Introduction to Power purchase agreement presentation by Audrey Mwala

1. p r e s e n t a t i o n b y
B Y A U D R E Y M W A L A
D I R E C T O R O F P R O J E C T F I N A N C E A N D R I S K A N A L Y S I S
P U B L I C P R I V A T E P A R T N E R S H I P C O M M I S S I O N
M A L A W I
The Power Purchase Agreement
(PPA)

2. What is a PPP?
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 The agreement that governs the sale and purchase of
power is known as a PPA or power purchase
agreement.
 A PPA is a contract between two parties, one who
produces or generates power for sale (the
seller/producer/project company) and one who seeks
to purchase power (the buyer/offtaker).
 This contract is sometimes referred to as an offtake
agreement.

3. Important Features of a PPP
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 The prospective buyer (the offtaker) has to make a
series of important decisions. These decisions can
include
 the need for power,
 the available sources of power,
 the buyer's economic ability to purchase power,
 the power generating technology desired, and
 the location of the power plant.

4. Power Demand
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 the offtaker will need to assure itself of the demand
for power.
 A study will need to be undertaken to ascertain not
only current power demand,
 but also any anticipated changes in demand over
time.

5. Budget
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 After identifying the need for power,
the offtaker must :
 identify potential sources of power.
 This determination will depend on the
approximate tarrifat which the buyer
can afford to purchase power
 the fuel and technology to be used, and
 where the power generation facility
should be located.

6. Technology
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 The determination regarding the offtaker's budget
will go hand-in-hand with the selection of power
generating technology.
 Certain technologies are more expensive than others,
but may be desirable due to their ability to
supplement their power sources
 when demand is greatest, or because of their
perceived environmental benefits.
 Government policy on the appropriate overall energy
mix for the country may also affect the decision

7. Location
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 The location is typically determined on the basis of
which regions of the country need additional power.
 If possible, the location will be near substations and
transmission lines that can carry that power most
efficiently to the end-user.
 Ultimately, offtakers (and producers) will want to
locate the power source as close as possible to a
connection point on the power grid to:
 avoid the cost and risk of building transmission infrastructure
and
 the transmission line losses.

8. Other factors to consider for
Location
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 easy access to the fuel source to the plant,
 the potential social and environmental impact of any
power plant on local communities, and
 whether efficient or low-cost mitigants are available.
 E.g. A gas-fired power plant, would be of little use in a remote
area where there is not an economically efficient source of gas.
 solar or wind, may be more appropriate for remote locations
and will have the added benefit of not adding to carbon
emissions.

9. Importance of choice of power generating
technology
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 The choice of power generating technology is
an important one for the offtaker.
 It will have a direct impact on the cost
 reliability of power,
 the environmental and
 social impacts of the project.

10. Power Procurement
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 The preferred method is via a solicited bid which takes
the form of a competitive procurement process.
 Unsolicited proposals are sometimes to:
 quickly procuring power to deal with emergency
situations, and hastening power generation
 where there is no framework in place for competitive
bidding.
 It is important to have adequate regulatory safeguard
measures to ensure transparency and value for money
 Quality Matters: The offtaker should select a producer
based not only on price, but also on quality and track
record.

11. Negotiations
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 Once the initial draft PPA has been prepared, the
producer and the offtaker sit down to negotiate the
various provisions,
 The lenders will seek to make clarifications or
modifications to the PPA even if it has been signed.
 Such amendment could be contained in an addendum to
the PPA, or
 contained in a document referred to as a "direct
agreement."
 Lender input: For projects being financed with third
party debt, before a PPA can be considered final it must
be satisfactory to the lender.

12. Other agreements
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 Concession/Implementation Agreement: the right to develop,
finance, construct and operate the power plant, including the
right to sell power to the offtaker.
 Grid Interconnection Agreement: Governs the connection of
the power plant with the power grid.
 Fuel Supply Agreements/Bulk Supply Agreement: Establishes
the availability of fuel supply and quality.
 Fuel Transportation Agreement: Provides for transporting the
fuel from the fuel supplier to the power plant.
 Engineering, Procurement and Construction Agreement (EPC
Agreement):

13. More agreements
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 Operating and Maintenance Agreement (O&M Agreement): the entity that
will operate the plant and be responsible for its maintenance.
 Long Term Service Agreement (LTSA): Provides for servicing the plant at
regular intervals during the operation of the PPA.
 Loan Agreement: Creates the obligation of the lender to make a loan to the
producer to finance the power plant, as well as the obligations of the
producer/borrower to comply with various covenants in the agreement.
 Equity Contribution Agreement: Obliges the owners of the power plant to
make equity or subordinated debt contributions to finance the portion of the
power plant not being financed by third party lenders.
 Sovereign Support Agreement: May include sovereign guarantees, comfort
letters, put and call options, and other forms of sovereign support that enhance
the creditworthiness of the offtaker and other government entities involved in
the project.
 Credit Support Agreement: May include Partial Risk Guarantees (PRGs),
letters of credit and bank guarantees from commercial banks, escrow agreements,
and sponsor support.
 Direct Agreement: governs the relationship between the lenders and the
parties involved in the project.