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Outline of the Presentation
Introduction
Parties to a PPA and other stakeholders
Matters governed by a PPA
Key principles of a PPA
Key Issues in PPA negotiations
Some tips on win-win negotiations generally
Introduction - 1
Power Purchase Agreements (PPAs) are
commercial/legal contracts usually entered into
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 supplier
Thoughtful negotiations are essential as the PPA is:
the key initial step to making the power projects
bankable;
the heart of BOT, BOO or BOOT types of power
generation projects to be undertaken by
Independent Power Producers (IPPs)
Introduction - 2
Most PPAs have tenures of 10-30 years, typically
20 years, during which Buyer buys energy, and
sometimes also capacity and/or ancillary services,
from the Seller
The PPA secures the long-term revenue stream
through the sale of electricity from the project and
provides evidence that the electricity is needed by
the Buyer
While recognizing current regulatory environment,
the PPA needs to have anticipatory language to
capture and accommodate future regulatory
regimes, even as it locks in price and quantity
Introduction - 3
The PPA specifies relevant dates of the project
coming into effect, when the project will begin
commercial operation, and a termination date after
which the contract may expire or be renewed
All sales of electricity are metered to provide both
Seller and Buyer with the most accurate information
about the amount of electricity traded
Rates for electricity are agreed upon in the
agreement between both parties to provide an
economic incentive to both parties of the PPA
To the Seller, the PPA is a key ingredient in the
project’s cost structure, economic and financial
success as well as profitability
Introduction - 4
To the Buyer, the PPA impacts the cost of its
electricity sales on the short, medium and long run
Any understanding between the parties should be
properly recorded and detailed clearly to prevent
misunderstandings in future (since people who originally
negotiate PPAs may not be involved later in the operating
period of the project)
The only thing that matters is what the document
says (no matter what conversations the parties might
have about provisions, terms and arrangements)
Any changes desired in the agreement should
therefore be negotiated before signing. (After that all
parties are legally bound to fulfill their part).
Introduction - 5
Buyers may be told that the agreements they are
being asked to sign are standard contracts and the
terms are typical and the same everywhere for
everyone
Even though this may be partially true, until an
agreement is signed, any and all of the agreement
provisions are negotiable and should be clearly
understood and agreed by both parties
Parties to a PPA & Other Stakeholders
Direct Parties
Seller
Buyer
Indirect Parties
Financiers/Lenders
Government
Transmission services provider
Operating procedures
Operational targets
Penalties for operational defaults
Commissioning and Testing
Operation and Dispatch Procedures
Repair and Maintenance
Metering
Matters governed by the PPA - 1
Sale and Purchase of Electricity
Invoicing and Payments
Fuel Supply (for thermal plants)
Curtailment and Deemed Generation (for
renewable energy, especially wind)
Renewable Energy Credits (RECs)
Insurance
Dispute Resolution
Termination and Default
Matters governed by the PPA - 2
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
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
Connection arrangements
Define the Delivery Point
How will the power plant 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
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
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
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
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.
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
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
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
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
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
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
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
Level and Structure of Tariff - 3
Energy charge usually covers variable O&M
cost
Other Charges
Fuel Charge - pass through, efficiency-
adjusted
Any other Pass through costs
Start up charges
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
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)
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)
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
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
Have a competent PPA negotiating team
PPAs are so important that each party should have
a competent negotiating team, with expertise in:
Technical matters (engineering, O&M,
environmental, etc);
Financial analysis;
Legal aspects
In-house competence is built progressively through
training and actually negotiating PPAs – there is
no shortcut to experience!
If you do not already have in-house capacity for
negotiating, it is wise to initially hire external
support
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.
Focus on interests
Distinguish between issues, positions, and
interests
Don’t get locked in; consider multiple options
Use objective criteria.
Seek joint gains
Be creative
For sustainable agreements, avoid one-
upmanship
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
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
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
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.
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.
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.
Negotiation steps - 1
1. 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
Negotiation steps - 2
9. 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
Negotiation steps - 3
14. Know what sources of power you (and others)
have and use them effectively
15. Reach agreements that stick
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