Basics of PPA Negotiations. Eng. David M. Mwangi, Individual Energy Consultant Nairobi, Kenya

Transcription

1 Basics of PPA Negotiations Eng. David M. Mwangi, Individual Energy Consultant Nairobi, Kenya

2 Introduction Power Purchase Agreements (PPAs) are commercial/legal documents necessary for financing of power projects A PPA is usually signed between a power producer (seller) and a buyer, commonly known as off-taker The off-taker may be a re-seller e.g. utility, an end-user of the power, or just a middleman Most PPAs are long-term agreements with tenures of years

3 Parties to a PPA & Other Stakeholders Direct Parties Seller Buyer Indirect Parties Financiers/Lenders Government Transmission services provider

4 Matters governed by the PPA - 1 Operating procedures Operational targets Sets out penalties for operational defaults Commissioning and Testing Operation and Dispatch Procedures Repair and Maintenance Metering

5 Matters governed by the PPA - 2 Sale and Purchase of Electricity Invoicing and Payments Fuel Supply Insurance Dispute Resolution Termination and Default

6 Key principles of PPAs Bankability Proper Risk Allocation Each allocated to party best placed to manage it Security of Cash Flow Repayment of project debt within tenure of PPA Step-in/buyout rights for lenders Financial viability of off-taker

7 Key issues in PPA negotiations

8 Agree on implementation Schedule It is necessary to agree on: Conditions Precedent Key milestones Well defined longstop dates, by which if certain conditions are not met, PPA can be terminated Penalties for delays or bonuses for earlier completion PPA should contain flexibility to accommodate possible delays in Engineering, Procure, Construct (EPC) contract delivery dates

9 Connection arrangements How the power plant will be connected to the grid Is there need for additional interconnection facility? Who pays for the cost of such facilities? How to deal with transfer of assets e.g. where facilities are to be installed by the seller and transferred to the off-taker

10 Procedures Procedures include: Commissioning and testing procedures Operation and dispatch procedures Metering procedures Maintenance procedures The procedures define level of performance expected and how this can be measured important, especially where capacity payments or take or pay arrangements are involved

11 Operational targets and penalties for default Agree on clearly defined operational targets and penalties for not meeting them Availability of capacity Guaranteed capacity tests Payments and interest on delayed payment Availability of off-taker s system For renewable energy, especially wind power, issue of curtailment/deemed generation

12 Clear definition of Events of Default Buyer s Events of Default Seller s Events of Default Cure periods for defaults that are curable Step-in by off-taker to remedy Lenders step-in rights

13 Fuel procurement Fuel Procurement is important in thermal plants as fuel represents a large portion of the O&M costs. Issues considered include: Type of fuel to be used, which has an implication on cost Party responsible for procurement / involvement of other Levels of security stock of fuel - has an impact on tariff How the cost of fuel is determined. Due to volatility of fuel prices, it is usual to make fuel cost a pass through element in PPAs.

14 Proper definition of Force Majeure Usually, there s a distinction between political force majeure (FM) and commercial FM Commercial FM usually insurable, whilst there is limited coverage for political FM, by Government, MIGA, ATI Lenders/developer would prefer off-taker bears FM risk - negotiate such that each party bears FM risk affecting it Need to ensure FM provisions are consistent with industry standard

15 Direct Agreement Lenders will require the off-taker to sign a Direct Agreement giving them step-in rights in case the seller fails to perform its obligations

16 Political risk This is a special risk arising from action or inaction of Government or a governmental authority A special provision is required to protect the project from such action or inaction

17 Provision for change in circumstances This includes, inter alia: change in law change which can have significant impact on project cost provision for adjustment of prices arising from change in circumstances is required to protect parties from the cost impact. Parties may agree on threshold change above which price adjustment would kick in

18 Dispute Resolution PPA, being long-term, requires a dispute resolution mechanism that allows parties to resolve issues and continue with the agreement, or agree to terminate it on specified terms Dispute resolution mechanisms include: Coordinators - representatives of the parties meeting to resolve the dispute Use of experts International arbitration

19 Level and Structure of Tariff - 1 Level of tariff needs to cover all cost components of the project/plant over the tenure of PPA Tariffs are usually in 2-3 parts namely; Capacity Charge, Energy Charge and, for plants, Fuel Charge Fuel cost is usually a pass through component, but typically with an efficiency adjustment e.g. an agreed specific consumption parameter

20 Level and Structure of Tariff - 2 Costs usually covered by capacity charge: Fixed operating and maintenance cost Fixed Costs (construction costs etc) Fixed fuel costs e.g. for security stock Reserves for major maintenance Debt service and return on equity

21 Level and Structure of Tariff - 3 Energy charge usually covers variable O&M cost Other Charges Fuel Charge - pass through, efficiencyadjusted Any other Pass through costs Start up charges

22 Level and Structure of Tariff - 4 Price escalation is critical in tariff design and structure due to inflation over the life of a project Escalation is based on the relevant CPI depending on the applicable currency, e.g. US CPI for US$-denominated and EURO CPI for Euro tariff Need to agree upfront on tariff components to be escalated e.g. energy charge and 15% of capacity charge. This percentage may be agreed to change over time

23 Evaluating Unsolicited Proposals - 1 Typical approaches to benchmark value for money of unsolicited proposals include: Open book processes Developer makes full disclosure of financial model Acceptable and pre-determined rates of return International and local benchmarking of prices, risk allocations, and terms (where feasible)

24 Evaluating Unsolicited Proposals - 2 Ensuring that developer competitively procures essential contracts for supply of project inputs (such as the EPC contract and finance) Pre-specifying an acceptable capital structure (typically debt/equity 75/25) Pre-specifying maximum interest rate and minimum repayment period of loans, (e.g. 7%, 14 years)

25 Security Package Security package could be in the form of: Letter of credit; or Escrow account covering agreed # of invoices; or Sovereign guarantee Important issues to consider in this case: Sustainability on the part of the purchaser/offtaker Bankability of the project on the part of the seller

26 PPA Termination Options Some PPAs have provisions for the off-taker to purchase plant for any of the following reasons: Defaults by the project company under the PPA; Force Majeure; Public interest (where the off taker is a publicly owned distributor) The PPA may also be terminated by the seller in the event of off-taker default Need to agree upfront on how termination compensation will be determined in each case

27 Project risks allocation in PPAs and their mitigation (Case of Kenya) - 1

28 Project risks allocation in PPAs and their mitigation (Case of Kenya) - 2

29 Some tips on win-win negotiations generally

30 Know your BATNA before starting BATNA - Best Alternative to a Negotiated Agreement Results matter: Don t settle for less than you could achieve without an agreement. Seek to improve BATNA.

31 Focus on interests Distinguish between issues, positions, and interests Don t get locked in; consider multiple options Use objective criteria.

32 Seek joint gains Be creative For sustainable agreements, avoid oneupmanship Look for differences in relative priorities Seek to achieve as much of your interests as you can, while giving the other side more than their BATNA

33 Reach implementable or sustainable agreements: Where interests of both parties are satisfied Which are technically sound Which are politically feasible (ratified) Where incentives or penalties reinforce compliance Which are can be reopened when necessary

34 Good process and Satisfaction Triangle Negotiations have several stages Create the conditions for effective problem solving People have three interdependent needs that must be carefully considered in order to achieve agreements and decisions that will last The 3 needs are represented in the following diagram, termed the Satisfaction Triangle

35 The Satisfaction Triangle - 1 Adapted from Center for Dispute Resolution, Boulder Colorado

36 The Satisfaction Triangle - 1 Procedural Needs are about: the opportunity to have a "fair go" the opportunity to put forward own point of view the opportunity to both listen and be listened to having confidence in information, protocols and meetings.

37 The Satisfaction Triangle - 2 Emotional Needs are about: personal and emotional aspects people bring to the negotiating table how people feel about what is being negotiated for how people feel about themselves during and after the negotiations.

38 The Satisfaction Triangle - 3 Substantive Needs: the material things and issues people are negotiating about can be both tangible, e.g. money, time, rights, possessions; or intangible, e.g. respect, consideration. People are very often just focused on what they need to negotiate and how to negotiate isn t seen as really that important.

39 Negotiation steps Be clear about your objectives 2. Focus on interests (yours and theirs) 3. Propose criteria for evaluating options 4. Consider BATNA (yours and theirs) 5. Invest in Preparation 6. Involve all affected interests 7. Agree on the terms for negotiation 8. Keep your constituency informed

40 Negotiation steps Devise strategies for joint fact-finding 10. Plan for implementation 11. Share information 12. Find joint gains 13. Create a problem-solving process -agree on scope of issues -ask questions -Listen! -generate multiple options

41 Negotiation steps Know what sources of power you (and others) have and use them effectively 15. Reach agreements that stick

42 Thank You