delivering viable onshore wind farm projects – global case ... · no delay liquidated damages for...

Delivering Viable Onshore Wind Farm Projects –Global Case Studies

Focus on PPAs

Presentation to Africa Utility WeekRenewable Energy Africa

Cape Town, 14 March 2011

Scott BrodskyDewey & LeBoeuf

JohannesburgTel: +27 11 911 4303

Email: [email protected]

Dewey & LeBoeuf LLP | 2

Introduction

● Exciting time for Wind and other Renewables development in SA and throughout Africa

● Energy Crisis in South Africa and Region

● In SA alone, estimated need for 50,000 new MW of generation capacity by 2028

● Tremendous Need Translates to Tremendous Opportunity

● Opportunities both in South Africa and throughout the Region –huge investor interest

● Development plans include Renewables, Cogeneration and other new generation

● Launch of South Africa’s REFIT Programme awaited


Outline

● Introduction to PPAs

● Key Issues

● Key Differences Between Wind PPA and Typical Thermal PPAs

● Bankability

● Direct Agreements

● Case Study – South Africa’s REFIT PPA

● Questions


Dewey & LeBoeuf in Africa


What is a PPA?

● A commercial contract for the sale and purchase of electrical power

● The mainstay of power project financing

● Between Project company or generator and offtaker

● Term typically 20-25 years


Risk and its Allocation

● Construction Risk (if applicable)

● Demand Risk

● Political Risk

● Change in Law Risk

● Force Majeure Risk

● Operating Risk

● Fuel Risk


Fundamental Provisions/Issues

● Tariff

● Construction Obligations

● Despatch

● Political Risk

● Change in Law

● Grid Connection/Deemed Completion

● Force Majeure

● Operating Obligations

● Fuel Obligations


Other Key Provisions/Issues

● Conditions precedent

● Testing

● Metering

● Insurance

● Liability/indemnities

● Term

● Events of default and termination

● Dispute resolution

● Security


Features of a Wind Project

● Wind plants use wind as their fuel

● Generation is intermittent, and therefore wind facilities are usually self-dispatching

● Equally, forecasting can be difficult

● Wind turbines each have their own generation curve

● Wind studies vital

● Environmental issues are different from thermal projects

● Transport of turbines and cranes to site may require upgrade of off-site infrastructure (e.g. roads) and logistical support (e.g. vehicular escorts)

● Wind plants can usually be commissioned in phases

These characteristics need to be reflected in the terms of a Wind PPA


Key differences between Wind PPA and typical thermal PPAs

Wind PPA Typical Thermal PPA

Usually contemplate phased completion and commercial operations May include phased completion

No delay liquidated damages for late completion of plant Delay liquidated damages payable by Seller to Buyer for late completion of plant

No forecasting obligations or only good faith forecasting obligations with no penalties

Binding forecasting obligations with penalties

Self-dispatching – seller controls dispatch Offtaker controls dispatch

One part tariff – energy charge only Two part tariff – capacity charge and energy charge

No guaranteed capacity and no capacity charge payable; no penalties for non-availability

Guaranteed capacity and capacity charge payable; penalties for non-availability

No fuel component Requires fuel

No default even if plant does not generate Default event if plant does not generate at specific level or meet minimum guaranteed capacity


● Thermal PPAs usually contain Delay LDs – a per day or per week amount payable by the Seller to the Buyer in the event that there are delays in completion of the plant other than due to a Buyer Failure or Force Majeure

● Delay LDs compensation Buyer for having to purchase power from other sources

● Delay LDs are usually paid by the EPC Contractor to the Seller, who passes them through to the Buyer

● A Wind plant does not guarantee any capacity or availability to the Buyer because of its intermittent generation profile

● Therefore, Delay LDs are not applicable under Wind PPA because no “loss” is suffered by Buyer – the delay is simply an “inconvenience”

● Seller is incentivised to complete the plant on time to generate revenue and to avoid termination for prolonged delay

Delay Liquidated Damages


Self-dispatch

● Thermal plants are generally available 24/7/365 (subject to outages etc)

● Seller declares availability and Buyer requests dispatch based on availability

● Wind plants only generate when wind speed meets turbine power curve

● Therefore, they generate power intermittently

● Seller will deliver power to the Buyer only when the plant is generating power

● Dispatch is within Seller’s control – known as “self-dispatch”


Tariff Structure

● Thermal plant tariffs comprise two parts – a fixed capacity charge (for available capacity) and a variable energy charge (for actual delivered energy)

● Wind plants and other self-dispatching plants usually have one part tariffs, comprising an variable energy charge only

● Energy charge payable when (and only when) plant generates and delivers energy to the Buyer

● Energy charge sized to cover fixed components of the financing and variable charges

● May be additional pass through costs


No Guaranteed Capacity

● Thermal plants guarantee a minimum available capacity which is paid for by a capacity charge – this covers the Seller’s fixed costs

● Wind plants do not guarantee any available capacity and so no capacity charge is payable – so the Seller’s fixed costs incorporated into the energy payment

● Seller takes the risk of wind conditions: if no wind, no payment


Fuel

● Thermal plants operate on fuels (gas, diesel, oil etc)

● Wind plants use the power of the wind to generate energy

● So PPA does not require any provisions relating to fuel


Generation Failure = Seller Default

● Thermal plant PPAs usually contain as a Seller Default the failure of the Seller to generate a minimum capacity over a period of time

● Such a failure indicates a problem with the reliability and performance factor of the plant

● Wind plants generate intermittently, so Seller cannot guarantee any minimum capacity

● So no need to include generation failure as a Seller Default

● Seller Default events in the Wind PPA are limited to breach, insolvency etc

● Seller incentivised to generate: no capacity payment, so if no generation, no income


Bankability

● Wind and other power projects often financed on a limited recourse project finance basis

● Unlike corporate finance, project income is only cash flow available to pay interest and repay debt

● PPA is sole source of project income

● Value of second hand power plant limited

● Bankability indicates whether project risk allocation is an acceptable basis for project financing

● Bankability varies over time, by institution and geographically

● Bankability needs to be considered for PPA and each individual project agreement, but also across project agreements as a whole


● Agreement between:

– Project Co

– Lenders

– Parties to key underlying project contracts, including PPA

Direct Agreement


● Lenders’ security package often defensive in nature – doesn’t allow Lenders to sell assets on enforcement

● Value of assets when split up unlikely to be sufficient to coverLenders’ outstanding debt

● Tie in key third parties

● An opportunity to ‘revive’ the Project – benefits all parties

Why have Direct Agreements?


● Enable Lenders to ‘step-in’ to the position of Project Co:

– to effectively take over the project upon a default under the financing arrangements

– where Project Co has default under a project contract, to prevent termination by the third party (for a period of time) and to enable Lenders to remedy Project Co’s default

● Ensure continuance of the Project’s contractual structure and ability to generate revenues

Effect of Direct Agreements


● Notice by Lenders to third party of assignment by Project Co to Lenders (enforcement of security)

● Consent/acknowledgement by third party to assignment and exercise of assigned rights

● Undertaking by third party not to terminate (and suspension of common law remedies) for a certain period (to give Lenders time to remedy any outstanding breach by Project Co)

● Agreement by third party to continue to comply with its obligations under the contract

● Agreement by third party not to terminate on enforcement of security by Lenders

Key Provisions of Direct Agreements


● Lenders’ ‘step-out’

● Allows the project to be moved to another company if there is a catastrophic claim

Key Provisions of Direct Agreements (cont)


Case Study – SA’s REFIT PPA

● Draft REFIT PPA published by NERSA in 2009

● Designed to cover wind and other REFIT technologies

● Extensive public consultation and comments

● Risk allocation in the PPA favours the Buyer and impacts on the bankability of the PPA

● NERSA and Government stakeholders seem to have taken on board the need for the final PPA to contain a balanced and bankable risk allocation consistent with international project financed PPAs to be attractive to investors and developers


SA’s REFIT PPA (cont)

● IPPs in South Africa have been through a number of false starts

● Investors – whether South African or international – can only be asked to continue to spend time and money for so long

● There are numerous markets competing for investor interest and funding

● Crucial that the final PPA and related documentation is the right side of the line in terms of risk allocation and bankability – market is expectant

● Testing the market through putting out an unbalanced and unbankablesuite of documents – even assuming that mark-ups are allowed - could jeopardise the success of the entire programme

● Possibility of private sector consultations before documents finalised

● Enlarged Government advisory team now working to finalise different PPA versions


Key PPA Issues

● Liability regime is unbalanced

● Limited protection for risks outside Seller’s control

● No financial protection in respect of changes in law

● Hair trigger termination rights

● No termination compensation regime

● Lender considerations

● Phased completion not contemplated

● Grid connection

● Industry restructuring


Liability regime is unbalanced

● The Parties’ respective remedies for breach are not equivalent (due to the different definitions of “Direct Loss” for each Party):

– the Seller is only entitled to recover "loss of payment which would have been due to it“

– the Buyer is entitled to "any direct loss incurred by it.”

● In addition, while “Direct Losses” are expressly stated to be the Seller's "sole remedy" in the event of breach (in addition to its termination rights), the Buyer's remedies are not exclusive of other rights and remedies in the PPA, and the Buyer is expressly entitled, in addition to termination rights, to seek specific performance of the Seller's obligations


Compensation for Non-Seller Risks

● There are limited protections for the Seller for risks outside its control which result in a delay in start up or reduced output

● For example:

– during the commissioning period, if there is a delay in the commissioning of the connection to the Grid resulting in the delay in commencement of operations

– during the operating period, if there is an event that is beyond the Seller's control or as a result of the Buyer’s failure which results in the Seller being unable or restricted in its ability to generate or evacuate power

● We suggested concepts of “Deemed Completion” (pre-COD) and “Compensation Events” (post-COD) be introduced into the PPA, consistent with international project financed projects


No protection for financial impacts of a Change in Law

● While a “Change in Law” concept is included in the PPA, there is no economic stabilisation clause mitigating the effects of the Change in Law on the Seller

– a Seller would expect that if there is a Change in Law (after the date of the PPA) which affects its costs of carrying out the project, it will be entitled to an adjustment in the tariff to alleviate the effects of the Change in Law

● The definition of “Change in Law” should not be too restrictive and should not, for example, exclude particular changes in tax laws and environmental laws


“Hair trigger” termination rights

● The PPA contains a number of (one-sided) “hair trigger” termination rights, permitting the Buyer to terminate the PPA

● These include:

– if the Seller does not meet 100% of its forecast availability for two years

– if an Environmental Failure is persistent or recurring over 6 consecutive months, and in respect of which the Seller has received a final warning to desist from a Competent Authority, and has not complied with such warning


No termination compensation for the Seller

● There is no termination compensation regime in the PPA requiringthe Buyer to compensate the Seller upon the early termination ofthe PPA for any reason

– if the Seller terminates the PPA for a Buyer Event of Default, it will simply be entitled to be paid for its Direct Losses

– early termination in any other circumstances will not entitle the Seller to any compensation to cover its debt and other costs

● Termination compensation payments are standard and accepted in international project financed PPAs


Lender Considerations

● Provisions regarding Direct Agreements are vague. Lenders will expect Direct Agreement covering matters such as:

– termination rights of the Buyer to be subject to extended cure periods

– lenders’ step in rights

– lenders to be named as co-insureds on Seller’s insurance policies, and insurance proceeds to be applied by the Seller subject to the requirements of the lenders


Phased Completion

● The PPA does not currently contemplate phased completion of units of a facility

– phased completion would be beneficial for many RE technologies, including wind, as many of them are modular, and can be constructed and commence operations even though the whole facility has not yet been completed

– Phased completion is mutually beneficial, allowing the Seller to earn income earlier, while allowing the Buyer to receive power earlier, thus adding RE to the system and alleviating South Africa’s power shortage more rapidly

● Both developers and lenders will be looking for the final PPA topermit phased completion


Grid Connection

● While the REFIT documents refer to “guaranteed access” to the Grid, they do not explain how this will be achieved. Nor does the PPA provide relief for the Seller for any delays in connecting the facility to the Grid (as discussed earlier)

● Developers and lenders will be looking for the final documentation to provide:

– which party is responsible for which aspects of the connection to the Grid, e.g. any required Grid strengthening, local connection

– the compensation available to the Seller for any delay in connecting the facility to the Grid. A concept of “deemed completion” would normally apply, permitting the Seller to receive income payments (on a liquidated basis) for the period from the Scheduled COD until actual connection to the Grid


Industry Restructuring Protections

● The PPA does not deal adequately with the possibility of any industry restructuring which affects the Buyer

– this relates to the Buyer’s creditworthiness

– lenders will have satisfied themselves of the creditworthiness of the current Buyer

– any change in the entity to whom the Buyer’s obligations are transferred, or any restructuring of the current Buyer (e.g. asset stripping) may mean the Buyer is no longer creditworthy

● Reorganisation of the SA electricity market is not a remote possibility – ISMO plans announced

● Government support expected


Questions?

Contact:

Scott Brodsky

Dewey & LeBoeuf

Tel: +27 11 911 4303

Email: [email protected]

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