  tive result  sult than engaging  ing in direct  rect negoti  gotiations  ations with interested producers  ers who put forward unsolicited proposals.  als. Unsolicited proposals  als are sometimes  times utilised as a means of quickly procuring power to deal with emergency sit uations,  ations, and hastening power generation in countries with with large power deficits. This process is also utilised in  juris where there is no frame work in place for competi  tive bidding.   dictions       It is important to have adequate  quate reg ulatory  latory safeguard  guard measures to ensure transparency  parency and value for money in the consideration of unsolicited proposals.  als. Putting Pen to Paper

In compet itive  tive bidding, the draft PPA is some times  times included in the RfPs package to enable prospective bidders to ensure that project risk allocations are given due consideration in the submissions  sions of their bids. In unsolicited proposals,  als, by comparison,  son, the off taker  taker has the option to provide a draft

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PPA to the producer after satis  isfactory  factory due diligence  gence to ascertain  certain the viabil ability and feasibility  bility of the proposal. The first draft of the PPA can some times  times come from the producer. How  ever, as the off taker  taker is seeking to purchase the power, and will be relying  lying on the docu m it is advisable a  ble for the off taker t  aker to take   ment   ent for years to come, it is responsi  sponsibility  bility for preparing the intial draft PPA with the assis  sistance  tance of   lateral  eral and bilat  lateral  eral de velopment   inqualified legal counsel.  Many multilat stitu  tutions  tions have financ  nancing  ing available to government entity off takers  takers to hire qualified  fied legal counsel. There are also instances where the prospective off taker  taker is a large industrial  trial user of power, and in such instances it may be that the ini tial  tial draft of the PPA comes from the producer for the off taker's  taker's re view   as part of the process of evaluat  ating  ing the merits of the proposal. It is worth noting  ing that parties will sometimes  times elect to enter into a more prelimi  liminary,  nary, non-binding doc ument  ment called a memorandum of understanding (MOU) in order to doc ument  ment some of the more basic agreements  ments that they have reached at that stage. As these doc uments  ments are often lacking in important detail, t  ail, and are ultimately  mately superceded  perceded by the PPA, entering into a memorandum of understanding is by no means a necessary  sary step. Negotiation and Finalisation

The draft PPA will include the key items such as tariff, tech nology  nology and location. It will also address a number of other issues that the parties will   need to agree upon. Usually,  ally, once the initial  tial draft PPA has been prepared,  pared, the producer and the off taker  taker sit down to negoti  gotiate  ate the various  ous provisions,  sions, and hopefully  fully reach a stage where they both deem the doc ument  ment to be near final. It bears noting  ing that during the negoti  gotiation  ation process it is advisable  able for both parties to engage knowledgeable  able legal counsel and, if funds are available, also engineers  neers and financial  nancial consultants. The parties parties will will benefit  fit from the advice of these consultants in determining  termining which risks and obligations  ations are   properly allocated to each party. This is an iterative process that will allow  27

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 action they are entering each of the parties to better t  er understand the transaction into, with the goal of arriving at an agree ment  ment that both parties can ulti mately execute  cute and abide by.  nanced by third-party lenders, before  fore a PPA can truly  For projects being financed be deemed final, the lenders will need to be comfortable a  ble with the the PPA. PPA. Al cally not a party to the PPA, the lenders fi nanc  nancing  ing the prothough typically  sure themselves that the doc umentaducer's upfront costs will want to assure  mentation governing the availability of revenue to repay its loan -- i.e., the PPA  isfactory  factory to them. The lenders  fore seek to clarify or even - is satis lenders will therefore  sions in the PPA to grant them greater comfort regarding  garding the modify provisions ability of their borrower (i.e., the producer) to rely on the PPA as a source  payment of their loan. The lenders will seek to make clari fi of repayment  fications  cations or  fications  cations to the PPA modifi the PPA even if it has been signed. Such amendment could be contained in an addendum to the PPA, PPA, or contained in a doc doc ument  ment re ferred to as a "direct agreement." This direct agreeement will be entered         into by the off taker,  taker, the producer, and the lenders, and may include any  amendments to the PPA required  quired by the lenders, as well as certain provi sions related  lated to the off taker's  taker's consent to the producer's collateral  eral or condi tional assignment  signment of the PPA to the lenders in a default  fault scenario,  nario, and the lenders' step-in rights. Before  fore the PPA is deemed ready for execu  cution  tion by any one of the parties, each of the parties will need to determine  termine if the PPA needs to be approved by their senior  nior management,  ment, a parliament or legislative  islative body, a reg ulatory   latory       body, an d/or another government entity. It is entity. ical to the ability  of the and/or PPA and the stability of the long-term relationship  lcrit ationship it esenforce  tablishes tablishes that all such approvals and consents have been obtained. Here is a summary of the key points discussed  cussed above: Before the PPA:

Tariff, Technology and Location: Before a PPA is drafted, an offtaker

will need to decide what their budget is, which powergenerating technology they want to use and where geographically the power is needed.

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Technology: The choice of power-generating technology is an

important one for the offtaker and will have a direct impact on the cost and reliability of power. Location: Offtakers (and producers) will want to locate the power source as close as possible to a connection point on the power grid and to the end user to avoid transmission line losses and accessibility to fuel sources. Power Procurement and Tariff Considerations: Procurement Methods: RfP - it is preferable for the offtaker to solicit

bids from producers using competitive tenders which preserve transparency and and ensure value for money is safeguarded. Unsolicited proposals are sometimes utilised as a means of quickly quickly procuring power to deal with emergency situations and hasten power generation in countries with massive power deficits. However transparency and  value for money must be safeguarded.  value Quality Matters: The offtaker should select a producer based not only  on price, but also on quality and track record. PPA Drafting: Who takes the pen: The initial draft of the PPA can come from either

the producer or the offtaker, but is typically generated by the offtaker. The importance of legal counsel: The offtaker should seek the advice of qualified legal counsel when preparing the PPA. Negotiation and Finalization: Details:  The offtaker offtaker and producer will need to negotiate the PPA to

ensure that both parties are aware of, and can agree to comply with, their obligations. The elephant in the room -- Lender input:  For projects being financed with third party debt, before a PPA can be considered final it must be satisfactory to the lender. This is true even if the producer and offtaker have already signed the PPA.

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Other Project Agreements Whilst the PPA governs the sale and purchase of power, there are a number of re lated lated contracts that interplay and re late late to the fi nanc nanc ing, ing, building and operation of the power plant. These agreements  ments must be aligned with the PPA to ensure fair apportionment of risks. For example, example, the duration  ration of the PPA should be synchronized to the life of the loan to ensure the loan is repaid  paid before  fore the PPA expires. Additionally,  tionally, each of the counterparties to the Engineering,  neering, Procurement  ment and Construction  tion Contract (EPC Contract) and the Operating  ing and Maintenance  nance Agreement  ment (O&M Agreement) / Long-Term Service Agree ment (LTSA) will need to be familiar with, and agree to abide by, the terms in the PPA relat l  ating i  ng to the design, s  ign, construction, operation and maintenance n   ance of the power plant. The follow ing  ing are some of the related  lated project agreements  ments typically  cally neces  es sary for a power project: Concession/Implementation Agreement:  Grants the producer the right to develop, finance, construct and operate the power plant, including the right to sell power to the offtaker. Grid Interconnection Agreement:  Governs the connection of the power plant with the power grid. Fuel Supply Agreements/Bulk Supply Agreement: Establishes the availability of fuel supply and quality. Fuel Transportation Agreement: Provides for transporting the fuel from the fuel supplier to the power plant. Engineering, Procurement and Construction Agreement (EPC Agreement): Sets the terms and conditions for the design of the power plant, the procurement of materials and equipment, and the construction of the power plant. The obligations obligations created under this this agreement can also be divided among multiple contracts that include one or more of these scopes.

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Operating and Maintenance Agreement (O&M Agreement): Governs the rights and responsibilities of the entity that will operate the plant and be responsible for its maintenance. Long Term Service Agreement (LTSA):  Provides for servicing the

plant at regular intervals during the operation of the PPA. Loan Agreement: Creates the obligation of the lender to make a loan to the producer to finance the power plant, as well as the obligations of  the producer/borrower to comply with various covenants in the agreement. Equity Contribution Agreement: Obliges the owners of the power plant to make equity or subordinated debt contributions to finance the portion of the power plant not being financed by third party lenders. Sovereign Support Agreement: May include sovereign guarantees, comfort letters, put and call options, and other forms of  sovereign support that enhance the creditworthiness creditworthiness of the offtaker and and other government entities involved in the project. Credit Support Agreement:  May include Partial Risk Guarantees (PRGs), letters of credit and bank guarantees from commercial banks, escrow agreements, and sponsor support. Direct Agreement: governs the relationship between the lenders and the parties involved in the project. The follow ing  ing chart illustrates  trates the relationships  lationships between  tween the dif ferent  ferent types of agreements:  ments:

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Overview of PPA Obligations The main obligation  ation of the buyer under the PPA is to pay the agreed tariff  when due. The seller's primary  mary responsi  sponsibili  bilities  ties are to build, operate and maintain the power plant in ac cordance  cordance with the require  quirements  ments of the PPA and applicable  able law, and deliver  liver the agreed amount of power in accor cordance with the PPA. How ever, not stop there.  ever, the parties' obligations  ations do not stop Additional  tional obligations  ations relate  late primarily  marily to the need for: (i) payment and performance secu  curity;  rity; (ii) transmis  mission  sion of power and interconnection  tion to

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THE POWER PURCHASE AGREEMENT (PPA)  

the grid; (iii) arrangements  ments with lenders; (iv) consents, permits, approvals and licenses;  censes; (v) rights to the land on which the power plant and/or trans  mission  sion lines will be located; and (vi) insurance. For the most part, these obligations  ations do not fall solely on one party alone, but are often shared by parties or will shift from one party to another based on the circumstances surrounding the power plant and where it is located.  

Buyer

Seller

Primary Obligations

Make payment

Build and operate power plant; deliver agreed energy

Security

Payment security

Performance security

Transmissi Trans mission/I on/Inter nterconn connecti ection on

Transmis Tran smission/ sion/Inte Intercon rconnect nection ion

Transmission/Interconnection

(bundled and some unbundled)

(some unbundled)

Arrangements with Lenders

Direct agreement

Financing

Permits

Assistance with permits/certain buyer approvals

Obtaining permits

Land

Grant of lan d/assistance with obtaining land

Obtaining land

Insurance

Force majeure, business

Force majeure, currency, etc.

interruption Local Content

N/A

Labour, materials, equipment

Decommission

N/A

Decommission, cleanup  

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Timing Requirements to Consider  ally various  ous timing require  quirements  ments in a PPA that both the proThere are usually  taker need to keep in mind. Both parties need to make ducer and the off taker  

 

 

 

sure that they are comfortable with the timing requirements and the conse quirements  ments under quences if they fail to meet their deadlines for these re quire the PPA. These include: Effective date of the PPA Time for satisfying conditions precedent and attaining financial close Time for testing the plant units for ascertaining COD Date for completing interconnection facilities and related facilities Time for fuel supply connection to the plant Fuel supply start date Time for submission and payment of invoices Time for conducting capacity tests Cure periods for various breaches Time to serve termination notices Dispute resolution timelines There is also a need to ensure that the various  ous timing elements  ments are properly  aligned. For instance, the interconnection  tion date and the fuel supply start date need to occur be fore fore COD.

 

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Financing of Power Projects Bankability Bank ability  bility refers to whether a project will be ac cept  ceptable  able to lenders, and

refers to the scope of consideration of a project seeking project fi nancing  nancing in the commercial lending market. How ever,  ever, a project can also obtain financ  nanc ing from lenders other than commercial banks, including de velopment fi   nance insti tutions  tions (DFIs) and pri vate   equity  uity funds. Therefore,  fore, bankability  can also be thought of as the ability to at tract  tract financ  nancing  ing from any source of  funds rather than limiting  ing it to one particular  lar source.

The Role of the PPA in Bankability The PPA is key to bankability. For the typical  cal power project, there is only  one stream of revenue - payments from the buyer under the PPA. If the buy er er fails to pay, it will be very dif fi  ficult  cult for the project to repay its lenders on a timely basis. The PPA also helps to accommodate  commodate the unique nature of power projects. Power generation is unique in that the electricity generated is being sold into a geograph  ograph ically  cally limited, and often highly reg ulated,  lated, market. As opposed to other high-value commodities  ties like hydrocarbons, minerals or pre cious metals  als that can be transported  ported to meet demand,  mand, the power project is beholden to the demand of the market that it serves. Similarly, the pricing       of electricity to end-users in emerging  ing markets is often guided by reg ula lation rather than by market forces. The PPA is es sential  sential because  cause it addresses both the uncertainty in demand  mand and in pricing. On the demand  mand side, the PPA establishes  tablishes a long-term purchase obligation  ation that provides a consistent  tent revenue stream to the producer and a consistent  tent flow of electricity to the off taker.  taker. On the pricing side, the PPA PPA incorporates a tariff formula that is tailored  lored to the technology,  nology, operations and debt characteris  teristics  tics of the pro ject, which can be modeled over the full life of the project. This allows the PPA to establish  tablish an electricity price that reflects  flects the true cost of generat ing  ing the power. 35

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Risks to Bankability In the typical  cal power project financ  nancing,  ing, the only financial  nancial return  turn to lenders is the repayment  payment of the project debt and the payment of interest rates (along with with certain agreed-upon fees). How ever,  ever, since debt providers have large capital at risk, and depend exclusively on revenues from the   outlays       project for repayment,  payment, the lenders will insist that the project sponsors and doc uments  ments are strong enough for the project to reach commercial operations. The lenders, like all of the parties, want to avoid a catastrophic  astrophic scenario  nario where the project fails completely, espe  pecially  cially during the construction phase of the project. At operations, the overarching  ing concern is ensuring that revenues are adequate  quate to service debt. The follow ing  ing lists the key considerations which, if not suf fi  ficiently  ciently covered, will make a project unlikely to receive  ceive debt financ  nancing:  ing: Term:  The term of the PPA should should be long enough enough to allow the debt to

be repaid, and if the debt is not fully amortised (in other words, if there will be principal amount outstanding at maturity) the term of the PPA should be long enough to support a refinancing of the remaining debt. Tariff: Lenders will require certainty with respect to the tariff payable under the PPA. Changes in Law and Tax: Lenders are not in a position to take any  risk related to changes in law or taxes over the life of the project. Offtaker Creditworthiness: If the offtaker is not sufficiently creditworthy, lenders will require other broad forms of  credit support that create additional costs and complications for the project. Even in developed developed markets, many offtakers are not not sufficiently  creditworthy to create a financeable project. Sponsor Quality: The lender and offtaker will consider the experience, reputation and financial strength of the owners of the special purpose  vehicle. Billing and Payment:  The billing period from the offtaker to the producer should be frequent enough (monthly or even bi-weekly) to minimize the level of unpaid energy and ensure that the schedule of  debt service payments are adhered to. It also alerts the lenders to potential payment/liquidity issues. 36

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Currency/Calculation:  PPA payments and calculations are most often made in the same currency as that needed to repay the debt. If not, there will need to be a plan for foreign exchange hedging and/or exchange rate indexation and and a true-up mechanism. mechanism. In addition,

are there any convertibility convertibility issues with the payment payment currency? If so, the lenders may require payment to be made in a different currency, or the offtaker or the host government will need to guarantee conversion. Termination: Lenders do not want the offtaker to be able to escape the long-term purchase obligation under the PPA, since this would leave the project without any revenue to service the project debt. Lenders will pay particular attention to ensure that seller events of default and force majeure events do not allow the offtaker to prematurely terminate the project. If termination does occur, lenders will also want assurances that the project debt will be satisfied. Remedies upon Buyer Events of Default: In particular, lenders need the seller to have the ability to exercise certain rights, even up to PPA termination, if the offtaker is failing to make payments or fails to deliver the required payment security. Lenders Rights:  Lenders will typically make provision for step-in rights and taking a security interest over project assets via the loan and direct agreements.

While the above can provide some useful guidelines, ultimately, bankability  is an ever-changing concept. What the lending market accepts (or demands) demands) today may be different from what it will accept (or demand) tomorrow. Given   the technology, size, scope, volume and geographical location of  Given power projects, it can be very difficult to ascertain what is truly "market" (i.e., consistent with terms you generally see market participants accepting).  Moreover, an experienced developer or sponsor may be better able to persuade lenders to accept provisions that are more friendly to the project company. Alternatively, lenders may be happy to live with a particular provision or risk at the project level, as long as they have a guarantee or other form of  credit support (from either the sponsor or offtaker) to cover that risk.

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FINANCING OF POWER PROJECTS

Finally,  nally, it is worth noting  ing that some power markets, partic ularly  larly in de vel  oped countries, are suf fi  ficiently  ciently mature that PPAs are not even re quired  quired to make a project bankable. This is often the case with merchant power plants (those that do not benefit  fit from a dedicated  cated buyer) where a project can be           de  veloped on the basis independent reports ing theisexistence of  suf   ficient fi  cient expected spotofmarket demand.  mand. Onceindi thecat project completed, the plant will simply sell into the spot market. market. How ever,  ever, even in the most de veloped   markets, the absence of a long-term PPA can re sult  sult in higher interest rates for the project. project. A conventionally bankable PPA remains  mains an es sential tool in virtually  ally every market and ideal in de veloping   country energy markets.

Why Care About Bankability? Questions  tions arise in the minds of policymakers:  cymakers: Why do these power pro jects need debt? Can't these projects be financed on the balance sheets of    large corporate corporate sponsors? sponsors? Even better,  ter, can the government just build these projects instead? It is hard enough to design  sign and build a project - and to negoti  gotiate  ate a PPA - without  out lenders involved. Why worry about making lenders happy? Why be concerned about bankabilit bankability? y? Taking a step back, the goal for any power project is to produce reli  liable  able power at the low est  est possi  sible  ble cost. Debt can be expensive, espe  pecially  cially project finance  nance debt. How ever,  ever, other sources of financ  nancing  ing can be even more expensive, or prohibitive  tive for other reasons. First, governments could certainly build power projects themselves - but they rarely do. Power projects are large and expensive, tying up massive  volumes of capital that could otherwise be used for a wide array of purposes. Countries can certainly obtain financ  nancing  ing from DFIs, but governments need to carefully  fully allocate available funds from each institu  tution,  tion, and utilising  ing funds from these institu  tutions  tions does not avoid the need to address lender concerns.

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Projects can be financed  nanced on the balance sheet of large corporate de velopers,     but governments are often surprised that this does not result  sult in cost sav-ings for the project. Why not? Surely large, creditworthy corporate de vel-opers   can borrow funds in the capital  tal markets at relatively low interest rates (much lower than the cost of project finance  nance debt), and pass these sav-ings on to the project? The an swer is yes, certain de velopers   do have ac cess  cess to low-cost capital  tal market funding, but their managers  agers (and their treasury   depart  partment)  ment) still consider all available in ternal funds to be equity when  making  ing investment  ment decisions.  cisions. Companies seek a high internal rate of re-turn  -turn for their equity. The follow ing  ing diagram  agram provides a simplified  fied view of  two typical  cal options:

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As shown above, in general, the less eq uity  uity that is involved in a project, the lower the likely cost of the overall financ  nancing.  ing. As a practi  tical  cal matter,  ter, this may vary depending  pending on how much credit support is re quired  quired in connection  tion with the project financing  nancing (since each element  ment of credit support will impose additional costs). It will also vary based on the rates of return demanded by        the equity and the interest rate for the debt. Even where large corporate de velopers   potentially have access  cess to low-cost capital  tal funding, they may still prefer  fer to de velop   this type of project using "off-balance sheet" financ  nancing  ing to ensure that the loan facility does not does feature on the balance sheet. It may also be more at attractive  tractive to lenders to lend to SPVs, as such companies are "clean" and have no other pre ferred  ferred creditors.  tors. Put more simply, bankability simply, bankability matters  ters because  cause the project finance  nance approach often provides the low est-cost financ ing for a power project, taking all        variables  ables into account.

Overview of Project Finance vs. Corporate Finance Project  ject finance refers to the financ  nancing  ing of a project based on (1) the pro-

 jected cash flows of the project and (2) the value of the asset. A project's fi nancing is typically non-recourse - the lenders have recourse to the assets     of the  project it  self,  self, but they  have no recourse  course to the owners of the project. The lenders are repaid  paid by project cash flows or, in a worst-case scenario,  nario, by  foreclos  closing  ing on the project and acquiring the project assets.  sets. In a typical  cal project financ  nancing,  ing, a special-purpose  cial-purpose entity is created  ated to own the assets  sets of the project and enter into the financ  nancing  ing doc uments  ments and the project doc uments,  ments, including the PPA. The project finance  nance lenders will take a se curity  rity interest in all of the as sets  sets of the project, including the PPA and other major project doc uments.  ments. The lenders will also have a secu  curity  rity interest in the project accounts,  counts, and all of the amounts on de posit  posit in, or credited

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to, those accounts.  counts. Lenders may impose strict require  quirements  ments on the location of all project accounts,  counts, and in the flow of funds through these ac  counts. In partic ular,  lar, the cash flow is restricted  stricted such that the project company cannot pay dividends  dends or distri  tribu  butions  tions subject to various  ous conditions  tions       often, no dis bumany tions power will beprojects made to sponsors a number of  years. In practice,  ttri ice, arethe financed  nanced on afor limited-re  course course basis. Lenders will require  quire various  ous forms of credit support, including sponsor guarantees to cover certain risks. Since the lenders do have recourse,  course, under specified  fied circumstances, to the sponsors and other related-party   lated-party  guarantors, these are not "pure" non-recourse  course financings.  nancings. Due to the lenders' secu  curity  rity interests and the heavy involvement  ment of lenders in the deci c  isions s  ions of of the project, including with re spect  spect to cash flows and capital  tal investment  ment deci  cisions,  sions, project finance  nance requires  quires a complex set of  highly-tailored  lored agreements.  ments. This can impose high transaction  action costs, including lawyer's fees for the creation and negoti ation of these agreements.         Corporate finance,  nance, by contrast, is based on the balance sheet of the entity  receiving  ceiving the financ  nancing.  ing. Lenders have recourse  course to all assets  sets of the entity, but they do not have a secu  curity  rity interest in any assets.  sets. There are typically  cally no (or very few) restrictions cash flow. Documentation  strictions on cash  mentation is relatively light. Raising  ing funds through corporate finance  nance may be cheaper than through pro ject finance.  nance. How ever,  ever, corporate finance  nance is only available to fairly credit worthy borrow ers,  ers, and where the financ  nancing  ing providers are confident  dent in a   relatively deepin secondary market. market. talabove, markets are unlikely to take struction risk, particular.  lar. As disCapi  cussed cussed certain de velopers   do conhave access  cess to low-cost capital  tal market funding, but it is not realis  alistic  tic to expect that this low-cost financ  nancing  ing will be passed on to the project, as de velopers   will require  quire a higher internal rate of return  turn for what they regard  gard as their equity.  uity.

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Direct Agreements A direct  rect agreement  ment sets out the off taker's  taker's acknowledge  knowledgement  ment of the secu  curity   rity  interests granted by the project company to the lenders with respect  spect to the project company's rights and interests under the PPA, and the lenders' rights to take reme  medial  dial action  tion (including taking over the project) in a de  fault sit uation.  ation. These rights are referred  ferred to as step-in rights. The direct  rect agreement  ment will be entered into by the off taker,  taker, the project company, and the lenders, and establishes  tablishes a direct  rect contractual  tual relationship  lationship between  tween the lenders and the off taker.  taker. Whilst the primary  mary obligation  ation to obtain financ  nancing  ing falls on the project company, the off taker  taker is generally expected to agree to amend or clarify the PPA as reasonably requested company's lenders. Ideally,  quested by the project company's  ally, such amendments and clarifi  fications  cations are introduced prior to the sig nature  nature of the PPA by the project company and the off taker. t  aker. How ever, e  ver, even if the PPA has been signed, the off taker  taker could still be expected to agree to certain amendments and clarifi  fications  cations to the PPA. The lenders may refuse to lend if this is not done. Where the PPA has already been signed, such modifi  fica cations will either  ther be incorporated by way of an amendment to the PPA, or through the direct  rect agreement.  ment.

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THE PPA IN CONTEXT

Environmental & Social Requirements Power plants are neces for power - and we need power! They can also also   sary    nity can occur both durbe large, loud and messy. Impacts on the community  fic, etc.) and operaing construction (large equipment, increased road traf fic,  tion). Local law will generally include a tion (noise, air and water pollution).  ronmental and social require  quirements  ments that must be complied number of environmental with. Addi tionally, tionally, many lenders will expect compli ance ance with their own  ronmental and social require  quirements  ments as part of the financ  nancing  ing of the proenvironmental    nance institu  tutions  tions require  quire compliance  ance with the  ject. Many de velopmental finance  ronmental and Social Performance Standards (see http://goo.gl/ IFC Environmental  ers such as the African De velopment   pNaCOv), while others Bank have their own standards (Integrated Safeguard System; see http://goo.gl/hWTO5p).         In addition,  tion, a number of commercial banks require  quire compliance  ance with the Equator Principles  ples (http://www.equator-principles.com/).  com/). For ease of ref erence  erence these standards will simply be referred  ferred to as lender standards in this section.

Environmental considerations Dif ferent  ferent types of power plants create  ate dif ferent  ferent environmental  ronmental concerns. For example, coal-fired power plants have to address emission levels of sul  fur dioxide, nitrogen  trogen oxide and dust particles,  cles, as well as potential cont ami  ami nation of water sources. Similarly,  larly, construction of large hydroelectric  tric plants may involve large-scale reset  settle  tlement  ment of populations,  lations, destruction  struction of  forests, degradation of water quality and di version   of water sources which impact on the environment  ronment and af fect  fect the ecolog ical  cal system.  tem. No technol nology is completely free of environmental  ronmental impacts. Failure to adequately q  uately address environmental r  onmental risks associ s  ociated a  ted with a pro nology may result  sult in sanctions by local authori  thorities.  ties. Environmen ronmen ject's technology tal considerations may also af fect the ability to access financing.     43

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ENVIRONMENTAL & SOCIAL REQUIREMENTS

Social considerations In addition  tion to environmental  ronmental concerns, local law and lender standards will have require  quirements  ments pertaining to social considerations. These include pro visions relat to gender issues, worker rights, limiting the impact of a     ing   on the   nity,   power plant local commu  nity, and issues  sues pertaining to reset  settle  tlement.  ment.

Worker Rights Local law and the above-mentioned lender standards will all contain re quirements  ments pertaining to worker rights. These will relate  late to the permitted  ted treatment  ment of workers, the minimum  mum age of workers allowed to be employed in connection  tion with the project, and the payment of workers, among other things.

Community Outreach/Impact While not a party to the PPA, the local commu nity  nity is clearly at risk of  being impacted by a power power plant located in its locale. As a result,  sult, the lender standards all include various  ous structures regarding  garding the permissi  sible  ble impacts to, and treatment  ment of, the local community.  nity. When determining  termining the need for a PPA, the parties should be mindful of any potential impacts on the local community  nity and should consider engaging  ing them through commu nity outreach.  reach.

Resettlement In order to build and transmit  mit the power from certain power plants, it may  be neces  essary  sary or desirable  sirable to have people living in the vicinity agree to relo locate or reset  settle.  tle. Reset  settle  tlement  ment generally refers to being phys ically  cally displaced  placed or moved from your res idence,  dence, as well as being economically  cally displaced  placed (losing  ing income, assets  sets or access  cess to your source of livelihood).  hood). To the extent any such reset  settle  tlement  ment is deemed involuntary, this will be an issue of partic  ular  lar concern for the lenders and may pre vent   certain lenders from providing financ  nancing.  ing. Involuntary reset  settle  tlement  ment typically  cally refers to a sit uation  ation in which the impacted people do not have the right to refuse the re set  settle  tlement.  ment.

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THE PPA IN CONTEXT

Gender Issues The transformational  formational nature of improved access  cess to power can have a sig  nif  icant  cant impact on gender outcomes  comes in the community  nity which the power project serves. In order to ensure that these benefits  fits are fully realized,  alized, it may be benefi to adopt gender-specific strategies as part of any local   cial       community  nity de velopment   plan associ  sociated  ated with an energy project. This may  include targeted use of electricity to modernise cooking stoves in the home or strategies  gies to capture indirect  rect benefits,  fits, such as extending water supply  lines to the power plant to also serve nearby communi  nities.  ties.

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THE PPA IN CONTEXT

Summary of Key Points Overview of Power Sector Power generation: The process of generating electrical energy 

from various sources of primary energy. Transmission of this generated energy is done at high voltage to move move the energy over long distances closer to where the end user will use the power. Distribution is the division of the energy into usable voltages so that consumers can purchase the energy. Types of electricity industry structure:  Two different types of  electricity industry structures: bundled and unbundled. In a bundled, market, the utility controls both transmission and distribution. In an unbundled market, the utility is segregated from the transmission and distribution of the power. Role of Actors: The power producer is the seller of power and owner of the power project. The offtaker, or power purchaser, is the buyer of  power.

The Power Purchase Agreement The Foundation: The power purchase agreement (PPA) is the central

contract that governs the sale and purchase of power. Planning and advice: The offtaker and producer will need to negotiate the PPA to ensure that both parties are aware of, and can agree to comply with, their obligations. Due to the complexity of the PPA, signficant pre-planning and advice of outside counsel is often required. Tenders: It is preferable for the offtaker to solicit bids from producers using a competitive tender. In countries with massive power deficits, unsolicited proposals are sometimes permitted as a means of quickly  increasing power generation capacity.

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SUMMARY OF KEY POINTS

Financing High Capital Costs: Power projects are large and expensive, tying up

massive volumes of capital. A well drafted and balanced PPA is necessary to attract this level of financing. Bankability: In order to improve the bankability (i.e., ability to attract financing) of a project, the host government may need to provide guarantees and other credit enhancements. Payment Security: the parties often put in place mechanisms to prevent interruptions in the stream of payments under the PPA.

Environmental and Social Requirements Local law: Local law will generally include environmental and social

requirements. Lender Requirements: Many lenders will expect compliance with

their own environmental and social requirements (e.g., International Finance Corporation Environmental and Social Performance Standards, Equator Principles, African Development Bank's Integrated Safeguard System). Environmental Requirements: Different types of power plants create different environmental concerns - no technology is completely  free of environmental impacts. Social Requirements: Local law and lenders generally have requirements regarding worker rights, community outreach, and resettlement.

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Financial Provisions Introduction Tariff Structures Procurement of Electricity Invoicing & Payments Credit Support for Offtaker Obligations Credit Support for the Project Company's Obligations Tax Exemptions Summary of Key Points

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FINANCIAL PROVISIONS

Introduction The financial  nancial terms of the PPA are arguably the most important provisions  sions in the PPA - at its essence, the PPA is an agree ment  ment to purchase. The ques tion is, what exactly is being purchased, and at what price? These terms are based on the tariff ( Tariff Struc tures   tures ), ), which is typically  cally a complex formula to determine  termine the price of capacity  ity and energy. The tariff  is established  tablished through some form of the procurement  ment process (Procure   cure ment   ment  of Electricity ), ), whether through a compet itive  tive tender or through a form of  price discovery.  covery. The devil is in the de tails  tails of invoicing  ing and payment (Invoic -  ). Given the nature of the power markets and power projects, ing & Payment ). there are often credit and liquidity concerns on both sides of the PPA, re  sulting  ing in various  ous require  quirements  ments for credit support for the off taker's  taker's obliga ations (Credit Support for Offtaker Obliga tions  ) and credit support for the pro   ject company's obligations  ations (Credit Sup  port port for the Pro ject   Com  pany's pany's Oblli gagations ). ). Another key issue is whether whether tax exemptions are granted to the propro ject (Tax Exemptions ). ). All of these provisions  sions are heavily negoti  gotiated,  ated, creat  ating  ing particular  lar complexity in the PPA.  

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FINANCIAL PROVISIONS

Capacity-based tariffs were de veloped to address the draw backs    backs that are inherent in the energy-only energy-only and take-or-pay structures. structures. These tariffs are structured to balance the interests of investors and consumers in an economically  cally ef fi  ficient  cient manner. This is achieved by ensuring that the project company has a reasonable opportunity to earn revenues that are suf fi   cient   to to (i) repay the capital  tal invested in   the project plus a reasonable return  turn the project investors and (ii) cover the fixed operat ing  ing costs of the project, regardless  gardless of whether the off taker  taker dispatches  patches the generation facility or not. The off taker’s  taker’s interests are protected because  cause the off taker  taker is only obligated  ated to pay for the capacity  ity that is made available to it, plus the energy that is dispatched p t  aker and actually a  lly delivered l  ivered to the delivery l  ivery point.   atched by the off taker In general, these tariffs provide that the off taker  taker will pay to the project company each month: A charge (a Capacity Charge) for the capacity of a generation facility  that is made available to the offtaker, regardless of whether the offtaker actually dispatches the facility, and A per MWh (or per kWh) charge (the Energy Charge) for energy that is dispatched by, and delivered to, the offtaker. The Capacity  pacity Charge is sized to enable the project company to earn revenues under the power purchase agreement  ment that are suf fi  ficient  cient to enable the project company to: 1. Repay the project loans (and in some cases associated infrastructure such as transmission lines); 2. Pay the sponsors a return on the equity and quasi-equity (such as shareholder loans) invested by them (and, in the case of a project company that is structured on a Build-Operate-Transfer basis, return the equity and quasi-equity invested by the sponsors to the sponsors over the term of the PPA); 3. Pay all corporate and other taxes that are assessed on the project company and its properties; and  4. Pay for fixed operations and maintenance costs and any other agreedupon project that factor. will be incurred by the project company  regardless of thecosts dispatch  

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TARIFF STRUCTURES

regardless the dispatch The  is sizedfactor. to enable the project company to earn suf fi  fi Energy of Charge cient revenues under the PPA to allow the project company to: The Energy Charge is sized to enable the project company to earn suf fi  fi 1. Recover theunder cost ofthe any fueltoused generate generate energyto: dispatched by, cient revenues PPA allowtothe projectthe company and delivered to, the offtaker; and 1. Recover the cost of any fuel used to generate generate the energy dispatched by, 2. Pay for any o operation peration and maintenance costs that vary vary depending on the and delivered to, the offtaker; and quantity of energy produced by the generation facility. 2. Pay for any operation operation and maintenance costs that vary vary depending on the of this energy produced by the generation facility.is indif ferent As quantity a result tariff structure, project company  sult of  ferent to ac tual dispatch  patch levels because  cause the project company’s capital  tal and fixed operaAs a reand  sultmainte sult of thisnance the projectthrough company indif ferent  ferent to ac tions ance structure, costs are re covered theis Capacity Charge,  ntariff  covered tual disis  patch patch levels  cause the cause project capiAs  tal aand tal which payable regardless of the levelcompany’s of dispatch. result, ult, itoperais not  gbeardless  patch.  sfixed tions mainte  nance costs nance are re  covered Capacity neces ary for the project company tocovered charge athrough risk prethe mium to bearCharge, market  essary  sand  mium which payable  gardless gardless thestructure level of dis  plects atch.theAs a re  sult, itofisprosult, not risk. Atis the sameretime, this of tariff reflects true nature  fpatch. neces  ecsompany  sary for the sary project to charge a risk preples  mles ium bear market  ject costs and iscompany consistent  tent with the princi  pmium of to economic dis risk. At the same time, this tariff structure reflects the true nature of propatch.    ject company costs and is consistent  tent with the principles  ples of economic dis patch. The Capacity Charge is stated as a price (some times  times referred  ferred to as an   acity Price) for each MW that is made available Hourly Base Capacity p The Capacity Charge is stated as a ity  times times  ferred ferred to as enan (whether or not that MW of capac ty is (some actu usedreto generate  iprice  tually  ally   acity for set each made available Hourly Base Capacity p ergy) over a settle ent pePrice riod. tle ent pethat riod to re  tlement  m  riod. )Each  tlement  mMW  riod isis weighted (whether or not thatofMW of capac ity  ityof iscapac actu  tuity  allyduring ally used that to generate flect the importance the availability hour to enthe  ity ergy) overThe a set  tlement tle  ment pefor  riod. riod. Each setcan  tlement tle  m period  riod off taker. charge paid each hour beent stated as: is weighted to re  taker. flect the importance of the availability of capac ity  ity during that hour to the off taker.  taker. The charge paid for each hour can can be stated as: where: amount of the Hourly Hourly Capacity Capacity Payment Payment for hour ‘ ’; where:   – means the amount  – th e amount Bas e Capacity Capaci ty Price for hour ho   –means meansthe the amountof amount ofthe theBase Hou Hourly rly Capacity Capac ity Payment Payme ntur for‘ ’;hour ‘ ’;  – means amount of Base theeHourly Fixed Operations  – means the the amount amount of the Bas Capacity Capacity Price for hour hour ‘ ’;& Maintenance Chargee for hour hour ‘ ’;  nance Charg  – means the amount of the Hourly Fixed Operations & Maintenance  nance Charg Chargee for hour hour ‘ ’;

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 – means the period factor for hour ‘ ’, (which (which is a num riod weighting  ing factor ber within a range of, for example, 0.65 and 1.5, that re flects  flects the importance of the capacity  ity during that settle  tlement  ment period);  riod); and

–     means the capacity that is declared to be available during hour ‘ ’ by the project project compa company. ny.  

The Hourly Capacity Payments that are payable during each hour of a month (month ‘m’) are then summed to determine  termine the monthly Capacity  Payment. In this manner, the off taker  taker only pays for capacity  ity that is actu  tually   ally  made available to it. Although the tariff will contain many formulas l  as and will address many matters ancilliary   ters that are not addressed above (e.g., ancilliary  charges, start-up costs and other supplementary  mentary items), this formula, which captures the most important elements,  ments, provides an example of how the key  concepts on which a modern capac ity-based  ity-based tariff can be stated. It is how ever, e  ver, useful f  ul to note that other provisions s  ions of the Power Purchase Agreement m   ent will adjust downwards in the event that the project company declares  clares that more capacity  ity is available than the project company  can actu  tually  ally deliver  liver durin duringg hour hour ‘ ’. It is also useful  ful to note that in the event that the project company is not able to make capacity  ity available due to risks that the off taker  taker has agreed to bear, then the capacity  ity will be deemed to be available to the off taker.  taker. Examples of such risks include risks related  lated to the availability of the transmis  mis   sion sys tem to energy from the power plant, availability fuel (if  the off taker  taker is take responsi  sponsi  ble for ble providing fuel), andthe polit  ical  cal forceofmajeure events. The illustration t  ration below shows the principal p   al components that make up a Base Capacity Charge and shows (in general terms) the relative size of each such component at the beginning the term of a PPA. PPA. During later years  ginning of the of the term, the interest on project loans component will decrease. c  rease. This de crease is off set  set by increases to the re payment  payment of project loans and re demp demption of and return  turn on equity components.

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Key Components of a Base Capacity Charge

    The illusCharge tration under below ashows principal components that power make up the Energy capacthe  ity-based ity-based tariff for a thermal plant.   (The Energy Charge under an energy-only tariff on a re new   new able  able project will contain components that are similar  lar to those identified  fied in the image above show ing  ing the components that go into a Base Capacity Charge.)

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Key Components of the Energy Charge

Key Points Capacity payments allow for project companies to recover their fixed costs (capital costs and fixed operating costs) and agreed-upon profits. These charges are paid so long as the power plant is made available for dispatch. Energy payments account for fuel and variable operating costs. In some jurisdictions, supplemental charges are imposed on the buyers for grid system requirements (such as start-up charges, cost of  ancillary services, and any charges for force majeure events that are the offtaker's responsibility under the PPA).

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TARIFF STRUCTURES

Tariff Structures for NonDispatchable Technologies Typically,  cally, PPAs for non-dispatch  patchable  able technologies  nologies (primarily  marily renew   new  ables) require  quire that the project company deliver  liver and sell to the off taker  taker all of the energy generated by the generation facility. The price is stated in simple terms such as cents (or other currency unit) per kWh or Dollars (or other currency unit) per MWh generated and de livered.  livered. The currency unit used is usually  ally determined  termined by the currency of the EPC contract or the currency in which the loans are denomi  nominated.  nated. These tariffs also recog  ognize  nize that there will be times when either  ther the off  taker or the transmis  mission  sion system  tem operator may curtail the production  tion of  energy at the facility due to constraints on the grid, emergencies, or for other reasons. Dif ferent markets allocate the financial risk for curtailment     losses dif ferently.  ferently. In emerging  ing market PPAs, the off taker  taker will cover curtailment losses as part of the tariff. Often, this is limited to curtailment losses that go over a pre-determined  termined threshold.  old. The curtailed energy is some times referred  ferred to as deemed generation t  ion. The main reasons that require  quire the off taker  taker of a non-dispatch  patchable  able plant to pay for deemed generation are: The likelihood of a prolonged curtailment is more significant for  various reasons, including includin g the condition of the transmission system and the likelihood that an insufficiency of generation capacity will trigger a network-wide blackout; and The government of the host country may have a controlling interest in both the offtaker and the transmission system operator. In this case, investors will be concerned that the offtaker may cause the transmission system operator to curtail generation in the event that the offtaker may purchase energy at a lower price from other sources. The risk of prolonged curtailments has led to the de velopme  velopment   nt of more robust methods  ods for calculat  lating  ing deemed generation quantities  ties in emerging  ing markets. This is a log ical  cal response  sponse to the risk of prolonged curtailments,

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because,  cause, during a prolonged curtailment, the total amount of deemed generation payments can be very large, and they will depend  pend heavily on the deemed generation formula and the measuring equipment.

    As an example, a PPA for project require the project  twould  orologtypi  ical  calcally company to construct onea wind or more mete eorolog masts to measure the  rection  tion of the wind during each period  riod of six minaverage speed and direc  curring during a billing period. utes occurring  riod. Prior to the commercial commercial operations operations  taker and the project company would de velop   date, the off taker (with the ap pendent engineer)  neer) a power curve   that predicts,  dicts, for each proval of the independent wind speed and direc  rection,  tion, the net electrical  cal output  put the wind farm can generate under those conditions.  tions. The power curve curve would be be updated annu annually   ally  or semi-annually  ally based on the actual performance of the wind farm. farm. When a curtailment occurs,  curs, the power curve could then be used - together with data on the wind speed, wind direc  rection,  tion, and the availability of each wind turbine generator during the duration  ration of the curtailment - to calculate  late the quantity of deemed generation for which the off taker  taker will be required  quired to pay. Similarly,  larly, a PPA for a solar project would require  quire the off taker  taker and the project company to de velop   a power curve that is based on the solar insolation measured by one or more pyranometers  ters or pyrheliome  liometers  ters (which measure the direct  rect and indirect  rect irradiance  ance and the direct  rect radiance  ance striking a plane, respectively).  spectively). In recent  cent years Cape Verde, South Africa and Kenya have each signed PPAs, some of which feature the above provisions  sions for wind generating  ing assets.  sets. Some of of these units have entered commercial operations. Key Points

Energy-only tariffs are stated in $/kwh or $/MWh (but they may also be stated in a local currency). The principle of deemed energy applies, since all energy produced is billed at the metering point and is payable. Careful measurements are taken by buyer and seller to determine/verify  the level of deemed energy for which the offtaker is obligated to pay.

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Feed-in Tariffs Feed-in tariffs are commonly used to incentivise the produc  tion tion of energy   new able  able resources.  sources. from renew  A feed-in tariff is generally understood to provide certainty as to three key  terms for a producer. Those three terms are (a) guaranteed ac access  cess to the grid, (b) long-term PPAs, and (c) an energy price that is ef fectively  fectively subsidised. The energy price is usually  ally established  tablished by the sector reg ulator  lator through an evaluation  ation of (i) the capital  tal costs and operations and maintenance  nance costs that a reasonably ef fi  ficient  cient producer would incur in connection  tion with the de vel  opment, construction, operation and maintenance  nance of a power plant that is based on a particular  lar technology  nology (such as wind or solar), and (ii) the capital  tal structure that a producer should be able to achieve.

 tablished and remain  main valid for a defined  fined term Feed-in tariffs are generally established  cover, and earn a reaso that the producer is certain that it will be able to recover,  turn on, its investment  ment in the project. As a general sonable return general rule, all producers  ers (subject to a pre-determined  termined cap on the quantity of capacity  ity that is eligi  gible  ble under the feed-in tariff) that that achieve commercial operations or  termined date are eligi  gible  ble for the feed-in tarstart construction by a pre-determined iff for the term of their contract. Reg ulators  lators peri  riodi  odically  cally re vise   the feed-in tariffs that are applicable  able to new  projects, with the objective  tive of reduc  ducing  ing the feed-in tariff to capture lower capital  tal costs and other costs savings that have re sulted  sulted from the more widespread  spread adoption of that particular  lar technology.  nology. Photovoltaic solar pro jects provide the best example of the trend towards lower costs; since 2008 the price of photovoltaic panels has dropped steadily and dramat ically.  cally. Feed-in tariffs are generally structured in a manner that is consistent  tent with the tariffs described  scribed above in the section titled  tled Tariff Structures  tures for NonDispatch  patchable  able Technologies.  nologies. A number of African countries operate feed-in tariffs   for renew ables.   59

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Take-or-Pay Obligations Under Fuel Contracts - Implications for Electricity Tariffs In a number of emerging  ing markets, gas suppliers  ers usually  ally insist that longterm gas supply agreements  ments contain a take-or-pay clause. In the context context of  a project company, a take-or-pay clause provides that the project company  must purchase an agreed quantity of gas (usually  ally stated in MMBtus or GJ (LHV) each year or pay for that quantity of gas regardless  gardless of whether pro ject company purchases that quantity. The economic rationale for a take-or-pay clause in a gas supply agree ment  ment is two-fold. First, the gas supplier supplier will have the right to extract gas from     the is supplying gasand forde a velopment periodreservoir(s) of time thatfrom is setwhich out initits exploration   defined andlilimited  cence over cence the blocks that include the rele vant   reservoir(s). If the gas supplier were to sign a long-term gas supply agreement  ment with a project company, and the project company were to fail to purchase a signif   nif  icant  cant proportion of the re serves the gas supplier dedicated  cated to the project company, then the gas supplier would lose some of the economic value represented  sented by its investment  ment in exploration, field capital  tal costs, gas processing  ing facilities,  ties, and other infrastructure. Second,  ond, in order to service its own debts, the gas supplier needs a consistent  tent revenue stream. The take-or-pay take-or-pay obligation  ation is the mechanism  anism that gas suppliers  ers use to control these risks. In spite of the economic rationale behind  hind them, take-or-pay obligations  ations should be treated with care, because  cause they can impact the tariff that is payable under a power purchase agreement.  ment. Every take-or-pay obligation  ation should soften the potential consequences  quences for the purchaser of the gas (in this case, the project company) by including carry-forward and makewhole provisions.  sions. A make-whole provision  sion provides that if the gas purchaser fails to purchase the take-or-pay quantity during any take-or-pay  period  riod (which is almost always a period  riod of one year), and pays a take-orpay payment equal to the purchase price multiplied  plied by dif ference  ference between  tween (i) the take-or-pay quantity, and (ii) the quantity of gas consumed, then the 60

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take-or-pay payment can be credited towards the cost of gas in a subse  quent take-or-pay period,  riod, once the take-or-pay quantity has been consumed during that period.  riod. A carry-forward provision  sion does just the opposite. It provides that if the gas purchaser purchases a quantity of gas in excess of the take-or-pay quantity during a partic u take-or-pay period,   lar   purchased   of  then the carry-forward quantity (the quantity of gas in excess the take-or-pay take-or-pay quantity) will be used to re duce  duce the take-or-pay quantity in subsequent  quent take-or-pay peri  riods.  ods. Take-or-pay obligations  ations impact the tariff that is payable under a PPA in the follow ing  ing manner. In the event that the off  off taker  taker fails to dispatch  patch the pro ject company at a level that would enable the project company to consume a quantity of gas equal to the take-or-pay quantity during a take-or-pay pe  riod, then at the end of that take-or-pay period,  riod, the off taker  taker will be re quired to make a payment that enables the project company to pay the take-or-pay payment to the gas supplier. Key Highlights

Take-or-pay provisions are necessary in long-term fuel supply  contracts because they lower risk for parties who bring fuel and generation assets to the market. Take-or-pay provisions may have the effect of increasing tariffs during certain months that coincide with the end of a take-or-pay period, thereby squeezing the liquidity of an offtaker who makes take-or-pay  payments for energy not used.

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Tariffs and Bankability Regardless  gardless of the tariff structure chosen for the PPA, the methodology for calcu lation lation of the tariff must be clear and fixed for the term of the power purchase agreement. change to the tariff must be made in accordance   mechAny   agree   anisms that are agreed up front in a binding with adjust ment ment anisms ment and signed off as part of the seller's and lenders' due dili  gence gence process. Tariffs that are subject to a general or dis cre cre tionary tionary right of reg u latory latory or polit i cal cal adjust ment ment are generally not ac cept cept able able to lenders and investors out side side North America and West ern ern Eu rope, rope, which have a long tradi tion tion of rate base reg u lation. lation. Even in those ju ris ris dictions, dictions, utility investors are start ing ing to de mand mand more reg u latory latory certainty be fore fore they undertake sizeable invest ments, ments, such as in new generation capac ity. ity.

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Procurement of Electricity The price component of a tariff is usually  ally established  tablished either  ther by conducting  ing an international compet itive  tive tender or by using an open book methodology (which is sometimes  times referred  ferred to as price discovery   overy). These two c methods  ods are explained in the follow ing  ing sections.

International Competitive Tenders In most juris  risdictions,  dictions, procurement  ment laws require  quire governments and government-owned or controlled entities  ties to procure goods and services through compet itive  tive tenders, subject to certain exceptions. The public policy policy rationale for these laws is sound - a properly conducted international compet i  -  tive tender is a very ef fective  fective tool for using competiti  tition  tion to achieve a re duction  tion of the price of capac ity  ity and energy, and for increasing  ing transparency  in the power market. Unfortunately,  nately, the procurement  ment of a long-term power purchase agreement  ment is often a lengthy and expensive process. In addition,  tion, some procurement  ment processes are so complex or techni  nical  cal that a rigid, formulaic  laic approach to the tendering process might not provide the best outcome  come for the host country. In some cases, the lack of flexibility  bility to accommodate  commodate the pecu  culiari  liarities  ties of a complex project can preclude  clude a project from going forward at all, even in the pres ence  ence of signif   nif  icant  cant competi  tition,  tion, and even if the project would provide good value for money to the country. Large scale, project-financed  nanced power projects are a prime example. All parties involved in these projects can benefit  fit from a degree  gree of flexibility  bility to conduct pre-bid discussions  sions with pre-qualified  fied bidders and post-bid negoti  goti ations on (a) the exceptions taken by the pre ferred  ferred bidder in the proposal they submit in response  sponse to the Request  quest For Proposal (RfP) issued  sued by the off taker,  taker, and (b) comments that may be received  ceived by the lenders follow ing  ing the execu  cution  tion of the power purchase agree ment.  ment. In general terms, an economic tariff is best achieved by ensuring that a suf  ficient number of pre-qualified bidders submit a proposal so that compet i  -      63

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tive pressures result  sult in an economic  nomic tariff. The number  ber of pre-qualified  ified bidders can in turn be maintained by: 1. Including reasonable, financeable terms terms and conditions in the RfP and the draft project agreements that will be attached to it, including reasonable and balanced terms regarding (a) the amount of the bid security, (b) the events that will give the offtaker the right to draw on the bid security, (c) the bid validity period, and (d) period for the negotiations as to the form of the project agreements (including the PPA); 2. Especially in the case of hydroelectric projects and other projects where the design will be heavily impacted by the site and the tariff, establishing a sound technical basis for the project design by conducting a feasibility  study that will allow for a reliable forecast of the length of the construction period and the projected capital cost of the project. A successful  ful tender requires,  quires, among other things, (a) a clear and concise RfP that attaches  taches either  ther fully-termed drafts of the project agree ments  ments (including the PPA), or, at the very least, clear and concise term-sheets for the project agreements,  ments, and (b) a consultative tender process that facili tates  tates an open dialogue  alogue between  tween the pre-qualified  fied bidders and the off taker.  taker.

Competitive Tenders for Fixed Tariffs Under a fixed-price tariff structure, the terms of the RfP require the bid  ders to bid a fixed price for capacity  ity that may be subject to escalation,  calation, but that will not be subject to signif   nif  icant  cant cost openers. In the case of a capac ity-based tariff structured in the manner sug gested  gested above, the Request  quest for Proposals  als would typically  cally require  quire bidders to bid on: 1. The Hourly Base Capacity Charge (which will be used in calculating the Hourly Capacity Charge and therefore the Monthly Capacity Charge) 2. The variable operations operations and maintenance charge (which will be used to calculate the Energy Charge);   64

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3. In the case of a thermal generation facility, the heat rate (which (which is also used to calculate the Energy Charge); and 4. In the case of a coal-fired coal-fired generation facility, the quantity of of coal that is required to undertake a cold start, a warm start, and a hot start. Bidders can either  ther be required  quired to bid a single Hourly Base Capacity Charge that applies during each year of the term of the Power Purchase Agree ment, or they can be permitted  ted to bid a dif ferent  ferent Hourly Base Capacity Charge rate for each year. A portion of the Hourly Base Capacity  Charge that corresponds  sponds to the portion of the fixed costs that are attribut  tribut able to fixed operations and maintenance  nance costs is usually  ally indexed to inflation, as is the variable  able operations and maintenance  nance charge. In the case of a project company that generates electricity using a non-dis              patchable (priprice marilystated renew  RfP typi cally requires the bidders totech bid nology an energy inables), cents the (or other currency units) per kWh or Dollars (or other other currency unit) per MWh.

Competitive Tenders for Tariffs with Cost Openers (Regulation by Contract) A fixed-price tariff structure by its nature allocates several risks to the pro ject company (and therefore  fore to the sponsors and the lenders to the pro ject). As a result,  sult, potential bidders will not submit a bid unless they are able to mit igate  gate these risks to accept  ceptable  able levels in advance of submit ting  ting their bid. To the extent extent bidders are not able to mit igate  gate the risks, they will either  ther (i) demand  mand a risk premium  mium for bearing the risk by increas ing  ing their bid price, or (ii) not submit a bid at all. In many cases, off takers  takers (and ulti mately, through the tariff, electricity consumers) are in a bet ter  ter position  tion to bear some types of risks. Allocating  ing these risks to the off takers  takers will actu  tually   ally  result  sult in lower tariffs and an ability to fi nance  nance projects that could not be fi  nanced if these risks were borne by the project company.

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For example, in general, potential bidders will not submit a fixed-price bid without  out having reached agreement  ment with an engineering,  neering, procurement,  ment, and construction (EPC) contractor  tor as to at least the principal  pal terms and condi tions on which the EPC contractor  tor will engineer,  neer, procure, construct, install, and commission the project, and the the EPC contract price. This often   leads potential bidders to invite an EPC contractor  tor to join their bidding consortium. This creates  ates several draw backs.  backs. First, bidders need need additional  tional time at the beginning  ginning of the tender process to reach agreement  ment with EPC contractors,  tors, which in turn need to reach agree ment  ment with their princi pal equipment suppliers.  ers. Second, if there are only a few EPC contractors  tors in the market for the construction of a particular  lar type of project, or only a few  equipment suppliers  ers capable of supplying the type of equipment that is neces  essary,  sary, there may not be enough EPC contractors  tors for all the interested bidders. There is, for example, a limited market for EPC EPC contractors  tors that   have theand ability complex trica projects in Sub-Saharan Africa, theretoisconstruct a real danger thathydroelec conduct ing  ing tender for a fixed-price tariff may result  sult in some potential de velopers   not being able to bid b id because  cause EPC contractors  tors are not available to team up with them. Reg ula  lation  tion by Contract is an alternative to the fixed-price tariff model.

Reg ulation  lation by contract has been used successfully  fully to de velop   the most challenging  ing of projects in emerging  ing market economies. The essence of reg ula lation by contract is the pre-specifi  fication,  cation, in one or more formal agreements  ments (usually  ally the PPA), of the formulas  las that determine  termine the price an IPP will charge. This does not mean that the price is specified  fied in the contract. Instead it means that the treatment of the indi vidual cost elements that to    gether determine  termine the tariff are defined  fined by a series  ries of formulas  las contained in a contract. In the context of an IPP, the fixed-price tariff model: Allows offtakers to conduct a truly competitive tender by describing in the tender documents the methodology that will be used to establish the tariff the offtaker will pay; Allows offtakers to allocate the risks discussed above in the most optimum manner, thereby lowering the tariff and ensuring that the broadest possible range of developers are interested in bidding to 66

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develop a project; and Does not force bidders to associate with the limited number of EPC contractors that may be interested in constructing a technically  challenging project. In the case of a capacity-based  ity-based tariff structured in the manner sug gested  gested above, the Request  quest for Proposals  als for a project that uses a tariff set by the Reg ulation  lation By Contract method would typi cally  cally require  quire bidders to bid: 1. The nominal annual yield the sponsors expect to earn on their investment, assuming that the actual plant availability equals the projected plant availability; 2. A cap on the development costs the IPP can include in the rate base that is used to calculate the Base Capacity Charge; 3. A monthly fixed operations and maintenance fee; and 4. A variable operations and maintenance fee. The most economically  cally advantageous bid would be se lected  lected by using a fi nancial model to determine  termine which of the bids result  sult in the low est  est net finan nancial obligations  ations for the off taker  taker per MW of capacity  ity over the term of the PPA, stated in net present  sent value terms. In order to ef fectively  fectively use a finan nancial model to calculate  late the net present  sent value of the off taker's  taker's net financial  nancial obligations,  ations, it is neces  essary s  ary to use explicit assumptions s  umptions as to (i) the contract price that will be payable under the EPC contract, (ii) the debt to eq uity   uity      ratio, (iii) financial terms of the project loans, and (iv) a broad rangethe of antici otherpated assumptions.  sumptions. In the negoti  gotiation  ation of a PPA, the financial  nancial model is shared with all parties. It is essential  sential that the off taker,  taker, IPP, and lenders all have someone  one on their team to examine and audit the financial  nancial model. Under the reg ulation  lation by contract approach, after the PPA has been exe  cuted, the IPP will be required  quired by the terms of the PPA to (a) conduct an international compet itive  tive tender to select  lect the EPC contractor  tor and (b) arrange financ  nancing  ing for the project. The Base Capacity Price will then be projected at financial nancial clos  closing using the actual contract price payable under       67

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the EPC contract, the actual  tual terms of the debt, and the actual  tual de velopment   costs incurred to date, together with a projection t  ion of the de velopment costs   that will be incurred through the commercial operations date. These calcu  lations will then be performed after the commercial operations date to de termine the final Base Capacity Price. The net result  sult of this structure is that identi fied  fied cost openers (items the cost of which will be decided  cided after bids are submitted  ted pursuant to the RfP) can be used to signif   nif  icantly  cantly reduce  duce the risk to de velopers,   which in turn can increase the number of pre-qualified  fied bidders that submit a proposal and ulitmately  mately result  sult in a more competitve price. Indicative Public Procurement Process:

The timelines  lines reflected  flected below are merely illustrative  trative and may overlap.  

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Invoicing and Payments Invoices In order to be paid for the energy it de livers,  livers, plus any applicable  able capacity   ity  charge, the seller will need to peri  riodi  odically  cally invoice the buyer, in an amount denomi  nominated  nated in the currency currency agreed in the PPA. The billing pe period  riod is generally on a monthly basis. The invoice will generally include the follow ing  ing components: (a) capacity  ity payment, (b) energy payment, (c) supple mental  mental payments (including payments for any start ups above the agreed thresh old), and (d) liqui  uidated  dated damages and penalty amounts owed to the buyer. The buyer has the right to re view   the invoice prepared  pared by the seller, and if it disagrees with the amount payable in the invoice, it may request     clarifi  fication  cation and substantiation  ation of such invoice within a number of days agreed among the parties.

Metering An important element  ment after the tariff negoti  gotiation  ation is how to measure the energy and capacity  ity to be invoiced to the buyer. The seller is typically  cally re sponsible  ble to buy and install me ters  ters to measure the output  put of the power plant. The net electrical and capacity be   output     to be invoiced will usually   measured according  cording to a metering  tering code published by the reg ulator.  lator. The parties will agree on the me ters  ters (a main meter and a back-up meter) to be used for measurements,  ments, and the delivery  livery points for those measure ments. Those meters  ters will be reg ularly  larly inspected and tested by both parties. Representatives  sentatives of both parties should generally be present  sent on the date of  reading of meters  ters for invoice.

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Payments Undisputed  puted payments must be made in the currency agreed by the parties to the power purchase agreement.  ment. Currency: The currency of payment under the power purchase agree  -

ment is a negoti  gotiated  ated issue that may vary from ju ris  risdiction  diction to juris  risdiction.  diction. Sellers often have foreign exchange exposure in emerg ing  ing markets. Foreign exchange exposure arises when a signif   nif  icant  cant portion of the project costs have been financed  nanced in a foreign currency (e.g., US Dollars or Euros). If the seller is to be paid by the buyer in the local currency, it must ensure that it can pay back the lenders in the foreign currency. The currency of payment will often depend  pend on the strength of the local currency as well as how readily convert ible  ible the currency is. In sit uations  ations where the local currency has a long history t  ory of stability and is generally re-  garded as being able to maintain this stability, the PPA will likely be payable in local currency. In other markets without  out this stable history  tory it is accomplished by: 1) bench marking the amount of the buyer's payment in local currency to the foreign currency at the market exchange rate, or 2) the buyer paying the seller di  rectly in a foreign currency. As an alternative, the tariff may include a more structured foreign currency  indexation formula. The indexation formula is used in cases where the seller can "hedge" "hedge" the foreign foreign exchange exchange exposure. Hedging  ing is generally  available in markets where the local currency markets are highly liquid. Method of payment: The method of payment is subject to agreement  ment of 

the parties, but is often by wire trans fer  fer to a desig  ignated  nated account  count of the seller. Disputed amounts: Normally, if any portion of the invoiced amounts are

disputed  puted by the buyer, these will be withheld  held from payment and contested as part of the agreed dis pute  pute resolu  olution  tion mechanism  anism under the power pur-

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chase agreement.  ment. An interest rate will apply to all such withheld  held amounts which must be added to the payment as determined  termined under the dispute reso olution  tion mechanism  anism to be owed to the seller. In some cases the parties may  may  agree that the amounts represent  senting  ing the disputed  puted portions of the invoice will be put in an escrow account until resolu of the dispute.       tion     Late payment: Any late payments (i.e., payments made after the due date

 tween the parties) will bear interest at an interest rate (ei ther agreed between t  her local interest rate or foreign interest rate) agreed between  tween parties from the date on which the payment was due until the date the payment is made. The basis of the interest rate is generally the inter-bank rate for the mone tary market published by the central bank of the country for local currency  components or the LIBOR/EURIBOR for US/EUR foreign currency components.  

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Credit Support for Offtaker Obligations Why Credit Support? This section sets out some of the princi pal  pal instruments  ments or methods  ods that are sometimes  times used to provide support for the payment obligations  ations of the off  taker under the PPA. This is an important issue partic ularly  larly where there is some concern about the ability of the off taker  taker to meet its payment oblig ations  ations over the term of  the PPA. Concern about the ability of an off taker to meet its long-term   of reasons. PPA payment obligations  ations can arise for a number A typical  cal sce nario in emerging  ing markets is where the end-user tariff is not cost-reflective - in other words, the revenues generated by the off taker  taker from the sale of electricity to consumers at tariff rates are not reflec  flective  tive of the cost the off taker  taker incurs to procure the electricity from power producers  ers (including cost of its own generation, where applicable) plus trans mis  mission  sion and distri  trib bution  tion costs. In this scenario,  nario, raising  ing the utility's tariff to reflect  flect actual  tual cost is often not available as a policy option - at least in the short run - because  cause of the adverse pressures  sures this will create  ate for consumers and the atten tendant social and politi  cal quences. As a result, the off taker is often not   conse     dies suf fi  ficiently  ciently creditworthy  worthy and  will require  quire government subsi  dies until such time as tariffs are fully cost-reflective.  flective. It is not possi  sible  ble to raise financ  nancing  ing for an IPP that will sell capac ity  ity and energy to an off taker  taker in such a finan nancial condition  tion without  out some form of credit support.

 

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Sovereign Guarantees and Letters of Credit In emerging  ing markets where the off taker  taker is a state-owned entity, lenders will sometimes  times require  quire a guarantee from the sovereign to provide credit support for the payment obligations  ations of the off taker  taker under the PPA. Under the guarantee, the state would agree to meet the payment obligations  ations of the state-owned off taker  taker if it is unable to pay, as they be come  come due. How ever,  ever, a guarantee is only really  ally useful  ful to the extent that a guarantor is of sound credit quality. If there are concerns about the credit quality of a sovereign, then certain products can be obtained to address the risk of non-payment by the sovereign, including: A partial risk guarantee from the World Bank or the African Development Bank (AfDB), A Non-Honoring Sovereign Guaranty insurance policy from the Overseas Private Investment Corporation (OPIC), A political risk insurance policy from the Multilateral Investment Guarantee Agency (MIGA), and A guarantee from OPIC or an export credit agency. In addition,  tion, letters  ters of credit can address short term liquidity  uidity problems when used alongside  side credit support from a DFI or export credit agency.           These letable credit will be required to be issued by a financial institution of accept  aters ble of credit quality. The issuance  suance of sovereign guarantees to cover the payment oblig ations  ations of  state-owned off takers  takers under the PPA can materi  rially  ally enhance the ability of  the government to attract  tract foreign direct  rect investment  ment to finance  nance large power projects. That said, a government that is asked to provide support in this form should, before  fore it issues  sues a guarantee or letter  ter of credit, undertake a thorough analysis of the underlying project to satisfy  isfy itself  self that the power project is commercially sound. This sort of as sess  sessment  ment will also enable the government to work out its potential financial  nancial exposure under the rele vant   guarantee or letter   of credit should it choose to issue it.

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For a number of reasons, governments are not always prepared  pared to issue sovereign guarantees or letters  ters of credit to provide explicit credit support for the payment obligations  ations of state-owned entities.  ties. In some cases, the ability of governments to issue such forms of support are constrained by the government's need to maintain sustainable public debt levels. In these cir  cumstances, governments will sometimes  times be prepared  pared to issue letters  ters of  comfort which are not legally binding, but which give investors and lenders "soft comfort" that the government will not allow the off taker  taker to go insolvent and that it will step in to as sist  sist the off taker  taker to meet its obligations  ations to its creditors.  tors. These forms of soft comfort are usually  ally not suf fi  ficient  cient to enable a project to attract  tract large amounts of foreign investment.  ment.

Escrow Account To address liquidity concerns, the off taker  taker may be required  quired to establish  tablish an

escrow  crow account for its payment obligations  ations under the PPA. PPA. The escrow  crow account will be required  quired to contain an amount equal to a certain number of  monthly payments under the PPA - for example, based on total expected charges for a given number of months, or based solely on the capacity   ity  charge for a given number of months. If the off taker  taker fails to make a payment when re quired  quired under the PPA, then the project company can draw on this escrow  crow account.  count. This provides a buffer, so thateven the ifproject continue operate andthe to es pay its debt service, the off company  taker failscan taker to pay. Aftertoany draw on  crow  crow  account,  count, the off taker  taker must immedi  diately  ately (or within a small number of speci  fied days) replenish  plenish the account.  count. If the off taker  taker fails to replenish  plenish the es crow account  count (or, in some cases, obtain some form of replace  placement  ment secu  cu rity), it will be an event of de fault  fault under the PPA. An escrow  crow account  count is functionally  tionally equivalent to a letter  ter of credit and can be used to address short-term liquidity  uidity issues.  sues.

 

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Put and Call Option Agreements Put and call option agreements  ments are sometimes  times also used as mechanisms  anisms to transfer  fer payment risk from the state-owned off taker  taker directly  rectly to the state. A put option  tion entitles  tles the holder of the option, often the seller, to compel the state to purchase the power project at a pre-determined  termined price upon the occurrence  currence of certain trigger  ger event(s)-primarily  marily termination.  nation. A call option on the  tion, on  the other hand, entitles  tles the holder of the option, often the sovereign, to compel the seller to sell the power project to the state at a pre-determined  termined price upon the occurrence of certain trigger  ger events. In both instances, the state ultimately m q  uiring assets. s  ets. The pur  ately ends up acquiring chase in both instances will be determined  termined such that the outstanding  standing debt of the project company will be paid in pri ority o   rity to other claims, thus protecting  ing the lenders. The formula for de termining  termining the purchase price will also take into account trigger  count whether the rele vant    ger event is a seller de fault, a buyer default  fault or some other event. In the former case, the buyer would often not be entitled  tled to recover  cover its projected prof its  its as part of the purchase price. This is discussed  cussed in further detail  tail in Post-Ter mi  mina   na tion  tion Oblig  a tions   tions .

 

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Partial Risk Guarantees Partial risk guarantees (PRGs) of fered  fered by multilat  lateral  eral de velopment   banks are also used as risk mit igation  gation instruments  ments in de veloping   markets. PRGs can be espe useful   cially     where there are concerns about the ability of a state-owned buyer or the sovereign to meet their contractual  tual obligations  ations to a project. PRGs will typically  cally give partial credit protection to pri vate   lenders in circumstances where the state-owned buyer or the state fail to meet their payment obligations  ations under the PPA. The list of trig ger  ger events for PRGs is restricted  stricted to polit ical  cal risk events, including the non-honoring of a financial  nancial obligation  ation by a soverign, including in respect  spect of an obligation  ation to purchase a power plant follow ing  ing the termination  nation of a PPA. PRGs ef fec  fec tively transfer  fer these risks to third-party multilat  lateral  eral institu  tutions  tions which are better  ter able than pri vate   parties to manage them. The World Bank Group and the African De velopment for example, provide partial risk guar  refer to Bank, antee products (please their respective  spective web sites for details).  tails). These PRGs can be used to guarantee the repayment  payment of both project loans by the project company and the obligation  ation to reimburse  imburse a bank that has is sued  sued a letter  ter of credit on behalf  half of an off taker.  taker. Example of PRG Structure:

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Political Risk Insurance MIGA and national export credit agencies also play an important role in providing forms of credit enhancement  ment for power projects in de veloping   markets. MIGA provides polit ical  cal risk insurance primarily  marily to support equity  uity invest ments and shareholder  holder loans within these projects. National export credit agencies provide polit ical  cal risk insurance that can be used to protect lenders and/or equity  uity investors against certain specified  fied polit ical  cal risk events. It is worth not noting  ing that a national export credit agency  cover is typically  cally tied to exports from the country of the rele vant   agency. The underlying power project must have a signif   nif  icant  cant percentage  age of export content from exporters in the export credit agency's country of origin  gin to qualify for polit ical  cal risk insurance from that export credit agency. Similar  lar to a PRG, these products enable these risks to be externalised to a third party that is better  ter able than a pri vate   actor to bear them.

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Credit Support for the Project Company's Obligations In this section, we will look at the nature of credit support that the host government and lenders may expect from the project company (and, in the case of limited recourse  course financing,  nancing, the sponsors). For the government, the negoti  gotiation  ation and finali  nalisation  sation of a PPA often in volves considerable expenses for the off taker  taker largely due to fees payable for legal, financial  nancial and techni  nical  cal advisory  sory services. In incurring these expenses, the off taker  taker wants some assurance  surance that the project company is fully committed to negoti at the PPA to its conclusion, arranging neces fi-        ing         sary   nancing  ing in order to attain  tain financial  nancial close, and diligently  gently de veloping   the project with a view to completing  ing construction and timely attaining  taining the agreed Commercial Operations Date (COD). Also, given that the off taker  taker  ally procures the power for resale  sale to distri  tribu  bution  tion companies or conusually  tual commitments  ments to make a cersumers, it may also have binding contractual tain quantum of power available to them by agreed dates. For these rea taker may insist on appropriately sons, the off taker  ately sized delay damages or de fault payments from the project company. Given that the project company's primary initial obligation is to complete     the power plant in accordance  cordance with operat  ing   specifi ing  fications  cations by the targeted COD, the need to obtain credit support for the project company is often limited to the construction phase of the project. It is worthwhile to note that where construction takes the form of an EPC contract, the construction risk will be shifted from the project company to the EPC contractor,  tor, with the latter  ter being required  quired under the EPC contract to provide a comple tion support guarantee or other secu  curity  rity for its obligations.  ations. From the perspective of the project company, it is es sential  sential to ensure that its li abilities  ties under the credit support of fered  fered to the off taker  taker are no

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greater than the liquidated damages  ages payable by the EPC contractor and the credit support provided by the EPC contrac tor.  tor. Below is an illustration  tration of the evolution  tion of a power plant facility from ini  tial de velopment (the process of putting together the rele vant project docu-    ments  and allocating  ing risk to rele vant   parties) to commercial operations. The timelines  lines reflected  flected below are merely illustrative  trative and may overlap.

Failure by the project company to achieve commercial operation by the scheduled COD may trigger  ger delay-liq  lay-liqui  uidated  dated damages under the PPA. Similarly,  larly, failure to acheive minimum  mum capacity  ity and energy thresholds  olds may trig ger performance-liqui  uidated  dated damages. Failure of of the project company to achieve commercial operation by the long-stop date may enti tle  tle the parties to terminate  nate the PPA (and potentially other agreements).  ments). In any such case of non-performance, there will be financial  nancial consequences  quences for the pro ject company and the EPC contrac tor.  tor. In most cases, unless the reason for failure to achieve commercial operation is not capable of remedy, it would not be in the interest of the government to terminate  nate the PPA. It may be quite dif fi  ficult  cult to attract  tract new investors to a troubled  bled project. To ensure that these financial  nancial obligations  ations can be met, the host government, the off taker  taker

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and the lenders will normally expect credit support from the project company and the EPC contractor in the forms described  scribed below.

Typical Credit Instruments During Construction C onstruction Performance Bond: A performance bond normally takes the form of a

letter  ter of credit or a bank guarantee. The value of this bond is normally a fraction  tion of the investment  ment value of the project and in theory  ory should take into consideration the wasted cost incurred by the host government  ment and lost generation capacity.  ity. In practice,  tice, the main purpose of the bond is one of  deterrent  terrent value and is typically  cally insuf fi  ficient  cient to cover the real cost suf fered  fered by  the government in the event of non-performance.

 ment Bond: In certain juris  risdictions,  dictions, the project company may be Development     re quired and to post a de velopment bondagree in consideration for aa government consent support or concession  sion  ment (note that ment government support agreement  ment is not a guarantee). If the project is unable to reach specified  fied milestones  stones for reasons attribut  tributable  able to the de veloper,   and thus the PPA does not become  come ef fective  fective at a given date, the off taker  taker may  draw on the de velopment   bond. bond.  port Agreement: Although this agreement  ment is not part of the Sponsor Support  tion for commercial banks to provide limited PPA, it is often a central condition  course lending. Essentially, this implies that any funding shortfalls  falls during recourse construction will be provided by the sponsor and that the sponsor may be required to set aside the value of the requi funding commitment. Spon    site      cally be required  quired if the contingency budget in a project sor support will typically  larly high. is small or the risk of cost over-runs are perceived to be partic ularly  sourced project sponsors/shareholders  holders are well-placed to provide Well-resourced sponsor support.

 

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Credit Support for the Fuel Supply Agreement Fuel should be arranged in advance of the targeted commis sioning  sioning date to enable testing  ing and commissioning  sioning to take place. The fuel supplier will expect the project company to provide credit support for its payment oblig a ations under the fuel supply contract. For example, in gas supply contracts, credit support is normally in the form of a letter in stances, this would represent  ter of credit (LC). In many instances,  sent esti  timated  mated gas supplies for a period  riod of the operations. If the project company misses a payment for any given month, the gas supplier can draw on the LC. Should this happen, the project company will be expected to fund the LC. This mechanism  anism provides the gas supplier with reasonable as surance  surance that the project company will meet its payment oblig ations  ations in a timely manner. Typically,  cally, the require  quirements  ments for this credit support are established  tablished prior to financial close, but the actual financial instrument needs to be in         place prior to first gas delivery.  livery. Once gas begins  gins to flow through the gas pipes under the contractual  tual terms, but prior to the commercial operations date, this LC is typically  cally expected to be in place. In general, the above obligations  ations and instruments  ments fall away at the commercial operations date, except for the LC for the gas (fuel) supply agree ment  ment which will be continued into commercial operations.

Other Credit Support Instruments Post-COD Debt Service Reserve Accounts (DSRA): This is intended to enrich the

credit of the project and to ensure that the project can meet its debt oblig a ations even when payments from the off taker  taker are temporarily inadequate  quate to service principal  pal and interest. It is also used to guard against fluctu ations  ations in the foreign exchange rate where the currency of payments under the PPA is not the same as the currency for debt repayment.  payment. The DSRA is typically   cally  sized in an amount equivalent to a certain number of months of debt ser vice payments and is funded from the date of first draw down.  down. Thereafter,  after, the project company must top up the account  count in the event it is drawn down. The obligation  ation to maintain the DSRA at the contracted level is normally negotiated as a compo of the tariff formula.     nent  

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 ing Capital  ital Letters of Credit: At the start of the op erat  erating  ing life of a Working project, there is a mismatch  match of expenses and income. income. Signif   nif  icant  cant expenses have to be borne by the project be  fore fore there is income to cover it. In this instance, the project sponsor may be re quired quired to obtain a credit line or fund the initial as a going con  cash shortfall   such that the project can func tion   cern from the start.  

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Tax Exemptions In an ef fort  fort to incentivise investment  ment in a sector, governments may some times provide incentives inor thereform of tax exemptions. These take the form of a removal  moval of taxes  duction duc  tion of taxes on certain specific  cmay ific items or equipment to be procured during the construction phase. These may also include exemptions from income tax for a certain number of years during project operations. Tax exemptions may improve the project's financial  nancial viability  ability and encourage investment,  ment, allow ing  ing a lower end-user tariff that will benefit  fit consumers. Examples of the types of exemptions that may be granted are exemptions from custom  tom import duties  ties and levies on require  quirements  ments during construction, reduced  duced regis  istration  tration fees, negoti  gotiated  ated levels for Value Added Taxes (VAT) and the granting during operations.   of tax holidays   Tax and customs  toms exemptions granted to a project will have to be approved by the tax authority  thority and in some cases by the leg is  islature  lature or chief executive  tive of the country. This process may take a sig nif   nif  icant  cant amount of time. Where tax exemptions are contemplated for a power project, the parties will need to take this timing constraint into ac count  count during their negoti  gotiations.  ations. It is important for the project company to use good tax advisory  sory services to ensure that it identifies  fies and takes advantage of all the pos si  sible  ble tax benefits  fits available in the host country.  

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Summary of Key Points Tariff structures Dispatchable: The tariff structure for dispatchable technologies

(thermal and large hydro) includes a payment for the capacity made available to the offtaker and a payment for energy that is actually  dispatched the offtaker. Non-Dispatchable: The tariff structure for non-dispatchable technologies (wind, solar and smaller run of the river) consists primarily  of a payment for the energy generated by the generation facility. A feed-in tariff may also be used to incentivise renewable energy projects.

Fuel Supply Agreements Take or Pay: Fuel supply agreements usually contain a take or pay 

clause which provides that the power producer must pay for an agreed quantity of fuel (typically gas) regardless of whether it actually takes that quantity.

Currency and Tax Convertability Risk: If payments under the PPA are in local currency 

and the debt for the project is a foreign currency, the power producer is subject to the risk of being unable to convert the local currency to satisfy  the foreign currency debt payments. There are a number of different approaches to address this exposure in the PPA. Tax Exemptions: In order to attract investment into power projects, the host government may grant special tax exemptions which extend beyond the general rules applied to all companies.

 

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Credit Support Offtaker Credit Support: The offtaker typically provides some form

of credit support to further secure its payment obligations under the PPA. This may include some combination of sovereign guarantees, comfort letters, put and call option agreements, letters of credit, and an escrow account to provide payment liquidity. Political Risk Cover: Depending on political risk concerns in the host market, project lenders may require partial risk guarantees guarantees from multilateral development banks  banks  or other development finance institutions to institutions  to provide additional investment protection under the PPA. Seller Credit Support: The project company typically provides some form of credit support to support its performance obligations under the PPA. The focus may be on the risk of project construction or on the project company's obligations under fuel supply and financing agreements.  

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Introduction

Development and Construction Phase Risks Operational Phase Risks Other Risks Force Majeure Insurance Summary of Key Points

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Introduction The foundation of a successful  ful and bankable power purchase agree -

 

   

ment is the of an to eqthe uitable and allocation amongst the achieve contractment  ing parties ing PPA.balance The age-old principle  ple of of risks contractual risk allocation in project fi nanc  nancing  ing rings espe  pecially  cially true for PPAs, the essence of this princi ple ple being that risks should optimally  timally be allo cated to the party best able to manage such risk.

The management  ment of the risks may best lie with a third party, for example, the contrac tor tor who has been appointed to undertake the construction of  the power plant, or the trans mis  mission  sion company responsi  sponsible  ble for building the interconnec tion tion facili ties. ties. How  ever, ever, those third parties are not the contract ing ing parties to the PPA, yet the risk must be allocated to one of the parties to the PPA. So how is this gap bridged? How such risks are to be mit igated  gated is a neces  essary  sary consideration within the PPA. Risks within the control of a third party assumed  sumed by one of the parties to the PPA may, for example, be passed to such third party through the use of back to back pro vi    sions sions in the PPA and the contract with the third party. If a party takes on risk that is not usually  ally allocated to that party, they will expect to receive  ceive some benefit  fit for assuming  suming such risk. In the case of the off taker, the expectation could be that it would want to re ceive a lower tar  be an iff.  In the case of a project project company, the expectation expectation could appropri ate increase in its eq e q uity uity re turn turn for bearing that risk. There fore, fore, whilst a party may achieve a commercial win in pass ing ing on risk to its counterparty, that party ulti mately mately is still bearing the cost of such risk in some form or other. An appropri ate ate balanc ing ing and allocation of risk in a PPA should aim to provide suf  fi fi cient cient incentive to the contract ing ing parties to perform their oblig ations ations under under the PPA. Some risks are present  sent throughout  out all phases of a project. Certain risks arise only during the de velopment and construction phase, while others    ers arise only once the project is operational.

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This chapter seeks to explore the key risks that arise in the context of a PPA. The risks outlined  lined in these chapters are not exhaus tive.  tive. Risks and meth ods ods for their mit igation  gation may also vary from project to project, de pending on the ju ris ris diction, diction, the underlying reg ulatory  latory framework,  work, the structure of the off taker, and the particu generation technology,     lar     amongst other other considerations. These various  ous permutations  tations are touched on in other chapters of this handbook.

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Development and Construction Phase Risks Pre-Construction Land Procurement The project company will typically  cally bear the primary  mary responsi  sponsibility  bility to pro  cure the land on which the power plant will be de veloped and operated. operated. To  taker and/or government owns, leases or grants a the extent that the off taker concession over such land, and is making such land available to the project   then  sponsibility  bility may sit more appropriately  ately with the off  company, the responsi  larly, where a government authority  thority or entity controlled by the taker. Similarly,  taker is the lessor of the project site, the project company  government or off taker  tional comfort from the off taker/government  taker/government with re will often seek additional  ance by such lessor of the terms of the rele vant   spect to compliance lease  ment. It is in the interest of both the off taker  taker and the project comarrangement.  cupy the project site is secured  cured for the pany to ensure that the right to occupy entire term of the PPA. If the term of the PPA can be re newed, newed, then the  cured for the extension period.  riod. right to occupy the project site should be secured

 

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Failure to Commence The off taker  taker will want reas  assurance  surance that the project company will commence construction activity  tivity within a minimum  mum period  riod of time after the ef  fective the failure to commence may notdate be aofdithe  rectPPA. rect result  sultAlthough of the project company's acts, suchconstruction as when an EPC contractor  tor fails to execute  cute its duties  ties under the EPC contract, the potential liabili  abilities  ties associ  sociated  ated with this form of default  fault still rest entirely with the project company. Failure to commence construction within the defined  fined time period  riod will either  ther cause the PPA to terminate  nate automat  tomat ically,  cally, or give the off taker  taker the right to terminate  nate the PPA. The project company's failure to commence construction may also trigger  ger payouts under construction or performance bonds.

 nities  ties for a project company to cure a failThere are often limited opportuni ure to commence construction. Some PPAs may provide the project com ment period,  riod, while at the pany with the option to extend the commencement  dated damages to remedy the initial  tial delay. If  same time paying liquidated  cal force mathe delay is caused by a force majeure event (including a polit ical  jeure event) or by a default  fault by the off taker  taker (or any related  lated party or governmental authority  thority under any other project contracts), the time limit for commencement  ment of construction construction will be extended day-for-day. day-for-day. This exten   fault sion will continue for so long as the rele vant force majeure event event or default    ing construction. pre vents the project company from commenc commencing

 

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Follow ing  ing commencement  ment of construction, the off taker  taker will also want to Construction

be sure that construction is proceeding and that the project has not been abandoned. Abandonment could take the form of a permanent suspension  pension Abandonment of the project's construction construction or operation, operation, or could occur via construcFollow  tive abandonment, ing commence where ment construction of construction, or operation the off taker been also suswant pended to       haswill    riod of is  therand forsure a protracted period time. In either case,that abandonment be that construction proceeding the project of hasthe notproject been will constitute  tute an event of de  faulttake fault by the company, entitling  tling off   pthe abandoned. Abandonment could theproject form of a permanent sus pension ension taker terminate  nate the PPA.nAfter theration, projectoris could operational, the concept of  of thetoproject's project's constructio construction or operation, ope co uld occur via construc able time peor  riod  pending abandonment and the applic able riod will vary, pending the  pon tive abandonment, where construction operation hasdebeen suspended ended  nprotracted  ferent level techanology ology of thepeproject, order account dif ferent  riod of in  ther for riod time. In to either case,for abandonment of of theintensity  project  tive  mcompany, of the operation tive ent of a thermal vs.  tute an (for  faultacby  tlingplant will consti tute eventexample, of default themanage projectment entitling the off  passive  sive  ment ment a solar installation).  nate taker tomanage terminate theofPPA. After the project is operational, the concept of   able time period  riod will vary, depending  pending on the abandonment and the applicable  nologyinofAchieving  count for dif ferent  ferent levels of intentech nology the project, inCOD order to account Delays sity of the operation (for example, active a thermal plant   anmanage   time of Construction of the power agreedment schedule is one of   sive manage  ment  vs. passive ment of aplant solar within installation). the primary obligations of the project company under the PPA. Accordingly, failure to complete the plant (i.e., achieve COD) within the applicable Delays inwill, Achieving COD timeframe, in the absence of force majeure or other relief events, constitute a breach PPA,plant entitling the an offtaker claim delay-liquidated Construction of of thethe power within agreedtotime schedule is one of  damages and/or ultimately, to project terminate the power purchase agreement. the primary obligations of the company under the PPA. AccordThe project willthe in plant turn need ensure that any obligation to pay  ingly, failurecompany to complete (i.e., to achieve COD) within the applicable delay-liquidated damages is passed through to or theother EPC relief contractor timeframe, will, in the absence of force majeure events,under conthe EPC contract delay-liquidated damages damages will delay-liquidated need to be sized stitute a breach of(in thewhich PPA, entitling the offtaker to claim to cover not onlyultimately, those payable under the PPA, but also debt service under damages and/or to terminate the power purchase agreement. the loan documents). EPC contract that, upon The project company The will in turn need toshould ensurealso thatprovide any obligation to terpay  mination of the power purchase agreement delay, the project delay-liquidated damages is passed throughfor to prolonged the EPC contractor under company is entitled terminate the EPC contract the EPC contract (in to which delay-liquidated damagesand willclaim needappropriate to be sized compensation. compensati to cover noton. only those payable under the PPA, but also debt service under the loan documents). The EPC contract should also provide that, upon termination of the power purchase agreement for prolonged delay, the project company is entitled to terminate the EPC contract and claim appropriate compensation.

 

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Deemed Completion There are a number of circumstances in which the project company (and its contractors)  tors) must be entitled  tled to claim relief  lief for delays.  lays. Relief  lief may be   given withonly), respect to time only the project is given a time extension or both time and(i.e., money, throughcompany the concept of Deemed  tion occurs  curs where completion  tion is not Completion. Deemed completion achieved, as a result  sult of risks for which the off taker  taker (and/or government) bears the risk. In such circumstances, deemed comple completion  tion will typically  cally be held to have occurred  curred on the later of the rele vant   scheduled completion  tion date and the date on which the plant would, but for the rele vant   risk event, have occurred.  curred. Upon deemed completion,  tion, the off taker  taker will be entitled  tled to receive  ceive capacity  ity payments (or deemed energy payments) sized by ref erence  erence to the contracted capacity  ity of the power power plant. plant. Thereafter,  after, follow ing  ing com    ple tion testcapac ing, ifity, thethe plant performance teststypi demonstrate a lower-thancontracted  ity, project company will  cally need to cally account  count for the dif ference.  ference.

Construction Cost Escalation From the off taker's  taker's perspective, one of the key objectives  tives in tendering out or negoti  gotiat  ating  ing a power project for de velopment   by the pri vate   sector, is to establish  tablish price (and therefore  fore tariff) certainty with respect  spect to the capital  tal  fore be determined  termined on the basis of a cost of the project. The tariff will therefore  tive bid or an agreed construction cost. The project company will compet itive in turn typically look to lock in the construction cost by negoti at a       ing   lump-sum, date-certain, turnkey contract with its EPC contractor.  tor. There  ple is that the project company (under the PPA) and after, the basic principle  tor (under the EPC contract) will bear the risk of any costthe EPC contractor overruns. There are how  ever, ever, certain exceptions to to this rule. Where the  sult of a variation  ation required construction cost increases as a result q  uired by the off taker  taker or changes in law (see Change in Law below), the PPA should allow ei ther for direct  rect compensation to be payable by the off taker  taker to cover the incremental  mental cost in construction, or for the tariff to be adjusted to cover the incremental  mental capital  tal cost (and any associ  sociated  ated financ  nancing  ing cost).

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Site Access and Availability There are a number of potential risks and issues  sues associ  sociated  ated with construction that relate  late to the site selected  lected for the project. These include geolog  olog ical  cal risk (i.e., whether the site is geo-techni suitable for the construction   cally     activity);  tivity); archaeolog  olog ical  cal risk (the possi  sibility  bility of archaeolog  olog ical  cal discoveries  coveries being made during excavation/construction, and how such discoveries  coveries are managed); and any pre-existing  ing environmental  ronmental contami  amination  nation that may be discovered  covered during construction activities.  ties.

Right to Occupy The project company's right to occupy the project site for the purposes of  constructing and then operating the power plant is fundamental to the integrity and viability of the project. That right may take a variety of forms, ranging from outright ownership of the project site (potentially through acquisition from a third party), different forms of leasehold interest, concession arrangements or other rights to occupy. These will vary according to the jurisdiction and the circumstances of the particular project. The project company may also require additional access rights, easements or written consents  in order to carry out construction activities with respect to associconsents ated infrastructure for which it is responsible, such as transmission lines. Access to the project site will also be required, not only for the construction, operation and maintenance of the power project, but also to afford the offtaker access to undertake whatever inspection rights it may have under the PPA.

 

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Site Suitability The project company will typically  cally bear the primary  mary responsi  sponsibility  bility for the suitability  ability of the project site. Where the project company has had the op    portu nityni site surveys, including de tailed soilcompany/consampling and geo-tech  nito  calconduct cal analysis,full it may be reasonable for the project tractor to take responsi  sponsibility  bility for geolog  olog ical  cal risk (i.e., whether the site is geo-techni  nically  cally suitable  able for the construction activity),  tivity), particularly  larly where the project company has been the primary  mary dri ver   for selec  lection  tion of the pro ject site. Conversely, where the off taker/government  taker/government has ef fectively  fectively preselected  lected the project site and/or the project company has had limited opportunity  nity to conduct such re views,   it may be more appropriate  ate for the off taker  taker to take take such risk. This is partic ularly  larly the case where the project site is ef  fectively a brownfield site which is being made available to the project company. In such circumstances, the project company is likely to require  quire appropriate and deemed completion, as   protection, including time relief     well as robust indemnities  ties for third party claims with respect  spect to any preexisting  ing environmental  ronmental contami  amination.  nation.

Site-Related Infrastructure It is generally the project company who determines  termines and assumes  sumes the ade quacy of road and rail links (or other transportation  portation links) to and from the  ing or rerouting  ing of existing  ing project site. This may also extend to the routing  erlines and water pipelines required  quired for the supply of utilities  ties to the pow erlines project site. The availability of the supply of utilities to the project site is   also typically  cally the project company's responsi  sponsibility,  bility, although this may vary  where the off taker  taker or government authority  thority or other related  lated party is oper ing an adjacent site and enters into an express contractual  tual undertaking to ating  larly, where it is agreed that a signif  supply such services. Similarly,  nif  icant  cant piece of  infrastructure (such as a transmission  mission line, gas pipeline or road) is to be undertaken by the off taker  taker or a government entity, the completion  tion risk asso so ated with such infrastructure may be assumed  sumed by the off taker.  taker. Reset  settle  tle ciated  quired in order to acquire  quire the project site. The impact ment may also be required  settle  tlement on the timing of the project by a reset  ment process should be carefully   fully      assessed by the contracting parties to the PPA.

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Interconnection Infrastructure The construction and operation of a new power plant needs to be supported by a whole host of supporting  ing infrastructure. In addition  tion to connec tion to the physi  cal lines which can vary from a few    grid via transmis   sions   kilome ters ters to hundreds of kilome ters, ters, the construction process also needs to be supported by the availability of utili ties ties and access roads. In terms of timing, the de velopment   of the power plant and associ  sociated  ated transmis  mission  sion network  work need to be co-ordinated  nated to ensue that the power plant is ready to be connected to the grid at the time of commis sioning.  sioning. This also re quires quires planning ahead in terms of availability of fuel and the infrastructure to bring in such fuel.

Transmission Interconnection The project company and the off taker  taker shall decide,  cide, typically  cally at a very early  stage, which party shall be re sponsi  sponsible  ble for the construction of the transmis  mis sion line, as well as the ongoing ownership and mainte nance nance of the line.

Construction by Offtaker Commercially, the prime incentive for the off taker  taker to take on the obliga ation to construct the transmission  sion line is to avoid the higher construction cost if construction is undertaken by the project company. The increased cost of construction by the project company will be passed back to the off -  taker through a higher tariff. The advantage of potential cost savings of construction by the off  taker must be weighed against two dis advantages:  advantages: 1. The off taker a source of suf fi  taker may not have a source  ficient  cient funds to undertake the construction, which is a problem fac ing  ing many utilities  ties in sub-Saharan Africa. 2. If the off taker  taker commits to constructing  ing the transmis  mission  sion line, then the off taker will also bear the re sponsi bility if it fails to com     

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plete the transmis  mission  sion line when the power plant is ready for commis sioning. sioning. Under the PPA, this will normally result  sult in the off taker  taker being re quired quired to pay liqui dated dated damages to the power plant, calcu  lated as if electricity is deemed to have been de livered. livered. To re duce duce the risk of delay in implement ing will     the construction, the off taker   need to plan ahead in terms of fi nanc  nancing  ing and equipment procure ment to ensure that comple tion tion can be be aligned with the timing for comple tion tion of the power plant.

Construction by Project Company Where the project company is responsi  sponsible  ble for constructing  ing the transmis  mis sion line, the off taker  taker will try to control the costs of construct ing  ing the trans mis sion sion line, since these costs will ulti  mately mately be passed back to the off  taker taker

 

 

 via tariff. The off  taker can try totocontrol by requiring major supply contracts to be subjected competthese tendering, and by all employ itive  tive costs ing a compe tent tent engineer  neer to oversee the implementation  mentation of the transmis  mis sion line construction.

Delivery Point Once the transmis  mission  sion line has been completed, the PPA identifies  fies the oblig ation ation of the project company to deliver  liver energy to a delivery  livery point. The de livery livery point is a phys ical  cal location that is specified  fied in the PPA. The project company will want the de  livery livery point as close to the power plant as possi The off taker would then take trans mis line risk from and   ble.       sion   after the delivery  livery point. How ever,  ever, this may be specif  ically  cally negoti  gotiated,  ated, particu larly larly where the trans mis mis sion sion line will be operated and maintained by a trans mis mission s  ion company that is unre lated lated to the off  taker. taker. This is further dis cussed in Power Genera tion  tion Markets   above, in comparing bundled and unbundled sys tems. tems.

 

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Testing and Commissioning Testing and Commissioning Testing  ing and commissioning  sioning of the power plant is required  quired before  fore the COD in order to ensure that the indi vidual   plant and equipment is functioning  tioning according  cording to the design  sign and the contracted performance output  put of the power plant. In addition  tion to the testing  ing of indi vidual   equipment, a complete power plant has to be tested to determine  termine the overall output parameters,  ters, including, among others,  ers, installed capacity,  ity, voltage  age output,  put, frequency   quency  and specific  cific fuel consumption. The obligation  ation to carry out tests and commissioning  sioning of the power plant rests on the project company, which has to make sure that experts and suitable  able test equipment are available when re       quired fore the ficient notice be given toness lenders,besince theyCOD. may Suf  engage their ownmust experts to wit  nthe ess offtaker the testsand together with the project company's engineer.  neer. Since part of the testing  ing process for certifying  fying the plant's capacity  ity involves the generation of electricity, the off taker  taker must be prepared  pared to receive  ceive that energy prior to the commencement  ment of the testing  ing and commissioning  sioning pe riod. If the interconnec interconnector  tor line or the network  work is not available, then pursuant to the terms in the PPA, the project company may claim liqui  uidated  dated damages for delayed  layed COD, which may include evoking the deemed completion  tion clauses in the PPA. Therefore,  fore, there is need for close coordination  nation of the require ment of either party before and during commissioning of the           power plant and related  lated facilities,  ties, including the transmis  mission  sion line where applicable. In case the off taker's  taker's facilities  ties are not available when testing  ing and/or commissioning  sioning is required,  quired, the project company may exercise the right to claim appropriate  ate damages, including deemed capacity  ity and energy  output.  put. The off taker  taker therefore  fore should carefully  fully evaluate  ate its capacity  ity to undertake its obligations obligations to meet the require  quirements  ments of the testing  ing and commis sioning of the power plant.

 

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Failure to Meet Contract Capacity  ing and commissioning     uts Testing s  ioning may re veal lower than contracted outputs p  quired performance levels, such as dependable  pendable caand/or failure to meet required         pac consumption (heat and other sues. fied Depending on ity, howspe farcific the fuel de parture parture of the test re sults srate), ults are from theisspeci fied out put, put,  tify the plant to meet accept  ceptable  able performance there may be a need to rectify output,  put, which may result  sult in delays  lays in achieving COD. If there is no possi  sibility  bility for improving the performance of the power plant, then there are typically  cally two options for the off taker:  taker: 1. To accept the resulting output, with relevant penalties penalties for not not achieving the guaranteed output. 2. To reject the deal, and therefore terminate the PPA.

    uced performance The PPA will contain rele vant clauses to address the reduced d  put levels (usually  ally addressed in the capacity  ity charge payment of dispatch output  sults are not accept  ceptable,  able, then the able generation plants). In case the test results  nated or amended substantially, with other re PPA may have to be terminated  dial actions  tions taken to improve the performance to accept  ceptable  able levels. The medial project company bears the risk of performance of the power plant through out the term of the PPA.

Output/Heat Rate Risk Allocation Upon testing, if the plant output and fuel consumption capacity       fail to meet the contracted performance levels, the project company may have recourse  course through its EPC contract to make claims against (i) the EPC contractor  tor and (ii) the equipment manufac  facturer's  turer's warranties and guaranties. It is important to note, how ever,  ever, these protections are not directly  rectly available to the off taker  taker under the terms of the PPA, since the off taker  taker is not a party to the EPC contract or the equipment supply contracts.

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Operational Phase Risks Market Risk The offtake obligations The off taker's  taker's obligations  ations to purchase the capacity  ity of, and the energy generated by, a power plant (the offtake oblig ations  tions) will be structured somewhat  what dif ferently  ferently depending  pending on the nature of the power project. With respect  spect to dispatch  patchable  able power plants (in partic ular  lar thermal power plants and hydro power projects with sizeable reservoirs), the off take   ation    obligation  ation will generally be structured as an oblig  ation (i) to pay for capac ity made available (or deemed available) to the off taker  taker and (ii) to take and pay for energy dispatched  patched by the off taker  taker and delivered  livered by the project company to the delivery  livery point. With respect  spect to technologies  nologies that are dependent  pendent on interruptible  ible renew   new  able energy sources (notably wind and photovoltaic solar projects), the obligation  ation will typically  cally be structured as an obligation  ation to take and pay for energy actu  tually  ally generated by the power plant or that could have been generated by the power plant in the absence of a curtailment. In both cases, the basic principle  ple is that the market risk (the risk that the capacity  ity of the power plant or the energy generated by it may not be nec es  es sary) should be allocated to the off taker  taker rather than the project company. In a sit uation  ation where generation is available, the off taker  taker must still make payments regardless  gardless of whether the project company actu  tually  ally dispatches  patches the power plant or "takes" the electricity generated. These payments are typically  cally referred  ferred to as availability payments or deemed energy payments  and are structured to ensure that the project company's capital of equity and return on equity)   costs (debt service, return        

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and fixed operating  ing costs are covered. In cases where the power plant is unavailable or incapable of generating  ing electricity as a result  sult of circumstances for which the off taker  taker (or government) has agreed to take the risk (including, among other things, polit ical  cal force majeure, force majeure af fect  fecting  ing the off taker, change in law, unavailability of the grid, and off taker default),       the project company may be entitled  tled to deemed availability  or deemed energy payments that are also intended to cover capital  tal and fixed operat  tual de vices    cial to the allocation of risk in a ing costs. These contractual are crucial power project.

Curtailment Notwithstanding  standing the basic principle  ple described  scribed above, certain off takers  takers and/or the rele vant   transmis  mission  sion system  tem operator may want to reserve  serve some flexibility with respect to the commitment to take interruptible en  curtailment     issue. ergy through rights. This will  be a keenly negoti  gotiated  ated From the project company's (and the lenders') perspective, they will want certainty that the minimum  mum off take  take commitment  ment will cover all fixed costs (including debt service and a minimum  mum equity  uity return).  turn). They may request  quest that the PPA provide for an extended term if curtailment rights are exercised, or they may get comfortable  able with curtailment rights under the circumstances of the project.

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Performance The contracting  ing parties will agree, when entering into the PPA, what the contracted capacity  ity of the power plant will be. In order to reach the COD, the power plant must be tested and certified as having met a percentage of      the contracted capacity.  ity. This is generally referred  ferred to as a minimum  mum capacity   ity  require  quirement.  ment. This testing  ing typically  cally involves partic ipation  pation by the project company, the off taker  taker and any independent  pendent engineer  neer appointed by the parties. For power plants that are paid both a capac ity  ity charge and an energy  charge, the tested capacity  ity at COD may (depending  pending on how the tariff is structured) determine  termine the capacity  ity charge the off taker  taker will pay to the pro ject company. This testing  ing is generally repeated  peated on an annual basis, and in each instance the newly tested capacity  ity will impact the capacity  ity charge payable to the project. If the power plant achieves or exceeds the mini mum  mum capacity  ity require  quirement  ment by the agreed date for the scheduled COD, but still does not achieve the contracted capacity,  ity, then the project company may have the option of ei  ther repairing  pairing or replacing  placing the impacted portions of the power plant within an agreed period  riod of time in order to achieve the full contracted capacity.  ity. At a certain point in time, the project company may be re quired  quired to live with the capacity  ity it has been able to demonstrate, and will no longer have the ability to increase the tested capacity  ity up to the contracted capacity  ity by fixing the defi  ficiency  ciency and demonstrating  ing the higher capacity  ity of the power plant. In the event that the minimum  mum capacity  ity is not achieved by the agreed out side  side or long-stop date for COD, the off taker t  aker will typically c  ally have the right to terminate  nate the PPA. Some PPAs may restrict  strict the project company from deliv livering any energy in excess of the tested capacity  ity locked in at COD, or may  simply specify that the off taker  taker is not required  quired to pay for such additional amounts. In PPAs where the tariff comprises both a capac ity  ity charge and an energy  charge, because  cause the off taker  taker is being required  quired to pay for capacity  ity of the plant, it will typically  cally want to ensure that this capac ity  ity is available for its use. As such, an off taker  taker will typically  cally impose minimum  mum availability re quirements. Availability is typically measured over an agreed agreed period of       

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time. Minimum  mum availability thresholds  olds are typically  cally negoti  gotiated  ated by the parties and are uniquely dependent  pendent on project site conditions  tions such as ambient  ent conditions,  tions, the partic ular  lar techni  nical  cal makeup of the power plant and other ef fi  ficiency  ciency crite  teria  ria provided for in the PPA. The PPA would then provide a remedy to the off taker for a failure by the project company to meet the   minimum  mum availability thresholds.  olds. This may take the form of a right to terminate  nate the PPA or the payment of performance liqui  uidated  dated damages by the project company. In any event, under a well-stuctured well-stuctured tariff, the off taker  taker should not be required  quired to pay for capacity  ity that is not made available to it. Dispatch

Under the PPA, the project company is re quired  quired to strictly comply with the dispatch operator. The project company company takes the  patch instructions of the grid operator. risk of any operational failure to dispatch.  patch. The grid's dispatch  patch protocol can be ref erenced by the PPA and becomes part of the PPA, or can be part of      the transmis  mission  sion connection  tion agreement  ment to be signed between  tween the project company and the transmis  mission  sion company. Dispatch  patch plans are delivered  livered to the project company to cater for monthly, weekly, and daily load planning purposes. Special Considerations for Renewable Energy Projects Special

The allocation of performance risk in renew   new able  able energy projects is compli cated by the generation profile for these projects, namely the fact that power generation is subject to the intermittent  tent availability of the renew   new  able resource.   In renew   new able  able energy PPAs, the off taker  taker only pays for the energy that is de livered. The obligation  ation of the off taker  taker to pay at the tariff rate for de livered  livered energy is sometimes  times capped at an amount set forth in the PPA, with any  excess energy being remu spot prices if there is a spot  munerated  nerated at pre vailing   market. While the off taker t  aker may insist upon a minimum m i  ty require q  uire-    um capacity ment, that threshold  old should be considerably lower than for dispatchable  patchable plants because  cause of the inability of the project company to control the output  put of its renew   new able  able energy project.

 

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To state it plainly, renew   new able  able energy projects are in many ways subject to the whims of the sun, the rain and the wind, and are unable to guarantee a partic ular  lar capacity  ity on any particular  lar day. Similarly, while the off taker would prefer a minimum availability re-    to setnet   capac  ment in order to  support their projected  ity, shifting  ing quire  ment power ity,    ment in renew   new  this risk to the project company may se verely deter investment able energy projects. A compromise  promise solution  tion is to establish  tablish minimum  mum avail quirements  ments that are substantially lower than dispatch  patchable  able power ability require  bility to weather unforseen plants, in order allow the project company flexibility  ronmental variables  ables while still leaving the off taker  taker with the confidence  dence environmental that the project could be terminated  nated if the lower availability require  quirement  ment is not met for an extended an extended period  riod of time.

Fuel and Other Feedstock Supply The long-term adequacy  quacy of supplies, and the pricing for, fuels and other supplies of feedstock is one of the most crit ical  cal elements  ments in a power project. The allocation of fuel supply risk will depend  pend on a number of issues  sues including, in partic ular,  lar, which party is in the best position  tion to negoti  gotiate  ate the supply, the financial  nancial viability  ability of the fuel supplier, the availability/acces  cessi  sibility   bility  of alternative fuel suppliers,  ers, and the the state of de velopment   of the rele  vant market for fuel supply. Tolling Arrangements

Project companies are not always in the best position  tion to negoti  gotiate  ate and se cure a stable supply of a fuel resource  source such as oil, coal, natural  ural gas, biomass or steam. The off taker  taker or government may be better  ter placed to do so. In such circumstances, the off taker  taker may prefer  fer to structure the power project as a tolling arrangement.  ment. This may make sense, partic ularly  larly where the fuel supplier is owned by government or af fili  filiated  ated with the off taker.  taker. Under a tolling arrangement,  ment, the off taker  taker takes full responsi  sponsibility  bility for the procurement  ment (including payment) and supply of fuel to the power plant. If  the off taker t  aker wishes to dispatch p   atch the power plant, it needs to ensure that a

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 cient volume of fuel is delivered  livered to the power plant to allow the elecsuf fi f  icient tricity it dispatches  patches to be generated. generated. The project company will then take responsi  sponsibility  bility for ensuring that the fuel delivered  livered to the power plant is utilised in an ef fi  ficient  cient manner. This is accomplished  complished by requiring  quiring the pro ject company to convert fuel into energy at an energy conversion rate that reflects  flects the agreed ef fi  ficiency  ciency of the power plant given the ambi ent  ent atmos  mos pheric and transmis  mission  sion conditions.  tions.  

Under a tolling arrangement,  ment, therefore,  fore, the off taker  taker or the host government will enter into fuel supply agreements  ments directly  rectly with third party fuel suppliers  ers and be responsi  sponsible  ble for the fuel resource  source payment. Then the off  taker will enter into a separate agreement,  ment, which may be called a power purchase agreement,  ment, a tolling agreement,  ment, or an energy conversion agree ment, with the project company. This will contain contain both the conventional conventional

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PPA terms and certain terms terms for the fuel supply. For ease of administra tration, the project company may give instructions directly  rectly to the third party  fuel supplier for the delivery  livery of fuel, and agree to protocols for nomi nat  nating  ing quantities  ties of fuel to be delivered,  livered, and for taking deliveries  liveries of that fuel, but the project company should not bear responsi bility for payment, nor the     risk that the fuel supplier may breach its obligation  ation to deliver  liver the fuel properly nominated  nated by the project company. Fuel Supply Agreements

Off takers  takers will often seek to pass greater re sponsi  sponsibility  bility onto the project company for procuring fuel supply, how ever,  ever, and require  quire the project company to enter into a fuel supply agree ment  ment with a third party fuel supplier. The project company will then need to contract for suf fi  ficient  cient volumes of fuel to meet its contractual  tual commitment  ment to make the power plant "available" under the PPA, so that, if the off taker elects to dispatch the     plant, the project company has suf fi  ficient  cient fuel to generate. Conversely, it is important that the project company does not contract for quantities  ties of fuel which it cannot use, or the project company will be making unneces  essary   sary  payments for excess fuel that cannot be used to generate power. A detailed  tailed analysis of fuel supply agreements  ments is beyond  yond the scope of this handbook, but the project company will need to ensure that a number of  key issues  sues are covered, including: A binding legal obligation on the part of the fuel supplier to provide the contracted quantity of fuel. which This can be contrasted a "best endeavours" type of obligation, creates the risk ofwith fuel supply  failure with little or no remedies for the plant developer; Appropriate levels of flexibility with respect to monthly and annual contracted quantities to cater for circumstance in which the power plant is not dispatched; Appropriate protections with respect to the supply of offspecification fuel. The fuel needs to meet certain specifications. specifications. The offtaker should be entitled to receive liquidated damages from the fuel supplier to cover additional costs incurred as a result of  burning off-spec fuel (including the increased use of filters and stoppage time for cleanups and startups);

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To the extent that the project company is assuming responsibility  for fuel supply under the terms of the PPA, the project company  will also need to ensure that any liability it incurs under the terms of the PPA for non-availability due to fuel supply failures are passed through to the fuel supplier. It is often difficult or impractical to obtain agreement from a fuel supplier to bear such liabilities; and Alignment of the commencement of the fuel supply with the commissioning and testing of the power plant under the PPA to ensure the availability of fuel to test the plant before the scheduled COD provided for in the PPA. However, the fuel supply  start date should not be too early, or the project company may end up paying capacity payments under the fuel supply agreement well before the fuel is actually needed. needed.

      It is important note, in addi tion, thatin liabili ties that project incurs under a to fuel supply agree ment respect of athe take or paycompany  oblig a ment  spect  ation will, where appropriate,  ate, need to be passed through to the off  taker under the PPA. PPA. In other words, to the extent that the project company is liable  able to pay for fuel that is not taken due to a risk as sumed  sumed by the off taker  taker under the PPA, the off taker  taker will need to indemnify the project company for this liability.  ability. As a result,  sult, a number of the provisions  sions of the fuel supply agreement  ment will be of direct  rect interest to the off taker.  taker. As explained in Tariff Structures  above,  above, the fuel price will usually  ally be a direct  rect pass-through under the PPA (assum suming that the fuel is converted into energy at the agreed ef fi It is   ciency).   therefore  fore important for the off taker,  taker, as part of project due diligence,  gence, to re  view and ensure that the fuel cost is reasonable and consistent  tent with indus try rates. The off taker  taker should also re view   the minimum  mum take-or-pay commitment  ment for fuel in the fuel supply contract. Given that the contrac tual  tual commitment  ment for plant availability is always lower than 100% factoring  toring in peri  riods  ods of maintenance,  nance, it is important that the minimum  mum take-or-pay  commitment  ment for fuel is not so high as to create  ate a payment obligation  ation for fuel for peri  riods  ods when the fuel is not being utilised due to planned mainte  nance. In the same vein, the project company should aim to align the scheduled maintenance of the power plant with the scheduled mainte nance    

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of the gas facilities  ties (in the case of a gas-fired power project) as a mis align alignment may lead to the plant being unable to produce power due to on-going maintenance  nance of the fuel facilities.  ties. It is also important to note that the exis tence of a separate fuel supply    agreement  ment between  tween the off taker  taker and the fuel supplier does not nec es  essarily   sarily   taker must take full fuel supply risk under the terms of the mean that the off taker  taker's ability to accept  cept fuel supply risk under the PPA will PPA. The off taker's depend  pend largely on its recourse  course to the fuel supplier and/or its access  cess to readily available alternative alternative sources of fuel. If the fuel supplier is the only or  mary viable  able source of fuel supply, the off taker  taker will need to ensure that, primary  course to the fuel supplier on a full indemon a fuel supply failure, it has recourse  fall in revenue, any penalties payable under the nity basis for any shortfall terms of the PPA, and ultimately  mately the loss suf fered  fered on termination  nation of the PPA. The off taker will also need to consider the credit status of   nancial resource  source to pay  the fuel supplier.  Will the fuel supplier supplier have the the financial  ment is availout on such an indemnity? If not, what sort of credit enhance enhancement  uidity support and/or guarantees (including, if neces able in the form of liquidity  es sary, sovereign guarantees)? Fuel Transportation Arrangements

These considerations may involve further complexity  ity if there is a di vi   sion  sion of responsi  sponsibility  bility for supply and transportation  portation of fuel. Depending  pending on the proximity of the plant to the fuel source, and the nature of the fuel, it may          be nec essary to enter intothe a separate agree with a trans porter trans  port port  ing the ing fuel from fuel process  ingment ing facility to the plant. Thisfor of  course would likely increase the risk elements  ments of the project, as the fuel supplier could transfer  fer title and risk of the fuel to the fuel transporter  porter or the project company at a delivery  livery point that is still far from the plant. Where the fuel supplier commits to delivering  livering the fuel to the delivery   livery  point at the power plant, the fuel supplier will bear the risks as soci  sociated  ated with ensuring that fuel of the right quantity and specifi  fication  cation reaches the delivery  livery point at the plant. Where, how ever,  ever, there is a separate contract for transportation  portation of the fuel, that contract would apportion risks among the fuel supplier, the transporter, and the project company. The delivery of     

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off-spec fuel to the plant, for instance, may not be the fault of the fuel  porter, but may result  sult from off-spec fuel being provided to the fuel transporter,  porter by the fuel supplier, in which case the project company should transporter  cource to the latter  ter through the remedies  dies provision  sion of the fuel suphave recource ply agreement. Where the fuel transporter is publicly owned, the project     company may make an argument  ment for the off taker  taker to bear the risk of nonperformance or or defec  fective  tive performance by the fuel transporter,  porter, in addition  tion  portation force majeure. How ever,  ever, depending  pending on how well to fuel transportation capitalised  talised the public fuel transporter  porter is, it may be able to bear such risks on its own, which also avoids the polit  ical  cal challenges of one government entity (the off taker)  taker) bearing the risks of another government entity (the fuel transporter).  porter).

Transmission In a bundled system  tem, the market roles of power purchasing, transmis  mission  sion  tribu  bution  tion are all bundled into one entity: the off taker.  taker. The off taker  taker and distri  ally bears responsi  sponsibility  bility for transmit  mitting  ting the power that is produced and usually  larly, the off taker  taker in this system  tem will have sold by the project company. Similarly,  ation to keep the power plant connected with the power grid. the obligation By contrast, an unbundled system  tem is one in which one or more of these roles is not the responsi  sponsibility  bility of the off taker,  taker, and is handled by a dif ferent  ferent entity. The extent of this separation is dependent on the specific electricity      reform  form path adopted in a particular  lar juris  risdic  diction.  tion. There are unique transmis  mission  sion risks in an unbundled system.  tem. The core concern in in an unbundled system  tem is the creditworthi  worthiness  ness of the unbundled transmis  mission  sion company and whether it can af ford  ford to cover the risk of failing to transmit  mit when the power is: (i) ready for delivery;  livery; and (ii) required  quired under the PPA. From the off taker's  taker's perspective, transmission  mission risk is outside  side their control, and therefore  fore not a risk they wish to bear. From the project company's perspective, they likewise  wise will have limited control over trans   mis sion risk andjuwill argue that should be borne by the party with more leverage in the ris the it off  taker. is partic true in sit  risdiction:  diction:  taker. This  ularly  larly  ua a-

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tions in which the off taker  taker and the transmis  mission  sion company have an estab tablished relationship  lationship (i.e. both are government-owned parties or part of the same holding company). The project company will argue that the government as a whole is benefit  fitting  ting from the delivery  livery of power and should therefore bear the risk that one of its entities does not connect the power     plant or transmit  mit the power when needed. As a result,  sult, PPAs in an unbundled power market will often allocate most or all of the transmission  sion risk to the off taker  taker so that the off taker  taker acts as as a guarantor of the trans mis  mission  sion company's obligations.  ations.

Foreign Exchange Where financ  nancing  ing is provided in a currency other than that in which payments are made under the PPA, the project sponsors will need to take steps to protect themselves against fluctu  tuations  ations in foreign exchange rates. There are two risks that arise when a project's revenue is in a local currency: The local currency may not be freely convertible (i.e. cannot exchange the local currency for a major currency); and The host government may not have a foreign currency reserve that is sufficient to meet the conversion needs throughout the life of the project. If any of these convertibility  ibility risks exist, the parties should consider mit igat  gat ing the risk through a combination of government guarantees and insur  ance. Foreign exchange rate fluctuation

Ideally,  ally, financ  nancing  ing for the project should be obtained locally and in the host country's currency to avoid exchange rate risks. How ever,  ever, this is rarely  possi  sible  ble in emerging  ing markets where there is an underde veloped   banking industry  try and limited capacity  ity for lending. Where financ  nancing  ing for the project cannot be obtained in the local currency of the host country, and the tariff  cannot, for whatever  ever reason, be denomi  nominated  nated in the foreign currency in       which investment was made and financing is obtained, the project com-

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pany will need to seek funding in an alternative currency and protect it self   self  against short-term fluctuations ation)  ations (but not catastrophic  astrophic de valu    ation) in exchange rates. Miti  gation of short-term exchange rate risks   achieved through one or more of the follow ing  ing means:

is

commonly 

1. All tariff components are denominated in the funding currency  and the offtaker is required to pay electricity fees in the local currency equivalent to the electricity fee denominated in the funding currency; 2. Entering into derivatives and future currency swap arrangements with creditworthy counterparts; and 3. Government undertaking to make make up losses due to exchange rate fluctuations (a less commonly seen approach). While the above are ef fective  fective in mit igat  gating  ing against short term currency exchange fluctu  tuations,  ations, neither  ther is capable of protecting  ing the project company  against catastrophic ation  astrophic de valu    ation risk. In the event of a catastrophic  astrophic de valu    ation of the host country's currency, it is unlikely that the end-users or the host government will be able to af ford  ford the increase in tariff or shortfall  fall payments for an extended period  riod of time. Mit igation  gation of the risk of a cata astrophic de valu ation    ation is usually  ally best achieved through insurance in the form of a currency hedge. Convertibility and remittance

In juris  risdictions  dictions where the local currency is not freely convertible,  ible, and foreign currency is required  quired to make debt payments and dis tri  tribu  butions,  tions, the project company could face dif fi  ficulties  culties in securing  curing access  cess to foreign currency in which the investment  ment was made and debt is being serviced. While the host government would normally provide an undertaking u ndertaking to ensure the convertibility  ibility of currency throughout  out the term of the project, convert ibility   ibility  and remit  mittance  tance risks remain  main on two fronts: 1. Breach by host government of its undertaking on convertibility; and

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2. Lack of foreign currency reserves to meet its conversion obligations.

 gation against such risks can be achieved in a number of ways: Mit igation 1. Build up an offshore debt service reserve account which should help to create a buffer for short-term conversion obstacles; 2. Swap for other other valuable commodities commodities in lieu of cash payment; payment; and 3. Obtain political risk insurance cover on currency currency inconvertibility. inconvertibility.  

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Other Risks Compliance with Law and Change in Law The off taker  taker and the government will likely require  quire the project company to contractu  tually  ally commit in the PPA to comply in all material  rial respects  spects with the laws of the rele vant   country. The project company should in turn be able to commit to do so, at least by ref erence  erence to applicable laws at the outset  set of  the project on the basis of legal due diligence  gence and and advice. advice. The project project company (and by extension its lenders) will, how ever,  ever, find it dif fi  ficult  cult to give an unqualified commitment to comply with laws to the extent that laws may  change  over time.   The concept of Change in Law has evolved to include (i) the introduction of new law, (ii) modifi  fication  cation of existing  ing law and/or and/or (iii) changes in the interpretation  tation of law by any court, tribunal,  bunal, governmental entity or other au thority which has applicable juris  risdiction  diction or reg ulatory  latory oversight with re spect to the Project Project or the Project Project Company. "Law" in this context should be defined  fined to cover a comprehensive  hensive range of legislative,  islative, statutory  tory and reg ulatory  latory instruments, orders, guidelines l  ines etc. Timing - there may be some de bate beween the off taker and the project       company as to the date from which any Change in Law should be consid nature of the PPA.  ever, where ered. This will often often be the date of sig signature PPA. How ever,  ted to a tariff in the course of a tender the project company has committed process, it may be more appropriate  ate to set the date at the date of submis sion of the the project company's proposal (in response  sponse to the RFP). This is an  times be resolved  solved by due diligence  gence to determine  termine issue that can sometimes  curred that might have an impact on the whether a Change in Law has occurred  ever, depending  pending on the transparency   parency  project company's company's cost structure. How ever,  islation  lation in the juris  risdiction,  diction, and the time available to the project comof legis pany to perform such due diligence, it may make more sense for the off -   

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taker to add this incremental  mental risk to the risk of changes in law after execu  cu tion of the PPA, which it will often already have agreed to take. A Change in Law may impact the project company in a number of ways: 1. It may adversely affect performance of a particular particular obligation under the PPA or render peformance impossible; 2. It may adversely affect the project company's revenue stream; 3. It may require the project company to incur a one-off capital cost or cause an on-going increase in the project company's operating costs (in each case, in order for the project company to comply with the relevant change in law); or 4. Conversely, it may lead to a reduction in the project company's operating or forecast capital expenditure. Subject to appropriate  ate materi  riality  ality thresholds,  olds, the project company and off  taker will generally agree that the project company should be left in no bet  ter or worse position  tion than if the rele vant   Change in Law had not occurred.  curred.  Thus, to the extent the project company is temporarily unable to perform an obligation  ation as a result  sult of a Change in Law, this will not consti tute  tute a pro ject company default  fault and any time limits imposed on the project company  will be extended accordingly. extent that the Change  cordingly. Furthermore, to the extent in Law causes a delay in COD, the plant may be "deemed complete" and to the extent that the plant is unavailable as a re sult  sult of such Change in Law, the project company may be entitled to Deemed Availability or Deemed   Generated Energy payments. In addition,  tion, to the extent that the project company incurs an increase in costs or de crease  crease in revenues as a result  sult of a Change in Law, this will entitle  tle the project company to receive  ceive either  ther (i) direct  rect compensation to pay for or reimburse  imburse the project company for such cost or revenue shortfall,  fall, or (ii) an appropriate  ate tariff increase. Con versely, if the project company benefits  fits from a Change in Law, then an appropriate  ate downward adjustment  ment in the tariff will typically  cally apply.

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To the extent that a Change in Law renders performance under the PPA impossi  sible,  ble, the project company will generally be enti tled  tled to terminate  nate the PPA with the level of compensation applicable  able assessed  sessed in the same way as termination  nation for Polit ical  cal Force Majeure.

Consents, Permits and Licences, Lapse of Consent Project Company's Responsibility to Secure Consents, Permits and Licences

Off takers  takers understandably want power plants to be built and operated in ac cordance with the consents required by the applicable law.   The project company is typically  cally responsi  sponsible  ble for obtaining the neces  essary   sary  consents to build, own and operate the power plant. These include, amongst others:  ers: a construction permit, an environmental  ronmental license,  cense, an archaeolog  olog ical  cal permit, and an operating  ing permit. The term consents is generally understood to include any regis  istration,  tration, de claration,  laration, filing, consent, li cense, right, approval, authori  thorisation,  sation, or permit. Offtaker's Obligation to Assist in Securing Consents, Permits and a nd Licences

It is not the case that all obligations  ations regarding  garding consents reside  side with the pro ject company. Because  cause the off taker  taker is often af filli  filliated  ated with the government, it is anticipated that the government will have some connec tions  tions to, and influence  tion, as an established  tablished  ence over, other government agencies. In addition, entity in the domestic  tic market, the off taker  taker is often more familiar with the legal and reg ulatory  latory require  quirements  ments for operations in the market. As a re sult,  sult, the parties will typically  cally agree that the off taker  taker should be obligated  ated to offer "reasonable assis  sistance"  tance" to the project company in obtaining consents. Ulti  mately, this is in the interest of all of the parties, including the lender, who will need the assurance  surance that the project company has obtained all of the neces consents.   sary  

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Joint Coordination for High-Level Approvals

In certain instances, the parties may agree that the re sponsi  sponsibility  bility to obtain partic ular  lar consents from higher levels of government are a joint re sponsi  sponsi       bility. Such might include consents theministries rele vant au ties (such as cabiapprovals nets, ministries of finance, ance, ofthori energy,  nets, parliaments,  nof tax aut  horities,  ties, reg ulators,  lators, and central banks). Since such consents are often neces  essary  sary for the ef fective  fectiveness  ness of a PPA, it generally makes sense that both parties would work together to ensure that they are obtained on time. Rights to Land

The obligation  ation to obtain rights to the land on which the power plant, and the rele vant   transmis  mission  sion lines, will be located, will vary from transac  action  tion to transaction  action and juris  risdiction  diction to juris  risdiction.  diction. In juris  risdictions  dictions where the government owns all of the land or large areas of land where the power plant is intended to be located, the off taker t  aker will often be expected to grant, or cause another government entity to grant, the neces  essary  sary land rights to the project company. In other juris  risdictions,  dictions, how ever,  ever, it is incumbent upon the project company to secure  cure access  cess to, and the right to use, the land. In such instances the off taker  taker may still be called upon to assist  sist the project company in obtaining such rights, es pe  pecially  cially where pri vate   land owners are unwilling to sell their land and the government can use its right of expropriation  ation or eminent  nent domain (the right of a sovereign or its agencies to ac  quire pri vate   property for public use in exchange for fair compensation). The nature of land rights also varies from ju ris to juris   diction     diction.   Where the land system  tem does not provide freehold  hold title, the term of use (or lease) of the land must be suf fi  ficient  cient to cover the life of the project. Lapse of Consent

Where a government authority  thority fails to grant or renew a consent  sent upon due application  cation of the project company, this will be treated in the same way as a Change in Law. This is sometimes  times referred  ferred to as a Lapse of Consent. Note that where the project company is unable to complete the req ui  ui site formalities t  ies to obtain or renew a consent as a re sult s  ult of a Change in Law, the Change in Law protection should nonetheless apply. It bears notin ing     g

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 times referred  ferred to in PPAs as a that the concept of Lapse of Consent is sometimes policit ical  cal force majeure event, with the same net ef fect.  fect.

Change in Tax Changes in tax may se verely   impact project revenue and could result  sult in making a project fundamentally uneconomical.  cal. The change may come in the form of a change in tax rate, the creation  ation of a new class of tax, or re moval of rele vant   tax benefits  fits that may adversely af fect  fect the project's return  turn on investment  ment and/or its ability to service its debt. The conse quences  quences of a change in tax may: 1. Increase or decrease decrease project project costs; costs; 2. Increase or decrease decrease the maintenance and operation costs; and and 3. Increase or decrease decrease the revenues revenues expected by the project project company. Material  rial issues  sues to consider in relation  lation to the management  ment of change in tax risks includes the follow ing:  ing: Reference Date by Which Change in Tax is Measured

A change in the tax position  tion must be defined  fined relative to the tax position  tion at a ref erence  erence date. The ref erence  erence date is commonly agreed between  tween the parties and could be the date of the signing of the PPA or the date of fi nancial  nancial closing.   Whether the Change is Discriminatory in Nature

In determining  termining which party shall bear the risk of change in tax, distincion  tincion  tween three cat egories  gories of changes: is normally drawn between 1. Changes that are applicable specifically specifically to the project and and the involved sponsors, contractors and lenders only (Disciminatory Change in Tax); 2. Changes that are applicable to the industry in general general or similar class of  investors (Specific Change in Tax); or

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3. Changes that do not fall into the above two two categories and are applicable to the general community (Non-discriminatory Change in Tax). For Discrimi  criminatory  natory Change in Tax, the off taker  taker is normally expected to bear this risk by means of tariff pass through. In other words, any increased tax charges are included in the tariff calcu lation  lation of project costs, and there fore the off taker  taker has to pay a tariff that is reflective  flective of the extra tax charges. For Non-discrimi  criminatory  natory Change in Tax, the project company is normally  expected to accept  cept this as part of the risk of conducting  ing business  ness in the host country. In relation  lation to Specific  cific Change in Tax that is not dis crimi  criminatory  natory in nature, this is often open to negoti  gotiation  ation between  tween the parties. Mitigating the Risk of a Change in Tax

Mit igation  gation measures against change in tax are normally implemented  mented through one or more of the follow ing:   Host government undertaking and political risk insurance insuran ce An undertaking by competent government authority(ies) of the host country that no change in tax, imposition of new tax, or removal of tax benefits shall be applicable to the project company, its sponsors and contractors throughout the life of the project. The project company can further mitigate this risk by obtaining political risk insurance to insure against breach of the undertaking by the host government. Tariff Pass Through The tariff is designed to allow full pass through of any increase in tax, imposition of new class of tax, or removal of tax benefits during the term of the Project that are "discriminatory" or "specific" in nature.

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Change in Control  Just as important as assess  sessing  ing the viability  ability of a project being de veloped   by  the project company in determining  termining whether to finance  nance a project, both the lenders and the off taker also undertake an assess of the project com    ment   pany itself,  self, and the parties in control of the project company. The repu ta tation of these parties, and their experi  rience  ence and track record, all influence  ence the off taker  taker and lenders in assess  sessing  ing whether the project company will have the ability to meet its obligations  ations under the PPA. It there fore  fore becomes  comes important to both the off taker  taker and the lenders that the project company's shareholders  holders be restricted  stricted from unilat  laterally  erally changing  ing the control of the project company. PPAs normally contain explicit provisions meaning  sions on the me aning of control and what constitutes in control of the project company. The PPA   thataachange could provide change in control of the project company cannot occur without  out off taker  taker consent. Typically,  cally, the PPA will state that the off taker  taker cannot unreasonably withhold  hold its consent. Alternatively, a change in control may only be allowed after a pre scribed  scribed time period  riod (this may be aimed at, for example, locking in the parties for the initial  tial loan term, or for the construction phase). Further conditions  tions may be imposed that if a change in control has to occur, then it cannot reduce  duce the local content require  quirement  ment of  the project company, or that the new enti ties  ties must have the same repu ta tational standing as its prede  deces  cessor.  sor. The latter  ter may be quite a subjective  tive as sessment.  ment. The restrictions  strictions and conditions  tions will vary from project to project. The project company may also have an interest in changes in control of the off taker,  taker, partic ularly  larly in those juris  risdictions  dictions undergoing an unbundling of  the electricity supply industry  try and the restructuring  structuring of a monopoly utility off taker.  taker. Where sovereign support has been provided for the off taker's  taker's obligations  ations under the PPA, this issue may be less important to the project company. How ever,  ever, where no such support has been provided and the in vestment  ment grading, reputation  tation and sophisti  tication  cation of the off taker  taker were key  considerations for the project company and the lenders when concluding the PPA, then the off taker  taker may be similarly  larly restricted  stricted from undergoing a change in control without the project company's consent. There may also  

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be conditions  tions imposed on the off taker  taker that, for example, the restructured  structured off  taker taker have the same investment  ment grading as its prede  deces  cessor  sor or an obliga ation that sovereign support be provided.

Political - Sovereign Risk and Expropriation A PPA is a commercial agreement  ment for the supply and purchase of electricity  be tween tween a pri vate   de veloper   and an entity entity frequently  quently owned by the government. There is a risk that the government may de cide cide to interfere in the func tioning tioning of the plant, di rectly rectly or indi rectly, rectly, with the re sult sult that the pro ject company is no longer able to generate project revenues. In turn, this will jeopardize the project company's ability to service its debt, as well as share holders' holders' return  turn on equity.  uity. Such interference is typically  cally provided for ei ther ther under local polit ical  cal force majeure or a separate provi sion  sion dealing with government risk events.

 quences of expropriation  ation should be addressed in the PPA. ExproThe consequences  lation to the phys ical  cal plant or shares in the project pri ation ation may be in relation company, and the PPA should cover both instances. In the former case, the government could de ploy ploy se cu cu rity rity personnel to phys i cally cally take over the plant, and in the lat ter ter case the government could compulsorily take over ownership of shares in the plant. There is need for clear de  f  f i   ni ni tion tion of ac tions that come within this umbrella, including nationali sation, s  ation, confiscac  ation, requi si si tion tion and other re lated lated ac tions. tions. It may also be neces  essary  sary to make provisions  sions for creeping expropriation,  ation, which usually  ally refers to sit uations  ations where the government does not di rectly   rectly  expropri ate ate a plant but takes measures that ulti mately  mately ensure that the pro ject company is no longer in ef  fective fective control of the plant, including onerous reg u latory latory imposi tions tions and re strictions strictions in foreign currency purchase or repatri ation ation where the PPA tariff is de nomi nomi nated nated in local currency. Such measures may be covered in provi sions sions dealing with local polit i cal cal force

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majeure or change of law or tax which, unless compensated for by the off  taker, could spell doom for the project. It is also important for the PPA to provide for what is not expropri ation.  ation. Otherwise, the government may find itself facing se vere penalties for tak        ing le git git i mate mate actions  tions that are not generally recog nised  nised as amounting  ing to expropri ation. ation. Governments are usu ally ally able to take measures for reg  u lat lat ing ing economic ac tivity tivity in the country, including health and envi ronmenronmental safety measures, and tax re lated lated measures. How  ever, ever, such measures must be made in good faith and not be dis  crimi crimi natory natory in nature or pri marmar  ily intended to confis cate cate pri vate property. Also, where a project company has contrac tual tual agree ments ments with government-owned companies re sponsi ble ble for as soci soci ated ated infrastructure, such as trans mis mis sion sion and gas trans portation, it is also important to dis  tinguish tinguish be tween tween expropri ation, ation, which is essentially a political and commercial disputes, which should be dealt   act,  dies provided  for in these agreements.  ments. with  in accordance   with the remedies De velopers   typically  cally argue that expropriation  ation should be treated as a termi nation event under the PPA, for which the project company should be fully  compensated for the expected revenue stream over the life of the PPA. The pre cise cise calcu lation lation of the termi nation nation payment is dis cussed cussed in Post-Termina tion tion Oblig a tions tions. In any case, compensation compensation under PPA termi nation nation may or may not be appropri ate, ate, de pending pending upon the extent to which the off  taker taker is inde pendent pendent from the government. The more inde -

 

 

 

pendent the off taker is,cover the bet terrisk theofargu ment that company  and the lenders should the expropri  ationthe ation in project some other way, rather than expect the off  taker taker to pay them in full in such event. In addition,  tion, all parties should consider whether the off taker  taker will have a source of funds to make any termination  nation payments in the event of expropri ation. ation. Ide ally, ally, this obligation  ation would be supported by a sovereign guarantee, but that may be prohibi tive tive to obtain. Where there is a separate agreement  ment dealing with the compensation regime, such as a Put and Call Option Agreement,  ment, it should clearly provide

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for exactly what the payout should be in the event of expropri ation,  ation, to avoid any ambigu  guity.  ity. A de veloper   may also consider getting  ting polit ical  cal risk insurance from an institu like the Multilat Investment Guarantee Agency (MIGA),   tion     eral     which is part of the World Bank Group. The bene fit  fit of MIGA insurance is not just the certainty of a payout in the event of expropriation,  ation, but more importantly, it signif   nif  icantly  cantly reduces  duces the likeli  lihood  hood of expropriation  ation due to the reputational  tational risk for the government and the likely adverse collateral  eral impact on its perception in other international transactions.  actions.

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Force Majeure It is important to have a clear provision  sion dealing with force majeure in a PPA, which will set out the meaning and consequences force majeure. It   withinofthe may also specif  ically  cally describe  scribe what is not covered scope of force majeure in the PPA.

Key Features of Force Majeure In general, force majeure tends to have the follow ing  ing defining features: The event has material adverse impact on a party's ability to discharge contractual obligations. The event is not the fault of the party seeking relief and is beyond the reasonable control of the party. The event could not have been reasonably foreseen by the party, and reasonable measures could not have been implemented by a diligent party to avoid it or mitigate its impact. Sometimes,  times, the def   f  ini  nition  tion extends beyond  yond the event itself  self to the continuing  ing impact of the event. For instance, when there is a major unexpected flood that damages a power plant, and it takes up to a month for the flood water to be drained out before  fore the commencement  ment of damage assess  sessment,  ment, the force majeure relief  lief claimed could go beyond  yond the day of initial  tial flooding and also extend to the continuing  ing impact of the flooding. It is also important to clarify what is not covered within the scope of force majeure. Where a power plant is down because  cause of poor maintenance,  nance, it does not fall within the scope of force majeure. This would also be the case where the project company has failed to contract for suf fi  ficient  cient quantity of  fuel to enable it to produce the full contract capacity.  ity.

 

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  of Force Majeure Types

Force majeure under a PPA could be  placed in a number of cat  egories,  gories, the key ones being Local Polit ical  cal Force Majeure, Foreign Polit ical  cal Force Ma jeure and Natual   Force Majeure. Local Political  litical Force Majeure  jeure tends to cover events that are either  ther caused by the government of the host country or could be best pre vented,   controlled or mit i gated gated by the government. Events in this cat e gory gory would include wide spread spread riots and civil dis order, order, acts of terrorism, and nationwide indus trial trial strikes. The scope could also extend to lack of trans mis mis sion sion grid availability to evac u ate ate the power from a power plant where it is owned by the government, as well as unavailability of any other as  soci soci ated ated infrastructure needed by the power plant which is publicly owned or controlled. Some ele ment ment of change in law could also fall within the scope of  local politi  cal   force majeure, such as the host government's introduction of  re strictions strictions on capi tal tal repatri ation ation which pre vents   scheduled payments to off  shore shore equity and debt providers. Foreign Political  litical Force Majeure  jeure tends to cover acts of a polit ical  cal nature

that are of foreign origin  gin but still have a mate rial  rial adverse impact on a party's ability to continue with PPA obligations.  ations. For instance, an industrial  trial strike in a foreign country could mean that a crit  i cal cal piece of plant equipment, such as a re place place ment ment turbine, manu fac fac tured tured in that country, cannot be exported to the country where the power plant is located. A trade embargo could also have a similar   impact. Natural Force Majeure  jeure covers events such as flooding, hurricanes,  canes, earth -

quakes, tsunamis and other adverse weather or natural  ural conditions  tions that have a material  rial adverse impact on a party's ability to meet its contractual  tual oblig ations. ations.

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Extension of Force Majeure Typically,  cally, a PPA will provide for force majeure re lief  lief to extend beyond  yond the PPA to other project agreements  ments that the PPA parties are also party to, including the fuel supply and transportation agreements, the EPC contracts     and the transmis  mission  sion agreements.  ments. As such, where the occurence  curence of a force majeure event pre vents   the fuel supplier supplier or transporter from supplying fuel to the power plant, the project company may be able to seek re  lief lief from its contrac tual tual oblig ation ation under the PPA for mini mum mum plant availability. Given the fact that a PPA counterparty may wish to seek force majeure re -  lief for events that occur under other agree  ments, ments, it is important to aim to have a harmonised concept of force majeure across all the project agree-  ments. Oth erwise, erwise, there is a risk that an event that is de fined fined as a force majeure in the trans mis mis sion sion agree ment, ment, for instance, may not feature as a

 

 

 

force majeuthat majeure re event the PPA. quently, count the conmisalignment, eventunder may not qualifyConse a party for relief  lon ief ac from its of other trac tual tual oblig ations. ations.

Relief from Contractual Obligations As a Result of Force Majeure As has been discussed,  cussed, a party claiming force majeure usually  ally wants relief   lief  from contractual  tual obligations  ations during the duration  ration of the force majeure event. If the force majeure pe riod  riod is protracted, the PPA would usu ally   ally  identify how long re lief lief from contract obligations  ations will be granted before  fore the unaf fected party can seek contractual termination.      

 tinction between  tween force majure In a PPA, it is often important to draw a distinction  taker and the project company respectively.  spectively. Where the off  af  fect fect ing ing the off taker taker is af  fected fected by force majeure, the PPA would usu  ally ally provide for continu ation ation of capac ity ity and energy payments to the project company during the pe riod riod of the force majeure. If the ef  fect fect of the force majeure event af  fect ing ing the off  taker taker is to delay the COD date, the project company may be enti tled tled to claim a deemed completion. In that instance, the project company may be enti tled tled deemed ca pacity pacity payments that cover debt service

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(which would have commenced on the orig  inal  nal COD date) and any addi  tional project costs incurred as a result  sult of the delay. Where the force majeure af fects  fects the project company, the impact on capac  ity or energy payments may depend on the specific type of force majeure.     Such payments would typically  cally continue in the case of Local Polit ical  cal Force Majeure, but could be suspended  pended in the case of Nat ural  ural or Foreign Polit ical  cal Force Majeure. Also, a project company af fected  fected by force majeure may still be able to produce some power even if it is below the contract quantity, and provision  sion should be made in the PPA for such power to be purchased and paid for nonetheless.  less.

Specific Remedies as a Result of Force Majeure     Although marycontrac form oftual relief in ations, casethere of force may be the suspension of pri certain oblig tions, are majeure also other forms of   pensionthe  tual  athe specific  cific remedies  dies for force majeure that may be provided for in the PPA. One common example is an extension of certain time pe ri  riods  ods under the contract in order to account  count for the delay caused by the disruptive  ruptive event. If  the force majeure delay occurs  curs during the construction phase, the project company should be entitled  tled to an extension of the time pe riod  riod for achieving COD. If the force majeure delay occurs  curs after COD, the full term of the contract should extended to account  count for the delay. Other project agree ments should be aligned accordingly.

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Insurance From the planning to the construction and operation phase of the project, there are a multitude of risks that are best miti  gated by means of insurance.    

Construction Phase During the construction phase, the EPC contractor  tor shall be primarily  marily re sponsible  ble for obtaining insurance against property damage and injuries to personnel. Types of coverage include: All Risks (Property Damage) insurance - this type of insurance usually  covers the replacement cost of the project plant; Employers Liability insurance - this type of insurance usually covers the liability of the employer for disease, fatality or injury to employees arising out of workplace conditions or practices; and All Risks Marine Cargo insurance - this type of insurance usually covers the replacement cost of plant and equipment shipped to and intended to become part of the power plant.

Commercial Operation Phase   Upon commence ment ofsponsi commercial plant, the all project company shall bear the re  sponsi  bility ofoperation bility obtaining of andthe maintaining risks (property damage) insurance and employer liability  ability insurance. In addition,  tion, the project company may also want to obtain polit ical  cal risk insurance against the host government reneging  ing on its undertaking or guarantee on the follow ing  ing (if any): Undertaking on free convertibility of currency and sufficiency of  foreign reserve; Undertaking on no change in law or tax, or on cancellation of tax benefits that may adversely affect the project; Cancellation of permits or concessions; and/or Expropriation.

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In  all cases, the exact insurance cover required  quired for a partic ular  lar power pro ject will be determined  termined on a case-by-case basis in consulation  lation with a spe cialist insurance adviser. Lenders will typically  cally require  quire the appointment  ment of  an insurance adviser to advise them on the ade quacy  quacy of the insurance program for the power project.

 

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Summary of Key Points Risk Management

Allocation of Risk: The risks inherent in the PPA should be allocated

to parties best equipped to mitigate that risk. Seller Risk: The seller will typically bear the risks associated with their construction and operation obligations under the PPA. This may  include the risk of failure to commence construction, failure to reach the contract Commercial Operations Date or the failure of the constructed plant to satisfy the capacity requirement. Exception to Seller Risk: The seller may be excused from a failure to meet its obligations when the delay is a result of the buyer's action (or inaction). In this case, the seller may be granted additional time or compensation for any additional costs incurred in resolving the delay. Buyer Risk: The risk of lower-than-expected demand in the power market is typically allocated to the Buyer through the use of capacity  payments, in the case of dispatchable projects, or through the use of  deemed energy payments, in the case of non-dispatchable renewable energy projects. The buyer may also take on fuel supply risks through the use of tolling agreements.

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General Risks Force Majeure: The seller or offtaker may be released from obligations

under the PPA due to the occurence of events that are beyond their control and which they could not reasonably have foreseen. In addition to the release of obligations, the sellers may also be entitled to receive capacity payments if certain force majeure events occur. Stabilisation Clauses: Changes in tax and in laws may pose risks for sellers because they can fundamentally alter the economics of the original agreement. The PPA will typically include terms that allow the seller to be made economically whole in the event of a material change. Change in Control:  PPAs may seek to restrict the ability of sellers to change their controlling shareholders since offtakers may have offered to enter into the PPA on account of the financial strength of the majority shareholder in the project company. Lenders may have similar concerns.

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Other PPA Provisions Introduction Resolving Disputes Expiration of the PPA Local Content Confidentiality Boilerplate Provisions Summary of Key Points

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Introduction  ters that are typically   cally  This chapter deals briefly with some important matters dealt with in the PPA but that do not neces sarily fit neatly into the other      solve any  chapters of this handbook. For instance - How will the parties re solve dis putes? putes? What happens when when the PPA comes comes to the end of of its term? How  might local content re quire quire ments ments impact the PPA? How are mat ters ters of  confi dentiality dentiality dealt with? Fi nally, nally, what basic contrac tual tual provi sions sions must be in the contract that are relatively non-ne  gotiable, gotiable, or that only the lawyers lose sleep over? This chapter sets out to answer answer those ques ques tions tions and more.  

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Resolving Disputes Goals of Resolving Disputes Disputes  putes happen. Even after reading this guide and ne goti  gotiat  ating  ing a sound PPA with all of the proper advisors  sors in place, and despite  spite best intentions - things do go wrong and circumstances will change. After all, the PPA is a long term contract and parties cannot always know with certainty what will mate ri ri alise alise over a pe riod riod which some times times can extend to 30 years! When a dispute  pute does happen, it is in the interests of all parties to re solve  solve these dis putes putes as quickly and ef fi  ficiently  ciently as possi  sible.  ble. The purpose of dispute  pute resolu mechanisms are to ensure that whatever type of dispute arises, it   tion         gets re solved solved fast so the parties can re vert   to performing their re spective spective oblig ations ations under the PPA. When a dis pute pute is prolonged, nobody wins. Disputes  putes arise for a variety  ety of reasons. These disputes  putes can relate  late to a range  nical  cal or financial  nancial issues,  sues, for example, an invoicing  ing of is sues, sues, including techni dis pute, pute, a dis pute pute in the way the power is me  tered, tered, or an interpre tation tation of  an indus try try term. term. Disputes can also re late late to an interpre tation tation of the contract, es pe pe cially cially around areas re lat lat ing ing to the manner or timing of each party's oblig ations. ations.

Informal Resolution Mechanisms The best thing parties can do when a dispute  pute arises, is to talk to each other. Having an ongoing dialogue  alogue between  tween the parties after the comple tion  tion of  the PPA can help to quickly re  solve solve most disputes.  putes. If the techni  nical  cal staff are not able to work out an issue, it might help to include a dis cus cus sion sion be tween tween se nior nior manage ment ment of both the off  taker taker and the project company.

 

 

 

 

 

A requirement for talking before going to formal dispute processes is typically captured in the PPA. PPAs normally require  quire that parties negoti  gotiate  ate in

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good faith before  fore undergoing any type of formal dispute  pute mechanism.  anism. Without  out demonstrating  ing that the parties tried to amicably  cably resolve  solve the dis pute, other more formal mechanisms  anisms may not be available. This may be neces sary sary to force the parties to talk to each other.

Formal Resolution Mechanisms When informal mechanisms  anisms fail to resolve  solve the issue, the PPA will provide for various  ous formal resolu  olution  tion mechanisms.  anisms.

Fast Track Dispute Resolution Other alternative forms of fast track dispute  pute resolu  olution  tion can be considered.

 

   

   

These often include provi sionsusu forally imme diatetode cisions certainwill types of "simpler" disputes,  putes,  ally related  lated tech  nical ni  calrendered or invoicing  ifor ng is sues. sues. The types of disputes  putes that can be covered by this can be pre-defined.  fined. The parties can also choose whether or not the fast track deci  cisions  sions will be binding.

Role of the Independent Engineer For techni  nical  cal issues  sues such as the achievement  ment of COD, metering,  tering, measure ment or capacity  ity issues,  sues, the dispute  pute can be submitted  ted to an independent  pendent engineer. The independent engineer can give an opinion that can help re -        solve the dis pute. pute. There could could also be particu lar lar identi fied fied is sues sues where the de termi termi nation nation of the inde pendent pendent engi neer neer shall be binding on the parties. The list of issues  sues that can be submitted  ted to an independent  pendent engineer  neer can be agreed on during the negoti  gotiation  ation stage. This can be included in the PPA. The mandate of the independent  pendent engineer  neer is usually  ally recorded in a separate agree ment ment be tween tween the inde pendent pendent engi neer neer and the PPA contract ing ing parties. The PPA parties can de cide cide together if they wish to pre-appoint the inde pendent pendent engi neer neer when entering into the PPA, or they can agree to decide later.  

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Mediation

There can also be provisions  sions for non-binding medi  diation.  ation. This process uti lizes a neutral  tral party to facilitate  tate a discus  cussion  sion between  tween the off taker  taker and pro ject company. The outcome of this can be a recommendation which can   help resolve  solve the dispute  pute   quickly. Arbitration

Arbitration  tration is the process used in PPAs to resolve  solve the disputes  putes that cannot be resolved  solved through informal or fast track resolu  olution  tion mechanisms.  anisms. Unless the PPA includes provisions  sions requiring  quiring the parties to use arbitration,  tration, the dispute  pute would be submitted  ted to the courts that have ju ris  risdiction  diction over the parties and issues.  sues. There are various  ous options for pre-established  tablished procedural  dural rules for arbitra tration including the World Bank's International Centre for Set tle  tlement  ment of In vestment  ment Disputes  putes (ICSID), the International Chamber of Commerce (ICC), the United Nations Commission on International Trade Law  (UNCITRAL   RAL), or the London Court of International Arbitration T  tration (LCIA). Each of these procedural  dural rules include provisions  sions for issues  sues such as the qualifi  fications  cations of the arbitrators,  trators, the number of arbitrators,  trators, the method of  appointing  ing arbitrators,  trators, the confidentiality  dentiality of the proceedings, the pow ers  ers of the arbitrator,  trator, fees and costs of the arbitrators,  trators, and the force of the awards. One advantage of arbitration  tration proceedings is that the parties to the dispute maintain some flexibility to structure the proceedings in a way that     fits best for the issue in dispute.  pute. The Seat of Arbitration

The PPA should outline  line the seat where any dispute  pute resolu  olution  tion proceedings will take place. The seat sounds like it is where the arbitration  tration will phys i cally take place, but it is important that the seat not be confused with the  venue of the arbi tration.  tration. The seat seat is important because  cause the law of the seat will (either  ther favourably or unfavourably) fill in gaps not catered for by the arbitral  tral rules, impact on the role of the courts with regard  gard to the indepen pendence of the arbitrators, t  rators, and might even override certain arbi tration t  ration rules.

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RESOLVING DISPUTES

The law of the seat can even influ ence  ence the ultimate  mate enforceability  ability of any  award. Prudent  dent contracting  ing parties would undertake a comprehensive  hensive due diligence  gence of the chosen seat. Host countries often seek to have their own countries be chosen as the seat, while international investors usually prefer a seat related to their home countries or other common jurisdictions for international finance. Many of  the lenders will require that the seat of arbitration be somewhere outside of  the host country to ensure that the process is perceived as neutral. Choice of Law

The interpretation  tation of the PPA may vary signif   nif  icantly  cantly depending  pending on which country's laws govern the interpretation  tation of the PPA. Optimally, the same governing law would be chosen for all the project doc -    uments.  ments. But this is an ideal scenario,  nario, and often does not materi  rialise  alise practi  ti cally in view of the matrix of project documentation  mentation in a power project. When choosing  ing the governing law, it is important to consider disputes  putes which may occur across various o m f  erent gov  us project agreements   ents where dif ferent erning law applies to the dif ferent  ferent agreements.  ments. Issues of joinder and consolidation  dation of disputes should also be carefully  fully assessed  sessed and considered. Enforceability of Arbitral Award

         Parties pre ferarbi arbitral tration tomay litigation due to in theany enforce ability of an arbitral  tral often award. An  tral award be enforced country which is a signatory  natory to the New York Convention (Convention on the Recog ni  nition  tion and Enforcement  ment of Foreign Arbitral  tral Awards).

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Outside the Contracts - the Role of Investment Treaties It is important to note that many host countries are sig natories to various     investment  ment treaties. Investment  ment treaties are agreements  ments between  tween states in which each state party promises to provide certain types ty pes of treatment  ment to in vestors from the other state party. States commit to treat foreign companies "fairly and equi  uitably"  tably" and are required  quired to provide full protection t  ection and   ity to investments.  ments. security r It is important to note that compliance  ance with domestic  tic law is not a defence  fence to a breach of an investment  ment treaty. Even if the government's government's action  tion is entirely consistent  tent with its own law, it may still be inconsistent  tent with the in vestment It is important for investors and host host countries to under  whattreaty. stand treaties may apply in the resolu  olution  tion of any dispute.  pute.

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Expiration of the PPA At the expiry of the term of the power purchase agree ment,  ment, including any 

Expiration of the  PPA

 

 

extensions that may be applicable, the power plant may ei ther be transAt the to ferred expiry the government, of the term ofsold theto power a third purchase party, continued agree ment, to including be ownedany  by   ment, extensions the orig i nal nalthat de veloper, de commis commis able,  sioned. sthe ioned. power plant may ei  ther ther be trans   may beorapplic  able, ferred to the government, sold to a third party, continued to be owned by  Transfer orde Continued the orig i nal nal  veloper, or Ownership de commis commis sioned. sioned.   At the expiry of the term of the PPA, depending  pending on the structure of the Transfer or Continued Ownership deal, the plant may be transferred  ferred to the host government. In some cases, At the the party expiry may of alsothe have term theofability the PPA, to sell dethe pending  pending plant on to athe third structure party. Provi of the deal, the sions re lated lated planttomay the end be trans of the ferred  ferred termtoofthe thehost PPAgovernment. will reg  u late late In what some happens cases, thethat in party scemay nario.  nario. also Inhave any case, the ability duringtothe sellne the goti  goti plant ationtophase  ation a third ofparty. the PPA, Provi the -

   

 

 

   

sions pos sibility resce lated to recog the the end of may theduring re term tain of athe residual thenePPA at the ulateof end what of PPA, the happens PPA in that term should nthat  nario. ario. be In plant any nised.  nised. case,  gotivalue goti  awill ation tionreg phase the the pos si si bility bility that the plant may re tain tain a residual value at the end of the PPA Where the de  veloper the power plant re tains tains ownership of the plant at   recog nised. term should be nof ised. the end of the term, and does not trans  fer fer it to the off  taker taker or host governWhereitthe ment, may de veloper to the enter power into plant a newrePPA tains or ownership oth  erwise erwise of operate the plantthe at   choose of  tains the endplant power of the and term, sell and power does onnot a spot trans basis. fer it to the off  taker taker or host govern fer ment, it may choose to enter into a new PPA or oth  erwise erwise operate the Decommissioning power plant and sell power on a spot basis. In some cases where the power plant may have no more use for generation, Decommissioning the project company may have the contractual  tual obligation  ation to decommis  commission  sion In some the plantcases in a where manner thethat power complies plant may with have the legal no more and envi use for ronmental re-    generation, the project quire ments.company  ments. This varies maybased have the on the contrac legal tual tual andoblig reg u ation a latory ltion atorytoframe de commis commis work  sion  work sand ion the type plantofintech a manner nology.that complies with the legal and envi  ronmental  nology. ronmental re quire ments. ments. This varies based on the legal and reg u latory latory frame work work and The de commis commis s nology. ations would include dis mantling mantling and re moval moval the type of tech sioning nioning ology. oblig ations of the power plant equipment from the project site, and a site cleanup and The de commis commis sioning ations include The dis mantling mcleanup antling and re moval mmay  oval restoration to the  sioning sat is is faction foblig action  ations of thewould government. ac  tivity tivity of the power include land re plant fill ifequipment  fill re quired quired for from the the subse project quentsite,  quent use and of the a site land. cleanup The envi and ronmental ations may last for government. several yearsThe after the expiry of may  the restoration oblig to the ations sat is is faction faction of the cleanup ac  tivity tivity power agree m ent. for the subse quent includepurchase land re fill fill if re ment. quired  quired quent use of the land. The envi -

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OTHER PPA PROVISIONS

Local Content Several countries have de veloped   laws and policies  cies requiring  quiring local content. These laws and policies can be found as stand-alone docu sector    ments,   specific  cific doc uments,  ments, or within national procurement  ment laws. Sometimes  times they  may feature as reg ulatory  latory or licence  cence require  quirements  ments by the electricity reg ula lator in the country. The general aim of these laws and poli cies  cies is to increase economic linkages between  tween foreign investment  ment and domestic  tic markets. Local content can take many forms. Ownership, local manu fac  facturing,  turing, local labour, services, materi  rials  als and equipment, technology  nology transfer,  fer, and training of nationals are a few examples of local content require  quirements.  ments. Local content provisions  sions are generally not a require  quirement  ment in PPAs, and are often not included (particularly in countries with policies or legis on       lation   the topic). Local content provisions  sions are more likely to be found in the RfP or the concession  sion or implementation  mentation agreement  ment between  tween the project company and the host government. Local content provisions  sions are not neces sarily a strict require  quirement,  ment, but may also be a statement  ment of intent or incentives. When local content provisions  sions are applicable, the parties need to understand the implications  cations for their project. This is be cause  cause local content provi sions may have an impact on the tariff and fi nanc  nancing  ing options, and may be in conflict with international investment treaties entered into by the host   government.

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Confidentiality Most PPAs include a confidentiality  dentiality provision  sion that requires  quires both parties to maintain the confidentiality of sensitive commercial or techni       cal   information. There may be exceptions for dis closures  closures that are required  quired by law, courts, or reg u latory latory authori  thorities.  ties. Confidentiality  dentiality provisions  sions may be complicated  cated by policy concerns around the general power market. The government and off taker  taker may wish to keep confi dential dential any fi nancial nancial incentives or other measures that were provided to at tract tract ini tial tial project invest ments. ments. The government may also be concerned that the more generous terms of  fered fered for certain projects may prejudice d g a  te lower tariffs for future t  ure projects. This desire s  ire for   ice its ability to negoti   otiate confi dentiality dentiality must be balanced with trans parency parency and public ac count count abilability concerns. The need to engage and build trust with the public is es pe pe cially important given that consumers will eventu ally ally bear the costs of the power project.

 

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Boilerplate Provisions In addition  tion to the aforementioned  mentioned obligations  ations that reside  side in a power purchase agreement, it is worth noting of the lit-      (if only briefly) the existence   tle-loved boilerplate provisions.  sions. These lonely provisions  sions occupy  cupy the more remote  mote corners of most power purchase agreements  ments and have the impres sive ability to make even the most scruti  tinis  nising  ing reader's eyes glaze over after even the most cursory re view   of their headings. Suf fice  fice to say, these provi sions do exist for various  ous reasons, including to ensure the enforceability  ability of  the bargain struck by the buyer and the seller in the meatier and more interesting  ing portions of the PPA. Boilerplate provi sions  sions are rarely controversial, but are a neces  essary  sary component of the PPA.

  This section highlights some of the boilerplate provisions you may see at the back of a PPA.

Limitation of Liability and Indemnification The PPA will normally contain provisions  sions limiting  ing the liability  ability of each party to the other party. Such provisions  sions will usually  ally exclude liability  ability by ei ther party to the other for remote  mote or unforesee  seeable  able losses (i.e., consequen quential loss or loss of prof its). As a general principle, the compensation or     damages payable under the PPA by either  ther the Seller or the Buyer should be contractu  tually  ally agreed and clearly defined  fined amounts (i.e., liqui  uidated  dated damages). There is also a related  lated provision  sion dealing with indemnifi  fication  cation and sole re lief. The former may provide that each party will indemnify the other party  for losses suf fered  fered or payments made as a result  sult of the negli  ligent,  gent, wilful or reckless acts or omissions  sions of the other party. The latter  ter may state that the sole relief  lief available to the parties are contained in the PPA. Sometimes,  times, an minimum  mum annual threshold  old is agreed beyond  yond which indemnifi  fication  cation will be made. This is generally aimed at avoiding the administra tra-

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tive inconvenience  nience involved in constantly seeking indem  demnity  nity for small amounts.

 fication  cation for third party death or injury is normally unlimited. Indemnifi

Governing Law The PPA will provide for the governing law applic able  able to the PPA. Provi sions of general law which may apply au tomat  tomat ically  cally or might otherwise  erwise allow a party to apply to a court for an amendment to the contract (such as financial  nancial hardship clauses) should, to the extent legally possi  sible,  ble, be excluded. This is to ensure that the substance of the commercial transaction,  action, as agreed by the parties in a mutu  tually  ally negoti  gotiated  ated contract (in other words, the PPA), is not unduly eroded.

Amendment of the PPA The PPA, like most agreements,  ments, will typically  cally include a provision  sion dealing with amendments to the PPA. Sometimes,  times, follow ing  ing the execu  cution  tion of the PPA, as the project company steps up ef forts  forts to raise financ  nancing  ing for the construction of the plant, dif ferent  ferent prospective lenders scruti  tinis  nising  ing the PPA and other project doc uments  ments may request  quest that certain provisions  sions be amended, due to their perception of how various risks could imperil the   revenue stream of the project needed to pay off the project loans. Usually,  ally, amendments need to be agreed in writing  ing by both parties to the PPA. Depending  pending on the particular  lar juris  risdiction,  diction, there may be a require  quirement  ment for reg ulatory  latory and/or parliamentary approval for the amendment before  fore it becomes  comes ef fective.  fective.

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OTHER PPA PROVISIONS

Summary of Key Points Dispute Resolution: There are a number of mechanisms established to

prevent termination of contracts. These include mediation and arbitration which seek to settle disputes between the parties. Under certain circumstance the parties may still have recourse to the courts Expiration of the PPA: When the term of the power purchase agreement expires, the parties can agree to either transfer the plant, sell the plant, or decommission the plant. Alternatively the project company  may retain and continue to operate the power plant. Local Content: Governments may be inclined to put in place laws or policies to increase economic linkages between foreign investment and domestic markets. These requirements may, however, limit financing options due to conflict with international investment treaties. Confidentiality: Special obligations may be established under the PPA to address confidentiality of privileged information. . Boilerplate: The PPA will typically include a signficant number of back of the document provisions including, limitation of liability, indemnification, governing law and others.

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Default and Termination Introduction Buyer Default Seller Default Post-Termination Obligations Non-default Events Lender Rights Summary of Key Points

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Introduction Parties entering into a contract like a power purchase agreement  ment usually  ally do so with the best intentions that this long-term contractual relationship will     endure for the full term the parties contracted to be together. The PPA should ide ally ally be structured to encourage the parties to maintain and sus  tain the contrac tual tual re lationship. lationship. This chapter first seeks to provide guidance on the circumstances and events which may lead to the non-default  faulting  ing party exercising  ing a right to termi nate nate the PPA. The list of de  fault fault events in this chapter is not exhaus  tive, tive, and always has to be considered against the partic u lar lar PPA concluded and the leg islative islative and policy frame work work of the ju ris ris diction diction in which the power plant is located. This followed by an anlysis of the consequences  quences of termination  nation and the reme dies dies to the non-de fault fault ing ing party. Partic ular  lar attention  tention is paid to the calcu lation lation of termi nation nation payments, whether directly  rectly under the PPA or under a put and call option agree ment ment or a simi lar lar arrange ment. ment. The chapter moves on to explain events which occur as a re sult  sult of no fault of ei ther ther party, known as "non-default  fault events". These events ultimately   mately  give the parties the right to exercise an option to termi nate nate the PPA, for example, a prolonged force majeure event. There is also a discus  cussion  sion of the rights of the lenders under termination  nation circumstances. PPAs typically  cally do not contain hair-triggers  gers which may lead to termination  nation as this is not in the interest of the off taker,  taker, the project company, or the lenders.  

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Buyer Default Typical  cal buyer events of default  fault which may lead to the right by the seller to terminate the PPA are set out below. The cure pe ri are merely illustra    ods     tive and usually  ally negoti  gotiated  ated between  tween the contracting  ing parties. The applicability of any of these events to a project largely de  pends pends on the type of PPA contract ing ing structure. Guidance on the vari ous ous PPA structures are pro vided in other sections of this handbook. Failure to pay

Failure to pay any amount due to the seller within a prescribed cure period after receipt of notice that such payment is overdue

Insolvency

Bankruptcy and insolvency events, which include appointment of liquidator, administrator, trustee, custodian or similar in a proceeding brought against the buyer or appointment and failure to discharge the appointment appointment within [90]* days in proceedings brought against the buyer

Misrepresentation

Misrepresentation that has a material adverse effect on the seller’s ability to perform its PPA obligations if the misrepresentation (if capable of being cured) is not cured within [30-60]* days of notice

Failure to meet buyer construction milestones

Failure of buyer to achieve buyer construction milestones for reasons not attributable to force majeure nor the defaultinfrastructure of the seller (related to buyer interconnection and assets and any other associated facilites that the buyer is required to construct) following a cure period that is reasonable, given the complexity of the associated facilities the buyer is required to construct and the potential impact of delays on the critical path timeline for the construction of the power plant

Default under another key project document

The occurrence of a buyer event of default or government event of default under another key project agreement

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Change in law

The occurrence of a change in law that, in each case for a period of [90 to 180]* days  Renders a material undertaking of buyer void or Renders unenforceable; Renders a material right of the project company void or unenforceable; and/or Restricts repatriation of dividends or the payment of loans, which effect is not mitigated by credit enhancing undertakings by the government to cover for such events  

Assignment

Assignment of the PPA (including by reorganisation or privatisation of buyer) in violation of any provisions of the PPA that prohibits the assignment of the PPA

Material breach

Any other material breach by buyer following notice and failure to cure within 30 days of notice (or commence curing within 30 days and cure within [90 – 180]* days)

* The number of days is indicative and has to be ne goti gotiated  ated between  tween the * The num ber  ber of days is in dica   dica tive  tive and has to be negotiated  between the parties. parties.  

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Seller Default Typical  cal seller events of default  fault which may lead to the right by the buyer to terminate the PPA are set out below. The cure pe ri are merely illustra    ods     tive and usually  ally negoti  gotiated  ated between  tween the contracting  ing parties. The applicability of any of these events to a project largely de  pends pends on the type of PPA contract ing ing structure. Guidance on the vari  ous ous PPA structures are provided in other sections of this book. Failure to reach financial close

Failure to achieve financial closing within [90]* days of required financial closing date for reasons not attributable to the buyer's default

Insolvency

Insolvency events (appointment of liquidator, administrator, trustee, custodian or similar in a proceeding brought against the seller or appointment and failure to discharge the appointment within [90]* days in proceedings brought against the seller)

Misrepresentation

Misrepresentation that has a material adverse effect on the buyer’s ability to perform if the misrepresentation (if capable of being cured) is not cured within [30-60]* days of notice

Failure to commence construction

Failure to issue the notice to proceed to the EPC contractor within [10-15]* days of financial closing

Failure to achieve COD

Failure to achieve within days ofto the scheduled COD forCOD reasons not[180]* attributable force majeure or the default of the buyer / failure to reach COD by the long stop COD

Abandonment

Abandonment of the project for [30]* days or more

Insurance

Breach of project company’s obligation to maintain insurance (following notice, and other than a result of the non-availability of such insurance i nsurance on commercially reasonable terms)

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Consents

Failure to maintain governmental consents (other than as a result of a failure of the government to issue those consents following the submission by the project company of the application for the consent together with the supporting materials that are required by applicable law to be submitted with the application, and the payment of the applicable fees required by applicable law)

Failure to operate according to prudent operating practice

Persistent failure to operate in accordance with prudent operating practice or prudent utility practices

Availability thresholds

Failure to achieve minimum levels of availability, sometimes combined with a failure to propose and implement a remedial plan that is designed to return the levels of availability to the minimum levels of availability within an agreed period period of time

Assignment

Assignment of the PPA in violation of any provisions of the PPA that prohibit the assignment of the PPA

Change in control

Change in control of the seller without consent

Material breach

Any other material breach by seller following notice and failure to cure within [30] days of notice (or commence curing within 30 days and cure within [90 – 180]* days)

* The num ber  ber of days is in dica   dica tive  tive and has to be negotiated between the parties.

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Post-Termination Obligations Introduction For most independent  pendent power producers  ers in emerging  ing markets, the power purchase agreement  ment is the only contract under which the project company  will earn revenues of any signif   nif  icance.  cance. As a result,  sult, if the PPA is terminated  nated or otherwise  erwise becomes  comes unenforceable,  able, then the project company will not have any reli source of revenues. In order to eliminate  liable  able source  nate the uncertainty,     investors and their lenders may agree require that an off  or host support country  agree in the PPA or in a separate  ment ment (such as ataker government agreement,  ment, or a put and call option agreement)  ment) to purchase the power plant together with all of the associ  sociated  ated facilities  ties (or all of the outstanding  standing shares in the project company) in the event that the PPA is termi nated  nated for reasons that are attribut  tributable  able to the off taker  taker or the host country (or certain other force majeure events). The host country and the off taker  taker are exposed to a similar  lar but opposing  ing set of risks. In many countries, the the off taker  taker may be short on capacity  ity and energy and need the capacity  ity of the power plant to keep the lights on. If a project company fails to properly perform its obligations under a PPA, then   the off taker  taker and host country may require  quire the right to purchase the power plant and all of the associ  sociated  ated facilities  ties (or all of the outstanding  standing shares in the project company) in the event the PPA is terminated  nated for reasons that are attribut  tributable  able to the project company or the sponsors (or certain force majeure events).

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Put and Call Options It is often convenient  nient to discuss  cuss the rights and obligations  ations of the off taker,  taker,     host government, project and and sponsors follow  the termi nation of a PPA in terms of acompany, put option t  ion a call op t  ioning tion . When viewed in this framework:  work: A put option is a right held by the project company and the sponsors to require the offtaker or the host country to purchase either the power plant and associated facilities or the outstanding shares in the project company at a pre-agreed purchase price following certain well-defined trigger events; and A call option  is a right held by the offtaker or the host country to require the project company or the sponsors to sell either the power plant and associated facilities or the outstanding shares in the project company to the offtaker or the host country at a pre-agreed purchase price following certain other well-defined trigger events. The trigger  ger events that would ordinarily  narily lead to a right to exercise a call option or a put option appear in the illustration  tration below.

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Typical Trigger Events & Resulting Exercise Rights

Oaker Right to Purchase

Project Company Right to

Plant or Shares ("Call Opon")

Require Purchase of Plant or Shares ("Put Opon")

Offtaker Event of Default

[Maybe] *

 Yes  Y es

Project Company Event of Default occurring prior to COD

 Yes  Y es

No

Project Company Event of Default occurring after COD

 Yes  Y es

[Maybe] *

Expropriation

[Maybe] *

 Yes  Y es

Prolonged Local Political FME

[Maybe] *

 Yes  Y es

Prolonged Local Political FME Affecting Project Company

 Yes  Y es

[Maybe] *

Prolonged Local Political FME Affecting Offtaker

 Yes  Y es

Yes

Prolonged Natural FME Affecting Offtaker

[Maybe] *

 Yes  Y es

Prolonged Natural FME Affecting Project Company

 Yes  Y es

[Maybe] *

Prolonged Supply Constraint

 Yes  Y es

[Maybe] *

Event

* [Maybe]  reects  reects arguments over whether the party reponsible for termination should be able to

purchase (or require the purchase of) the plant or shares

Purchase Prices The purchase prices should vary depending  pending on the trigger  ger event. In order to provide the proper incentives to all parties, it is appropri ate  ate to di vide   the trig ger ger events into the follow  ing ing three cat e gories: gories: Offtaker Attributable:  Trigger events that are attributable to the offtaker or the host country result in the payment of the highest purchase price, which is sometimes referred to as Offtaker Default Purchase Price.

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Producer Attributable: 

Trigger events that are attributable to the project company or the sponsors result in the payment of the lowest purchase price, which is sometimes referred to as the Project Company  Default Purchase Price. No Attribution:  Trigger events that are attributable to neither party  result in the payment of a purchase price that is in between the offtaker default purchase price and the project company default purchase price. This mid-point purchase price is sometimes referred to as the Natural Force Majeure Purchase Price. Although a wide variety  ety of methods  ods can be used to calculate  late the purchase prices, some fundamental building blocks are commonly used. These building blocks are shown in the two sample methodologies for calculat  lating  ing purchase prices in the illus  trations trations below. In these illus trations, trations, the vari ables shown in black constitute a common core of variables that appear in     all of the purchase prices. Vari ables ables that appear in blue may or may not appear in the for mula mula de pending pending on the purchase price. Vari ables ables that appear in red are alternative meth ods ods for calcu lat lat ing ing one of the vari  ables. ables. It should be stressed that these are simply examples as to how purchase prices can be calcu lated. lated. The illustration  tration shows the typical  cal trigger  ger events, the rights that typically   cally  arise out of the trigger  ger events, and the purchase price that would typi cally   cally  be payable follow  ing ing the exercise of the call option or put option.

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Trigger Events  tration that appears below shows an example of how purchase The illustration  lated. prices can be calculated.

 

 

Variable

Meaning

DO

Debt outstanding* outstanding* plus hedge break costs

TC

Termination costs (taxes arising out of transfer transfer,, cost to terminate other project agreements)

IP

Insurance proceeds

EP

Expropriation proceeds (proceeds from remedies for expropriation under applicable law)

ER

Environmental remediation (the cost of bringing the facility into the condition required under the PPA)

DM

Deferred maintenance remediation (the cost of bringing the plant to the condition in which the PPA requires the Project Company Company to maintain it, as determined by an independent engineer)

USC

Un-contributed equity commitments that should already have been contributed

SCO

Shareholder contributions outstanding (assuming equity is redeemed on a straight-line basis)

PTRSCO

Post termination return on shareholder contributions outstanding (a return of X% on outstanding equity for a period equal to the lesser of (i) [18 months – 3 years], and (ii) remainder of term)

will outstanding specified in ain schedule, with DO capped Negotiated:  Negotiated:   Offtaker Offtaker will want outstanding principal specified a schedule, DO capped **Negotiated: Negotiated:  at the amount set forth in want the schedule plusprincipal any debt outstanding that may bewith outstanding as a

at the amount set forth in the schedule plus any debt outstanding that may be outstanding as a

result of the relevant termination event; Lenders Lenders will want all outstanding debt to be included. result of the relevant termination event; Lenders will want all outstanding debt to be included.

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The illustration  tration that appears below shows another example of how purchase prices can be calculated.  lated.

 

 

Variable

Meaning

DO

Debt outstanding* outstanding* plus hedge break costs

TC

Termination costs (taxes arising out of transfer, cost to terminate other project agreements)

IP

Insurance proceeds

EP

Expropriation proceeds (proceeds from remedies for expropriation under applicable law)

ER

Environmental remediation (the cost of bringing the facility into the condition required under the PPA)

DM

Deferred maintenance remediation (the cost of bringing the plant to the condition in which the PPA requires the Project Company to maintain it,

as determined by an independent engineer) USC

Un-contributed equity commitments that should already have been contributed

SCO

Shareholder contributions outstanding (assuming equity is redeemed on a straight-line basis)

DFD

Discounted future distributions (future dividends and redemption payments for the full term of the PPA, discounted to NPV at equity IRR)

want outstanding principal specified in a schedule, DO capped *Negotiated: Negotiated:    Offtaker at the amount set forthwill in the schedule plus any debt outstanding that may bewith outstanding as a

result of the relevant termination event; Lenders Lenders will want all outstanding debt to be included.

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Non-default Events Either  ther the buyer or the seller shall have the right to termi nate  nate the PPA where, through no fault of ei ther party, performance of the PPA is ren  dered impossi  sible.  ble. This consists mainly of force majeure events (including both polit ical  cal and non-polit ical  cal force majeure events) which persist for a prolonged period  riod of time, with the ef fect  fect of rendering performance of  obligations  ations by one or more parties under the PPA impossi  sible.  ble. Offtaker may Terminate Following

Project Company May Terminate Following

Prolonged Natural Force

Prolonged Natural Force

Majeure Events

Majeure Events

Prolonged Foreign Political Force Majeure Events

Prolonged Foreign Political Force Majeure Events

Prolonged Local Political FME if:

Prolonged Local Political FME if:

1.   Local Political 1. Political FME renders renders continued performance or restoration restorat ion unlawful or impractical;

1.   Local Political 1. Political FME renders renders continued performance or restoration restorat ion unlawful or impractical and offtaker elects not to continue paying capacity payments;

2.   Restoration costs exceed 2. exceed threshold; 3.

Efforts to finance

2.   Restoration costs exceed 2. exceed threshold;

restoration fail 3. Prolonged fuel constraints following use of reasonable efforts to arrange alternative supply (depends on technology)

Efforts to finance

restoration fail

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Lender Rights Lenders are concerned that the project company may fail to comply with its obligations under the PPA, since this can result in the off taker having the       right to terminate  nate the PPA - and, ultimately,  mately, jeopardise the ability of the project company to repay the lenders. Therefore,  fore, in a typical  cal project, lenders will require  quire notice of any default,  fault, certain minimum  mum cure peri  riods,  ods, and step-in rights to cure defaults  faults directly.  rectly. These matters  ters will often be dealt with in direct  rect agreements  ments (see below). Lenders may request  quest equivalent provisions  sions - notices, cure peri  riods,  ods, step-in rights - for other key project doc  uments,  ments, but the concern is most sig nif   nif  i cant for the PPA, since the PPA is the revenue-producing contract.

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ability to exercise remedies  dies against a project company that is breach ing  ing its obligations  ations under the PPA.

Novation/Substitution A third scenario  nario is where the project company may be unable to continue to operate the project. The lenders will want the right to transfer   fer all of the project company's rights and obligations  ations to a substitute  tute entity, in which case the substitute  tute entity, for the purposes of the project, takes over the project company's role and the project company is re moved  moved from the pro ject. The PPA (and other key project doc uments)  ments) will need to provide for transfer  fer or be renegoti  gotiated  ated before  fore the lenders can successfully  fully transfer  fer the       project to the substi tuteThe entity. This (and transother fer is key generally referred to as a  novation of the PPA. off taker  taker contract counterparties) may want the right to approve the substi tute  tute entity, although the lenders will be concerned that requiring  quiring such approvals could delay the process.

Direct Agreements Certain provisions  sions above may be contained directly  rectly in the PPA (whether in the origi  nal PPA or an amendment), but ultimately, all parties should ex  ment pect that  the lenders will require  quire a direct  rect agree  ment between  tween the lenders and the off taker  taker that will cover the above provisions  sions and other lender concerns. The project company would usually  ally also be a party to the direct  rect agreement,  ment, since the direct  rect agreement  ment will typically  cally set forth certain amendments or modifi  fications  cations to the PPA.

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How Direct Agreements Fit In

The fundamental purpose of the direct  rect agreement  ment for a PPA is to create  ate a direct  rect relationship  lationship between  tween the lenders and the off taker.  taker. First, the off taker  taker needs to know that the lenders exist. Second,  ond, the PPA itself  self may restrict  strict the project company from assigning  signing its rights and obligations  ations under the PPA. Therefore,  fore, the direct  rect agree ment must provide that (i) the project may collaterally sign its interests to   the as   the lenders, and (ii) in exercising  ing their remedies,  dies, lenders may further novate the PPA to a substitute  tute entity who assumes  sumes the rights and obliga ations of the project company as the seller under the PPA. Third, the direct  rect agreement  ment should be expected to include the provisions  sions described  scribed above - notices to lenders, extended cure pe ri  riods,  ods, step-in rights, and the right to novate the PPA to a substi tute  tute entity - to the extent not already suf fi  ficiently  ciently covered in the PPA. Fourth, the direct  rect agreement  ment may contain substantive amendments to the PPA, to address lender concerns that the initial   PPA did not address to the

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DEFAULT AND TERMINATION

lenders' sat is is faction. faction. These provi sions sions may do everything from modi fying fying fundamental commercial issues  sues - such as extending the term of the PPA, or adjust ing ing payment provi sions sions - to fixing small typos. Direct r  ect agreements m l  arly used between t  ween the lenders and the other   ents are similarly  pants. For each project contract, there may be specific  cific major project partic ipants.  sions that may be rele vant    rect considerations to be addressed. Provisions for direct agree ments ments in other project contracts, but typi cally cally not the PPA, include, amongst many other things: li cens cens ing ing rights, land is sues, sues, and the supply of  spare parts or raw mate ri ri als. als.

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Summary of Key Points Events of Default Buyer Events of Default: Events of default attributable to the buyer's obligations, such as the failure to pay and failure to achieve buyer's construction milestons, will be categorized as Buyer Events of Default. This category may also include events outside the Buyer's control, such as a change in law. Seller Events of Default: Events of default attributable to the seller's obligations, such as failure to complete construction or failure to operate the plant properly, will be categorized as Seller Events of  Default. Unlike with Buyer Events of Default, this category is strictly  limited to events entirely within the control of the seller. Non-Default Events: Events outside the control of either party may  render the PPA impossible to perform. This category typically includes force majeure events but may also be negotiated to include other events, such as prolonged fuel constraints.

Lender Rights Step-In Rights: Lenders will require the right to step in and cure the breach of the seller in order to avoid termination of the PPA. Novation/Substitution: If the lender is unable to cure the breach through its exercise of step-in rights, then the lender may seek to novate the contract to an entirely new seller to resume operation of the project and avoid termination of the PPA. Direct Agreement: The lenders step-in and novation rights will typically be included in a direct agreement between the lender and the offtaker.

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SUMMARY OF KEY POINTS

Post-Termination Post-Termina tion Remedies Put and Call Option:  The buyer has the obligation to purchase the

ownership interest of the seller or the power plant and pay off any  outstanding loans to lenders based on terms stipulated in the Put and Call Agreement in the event of a termination of the PPA. will depend on the type of event Purchase Price: The purhcase price will that triggers termination (Offtaker, Producer, No Attribution). There are a number of different methods for calculating the price.  

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Appendix Glossary Acronyms Other Resources

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APPENDIX

Glossary  tion - a dispute  pute resolu  olution  tion mechanism  anism where the matter  ter in dis   Arbitra tion pute is referred for determi nation by an arbitral panel in accordance with a           pre-agreed set of rules.

 signment - a legal term describing  scribing the act of transferring  ferring the rights, but Assignment not obligations,  ations, of a party under an agreement  ment to another party. The right of a party to assign  sign its rights under an agreement  ment will be subjected to re strictions and limitations agreement  tations set out in the rele vant    ment and may require  quire the prior consent of other parties to the agreement.  ment.

 sions in dif ferent  ferent contracts to pass Back to Back - mirrored contract provisions risk to another party. More pre cisely, in relation to an obligation, means   to another the ability of the obligor to pass  on the risk  of such oblig ation  ation party. This is normally achieved through third party contracts.

 pacity - generating  ing capacity  ity within a national or Baseload Power or Capacity regional  gional grid network  work that the off taker  taker or grid operator intends to dispatch  patch or utilise on a continuous  ous basis.

 pacity Payment - a payment for capacity  ity by the off taker  taker which is based Capacity on the ability of the power plant to generate a certain amount. The payment is designed  signed to allow the producer to recover  cover their fixed costs (capital  tal costs and fixed operating  ing costs) and agreed-upon prof its.  its. These charges are paid so long as the power plant is made available or deemed available for dispatch,  patch, regardless  gardless of whether the power plant is actu ally  ally dispatched.  patched. Carry Forward  - an amount of enti tle  tlement  ment that is not immedi  diately   ately 

utilised by the party so entitled,  tled, which is added to the enti tle  tlement  ment of the party in the next period  riod of entitle  tlement.  ment. Collateral - property, contract rights, or other assets  sets in which a borrower

grants a secu  curity  rity interest to a lender in order to se cure  cure the repayment  payment of a loan.

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GLOSSARY

Commercial Opera  erations  tions Date or COD - a key milestone  stone date defined in

the PPA when the power plant commences commercial operation. Concentrated Solar Power or  CSP  - a form of solar power generation

whereby a circular  lar arrangement  ment of solar panels is focused onto a water tower to cre aate te steam to enable generation of electricity through a steam turbine. Concession  sion - the right granted by the host government to build and oper-

ate the power plant and sell electricity in the host country for a number of  years. A concession  sion agreement  ment is the agreement  ment by which the concession  sion is granted to the project company. An implementation  mentation agreement  ment serves a similar  lar purpose. Conditions Precedent - a set of condi tions that must be fulfilled be fore a    

contract or parts of it become  come ef fective.  fective.

 f  ini  nition  tion of Direct  rect Loss. Consequential Loss - please refer to the def   bility - a liability  ability that has not yet materi  rialised  alised but which Contingent Liability may materi  rialise  alise in the future.  ture.

 rate Finance  - used to distinguish  tinguish Project Finance  nance (see below). Corporate  nance implies that the lender has recourse  course to the shareholders  holders Corporate finance of the rele vant borrower and/or to as assets over and above the asset being fi-    nanced.  

 riod during which a default  faulting  ing party has a Cure Period  - the time period  erise lead to an event of default.  fault. chance to correct a breach which would otherise    tion by the off taker  taker or grid operator to the power Curtailment - an instruction producer of a non-dispatch  patchable  able power plant to reduce  duce generation. This may be moti vated   by end-user demand,  mand, the availability of alternative generation resources,  sources, transmis  mission  sion network  work capacity  ity and/or grid stability.

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APPENDIX

Debt  Service Reserve Account or DSRA - in the context of the loan

agreement,  ment, a special  cial debt reserve  serve account  count denomi  nominated  nated in the currency of  the loan, which the project borrower funds with available project cashflow, up to an amount that is suf fi to cover the scheduled debt service oblig -    cient   over ations of the project borrower an agreed period  riod of time. Decommissioning  - the obligation  ation of the project company to dismantle  mantle

the power plant and clean up the project site upon the expiry of the term of  the concession.  sion. Deemed Capacity  pacity - the capacity  ity that a power plant would have been able

to make available, but for the occurrence  currence of an event or circumstance for which the off taker  taker bears the risk. Deemed Completion - the date on which a power plant would, but for

the occurrence  currence of an event for which the off taker  taker bears the risk, have achieved the COD.

 tion- the electricity that a power plant would have been Deemed Generationable to generate, but for the occurrence  currence of an event or circumstance for which the off taker  taker bears the risk.

 sponsible  ble for deliver liverDelivery Point - the point to which a producer is responsi ing electricity generated by the power plant. The delivery  livery point is typically   cally  on the high voltage side of the step-up transformers. The electricity electricity that is     generated by a power plant is measured at the delivery  livery point. Developer - see Sponsor.

 ment Finance Institutions  tions  - financial  nancial institu  tutions  tions with a manDevelopment date to finance  nance projects that achieve de velopment   outcomes.  comes. Examples include the World Bank, AfDB, OPIC, FMO, DEG, CDC, DBSA and Proparco. Direct Agreements - contracts or agreements  ments between  tween lenders and coun-

terparties of the project company (including the off taker t  aker and, where rele 

168 173

 

GLOSSARY

 vant, the host government), under which the rele vant   project counterparty  acknowledge  knowledge the secu  curity  rity interests granted by the project company to the lenders, and allows lenders the opportunity  nity to step in to remedy breaches     by the project company. project Direct contract. Agreements may also be used to clarify/amend the underlying Direct Loss - a loss arising  ing directly  rectly as a result  sult of a default  faulting  ing party's failure

to perform its obligations  ations under the agreement.  ment. Dispatch  - an instruction by the off taker  taker or grid operator to the power

plant to produce electricity. Dispatchable Plant - a power plant that is capable of responding  sponding to the

instructions of the transmis  mission  sion company on demand  mand to vary its output  put on short notice. Plants that fall within this cate  gory include coal-fired plants,   gas-fired plants, and renew   new able  able plants with a relatively constant or storable source of energy such as a hydro plant with reservoir and/or a biomass plant. Drawdown - in the context of a loan, means the advance of funds from

the lender to the borrower.

 fect. The condi Effective Date - the date on which the PPA comes into ef fect. tions to the ef fective  fective date will vary from project to project, but will often include financial close.  

 taker which is based Energy Payment - a payment for electricity by the off taker on the actual  tual amount of power generated and dispatched.  patched. The payment is designed  signed to allow the producer to recover  cover fuel costs and variable  able operating  ing costs.

 curement and Construction Contract or EPC ConEngineering, Procurement  tween the EPC contrac tract - one or more contracts to be entered into between tor and the project company for the purpose of setting  ting out terms and conditions  tions for the design,  sign, engineering,  neering, procurement  ment of materi  rials  als and equip-

ment, the construction and commissioning  sioning of the power plant.

169 174

 

APPENDIX

Equa tor tor Principles  - risk management  agement framework  work adopted by financial  cial

institu  tutions  tions for determining,  termining, assess  sessing  ing and managing  ing environmental  ronmental and social risk in projects, primarily  marily intended to provide a minimum  mum standard for due diligence to support responsi ble       risk deci   sion-making.   Eq uity  uity  - money invested by the sponsors in the project that is not bor-

rowed by the project company. The term "Equity" may sometimes  times be used to include shareholder  holder subordinated  nated debt (which is finance  nance made available to the project company by the sponors or shareholders  holders of the project company, which is subordinated  nated to debt made available by the lenders). Eq uity  uity Contribution  tion Agreement  - obliges the owners of the power

plant to make equity or subordinated  nated debt contribu  butions  tions to finance  nance the portion of the power plant not being financed  nanced by third party lenders. Event of Default - a default  fault that the parties to a contract agree is a mate r r-

ial default.  fault. The occurrence  currence of an Event of Default  fault usually  ally grants the nondefault  faulting  ing party the right to terminate  nate the contract if such default  fault is not cured within any applicable cure period.  riod. Feasibility  sibility Study  - a techni  nical  cal and financial  nancial study of the viability  ability of the

proposed power project. t  her (i) the execu c  ution t  ion of the Financ n i  ng Docu m Financial Closing  ing  - either   ancing   ments,   ents, or (ii) the execu tion of the Financ ing Docu ments and the satis faction of all                 of the conditions  tions for disburse  bursement  ment of the project loans.

 ments - the set of contracts and agreements  ments other than Financing Documents the project doc uments  ments (including the Loan Agreements  ments Direct  rect Agreements  ments and Secu  curity  rity Agreements),  ments), that define  fine the rights and obligations  ations of the lenders and the project company in relation  lation to the financ  nancing  ing of the power plant.

 jeure Event - an event beyond  yond the control of the af fected  fected party  Force Majeure that pre vents it from performing one or more of its obligations    ations under the

rele vant contract. Events constitut    tuting  ing force majeure are generally further

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GLOSSARY

classi  sified  fied into Polit ical  cal Force Majeure Events and Non-Polit ical  cal Force Ma jeure Events, with dif ferent  ferent financial  nancial and contractual  tual consequences  quences to the contracting  ing parties. Natural  ural Force Majeure falls within the latter  ter cat egory.  gory. Fuel Supplier p   lier - a supplier of fuel used to generate electricity. Fuel Sup ply ply Agreement - the agree ment ment be tween tween the project company 

and the fuel supplier (in the case of a conventional PPA), or be tween  tween the off taker  taker and the fuel supplier (in the case of a tolling agreement  ment or energy  conversion agreement),  ment), under which the fuel supplier supplies fuel to the project company.

 tion Agreement  - an agreement  ment providing for the Fuel Transportation transportation  portation of fuel from the fuel supplier to the project company.

 tor - see Seller. Generator Grid - a system  tem of high tension cables by which electrical  cal power is distrib trib-

 out a region.  gion. uted throughout Heat Rate - a measurement  ment of the ef fi  ficiency  ciency of a power plant in convert -

ing a unit of fuel into a unit unit of energy. Heat rates are typically  cally described  scribed in terms of MMBtu (LHV) per kWh or GJ(LHV)/kWh. Host Government - the government of the country in which the power plant is located. IFC Performance Standards  - a set of standards de veloped   by the IFC

that are designed  signed to help identify, avoid, mit igate,  gate, and manage any adverse social or environmental  ronmental impacts that may be created  ated by a power project. Independent Power Producer  ducer  - a pri vately-owned   producer of electric

power. Insolvency - the inability of an entity to pay its debts when or as they be  -

come due.

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APPENDIX

   mission system  tem and the Interconnection   - the point at which the transmission power plant interconnect.

    Interconnection Agreement  - an agreement between the project company and the transmis  mission  sion system  tem operator providing for the connecting  ing of  the power plant to the transmis  mission  sion system.  tem.  alised ef fective  fective compounded Internal Rate of Return  or IRR – the annualised rate of re turn turn earned on an invest ment ment over a pe riod riod of time. Investor - see Sponsor. Kilowatt  watt Hour - a measurement  ment of energy which is equal to 1,000 watts

of electricity being generated or consumed continuously  ously for a period  riod of one hour. Lenders - the providers of loan financing  nancing to the project company. Liq uidated  uidated Damages - a contractu  tually  ally agreed, fixed amount of damages to

compensate one party to a contract for a breach by the other party. Liq uidity  uidity - the availability of cash and cash equivalents to cover a party's

short-term financial  nancial obligations.  ations.

    to the producer to finance  nance the power project, and the obligations  ations of the producer/borrower to repay the loan with interest and to comply with various covenants set forth in the loan agreement.  ment. Loan Agreement - creates the commitment of the lender to make a loan

Long-Stop Date  - the final deadline for the achievement  ment of a signif   nif  icant  cant

milestone  stone in a contract, such as the fulfilment of the conditions  tions precedent  dent to the parties' obligations  ations under the agreement,  ment, the achievement  ment of finan nancial closing,  ing, or the achievement  ment of the commercial operations date.

 ment under which Long Term Service Agreement or LTSA  - an agreement the equipment supplier will provide certain maintenance maintenance services on a

 

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GLOSSARY

 lar intervals during the term of a PPA and/or will propower plant at reg ular  vide certain spare parts that are neces  essary  sary in order to operate and maintain the power plant. Make-whole  - the act of putting a party in the same posi tion t  ion as if the

event that caused a loss or reduction  duction of benefit  fit has not occurred.

Material  terial Breach - a seri  rious  ous breach by a party of its obligations  ations under an

agreement.  ment.

 ment of power meaning 1,000,000 watts. Megawatt - a measurement Merchant Power Plant - a power plant that sells electricity to a compet i -

tive wholesale  sale market instead of under a PPA. The off take  take of electricity  from a merchant power plant is governed by market forces, thereby expos-  ing the project company to market risk.

 resentation  tion - a statement  ment or representation  sentation made by one party to Misrepresenta another which is proved to be untrue.

 cal energy, typically  cally expressed in Net Electrical Output - the net electrical MWh, that is generated by a power plant and delivered l  ivered to the delivery  l  ivery   tering system  tem located at the delivery  livery point. point, as measured by the metering Non-dispatchable Plant - a power plant that is not capable of responding  sponding

to instructions  tions from a transmis  mission  sion system  tem operator to vary its output.  put. Non-Political  litical Force Majeure  jeure Events - a force majeure event that is not

a Polit ical  cal Force Majeure Event. Non-Recourse Financing  - financ  nancing  ing that will be repaid  paid solely from an

identified  fied source of revenues. Non-recourse  course financ  nancing  ing is usually  ally provided to a special-purpose  cial-purpose vehi  hicle.  cle. The obligations  ations of the shareholders  holders in the spe cial-purpose vehi  hicle  cle are usually  ally limited to their obligation  ation to contribute capital  tal and, in some cases, to provide other limited and well-defined  fined support to the special-purpose special-purpose vehi vehicle. cle.

 

   

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APPENDIX

No va vation  tion  - a legal mechanism by which the rights and oblig  ations  tions of a

party under a contract are transferred  ferred to third party.

    made available and the electricity generated by the power plant, subject to the terms and conditions  tions of the PPA. Also referred  ferred to as the Buyer.

Offtaker - the party to a PPA whose obligation is to purchase the capacity 

Operating  erating and Maintenance Agreement or O&M Agreement  - the

agreement  ment between  tween the project company and the operator under which the operator operates and maintains the power plant. Pass Through - in relation  lation to a cost, a mechanism  anism under which the pro-

ducer passes such cost on to the off taker  taker by operation of the tariff. Political Force Majeure Event - a force majeure event that is politi  cal       in

nature. Typically  cally these would include any act of war, conflict, act of foreign enemy, blockade, embargo, or revolution,  tion, strikes of a nationwide or polit i cally moti vated   character,  ter, changes in law, and the re vocation   or non-is suance of concessions  sions or other authorizations.  thorizations.

 tween two parties, Power Purchase Agreement or PPA  - a contract between one of which produces or generates power for sale (the seller/producer) and one of which purchases power (the buyer/off taker).  taker). This contract is sometimes  times referred  ferred to as an "off take"  take" agreement.  ment.

 ducer - see Seller. Producer  ject Company - See Seller. Project Project  ject Documents  ments  - the contracts or agreements  ments required  quired for the con-

struction, operation and maintenance  nance of the power plant. Typically  cally this will include the Power Purchase Agreement,  ment, the EPC Contract, Fuel Supply Agreement,  ment, Operations and Maintenance  nance Agreement,  ment, and the Interconnection  tion Agreement.  ment.

Project Finance  see Non Recourse Financing.      

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GLOSSARY

 ject Loan - a loan from one or more lenders to the project company, Project made for the purpose of financ  nancing  ing a power project.

      Project Works - the civil works and electro-mechanical equipment that will, once completed, constitute  tute a power plant.  lic Private Partnerships - arrangements  ments between  tween the public and pri Public  vate sectors whereby a service or piece of infrastructure that is ordinarily   narily  provided by the public sector is provided by the pri vate   sector, with clear agreement  ment on the allocation of associ  sociated  ated risks and responsi  sponsibili  bilities.  ties.

 lator  tor - competent  tent authority  thority of the host government having the statu Reg ula  late the Project and the project company. tory right to reg ulate Request For Proposal  - an invitation from the host government, the off -     

taker, or in some markets, the Reg u lator, lator, to potential investors to submit a   proposal to de velop a power project. project. Run of the River - in the context of a hydroelec tric  tric plant, a hydroelectric  tric

plant without  out a reservoir of any signif   nif  icant  cant size. Security  rity Documents  ments  - the doc uments  ments that grant the secu  curity  rity interests,

mortgages,  gages, pledges and other secu  curity  rity rights that secure  cure the repayment  payment of  the project loans in favor of the lenders. Seller - The entity which is selling power under the PPA. Also referred  ferred to

as the Project  ject Company, Power Producer  ducer or Generator  tor. Several Liability  bility  - means that each party is separately responsi  sponsible  ble for

its own performance and the consequences  quences of its failure to perform. Site - the land upon which the power plant is located. Sovereign Support  port Agreements  - can include sovereign guaran-

tees, comfort letters,  ters, put and call option agreements  ments and other forms of 

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APPENDIX

sovereign support that enhance the creditworthi    worthiness  ness of the off taker  taker and other government entities  ties involved in the project. Special-Purpose Vehicle  - a corporate entity es tablished  tablished specif  ically  cally for

the purpose of pursing  ing a specific  cific project which is prohibited from undertaking any activity  tivity beyond  yond the project in question.  tion. Often called the project company for the purposes of this handbook. h f  iliated a  ted with the shareholders h Sponsor - a shareholder   older or other parties af fili   olders of  the project company, also known as the Investor  or Developer  in this handbook. Spot Market  - in the context of the supply of electricity, the wholesale  sale

electricity  tricity market into which the project company can sell electricity other than under a long-term PPA. In the context of a fuel supply arrange ment,   the market from which the project company can ac  quire quire fuel with out out entering into long-term fuel purchase oblig  ations. ations. Step-in Rights - the rights granted to the lenders under a Di rect  rect Agree -

ment to step-in and cure a de fault  fault by the project company, under a project agree ment, ment, before  fore the counterparty to the project company may take any  ac tion tion to enforce the contract against the counterparty or termi nate nate the contract. of the off taker to Take and Pay - in the context of a PPA, the obligation   ac cept cept delivery by the  power  livery of and pay for electricity actu  tually  ally generated plant. Take or Pay - in the context of a PPA, the oblig ation  ation of the off taker  taker to pay  for electricity made available by the power plant regardless  gardless of whether the elec tricity tricity is ac tu tu ally ally generated, but excluding electricity that is dis patched patched by the transmis sion sion sys tem tem operator but not de livered livered by the producer.

riod of time during which a contract will remain Term  - the pe riod  main in force, unless terminated  nated earlier by either  ther party in accordance  cordance with the terms and

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GLOSSARY

conditions  tions of the contract. The term of a PPA is usu ally  ally expressed to run until a date falling a fixed number of years after COD.

 ment Tolling Agreement  - in the context of power projects, an agreement under which a party, usually  ally the off taker,  taker, agrees to provide fuel to the power producer that will be converted into electricity for the benefit  fit of the off  taker. taker.  rived unit for electrical  cal potential. Volts - a derived

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APPENDIX

Acronyms AfDB - African De velopment   Bank BOO - Build Own Operate BOOT - Build Own Operate Transfer  fer BOT - Build Operate Transfer COD - Commercial Operations Date CP - Conditions  tions Precedent  dent CSA - Credit Support Agreement   CSP - Concentrated Solar Power DBA - Design  sign Build Agreement  ment DFI - De velopment   Finance  nance Institu  tutions  tions DSCR - Debt Service Coverage Ratio DSRA - Debt Service Reserve  serve Account EBRD - European  ropean Bank for Reconstruction  construction and De velopment   ECA - Export Credit Agency  EIA - Environmental  ronmental Impact Assess  sessment  ment EIS - Environmental  ronmental Impact Statement  ment ESIA - Environmental  ronmental and Social Impact Assess  sessment  ment EPC - Engineering,  neering, Procurement  ment and Construction (contract)

178 183

 

ACRONYMS

EPCM - Engineering,  neering, Procurement,  ment, Construction, Management  ment

 BOR – Euro Interbank Of fered  fered Rate EURIBOR FM - Force Majeure FME – Force Majeure Event FMV - Fair Market Value FSA - Fuel Supply Agreement  ment GJ - Gigajoule  gajoule

 mentation Agreement  ment IA - Implementation ICA - Infrastructure Consortium for Africa ICC - International Chamber of Commerce

 tlement  ment of Investment  ment Disputes ICSID - International Centre for Settle IDC - Interest During Construction IE - Independent  pendent Engineer  neer IFC - International Finance Corporation   IPP - Independent  pendent Power Producer/Project kW - kilowatt kWh - kilowatt hour LD - Liqui  uidated  dated Damages LHV – lower heating  ing value

LIBOR - London Interbank Of fered f  ered Rate

184 179

 

APPENDIX

LC - Letter  ter of Credit

 tration LCIA - London Court of International Arbitration LTSA - Long Term Service Agreement m   ent MAE - Material  rial Adverse Ef fect  fect

 lateral  eral De velopment   MDB - Multilat Bank MIGA - Multilat  lateral  eral Investment  ment Guarantee Agency  MMBtu - Million British Thermal Units MW - Megawatt MWh - Megawatt hour

 nance O&M - Operations and Maintenance    ment Corporation OPIC- Overseas Pri vate Investment PCOA - Put and Call Option Agreement  ment

 livery  POD - Point of Delivery  PPA - Power Purchase Agreement   PPP - Public Pri vate   Partnership  nership PRG - Partial Risk Guarantee

 cal Risk Insurance PRI - Polit ical PV - Photovoltaic

 fication  cation PQ - Pre-Qualifi

RFP - Request  quest for Proposal

180

 

ACRONYMS

SOE - State Owned Entity  SPV - Special  cial Purpose Vehi  hicle  cle T-Line - Transmis Line   sion  

 TRAL - United Nations Commission  sion on International Trade Law  UNCITRAL VAT – Value Added Tax WCLC – Working Capital  tal Letters  ters of Credit  

181 186

 

APPENDIX

Other Resources  ing is a non-exhaustive list of additional  tional online resources:  sources: The follow ing

Country Risk Classifications Standard & Poor's Country Risk Ratings: http://goo.gl/E8Ha4

Environment and Social African Development Bank's Integrated Safeguard System: http://goo.gl/hWTO5p Equator Principles: http://www.equator-principles.com IFC Environmental and Social Performance Standards: http://goo.gl/pNaCOv 

 Development Finance Institutions Africa Finance Corporation: http://www.africafc.org African Development Bank Group: http://www.afdb.org Asian Development Bank: http://www.adb.org DEG German Investment Company: http://www.deginvest.de Development Bank of Southern Africa: http://www.dbsa.org European Bank for Reconstruction and Development: http://www.ebrd.com European Investment Bank: http://www.eib.org FMO Netherlands Development Finance Company: http://www.fmo.nl International Finance Corporation: http://www.ifc.org Islamic Development Bank: http://www.isdb.org Proparco Investment and Promotions Company for Economic Cooperation: http://www.proparco.fr Overseas Private Investment Corporation: http://www.opic.gov  World Bank Group: http://www.worldbank.org

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OTHER RESOURCES

Negotiation Support African Legal Support Facility: http://goo.gl/hux9Va Host Government Negotiation Support Portal: http://www.negotiation http://www.negotiationsupport.org support.org

Power Sector Guides Africa Power Guide: http://www.africapowerguid http://www.africapowerguide.com e.com Geothermal Handbook: Planning and Financing Power Generation by  World Bank: http://goo.gl/Ftms70 IEA Wind Wind Power Technology Technology Roadmap: Roadmap: http://goo.gl/5uaStk Important Features of Bankable Power Purchase Agreements by OPIC:  http://goo.gl/fBRXys Power Africa: http://www.usaid.gov/powerafrica World Energy Energy Outook 2014: http://www.worldenergy http://www.worldenergyoutlook.org outlook.org Eberhard, A. and Gratwick, K. N, Demise of the Standard Model for Power  Sector Reform and the Emergence of Hybrid Power Markets , Energy Policy  Volume 36, Issue 10. 2008. http://goo.gl/7y4076

Procurement EIB Procurement Guidelines: http://www.eib.org/info http://www.eib.org/infocentre/publications/all/gu centre/publications/all/guide-toide-toprocurement.htm South Africa's Renewable Energy IPP Procurement Program: Success Factors and Lessons: http://goo.gl/1YnSGy  World Bank Procurement Guidelines: http://www.worldbank http://www.worldbank.org/procurement .org/procurement

Project Finance World Bank: Project Finance and Guarantee Notes: http://goo.gl/rdCkTH World Bank: Bank: Partial Risk Guarantees: Guarantees: http://goo.gl/7z6ZQo

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APPENDIX

Project Preparation ICA Assessment of Project Preparation Facilities for Africa:  http://goo.gl/MfLS92

Public Private Partnerships Infrastructure Consortium for Africa: http://www.icafrica.org Unsolicited Proposals - An Exception to Public Initiation of  Infrastructure PPPs: http://goo.gl/hXJgFZ World Bank Public Private Partnership in Infrastructure Resource Center: http://www.worldbank.org/pppirc

184

 

Acknowledgment Though the following persons were unable to participate in the drafting of this handbook, we would like to acknowledge the invaluable contributions they made in sharing their wisdom and expert expertise ise throughout the consultative process that preceded and informed the drafting and publication of this handbook: • Andrew Alli, President & CEO, Africa Finance Corporation (AFC) •  Yesufu  Yesufu Alonge, Head, Power Procurement & Power Contracts, Nigerian Bulk Electricity Trading Trading Plc (NBET) • Sam Amadi, Chairman/CEO, Nigerian Electricity Regulatory Commission (NERC) • Justin Antonipillai, Deputy General Counsel, US Department of Commerce • John J. Beardsworth, Jr. , Partner, Hunton & Williams LLP • Joseph C. Brandt, President & CEO, ContourGlobal • Michael Boyd, Senior Energy Advisor Adviso r, Economic Growth Ofce, US Agency for International Development (USAID), Tanzania Tanzania • Rosanne Casey, Policy Coordinator - Power Africa, Africa

Bureau, US Agency for f or International Development (USAID) • Brian Christaldi, Associate General Counsel, Project Finance, Overseas Private Investment Corporation (OPIC) • Carl Fleming, Associate, Akin Gump Strauss Hauer & Feld LLP • Cephas Galley, Division Manager Manager,, Contracts (Legal Counsel), Electric Company of Ghana, Ltd • John. L. Garrison, Energy Advisor A dvisor,, Africa Bureau, US Agency for International Development (USAID) • Andrew Gray, Senior Legal Consultant, Trinity LLP

• Kenneth Hansen, Partner, Chadbourne & Parke LLP • Andrew M. Herscowitz, Coordinator for Power Africa and Trade Africa, US Agency for International Development (USAID) 185

 

• Paul Hinks, CEO, Symbion Power LLC • William H Holmes, Partner, K&L Gates LLP • David Hunt, Principal Consultant, Legal and Project Finance, Nexant, Inc. • Robert F. Ichord, Jr., Deputy Assistant Assis tant Secretary, Bureau of Energy Resources,US Department of State • James Kamau, Managing Partner, Partner, Iseme Kamau & Maema Advocates • Zahra Omar, Partner, Partner, Iseme Kamau & Maema Advocates • Astri Kimball, Senior Advisor to the President & CEO for Policy and Operations, Overseas Private Investment Corporation (OPIC) • Mohamed Loraoui, Intl. Program Specialist, Commercial Law Development Program (CLDP) • Rwabangi Luteganya, Investment Manager, Tanzania Electric Supply Company (TANESCO) (TANESCO) • Stephen Mallowah, Partner, MMC Africa Advocates • Patrick Mbengwalu, Director and Head, Debt and Infrastructure Financing, FBN Capital • Alex McClain, US Agency for International Development (USAID) • Elise McDonald, Senior International Program Specialist, Commercial Law Development Program, US Department of Commerce • Decklan Mhaiki, Deputy Managing Director Director,, Tanzania Electric Supply Company (TANESCO) (TANESCO) • Robert Mosbacher, Jr., Chairman of the Board, Initiative for Global Development (IGD) • Amyn Mussa, Partner, Partner, Anjarwalla & Khanna Advocates • Professor Chinedu Nebo, Honourable Minister of Power, Federal Republic of Nigeria • Dr. Mima S. Nedelcovych., President & CEO, Initiative for Global Development (IGD) • Lisa O’Brien, Partner, Partner, Freshelds Bruckhaus Deringer LLP • Crispine Odhiambo, Partner, Partner, Kiptiness and Odhiambo Associates

186

 

• Nicholas Okafor, Partner, Partner, Udo Udoma & Belo-Osagie • Imeh Okon, Power Africa, USAID Nigeria • Dozie Okpalaobieri, Special Advisor to the Coordinating Minister for the Economy and Honourable Minister of Finance • Kwame Parker, Executive & Head, Power and

Infrastructure, East Africa, Stanbic Bank • Sharon Pauling, Director - Economic Growth and Environment, US Agency for International Development (USAID) • David Powers, Partner, Baker Botts LLP • Jeremy Schwer, Partner, Akin Gump LLP • Adeola Sunmola, Senior Associate, Udo Udoma & Belo-Osagie • Nils Tcheyan, Director, Director, Government Affairs and Policy,, Africa, General Electric Company (GE) Policy • Aniekan Ukpanah, Partner, Udo Udoma • Sheryl Sheryl We Weisf isfog og, Attorney Advisor, Commercial Law Development Program, US Department of Commerce • Kelly R. Welsh, General Counsel, US Department of Commerce • Julie Wenah, Special Advisor to the General Counsel, US Department of Commerce • Rumundaka Wonodi, Managing Director & CEO, Nigerian Bulk Electricity Trading Plc (NBET)

With sincere thanks,

Stephen Karangizi Director African Legal Support Facility

Nnamdi Ezera Senior Counsel U.S. Department of Commerce  Commercial Law Development Program

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Hunton & Williams LLP is a global law firm with more than 725 lawyers practicing from 19 offices across the United States, Europe and Asia. Asi a. The firm’s global experience extends to myriad legal disciplines, including energy and infrastructure, corporate transactions and securities s ecurities law, international and government relations, regulatory law, privacy and cybersecurity, labor and employment and commercial litigation. Our Africa practice is ranked in leading legal publications such as Chambers Global and IFLR1000. As one of the first law firms to advise on major energy and infrastructure

investment in Africa, Hunton & Williams can assist clients with navigating the full lifecycle of a project. We have been involved in representing governments, project sponsors, equity investors and lenders throughout Africa for more than 30 years and understand the unique business, market and cultural conditions impacting individual jurisdictions. From pioneering techniques for African Afri can energy and infrastructure finance and development to successfully handling arbitration and litigation matters, our lawyers understand what matters most to our clients and how to deliver to them the best results. We are proud of our history working on innovative and groundbreaking “market “market first” transactions, including the Bujagali Hydroelectric Project in Uganda (awarded Project Finance  magazine “African “African Power Deal De al of the Year”), the Songo Songo Gas-to-Electricity Project in Tanzania and the SEACOM fiber optic cable system (awarded Project Finance “African Telecommunications Tel ecommunications Deal of the Year”), among others.

Ryan T. Ketchum Co-Head, Africa Practice, London

[email protected] rketchum@hunt on.com | +44 20 7220 5755 Ryan focuses his practice on the development and financing of energy and infrastructure projects in Africa and other emerging and frontier markets. He is a frequent speaker and author on topics related to the development of independent power projects and is recognized in Chambers Global and IFLR1000 for his practice in Africa.

 

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