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 Elec​tric​ity dri​ves the en​gine of op​por​tu​nity in the mod​ern world. It al​lows AAccrroonnyymmss 111788833 our chil​dren to study by light. It pow​ers the in​no​va​tion in our fac​to​ries. OOtthheerr RReessoouurrcceess 111888277 From telecom​mu​ni​ca​tions to trans​porta​tion, power is es​sen​tial to vir​tu​ally every as​pect of our in​creas​ingly dy​namic and in​ter​con​nected world. As a re​sult, in​vest​ment in power in​fra​struc​ture must be a part of any strat​egy for eco​nomic de​vel​op​ment. This is true for both broad eco​nomic growth ini​tia​tives in emerg​ing coun​tries and tar​geted rural growth ini​tia​tives in de​vel​oped coun​tries. The trans​for​ma​tional na​ture of power pro​jects does, how​ever, come with risks. Given that power pro​jects are most es​sen​tial where there is a power short​age in the mar​ket, these pro​jects often rep​re​sent a pi​o​neer​ing level of in​vest​ment and fi​nan​cial com​plex​ity in these mar​kets. As a re​sult, it has be​- come com​mon place to adopt a durable agree​ment that ce​ments the pre​- dictabil​ity and dura​bil​ity that is needed for any long term busi​ness ven​ture. This agree​ment is called the Power Pur​chase Agree​ment ( ) and has PPA helped to drive the growth and de​vel​op​ment of in​de​pen​dent power pro​- jects around the world. This hand​book is in​tended to pro​vide an overview of PPAs and the oblig​a​- tions, risks and reme​dies that are found within them. Our group of au​- thors, all whom con​tributed their time on a pro-bono basis, in​cludes con​- trib​u​tors from gov​ern​ments, de​vel​op​ment banks, pri​vate banks and lead​- ing in​ter​na​tional law firms. Our hope is that by pro​vid​ing per​spec​tives from all sides of the PPA ne​go​ti​a​tion process, we can pre​sent the reader with a bal​anced un​der​stand​ing of the chal​lenges in​volved in PPAs and an in​sight into the prac​ti​cal re​al​ity of over​com​ing these chal​lenges when ne​- go​ti​at​ing these com​plex agree​ments. More than any​thing, we want to com​- mu​ni​cate to the reader that the key to a suc​cess​ful PPA is to aban​don the as​sump​tion of an ad​ver​sar​ial process and to adopt in​stead a strat​egy of co​- op​er​a​tion and co​or​di​na​tion. It is only through this bal​anced ap​proach that the risks can be mit​i​gated and the re​wards re​alised for all par​ties in​volved. The hand​book was pro​duced using the Book Sprint (http://​www.​ 7 2 FOREWORD AAPPPPEENNDDIIXX Foreword GGlloossssaarryy 111677611 Elec​tric​ity dri​ves the en​gine of op​por​tu​nity in the mod​ern world. It al​lows AAccrroonnyymmss 111788833 our chil​dren to study by light. It pow​ers the in​no​va​tion in our fac​to​ries. OOtthheerr RReessoouurrcceess 111888277 From telecom​mu​ni​ca​tions to trans​porta​tion, power is es​sen​tial to vir​tu​ally every as​pect of our in​creas​ingly dy​namic and in​ter​con​nected world. As a re​sult, in​vest​ment in power in​fra​struc​ture must be a part of any strat​egy for eco​nomic de​vel​op​ment. This is true for both broad eco​nomic growth ini​tia​tives in emerg​ing coun​tries and tar​geted rural growth ini​tia​tives in de​vel​oped coun​tries. The trans​for​ma​tional na​ture of power pro​jects does, how​ever, come with risks. Given that power pro​jects are most es​sen​tial where there is a power short​age in the mar​ket, these pro​jects often rep​re​sent a pi​o​neer​ing level of in​vest​ment and fi​nan​cial com​plex​ity in these mar​kets. As a re​sult, it has be​- come com​mon place to adopt a durable agree​ment that ce​ments the pre​- dictabil​ity and dura​bil​ity that is needed for any long term busi​ness ven​ture. This agree​ment is called the Power Pur​chase Agree​ment ( ) and has PPA helped to drive the growth and de​vel​op​ment of in​de​pen​dent power pro​- jects around the world. This hand​book is in​tended to pro​vide an overview of PPAs and the oblig​a​- tions, risks and reme​dies that are found within them. Our group of au​- thors, all whom con​tributed their time on a pro-bono basis, in​cludes con​- trib​u​tors from gov​ern​ments, de​vel​op​ment banks, pri​vate banks and lead​- ing in​ter​na​tional law firms. Our hope is that by pro​vid​ing per​spec​tives from all sides of the PPA ne​go​ti​a​tion process, we can pre​sent the reader with a bal​anced un​der​stand​ing of the chal​lenges in​volved in PPAs and an in​sight into the prac​ti​cal re​al​ity of over​com​ing these chal​lenges when ne​- go​ti​at​ing these com​plex agree​ments. More than any​thing, we want to com​- mu​ni​cate to the reader that the key to a suc​cess​ful PPA is to aban​don the as​sump​tion of an ad​ver​sar​ial process and to adopt in​stead a strat​egy of co​- op​er​a​tion and co​or​di​na​tion. It is only through this bal​anced ap​proach that the risks can be mit​i​gated and the re​wards re​alised for all par​ties in​volved. The hand​book was pro​duced using the Book Sprint (http://​www.​ 7 2 FFOORREEWWOORRDD FOREWORD TThhee hhaanndd​b​booookk wwaass pprroo​d​duucceedd uussiinngg tthhee BBooookk SSpprriinntt ((hhttttpp::////​w​wwwww..​​ Bring​ing elec​tric​ity to un​der​served com​mu​ni​ties is a rare ex​am​ple of a uni​- bbooookksspprriinnttss..​n​neett//​)​) mmeetthhoodd,, wwhhiicchh aall​l​loowwss ffoorr tthhee ddrraafftt​i​inngg,, eeddiitt​i​inngg aanndd ppuubb​-​- ver​sally-held am​bi​tion in a world filled with com​pet​ing de​vel​op​ment pri​- lliisshh​i​inngg ooff aa ccoomm​p​plleettee pprroodd​u​ucctt iinn jjuusstt ffiivvee ddaayyss.. OOuurr jjoouurr​n​neeyy bbeeggaann wwiitthh aa or​i​ties. Gov​ern​ments, pri​vate com​pa​nies, pri​vate banks and de​vel​op​ment ssppiirr​i​itteedd ddiiss​c​coouurrssee aanndd qquuiicckkllyy pprroo​g​grreesssseedd ttoo aa ffuu​r​rii​o​ouuss ppaaccee ooff wwrriitt​i​inngg wwiitthh in​sti​tu​tions are all work​ing tire​lessly to​wards the goal of elec​tri​fi​ca​tion. If oocc​c​caa​s​siioonnaall iinn​t​teerr​r​ruupp​t​tiioonnss ffoorr tthhee iinn​t​trroo​d​duucc​t​tiioonn ooff bbrriill​l​liiaanntt iiddeeaass aanndd ccrriitt​i​i​c​caall this hand​book can in any way move us to​wards the shared goal of greater iinn​s​siigghhttss.. TThheerree wwaass aa ssuurr​p​prriiss​i​inngg aammoouunntt ooff ccoonn​s​seenn​s​suuss oonn ssoommee ttoopp​i​iccss aanndd en​ergy ac​cess, then we will con​sider it an un​qual​i​fied suc​cess. aann uunn​e​exx​p​peecctteedd lleevveell ooff ddee​b​baattee oonn ootthh​e​errss.. TThhee oouutt​c​coommee iiss aa pprroodd​u​ucctt tthhaatt rree​-​- fflleeccttss tthhiiss tteeaamm​w​woorrkk rraatthheerr tthhaann tthhee ppeerr​s​soonnaall ooppiinn​i​ioonnss ooff tthhee aauu​t​thhoorrss oorr Sin​cerely, tthhee iinn​s​sttii​t​tuu​t​tiioonnss tthhaatt tthheeyy rreepp​r​ree​s​seenntt.. The Con​tribut​ing Au​thors WWee wwoouulldd lliikkee ttoo tthhaannkk oouurr BBooookk SSpprriinntt ffaa​c​ciill​i​i​t​taa​t​toorrss FFaaiitthh BBoosswwoorrtthh aanndd LLaaiiaa RRooss GGaasscchh ffoorr tthheeiirr ppaa​t​tiieenntt gguuiidd​a​annccee aanndd uunn​w​waa​v​veerr​i​inngg lleeaadd​e​err​s​shhiipp.. WWee wwoouulldd aallssoo lliikkee ttoo tthhaannkk tthhee ooffff​s​siittee BBooookk SSpprriinntt tteeaamm,, iinn​c​clluudd​i​inngg HHeenn​r​riikk vvaann LLeeeeuuwweenn ((iill​l​luuss​t​trraa​t​toorr)),, RRaaeewwyynn WWhhyyttee ((pprrooooff​r​reeaaddeerr)) aanndd JJuuaann CCaarr​l​looss GGuuttiiéérrrreezz BBaarr​q​quueerroo aanndd JJuulliieenn TTaaqquueett ((TTeecchh​n​nii​c​caall SSuupp​p​poorrtt)).. WWee aarree eess​p​pee​-​- cciiaallllyy tthhaannkk​f​fuull ffoorr tthhee ssttrraattee​g​giicc ppllaann​n​neerrss tthhaatt hheellppeedd ccoonn​c​ceeiivvee tthhiiss pprroo​-​- ggrraamm:: RReennéé PPoosstt ((BBooookk SSpprriinnttss)),, TTooyyiinn OOjjoo ((AAffrriiccaann LLeeggaall SSuupp​p​poorrtt FFaa​c​ciill​i​ittyy)) aanndd MMoo​h​haammmmeedd LLoo​r​raaoouuii ((CCoomm​m​meerr​c​ciiaall LLaaww DDee​v​veell​o​opp​m​meenntt PPrroo​g​grraamm)).. WWee wwoouulldd aallssoo lliikkee ttoo rreeccoogg​n​niissee tthhee ffuunndd​i​inngg aanndd ssuupp​p​poorrtt ooff tthhee UUnniitteedd SSttaatteess AAggeennccyy ffoorr IInn​t​teerr​n​naa​t​tiioonnaall DDee​v​veell​o​opp​m​meenntt aanndd tthhee AAffrriiccaann LLeeggaall SSuupp​p​poorrtt FFaa​c​ciill​-​- iittyy.. TThhiiss hhaanndd​b​booookk iiss iinn​t​teennddeedd ttoo rree​f​flleecctt tthhee vvii​b​brraanntt nnaa​t​tuurree ooff tthhee BBooookk SSpprriinntt pprroocceessss aanndd sseerrvvee nnoott ssiimm​p​pllyy aass aa rreeff​e​err​e​ennccee bbuutt aallssoo aass aa jjuummpp​i​inngg--ooffff ppooiinntt ffoorr ffuurr​t​thheerr ddiiss​c​cuuss​s​siioonn aanndd sscchhooll​a​arr​s​shhiipp.. TThhee hhaanndd​b​booookk iiss iiss​s​suueedd uunnddeerr tthhee CCrree​a​attiivvee CCoomm​m​moonnss AAtt​t​trrii​b​buu​t​tiioonn--NNoonn​C​Coomm​m​meerr​c​ciiaall--SShhaarree​A​Alliikkee 44..00 IInn​t​teerr​n​naa​-​- ttiioonnaall LLii​c​ceennssee ((CCCC BBYY NNOO SSAA)) wwhhiicchh aall​l​loowwss aannyy​o​onnee ttoo ccooppyy,, eexx​c​ceerrpptt,, rree​-​- wwoorrkk,, ttrraannss​l​laattee aanndd rree--uussee tthhee tteexxtt ffoorr aannyy nnoonn--ccoomm​m​meerr​c​ciiaall ppuurr​p​poossee wwiitthh​-​- oouutt sseeeekk​i​inngg ppeerr​m​miiss​s​siioonn ffrroomm tthhee aauu​t​thhoorrss,, ssoo lloonngg aass tthhee rree​s​suulltt​i​inngg wwoorrkk iiss aallssoo iiss​s​suueedd uunnddeerr aa CCrree​a​attiivvee CCoomm​m​moonnss LLii​c​ceennssee.. TThhee hhaanndd​b​booookk iiss aavvaaiill​a​abbllee iinn eelleecc​t​trroonniicc ffoorrmm aanndd pprriinntteedd ffoorrmm ((EEnngg​l​liisshh aanndd FFrreenncchh)).. IItt ccaann bbee uusseedd aass aann oonn​l​liinnee iinn​t​teerr​a​acc​t​tiivvee rree​s​soouurrccee.. MMaannyy ooff tthhee ccoonn​t​trriibbuutt​i​inngg aauu​t​thhoorrss aarree aallssoo ccoomm​m​miitt​t​teedd ttoo wwoorrkk​i​inngg wwiitthhiinn tthheeiirr iinn​s​sttii​t​tuu​t​tiioonnss ttoo aaddaapptt tthhiiss hhaanndd​b​booookk ffoorr uussee aass tthhee bbaassiiss ffoorr ttrraaiinn​i​inngg ccoouurrsseess aanndd tteecchh​n​nii​c​caall aass​s​siiss​t​taannccee iinnii​t​tiiaa​t​tiivveess.. BBrriinngg​i​inngg eelleecc​t​trriicc​i​ittyy ttoo uunn​d​deerr​s​seerrvveedd ccoomm​m​muu​n​nii​t​tiieess iiss aa rraarree eexx​a​amm​p​pllee ooff aa uunnii​-​- 88 9 33 4