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“Leadership Course - Power Generation Optimisation"O i d bOrganised by

PXIL & IIM Ahmedabad

“Contractual Risk Management”

Suresh GehaniSuresh Gehani

March 19, 2013

In this Presentation……..

Contract Structure of Power Generation Project

Broad Contractual Risks and Mitigation Strategiesg g

Typical Power Sale Arrangements and Essentials of PPATypical Power Sale Arrangements and Essentials of PPA

Oth C t t l A t f S l f POther Contractual Arrangements for Sale of Power

ABPS Infrastructure Advisory Private Limited 29/05/2013 2

Case Study – Risk Analysis of Case-1 Standard PPA

Key Projects Agreements

Generation ProjectGeneration Project

PPA EPC O&M Fuel Supply Loan Agreement

ABPS Infrastructure Advisory Private Limited

Good contracts impart greater stability to project cash flows and provide comfort to lenders

Stakeholders’ in Power Project

E t C ditOff-taker Government

Insurers/Surety companies

Sales contract Suppliers

Export CreditAgencies

Guarantee

Surety companies

Insurance

Special Purpose Vehicle/Project Company

Arrangers/Lead funders

EPCContractor

EPC Contract

Guarantee

Debt

O&MS

Escrow agent/Trustee

L

Independent experts/lawyers

O&MContractor

Sponsors Lessors

• Promoters/sponsors acts as driving force behind the project


• Key issue in Contract Structuring is to identify risks and allocate them to the parties best positioned to manage these risks

Financial Implications of Key Project Contracts….

Contract Impact on project cash flowEPC Design & construction costcash flowcost

Assesses operational revenues

PPA

O&M Fixes O&M expensesp

FSA Fixes Fuel Expenses

Insurance Ensures force majeure returns


EPC Contract Key Issues…1/2

Contract Price

Terms of Payment

Escalation/price variations/exchange rate riskLiquidated Damages

/p / g

Security Deposit money/Performance Bonds/Bank Guarantees

Scope of Work

/

Inspection ProceduresPerformance and acceptance test proceduresacceptance test procedures

Commissioning and operating Spares

Defects liability


Defects liability period

EPC Contract Key Issues…2/2

Governing LawSub-contracting

i iprovisions

PatentsTermination or suspension of work

Transfer of Risk and Title Force Majeure/Dispute Resolution

p

Limitation of Liabilities Effective date & completion date

Procedure for measuring progress


O&M contract - Key Issues

O&M Cost

Terms of PaymentTerms of Payment

Assignment and transfer of interestIncentives, Indexing of payments

Scope of WorkPerformance Guarantee and

payments

Governing Law

Performance Guarantee and Liquidated Damages

Spares to be handed over


Force Majeure/Dispute Resolution








Risk Analysis

ConstructionRegulatory Risk Construction RiskPolitical Risk

g y

Financial Risk Operating Risk

Nexus of Contractsthat mitigates (but does not eliminate the risks).

PromoterMarket Risk

Force MajeureRisk


Project Construction - Completion Risk

• Obtain early regulatory environmental approvals

Delays

• Obtain early regulatory environmental approvals.• Turnkey EPC contract, construction/ equipment supply

contracts with LD clauses (LD Amount to at least cover LD payable under PPA+Additional IDC)

• In case of Split EPC Contract, Umbrella Contract to cover all the Contracts

P i i f ti d l ti t iCost Overruns

• Provision of contingency and escalation amounts in original cost estimates.

• Preferably Fixed Price EPC/Execution Contracts


Project Performance

Plant • Guaranteed Performance Parameters linked with Liquidated Plant Performance (Execution Stage)

Damages to cover the loss for life of Project on NPV basis (EPC/Execution Contract)

• Minimum Performance Parameters (EPC/Execution Contract)

Plant Performance (O&M St )

• Once tested at EPC Stage, Responsibility to be passed on to O&M Contractor

• Guaranteed Performance Parameters linked with LDs to

• Tried and tested technologies Preferable

(O&M Stage) Gua a teed e o a ce a a ete s ed w t s tocover annual loss

Technology

Tried and tested technologies Preferable• New technology can be used supported by a guarantee of

technological performance from the participant that owns or licenses the technology.


Market Risk

• Depends upon Demand Supply Position

Volume Risk

Depends upon Demand Supply Position• Offtake contract specifying minimum quantities and prices

(take or pay arrangements)• Project Competitiveness in Merit Order

Al O i f S l f P• Alternate Options for Sale of Power

Payment Risk • Appropriate Payment Security Mechanism• Assessment of Creditworthiness of BuyersAssessment of Creditworthiness of Buyers


Other Risks

• Volume Risk Minimum Take or Pay provisionsFuel Risks

• Volume Risk - Minimum Take or Pay provisions• Price Risk – Appropriate Mechanism to cover variation in

Power Sale Contracts

Force Majeure

• Back to Back force majeure provisions in the project contracts.

• To be mitigated through InsuranceA f fi i C iForce Majeure • Advance Loss of Profit Insurance during Construction Phase

• Business Interruption Policy during Operation Phase

Political Risks

• Appropriate Change in Law provisions in Power Sale Contracts









Power Purchase Agreement - Background

Prior to 1991, PPA used to be very simple and brief documentMost of the entities entering into PPA were Public Sector Entities with fewexceptionsEven TPC-BEST Agreement in Mumbai was also around 10 page

tagreementProjects were not funded on Project Finance Basis and most of theGeneration Projects were funded on Balance Sheet/Govt. Support BasisPrivate Sector Investment in Generation permitted in 1991 withPrivate Sector Investment in Generation permitted in 1991 withamendment of Electricity (Supply) Act, 1948Policy Notification in March 1992 stipulating Return on Equity of 16% andincentivesWith Private Sector entering into large power generation projects, Projectswere envisaged to be funded through Project Finance Route


Power Purchase Agreement – Types & MechanismMechanism

PPAs with Distribution Licensees can be broadly categorised into 3 categoriesdepending on the tenure

Long Term PPA (Typically Life of Project)Medium Term PPA (Upto 7 Years)Short Term PPA (Upto 1 Year)

PPAs can be broadly categorised into 3 categories depending on the TariffM h iMechanism

Cost Plus PPACompetitive Bid Tariff PPAB Eff B i PPABest Effort Basis PPA


Power Purchase Agreement – Cost Plus

PPAs for IPPs commenced with the structure of Cost Plus PPA (Elementsof Fixed Cost + Variable Cost with Fixed Return on Equity and PLF linkedIncentive)Detailed Tariff Mechanisms with Formulas were incorporated in PPA forcomputing Year wise Tariff linked to CEA Approved Cost and Financingcomputing Year-wise Tariff linked to CEA Approved Cost and FinancingPackageFuel Costs are pass through with take or pay obligations

Examples: Enron, GVK, Spectrum, All other IPPs prior to EA, 2003

Biggest Drawback observed is huge escalation in costs due to cost and timeBiggest Drawback observed is huge escalation in costs due to cost and timeover-run


Power Purchase Agreement – Cost Plus

In present Scenario (post 2006), Cost Plus PPAs are more relevant forCentral Generating Stations, State Generating Stations and MoU based IPPs

The matter of mandatory Competitive Bidding by Distribution Licenseesf t f i b j di ith H ’bl S C tfor procurement of power is sub-judice with Hon’ble Supreme Court

PPA provides for Tariff to be charged as approved by AppropriateRegulatory CommissionRegulatory Commission

Examples : PPA between MSPGCL and MSEDCL, TPC-G and BEST


Power Purchase Agreement – Competitive BiddingBidding

Mechanisms

Case -1 Case - 2

location, technology, or fuel not specified

location, technology, or fuel is specified

After successful selection of bidder, SBD PPA get signed between Sellerand Purchaser on the Quoted Tariff.


Power Purchase Agreement – Best Effort Basis

Typically these PPAs are executed with Trading Companies

PPA provides for indicative rate on best effort basis

Downsides in the Rates to be absorbed by Seller with some minimumthreshold level

Upsides in the Rates to be shared between Seller and Buyer in the agreedproportion

E l Sh T /M di T PPA b IPP i h T di C iExamples : Short Term/Medium Term PPAs by IPPs with Trading Companies


Essentials of PPA-Conditions Precedent ..…1/2

Effective Date – Date of Signing of PPAg g

Conditions Precedent – Conditions to be met before actual work on theProject starts

Zero Date – Fulfilment of Conditions Precedent

Typical Conditions Precedent to be met by Seller

ll / lAll Consents/Clearances

Land Acquisition

Financial Closure for Project FinanceFinancial Closure for Project Finance

Finalisation of Key Project Contracts (EPC or Main Plant Contract)


Conditions Precedent ..…2/2

Typical Conditions Precedent to be met by Procureryp y

Regulatory Approval, if required

Open Access Permissions, if applicable

Key Issues

Time Schedule for meeting Conditions Precedent (Typically 12 months forLong Term PPA and 3 months for Short Term)

Liquidated Damages if CPs are not metLiquidated Damages if CPs are not met

Obligations of the Parties

Consequences of Termination


q

29/05/2013 23

Commissioning and COD ..…1/2

Project Schedule – Unit Wisej

Synchronisation and Stabilisation Period

Testing and Commissioning Procedures

Period for conducting Performance Tests

Re-testing Time Frame and Procedures

Degradation of Capacity


Commissioning and COD ..…2/2

Key Issuesy

Liquidated Damages for Delay by Seller (Grace Period)

Compensation for Delay due to Procurer’s inability to offtake power

Compensation for Delay due to Force Majeure


Operational Aspects…… 1/1

Contracted Capacityp y

Metering and Meter Reading Procedures

Scheduling and Despatch

De-rating of Capacity and its Treatment


Billing & Payments …… 1/1

Billing CycleMonthly in case of Long Term PPAsWeekly or Fortnightly for Short Term PPAs

Due Date for Payment30 days for Long Term PPAs15 days for Short Term PPAs

RebateLate Payment SurchargePriority of Payments

Late Payment SurchargeEarlier unpaid BillsCurrent Bills


Payments Security…… 1/1

Letter of CreditNature of LC – Revolving, Automatic Re-instatementExpenses for opening LC

Default Escrow (For Long Term PPAs)

Third Party Sale in case of Payment Default


Events of Defaults & Termination …… 1/4

Typical Seller’s Events of defaultDelay in Commissioning with some grace period

Construction abandoned for agreed continuous period

Failure to achieve agreed % of Contracted Capacity even after retesting.

Reduction in availability below agreed% for continuous agreed

Bankruptcy

Material Breach of Obligations


Failure to make payments within the agreed period

29/05/2013 29


Typical Procurer’s Events of defaultDelay in Commissioning of Interconnection Facilities

Failure to make certain proportion of monthly payments for continuousperiod

Failure to reinstate the LC to original amount after drawl by Procurer

Bankruptcy

Material Breach of Obligations



Termination ProceduresPreliminary Notice PeriodCure PeriodFinal Termination NoticeObligations during Notice Period

Termination ConsequencesLender’s Substitution (Default by Seller)Third Party Sale (Default by Procurer)Lumpsum Compensation



Typical Seller’s Event of DefaultNature of LC – Revolving, Automatic Re-instatementExpenses for opening LC

Default Escrow (For Long Term PPAs)

Third Party Sale in case of Payment Default









Other Types of Contractual Arrangementyp g

Direct Sale of Power to Consumers

With Increasing Retail Tariffs, market for direct sale likely to increase gradually

T pical Tariff Str ct resTypical Tariff Structures

Two Part Tariff

Single Part Tariff

Discount to Grid Tariff


Alternative Two Part Tariff Structures

Levelised Fixed and Variable Charge with Fuel Escalation In‐built (High Risk

for Generator)

Levelised Fixed and Variable Charge with Fuel Escalation In‐built (High Risk

for Generator)

Year on Year Fixed and variable Charge linked to fuel price (Low Risk

Year on Year Fixed and variable Charge linked to fuel price (Low Risk

Two Part Tariff Structure Charge linked to fuel price (Low Risk

for Generator)Charge linked to fuel price (Low Risk

for Generator)

Single levelised Fixed and VariableSingle levelised Fixed and VariableSingle levelised Fixed and Variable Charge for first 10‐12 Years with Tariff Mechanism to be reviewed at the end of initial tenture (Moderate Risk for

Generator)

Single levelised Fixed and Variable Charge for first 10‐12 Years with Tariff Mechanism to be reviewed at the end of initial tenture (Moderate Risk for

Generator)


Broad Tariff Structure -Single Part

Year on Year Single Part Tariff with Fuel Price Pass through (Low Risk for

Generator and High Risk for Consumer)

Year on Year Single Part Tariff with Fuel Price Pass through (Low Risk for

Generator and High Risk for Consumer)

Discounted Grid Tariff (Moderate Risk for Generator but Consumer is alwaysDiscounted Grid Tariff (Moderate Risk for Generator but Consumer is always

Single Part Tariff Structure for Generator but Consumer is always

sure of price lower than Grid)for Generator but Consumer is always

sure of price lower than Grid)

Si l l li d T iff f fi t 10 12Si l l li d T iff f fi t 10 12Single levelised Tariff for first 10‐12 Years with Tariff Mechanism to be reviewed at the end of initial tenture

(Moderate Risk for Generator)

Single levelised Tariff for first 10‐12 Years with Tariff Mechanism to be reviewed at the end of initial tenture

(Moderate Risk for Generator)


Discounted Grid Tariff

Di t L d d C t l di D d Ch f th tiDiscount on Landed Cost excluding Demand Charges, for the respective yearof operation of the Power Plant.

Key IssuesKey Issues• Components for tariff subject to change based on the approval of Retail

Tariff. In case any new component added or deleted the same needs bemade applicable to Industrial Consumer.pp

• Risk of all applicable Open Access Charges (Wheeling charges,Transmission Charges, Losses, Cross Subsidy Surcharge) lies withGenerator.


Short Term Contracting

Typical Short Term ArrangementsBilateralThrough Power Exchange

Bilateral Sale/ Purchase involve three types of ContractsDirect ContractCompetitive BiddingTrader providing back to back arrangement


Short Term Contracting - Structure

Direct ContractContract can be Customized – Respond to the requirements of counterparties

Short-term Competitive BiddingStandard Contract i.e. standard features and clauses

Trader providing back to back arrangementStandard Contract i.e. standard features and clausesEasier to negotiateTrader may facilitate the conclusion of bilateral contracts by matching counterparties with compatible requirements


Diversifying Risks and Use of Market Options

Proposed structure ensures optimum flexibility and stability withupsides through sale of 20% power on merchant basis.Power Sale Arrangement Example

60%‐ 70% on long term basis

10‐15% on merchant th h

15‐20% through Short

through power market

Term Contracts



Proposed structure ensures optimum flexibility and stability withupsides through sale of 20% power on merchant basis.Power Sale Arrangement ExampleMeet the Lender’s requirement as 70% power is tied up on long term basis(Mitigates volume risk to the extent of 70%)

E i i f 70% f d iti t th d bt iEnsures minimum revenue for 70% of power and mitigates the debt servicerisks

Separate Contracts for Peak hours and off peak hours for short term saleSeparate Contracts for Peak hours and off peak hours for short term salecan enhance revenues

Mitigates payment risk to some extentMitigates payment risk to some extent

Provides opportunity to increase the returns for sale of market throughmarket routes



Proposed structure ensures optimum flexibility and stability withupsides through sale of 20% power on merchant basis.Power Sale Arrangement Example

Power Tie up Long Term Basis

Entire Capacity tied up with Distribution Licensee on Long Term basis(L V l Ri k b t i l P t Ri k)(Low Volume Risk but involves Payment Risk)

Part Capacity tied up with Deemed Distribution Licensees (SEZs),Industrial Consumers for Debt Service PeriodIndustrial Consumers for Debt Service Period

Low Load FactorPower during Off Peak period can be sold through marketHigher Revenue as tariff can be linked to Discount to Grid TariffHigher Revenue as tariff can be linked to Discount to Grid TariffMitigates payment risk to some extentProvides opportunity for revision at the end of Debt Service Period.



Contracts and Agreements in Power Sector

Power Purchase Agreement – Background, Types & Mechanismg g , yp

Essentials of Power Purchase AgreementEssentials of Power Purchase Agreement

Sh t T C t tiShort Term Contracting


Case Study on Risk Analysis- (Case 1 Standard PPA)

Project Development Phase ……..1/3

Sellers conditions subsequent : to be met within 12 months from EffectiveDate

– Obtain necessary permission for long term open access.– Award of EPC Contract or Main Plant (BTG) contract.

Seller should have achieved Financial Closure and provided certificate from– Seller should have achieved Financial Closure and provided certificate fromlead banker.

– Land Possession with complete payment.– Obtain all consents, clearances and permits required for supply of power.– Submit written notice to procurers indicating Aggregate Contract Capacity and

total Installed Capacity.

P di i b b f lfill d b P h i hi 6Procurers conditions subsequent : to be fulfilled by Purchaser within 6months from Effective Date

– Facilitate sellers representation of the Seller in the relevant RPC forum.– Should obtained the order of the Appropriate Commission for adoption of the


Should obtained the order of the Appropriate Commission for adoption of thetariff under section 63 of the Electricity Act 2003.

29/05/2013 44

Conditions Subsequent……..2/3

Risk Risk Covered

Delay in Meeting Conditions by Seller :Delay in Meeting Conditions by Seller :

• Delay beyond 3 months, AdditionalWeekly Performance Guarantee of Rs 1.50Lakhs per MW

• Total time available for meeting conditionssubsequent with additional CPG is 18 (12+6)months and without additional CPG is 15 (12+3)months.Lakhs per MW

• Delay beyond 3 months without additionalPG or non fulfilment of any conditionbeyond 6 months with additional PG - PPATermination

• Probability of not achieving CPs upto 15 monthsto be assessed

• Depending upon probability, the cost ofadditional CPG

• Upon Termination, LD of Rs 40 Lakhs/MWpayable

Delay due to Force Majeure :Time Extension till 10 months and termination • In case of Force Majeure, total time available forTime Extension till 10 months and terminationthereafter

In case of Force Majeure, total time available formeeting conditions subsequent is 22 (12+10)months.

• Both the parties are protected here for 22 months.Beyond 22 months both the parties have the right


to terminate PPA without any implication.

Conditions Subsequent……..3/3

RiskRisk Risk CoveredRisk Covered

D l i M i C di i b PDelay in Meeting Conditions by Procurers:• Granted extension of time upto delay of 3

months• Delay beyond 3 months – PPA Termination

LD i l 10% f ddi i l C

• LD of 10% of additional ContractPerformance Guarantee comes about to Rs0 15 Lakhs/MW• LDs equivalent to 10% of additional Contract

Performance Guarantee.• Release of Performance Guarantee of Seller

0.15 Lakhs/MW

• No tariff adjustments allowed on account of • Even in case of time extension due tod l h dtime extension procurers delay in meeting the conditions

adjustment to tariff not allowed.


Project Execution Phase-Delay

RiskRisk Risk CoveredRisk CoveredDelay in commencement of supply by Seller • Risk to be mitigated by providing forDelay in commencement of supply by Seller• LD upon delay in Scheduled COD

• Rs 10000/MW per day for delay upto 60 days• Rs 15000/MW per day for delay beyond 60 days

• Seller may supply power from alternative source for 12 months

• Risk to be mitigated by providing forappropriating LD levels inEPC/Execution Contracts

• Seller may supply power from alternative source for 12 months.Delay beyond 12 months – Termination

• In case of Alternative Source of supply, Transmission charges has tobe bear by seller

Delay by Procurer • Capacity Charge Recovery of Powery y• In case of delay by Procurer(s) due to Procurer Event of Default,

Procurer(s) shall make payment to the Seller of Capacity Charges inproportion to their Contracted Capacity, calculated on NormativeAvailability of Contracted Capacity for and during the period ofdelay

p y g yPlant is not affected

• Capacity Charge Recovery of CoalMine will be partially affected

• Seller will be able to meet debt serviceobligationsdelay.

• In case of Indirect Non Natural Force Majeure Event or (Natural ForceMajeure Event affecting the Procurer(s)) Procurer(s) shall makepayment to the Seller for Debt Service, subject to a maximum ofCapacity Charges calculated on Normative Availability of ContractedC it f th i d i f th (3) ti

obligations


Capacity, for the period in excess of three (3) continuous or non-continuous months.

Billing & Payment …1/4

• Invoicing– Monthly bill for the preceding month not later than ten (10) days of the next y p g ( ) y

month– Due date within 30 days from monthly bill– Supplementary bill for Tariff adjustment payments/Tariff Rebate

Payments/late payment surcharge and adjustment required for REA/ Change y / p y g j q / gin law etc.

• Rebate ApplicableR b t i t d f l t t th b f d d t– Rebate is computed for early payments up to one month before due date

– Rebate available @ 2.00% for bill payment (based on Provisional bill) on first day

– Rebate reduces @0.033% X {29 less number of days before Due Date when the pa ment is made b the Procurer(s)}payment is made by the Procurer(s)}

• Late Payment Surcharge– Payable by such Procurer(s) to the Seller at the rate of two percent (2%) in


y y ( ) p ( )excess of the applicable SBAR per annum

Billing & Payment - Payment Security Mechanism …2/4

• Irrevocable, revolving LC equivalent to 1.1 times the monthly billingLC h ll h t f 12 th d d ll • LC shall have term of 12 months and renewed annually

• Collateral Arrangement i.e. the combination of Default Escrow and Agreement to Hypothecate cum deed of Hypothecation

• Minimum revenue flow to escrow will be least amount required for LCq

• Nature of Agreement : Default Escrow Agreement

• Escrow Agreement to be signed by each Procurer separately

• Coverage : 1.1 times the monthly Tariff Payment

• Receivables to be Escrowed: Incremental Receivables (i.e. amount in excess of the amounts

already charged)y g )

• First Charge on Incremental Receivables: Procurer to create first charge over Incremental

Receivables in favor of Seller. 45 days prior to Scheduled Delivery Date.


Billing & Payment – Risk Analysis …3/4

Risk FactorsRisk Factors Observations Observations Billing Disputes g p•In case of billing dispute, Procurer to make

payment of the lower of amount equivalent toaverage of last three months invoices ofMonthly Invoice, which is disputed

• May Adversely affects the Cashflow

•In case of Disputed Bills, the matter may bereferred to Appropriate Commission forDispute Resolution

•Involves Regulatory Risk

Payment Risk (Procurer)•LC for 1.1 times the monthly billing•Costs related to operation and maintenance of

LC to be borne by Procurer(s) and negotiationcharges to be borne by Seller

• Risk largely depends upon creditworthiness ofProcurer

•Default Escrow account for at least equal to theamount required for the Letter of Credit bycreating first charge on incremental receivables


Billing & Payment – Risk Analysis …4/4

Risk FactorsRisk Factors Observations Observations

V l Ri kVolume Risk• Procurers to purchase the entire off take in

the proportion of their allocated capacity.• Right to sell power to third party if not

di t h d b l t P d

• Risk is covered• Power can be sold for short intervals

through market mechanisms.dispatched by relevant Procurer and noother Procurer


Force Majeure……..1/3

Natural Force MajeureAct of God, Lighting, drought…. earth quakeVolcanic eruption, landslide, flood, typhoon, etc.Exceptionally adverse weather conditions (last 100 yrs.,)

N N t l F M jNon-Natural Force MajeureDirect Non-Natural FM

Nationalisation or compulsory acquisition by Indian GovernmentUnlawful unreasonable or discriminatory revocation of or refusal to renewUnlawful, unreasonable or discriminatory revocation of, or refusal to renew,any consent required by the Seller to perform their obligations under theProject DocumentsRefusal to Grant consent for Project development/operationsAction of an Indian Government against the project, etc.

Indirect Non-Natural FMAct of war, invasion, and riot…R di ti t i ti i i i di ti


Radio active contamination or ionising radiationIndustry-wide strikes and labour disturbances, etc.

29/05/2013 52


Risk Covered under PPANo party shall be in breach of its obligationEvery party shall be entitled to claim reliefNatural Force Majeure

No tariff to be paid by procurer for contracted capacity affected under FMIndirect Non-Natural FM

If average availability reduces below 80%(consecutive 2 months & nonti 4 th ) t f i di t t l f j tconsecutive 4 months) on account of indirect non-natural force majeure events,

procurer will make payment for Debt Service maximum of Capacity Charges atnormative availability.

Direct Non-Natural FMIf average availability reduces below normative availability(consecutive 2months & non consecutive 4 months) on account of direct non-natural forcemajeure events, procurer will pay capacity charge at normative availability.



RiskRisk Risk CoveredRisk CoveredNatural Force Majeure affecting SellerNatural Force Majeure affecting Seller• No tariff is required to pay by the procurer for

contracted capacity• Risk can be covered through Appropriate

Insurance Cover• Advance Loss of Profit (ALOP) during Project

Execution Phase• Business Interruption Policy during Project

Operation Phase

Indirect Non Natural FM affecting Procurer•Units will deemed to have tested capacity •Payments to be made by Procurer in the form ofUnits will deemed to have tested capacity

equivalent to contracted capacity•Procurers will pay the amounts due under the

Financing Agreements i.e. for debt service

Payments to be made by Procurer in the form ofCapacity Charges as determined by AppropriateCommission

•Payments for FM events may affect cash flowsDirect Non Natural FM y yDirect Non Natural FM•Procurers to pay capacity charges on Normative

basis


Change in Law……..1/2

Change in LawThe enactment, coming into effect, adoption, promulgation, amendment,modification or repeal (without re-enactment or consolidation) in India, ofany Law, including rules and regulations framed pursuant to such LawA h i th i t t ti li ti f L b I diA change in the interpretation or application of any Law by any IndianGovernmental Instrumentality having the legal power to interpret or applysuch Law, or any Competent Court of LawThe imposition of a requirement for obtaining any Consents ClearancesThe imposition of a requirement for obtaining any Consents, Clearancesand Permits which was not required earlierA change in the terms and conditions prescribed for obtaining anyConsents, Clearances and Permits or the inclusion of any new terms orconditions for obtaining such Consents, Clearances and Permits; exceptdue to any default of the SellerAny change in tax or introduction of any tax made applicable for supply ofpower by the Seller as per the terms of this Agreement


power by the Seller as per the terms of this Agreement

29/05/2013 55

Change in Law……..2/2

RiskRisk Risk CoveredRisk Covered

Change in LawChange in LawConstruction Period• For every cumulative increase/

decrease of each Rs 1.25 lakhs/MW inthe Capital Cost the increase/

• Risk Covered but the quantum will depend upon QuotedNon Escalable Capacity Charges

the Capital Cost, the increase/decrease in Non Escalable CapacityCharges shall be an amount equal to0.267% of the Non Escalable CapacityCharges

Operation Period• No Compensation upto 1% of LC

Amount

• Prior regulatory approval required.• Compensation below 1% of LC amount will go un

accounted, which may affect the cash flows. May beadded while quantification of risks• Any compensation to the Seller shall

be determined by AppropriateCommission

added while quantification of risks.


Events of default & Termination ……..1/5

Seller Events of defaultSeller fails to supply power to procurer within 12 months from itsScheduled Delivery Date.Interruption of power supply for continuous 2 months.If a unit fails to achieve 95% of Contracted Capacity during a retest.Reduction in availability below Normative availability for a period of 12consecutive months and non-consecutive months within any continuousperiod of thirty six (36) Monthsperiod of thirty six (36) MonthsSeller fails to provide payment above Rs 1 Crore for 3 months and belowRs 1 Crore for 6 months.Any of the representations and warranties found to be untrue or inaccurateAny of the representations and warranties found to be untrue or inaccurateSeller assign or transfer rights related to power station in contravention ofthe provisions of the PPA



Seller Events of defaultSeller becomes voluntarily or involuntarily the subject of any bankruptcyor insolvency or winding up proceedings, any winding up or bankruptcyor insolvency order is passed against the Seller or the Seller goes intoliquidation or dissolutionliquidation or dissolutionMaterial breach by the sellerDirect and indirect change in shareholdingFailure to renew or replace Contract Performance GuaranteeFailure to renew or replace Contract Performance Guarantee



Seller Events of defaultProcurer Events of DefaultFails to ensure the availability of interconnection facilities and evacuationof power from delivery pointDelay in payment towards monthly bills for 30 daysFails to make a payment of 15% of the monthly bill for 90 daysFailure to re-instate an L/C after withdrawal by the Seller or renewed prior

45 d f i ito 45 days of its expiryThe defaulting Procurer repudiates this Agreement for the period of thirty(30) daysMaterial breach by the procurerMaterial breach by the procurerAny of the representations and warranties found to be untrue or inaccurate



Seller Events of defaultProcurer becomes voluntarily or involuntarily the subject of anybankruptcy or insolvency or winding up proceedings, any winding up orbankruptcy or insolvency order is passed against the Procurer or theProcurer goes into liquidation or dissolutionProcurer goes into liquidation or dissolution



RiskRisk Risk Covered Risk Covered

Termination by ProcurerTermination by Procurer• Lenders to exercise their substitution rights.• If Lenders do not exercise their rights of substitution,

Capacity Charge shall be reduced by 20% for the period ofSeller event of default.

• In case of Seller event of default,risk of procurer is covered underTermination by Procurer.

Se e e e t o de au t.• Seller has to provide 12 months capacity charges calculated

at Normative Availability to the Procurer within 30 days oftermination of the Agreement. In case of failure, Procurer(s)has right to encash the Contract Performance Guarantee.

• Clause ensures 12 monthscapacity charges for the procurerin case of seller event of default toreduce the financial loss risk ofth• Procurer(s) can enforce the unpaid amount as per the

provisions of the Law.the procurer.

Termination by Seller• Seller can sell power to third party and Procurer to make • In case of procurer event ofp p y

payments for capacity charges based on normativeavailability for three years.

• If the Seller is able to sell power at price higher than EnergyCharge, such excess realization will reduce the Capacity

h bl b

pdefault 3 years capacity Chargesis protected for the seller.

• The benefit of excess revenue willbe used to reduce the liability ofth P


Charge payable by Procurer the Procurer.

Conclusion…1/2

Risk Factors Past Concerns Mitigation Measures

Poor financialhealth of theState owned

Poor credit-worthiness of SEBs

Most of the States

Payment security mechanisms proposed

Letter of Credit Default Escrow State owneddistributionutilities

Most of the States promised escrow w/odue diligence Escrowable Capacity

Letter of Credit, Default Escrow Mechanism and Direct Supply

to HT consumers to be agreed upfrontnot

acceptable to Lenders

upfront

RegulatoryRi k

Re-opening of PPAs Electricity Act 2003T iff R l ti Risk Tariff Regulations National Tariff PolicyProcurement of Power through Tariff based competitive


pbidding

Conclusion…2/2

Risk Factors Past Concerns Mitigation Measures

Fuel Risks High cost of naphtha and

other liquid fuels made h S l

Focus on Coal based projects Captive Mining in case of

domestic coal based UMPPsthe SEBs reluctant to

buy power from such

projects projects Non- availability of gas in sufficient quantity

Price Risk Pass through of cost Competitive Tariff Structureelements


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