Understanding Power Purchase Agreements PDF
Preview Understanding Power Purchase Agreements
POWER AFRICA UNDERSTANDING SERIES (VOL 1) U Understanding N D Understanding E Power R S T Power A Purchase N D Purchase I Agreements N G Agreements P O W E R P U R C Funded by H A S E A G R E E M E N T Developed by S Institutional Partners Understanding Power Purchase Agreements – Version 1.3 Published Under the Creative Commons Attribution-Noncommercial-Share Alike 4.0 International License (cc by no sa) PDF and EPUB Editions 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 1 The African Legal Support Facility (“ALSF or Facility”) is a public international institution hosted by the African Development Bank (“AfDB”). The Facility has been supporting Afri- can governments in the negotiation of complex commercial transactions since 2010. The Facility was established to address the asymmetric negotiating capacity of African govern- ments when dealing with international investors. The ALSF is open to all sovereign nations and international organizations. Currently, there are 59 signatories to the Facility includ- ing 52 countries and 7 international organizations. The Facility provides technical legal assistance to African countries to strengthen their le- gal expertise and negotiating competencies. The ALSF’s goal is to ensure fair and balanced negotiations. In addition, the Facility offers legal training, knowledge sharing, and other capacity building assistance to eligible Participating States negotiating complex commer- cial transactions. Africa’s power deficit is well documented. The global surge in efforts to electrify the con- tinent has been reflected in the number of requests for assistance received by the Facili- ty from African governments relating to the negotiation of Power Purchase Agreements (“PPA”) and related contracts. Engaging international counsel to assist governments in these negotiations is only part of the solution. In order to fully utilize the expertise of these advisors and build capacity, gov- ernments require an understanding of these fundamental agreements that lie at the heart of the development of power infrastructure. Pursuant to the ALSF’s capacity building mandate, the Facility set out to develop a knowl- edge management tool to address this capacity gap. In collaboration with U.S. Department of Commerce’s Commercial Law Development Pro- gram, the ALSF brought together a group of experts on PPAs to draft a reference handbook that can be used by both public and private sector stakeholders to streamline the PPA ne- gotiation process. The objective of the PPA handbook is to demystify PPAs. It provides those involved in the negotiations, both lawyers and non-lawyers, with a clear understanding of the purpose, significance and impact of these long-term agreements. The outcome is to provide those involved with a common language and understanding to work with their legal advisors, technical experts and counterparties. Government decision-makers, officials involved in the negotiation of PPAs, private sector lawyers and others interested in an introduction to the process of negotiating a PPA and the core contractual terms that make a PPA “bankable”, will find this resource very valuable. The PPA handbook is an example of one of the many interventions that the Facility has developed to assist member states. For more details about the work of the ALSF please mail us at [email protected]. Stephen Karanzigi Director, African Legal Support Facility CC OO NN TT EE NN TT SS RISK ALLOCATION AND MITIGATION Introduction 8981 FFOORREEWWOORRDD Development and Construction Phase Risks 8993 FFoorreewwoorrdd 22 Operational Phase Risks 110004 Other Risks 111137 Force Majeure 112237 IINNTTRROODDUUCCTTIIOONN Insurance 112371 IInnttrroodduuccttiioonn 88 Summary of Key Points 112393 TTHHEE PPPPAA IINN CCOONNTTEEXXTT OTHER PPA PROVISIONS PPoowweerr GGeenneerraattiioonn MMaarrkkeettss 111411 Introduction 113326 TThhee PPoowweerr PPuurrcchhaassee AAggrreeeemmeenntt ((PPPPAA)) 222433 Resolving Disputes 113337 FFiinnaanncciinngg ooff PPoowweerr PPrroojjeeccttss 333544 Local Content 144113492 EEnnvviirroonnmmeennttaall && SSoocciiaall RReeqquuiirreemmeennttss 444333 Confidentiality 114405 SSuummmmaarryy ooff KKeeyy PPooiinnttss 444666 Boilerplate Provisions 114416 Summary of Key Points 114439 FFIINNAANNCCIIAALL PPRROOVVIISSIIOONNSS IInnttrroodduuccttiioonn 444999 DEFAULT AND TERMINATION TTaarriiffff SSttrruuccttuurreess 555000 Introduction 114551 PPrrooccuurreemmeenntt ooff EElleeccttrriicciittyy 666344 Buyer Default 114562 IInnvvooiicciinngg aanndd PPaayymmeennttss 777022 Seller Default 114584 CCrreeddiitt SSuuppppoorrtt ffoorr OOffffttaakkeerr OObblliiggaattiioonnss 777355 Post-Termination Obligations 115506 CCrreeddiitt SSuuppppoorrtt ffoorr tthhee PPrroojjeecctt CCoommppaannyy''ss OObblliiggaattiioonnss 788922 Non-default Events 115662 TTaaxx EExxeemmppttiioonnss 888477 Lender Rights 115673 SSuummmmaarryy ooff KKeeyy PPooiinnttss 888588 Summary of Key Points 116638 CC OO NN TT EE NN TT SS RISK ALLOCATION AND MITIGATION Introduction 8981 FFOORREEWWOORRDD Development and Construction Phase Risks 8993 FFoorreewwoorrdd 22 Operational Phase Risks 110004 Other Risks 111137 Force Majeure 112237 IINNTTRROODDUUCCTTIIOONN Insurance 112371 IInnttrroodduuccttiioonn 88 Summary of Key Points 112393 TTHHEE PPPPAA IINN CCOONNTTEEXXTT OTHER PPA PROVISIONS PPoowweerr GGeenneerraattiioonn MMaarrkkeettss 111411 Introduction 113326 TThhee PPoowweerr PPuurrcchhaassee AAggrreeeemmeenntt ((PPPPAA)) 222433 Resolving Disputes 113337 FFiinnaanncciinngg ooff PPoowweerr PPrroojjeeccttss 333544 Local Content 144113492 EEnnvviirroonnmmeennttaall && SSoocciiaall RReeqquuiirreemmeennttss 444333 Confidentiality 114405 SSuummmmaarryy ooff KKeeyy PPooiinnttss 444666 Boilerplate Provisions 114416 Summary of Key Points 114439 FFIINNAANNCCIIAALL PPRROOVVIISSIIOONNSS IInnttrroodduuccttiioonn 444999 DEFAULT AND TERMINATION TTaarriiffff SSttrruuccttuurreess 555000 Introduction 114551 PPrrooccuurreemmeenntt ooff EElleeccttrriicciittyy 666344 Buyer Default 114562 IInnvvooiicciinngg aanndd PPaayymmeennttss 777022 Seller Default 114584 CCrreeddiitt SSuuppppoorrtt ffoorr OOffffttaakkeerr OObblliiggaattiioonnss 777355 Post-Termination Obligations 115506 CCrreeddiitt SSuuppppoorrtt ffoorr tthhee PPrroojjeecctt CCoommppaannyy''ss OObblliiggaattiioonnss 788922 Non-default Events 115662 TTaaxx EExxeemmppttiioonnss 888477 Lender Rights 115673 SSuummmmaarryy ooff KKeeyy PPooiinnttss 888588 Summary of Key Points 116638 FOREWORD AAPPPPEENNDDIIXX Foreword GGlloossssaarryy 111677611 Electricity drives the engine of opportunity in the modern world. It allows AAccrroonnyymmss 111788833 our children to study by light. It powers the innovation in our factories. OOtthheerr RReessoouurrcceess 111888277 From telecommunications to transportation, power is essential to virtually every aspect of our increasingly dynamic and interconnected world. As a result, investment in power infrastructure must be a part of any strategy for economic development. This is true for both broad economic growth initiatives in emerging countries and targeted rural growth initiatives in developed countries. The transformational nature of power projects does, however, come with risks. Given that power projects are most essential where there is a power shortage in the market, these projects often represent a pioneering level of investment and financial complexity in these markets. As a result, it has be- come common place to adopt a durable agreement that cements the pre- dictability and durability that is needed for any long term business venture. This agreement is called the Power Purchase Agreement ( ) and has PPA helped to drive the growth and development of independent power pro- jects around the world. This handbook is intended to provide an overview of PPAs and the obliga- tions, risks and remedies that are found within them. Our group of au- thors, all whom contributed their time on a pro-bono basis, includes con- tributors from governments, development banks, private banks and lead- ing international law firms. Our hope is that by providing perspectives from all sides of the PPA negotiation process, we can present the reader with a balanced understanding of the challenges involved in PPAs and an insight into the practical reality of overcoming these challenges when ne- gotiating these complex agreements. More than anything, we want to com- municate to the reader that the key to a successful PPA is to abandon the assumption of an adversarial process and to adopt instead a strategy of co- operation and coordination. It is only through this balanced approach that the risks can be mitigated and the rewards realised for all parties involved. The handbook was produced using the Book Sprint (http://www. 7 2 FOREWORD AAPPPPEENNDDIIXX Foreword GGlloossssaarryy 111677611 Electricity drives the engine of opportunity in the modern world. It allows AAccrroonnyymmss 111788833 our children to study by light. It powers the innovation in our factories. OOtthheerr RReessoouurrcceess 111888277 From telecommunications to transportation, power is essential to virtually every aspect of our increasingly dynamic and interconnected world. As a result, investment in power infrastructure must be a part of any strategy for economic development. This is true for both broad economic growth initiatives in emerging countries and targeted rural growth initiatives in developed countries. The transformational nature of power projects does, however, come with risks. Given that power projects are most essential where there is a power shortage in the market, these projects often represent a pioneering level of investment and financial complexity in these markets. As a result, it has be- come common place to adopt a durable agreement that cements the pre- dictability and durability that is needed for any long term business venture. This agreement is called the Power Purchase Agreement ( ) and has PPA helped to drive the growth and development of independent power pro- jects around the world. This handbook is intended to provide an overview of PPAs and the obliga- tions, risks and remedies that are found within them. Our group of au- thors, all whom contributed their time on a pro-bono basis, includes con- tributors from governments, development banks, private banks and lead- ing international law firms. Our hope is that by providing perspectives from all sides of the PPA negotiation process, we can present the reader with a balanced understanding of the challenges involved in PPAs and an insight into the practical reality of overcoming these challenges when ne- gotiating these complex agreements. More than anything, we want to com- municate to the reader that the key to a successful PPA is to abandon the assumption of an adversarial process and to adopt instead a strategy of co- operation and coordination. It is only through this balanced approach that the risks can be mitigated and the rewards realised for all parties involved. The handbook was produced using the Book Sprint (http://www. 7 2 FFOORREEWWOORRDD FOREWORD TThhee hhaannddbbooookk wwaass pprroodduucceedd uussiinngg tthhee BBooookk SSpprriinntt ((hhttttpp::////wwwwww.. Bringing electricity to underserved communities is a rare example of a uni- bbooookksspprriinnttss..nneett//)) mmeetthhoodd,, wwhhiicchh aalllloowwss ffoorr tthhee ddrraaffttiinngg,, eeddiittiinngg aanndd ppuubb-- versally-held ambition in a world filled with competing development pri- lliisshhiinngg ooff aa ccoommpplleettee pprroodduucctt iinn jjuusstt ffiivvee ddaayyss.. OOuurr jjoouurrnneeyy bbeeggaann wwiitthh aa orities. Governments, private companies, private banks and development ssppiirriitteedd ddiissccoouurrssee aanndd qquuiicckkllyy pprrooggrreesssseedd ttoo aa ffuurriioouuss ppaaccee ooff wwrriittiinngg wwiitthh institutions are all working tirelessly towards the goal of electrification. If ooccccaassiioonnaall iinntteerrrruuppttiioonnss ffoorr tthhee iinnttrroodduuccttiioonn ooff bbrriilllliiaanntt iiddeeaass aanndd ccrriittiiccaall this handbook can in any way move us towards the shared goal of greater iinnssiigghhttss.. TThheerree wwaass aa ssuurrpprriissiinngg aammoouunntt ooff ccoonnsseennssuuss oonn ssoommee ttooppiiccss aanndd energy access, then we will consider it an unqualified success. aann uunneexxppeecctteedd lleevveell ooff ddeebbaattee oonn ootthheerrss.. TThhee oouuttccoommee iiss aa pprroodduucctt tthhaatt rree-- fflleeccttss tthhiiss tteeaammwwoorrkk rraatthheerr tthhaann tthhee ppeerrssoonnaall ooppiinniioonnss ooff tthhee aauutthhoorrss oorr Sincerely, tthhee iinnssttiittuuttiioonnss tthhaatt tthheeyy rreepprreesseenntt.. The Contributing Authors WWee wwoouulldd lliikkee ttoo tthhaannkk oouurr BBooookk SSpprriinntt ffaacciilliittaattoorrss FFaaiitthh BBoosswwoorrtthh aanndd LLaaiiaa RRooss GGaasscchh ffoorr tthheeiirr ppaattiieenntt gguuiiddaannccee aanndd uunnwwaavveerriinngg lleeaaddeerrsshhiipp.. WWee wwoouulldd aallssoo lliikkee ttoo tthhaannkk tthhee ooffffssiittee BBooookk SSpprriinntt tteeaamm,, iinncclluuddiinngg HHeennrriikk vvaann LLeeeeuuwweenn ((iilllluussttrraattoorr)),, RRaaeewwyynn WWhhyyttee ((pprrooooffrreeaaddeerr)) aanndd JJuuaann CCaarrllooss GGuuttiiéérrrreezz BBaarrqquueerroo aanndd JJuulliieenn TTaaqquueett ((TTeecchhnniiccaall SSuuppppoorrtt)).. WWee aarree eessppee-- cciiaallllyy tthhaannkkffuull ffoorr tthhee ssttrraatteeggiicc ppllaannnneerrss tthhaatt hheellppeedd ccoonncceeiivvee tthhiiss pprroo-- ggrraamm:: RReennéé PPoosstt ((BBooookk SSpprriinnttss)),, TTooyyiinn OOjjoo ((AAffrriiccaann LLeeggaall SSuuppppoorrtt FFaacciilliittyy)) aanndd MMoohhaammmmeedd LLoorraaoouuii ((CCoommmmeerrcciiaall LLaaww DDeevveellooppmmeenntt PPrrooggrraamm)).. WWee wwoouulldd aallssoo lliikkee ttoo rreeccooggnniissee tthhee ffuunnddiinngg aanndd ssuuppppoorrtt ooff tthhee UUnniitteedd SSttaatteess AAggeennccyy ffoorr IInntteerrnnaattiioonnaall DDeevveellooppmmeenntt aanndd tthhee AAffrriiccaann LLeeggaall SSuuppppoorrtt FFaacciill-- iittyy.. TThhiiss hhaannddbbooookk iiss iinntteennddeedd ttoo rreefflleecctt tthhee vviibbrraanntt nnaattuurree ooff tthhee BBooookk SSpprriinntt pprroocceessss aanndd sseerrvvee nnoott ssiimmppllyy aass aa rreeffeerreennccee bbuutt aallssoo aass aa jjuummppiinngg--ooffff ppooiinntt ffoorr ffuurrtthheerr ddiissccuussssiioonn aanndd sscchhoollaarrsshhiipp.. TThhee hhaannddbbooookk iiss iissssuueedd uunnddeerr tthhee CCrreeaattiivvee CCoommmmoonnss AAttttrriibbuuttiioonn--NNoonnCCoommmmeerrcciiaall--SShhaarreeAAlliikkee 44..00 IInntteerrnnaa-- ttiioonnaall LLiicceennssee ((CCCC BBYY NNOO SSAA)) wwhhiicchh aalllloowwss aannyyoonnee ttoo ccooppyy,, eexxcceerrpptt,, rree-- wwoorrkk,, ttrraannssllaattee aanndd rree--uussee tthhee tteexxtt ffoorr aannyy nnoonn--ccoommmmeerrcciiaall ppuurrppoossee wwiitthh-- oouutt sseeeekkiinngg ppeerrmmiissssiioonn ffrroomm tthhee aauutthhoorrss,, ssoo lloonngg aass tthhee rreessuullttiinngg wwoorrkk iiss aallssoo iissssuueedd uunnddeerr aa CCrreeaattiivvee CCoommmmoonnss LLiicceennssee.. TThhee hhaannddbbooookk iiss aavvaaiillaabbllee iinn eelleeccttrroonniicc ffoorrmm aanndd pprriinntteedd ffoorrmm ((EEnngglliisshh aanndd FFrreenncchh)).. IItt ccaann bbee uusseedd aass aann oonnlliinnee iinntteerraaccttiivvee rreessoouurrccee.. MMaannyy ooff tthhee ccoonnttrriibbuuttiinngg aauutthhoorrss aarree aallssoo ccoommmmiitttteedd ttoo wwoorrkkiinngg wwiitthhiinn tthheeiirr iinnssttiittuuttiioonnss ttoo aaddaapptt tthhiiss hhaannddbbooookk ffoorr uussee aass tthhee bbaassiiss ffoorr ttrraaiinniinngg ccoouurrsseess aanndd tteecchhnniiccaall aassssiissttaannccee iinniittiiaattiivveess.. BBrriinnggiinngg eelleeccttrriicciittyy ttoo uunnddeerrsseerrvveedd ccoommmmuunniittiieess iiss aa rraarree eexxaammppllee ooff aa uunnii-- 88 9 33 4
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