Completion (including delay and cost overrun) risk

Hydro power Hydro power

Description (What is the Risk)

The risk of commissioning the asset on time and on budget and the consequences of missing either of those two criteria.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner will bear principal responsibility for delay and cost overrun risk, and will typically manage this through the engagement of a suitable EPC contractor.

The principal risk arising out of delay will be a delay liquidated damages payable to the Contracting Authority under the power purchase agreement, termination of the power purchase agreement after, loss of expected revenue, ongoing costs of financing construction and extended site costs.

A schedule COD is fixed under the power purchase agreement. Failure to commence the commercial operation within the scheduled COD will result in the Private Partner being subject to delay liquidated damages, calculated on a daily basis and paid by deduction of a performance security placed with the Contracting Authority. Once the performance security has been fully deducted, and the facility has still not commenced its commercial operation, the power purchase agreement may be terminated.

The Private Partner is best placed to integrate complex civil works, the delivery and commissioning of parts, despatching and operations, and preventative and lifecycle maintenance to ensure a reliable and punctual service for an efficient price. This may be managed through a single EPC joint venture or by the Private Partner managing a series of works, supply and operation/commissioning contracts.

The Private Partner will be expected to demonstrate adequate system performance before it is allowed to fully operate the system.

Mitigation Measures (What can be done to minimize the risk)

Generally, the Private Partner will seek to pass risks associated with delay in achieving commercial operation on to the EPC contractor in order to minimise potential impact on the project. EPC Contracts will often contain liquidated damages and financial penalties and can assist in enforcing construction deadlines.

Typically, the amount of the delay liquidated damages to be paid by the EPC contractor under the EPC Contracts will factor in the delay liquidated damages which the Private Partner is required to pay to the Contracting Authority under the power purchase agreement and the financing costs of the project during the period of the delay.

In relation to commissioning and connection to the grid, the EPC contract should contain an obligation that the EPC contractor design and construct the facility so as to be compliant with the relevant codes (as required in terms of the relevant Government agreements) and that the EPC contractor assists the Private Partner in providing the information required to evidence compliance with the codes (as defined in the relevant Government agreement).

Government Support Arrangements (What other government measures may be needed to be taken)

The Contracting Authority may allow for certain relief where delays have arisen from either the fault of the Contracting Authority or the grid operator.

Comparison with Emerging Market

Achievement of construction deadlines may be easier as permitting delays are less likely and Contracting Authorities are likely to have greater experience and available resources to meet their obligations.

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Description (What is the Risk)

The risk of commissioning the asset on time and on budget and the consequences of missing either of those two criteria.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner will bear principal responsibility for delay and cost overrun risk, and will typically manage this through the engagement of a suitable EPC contractor.

The principal risk arising out of delay will be the loss of expected revenue, the ongoing costs of financing construction and extended site costs.

Generally, the Private Partner is must reach the commercial operation date no later than 180 days after the Scheduled COD and failure to reach this target allows the Contracting Authority to terminate the PPA.

The Private Partner is best placed to integrate complex civil works, the delivery and commissioning of parts, despatching and operations, and preventative and lifecycle maintenance to ensure a reliable and punctual service for an efficient price. This may be managed through a single EPC joint venture or by the Private Partner managing a series of works, supply and operation/commissioning contracts.

The Private Partner will be expected to demonstrate adequate system performance before it is allowed to fully operate the system.

Mitigation Measures (What can be done to minimize the risk)

A power plant can only complete commissioning and achieve commercial operation if it is able to full test the plant by exporting electricity to the grid.

To minimise uncertainty a Private Partner will often take responsibility for building connection facilities with the grid, even if these are handed over to the host utility after construction.

The Government agreements contain (i) a hard wired date by which the Private Partner must commence and continue construction after signature of the PPA and (ii) the implementation of a longstop date (180 days post scheduled COD) which creates the tension to incentivize timely completion while allowing the Private Partner a reasonable amount of time to meet its responsibilities in spite of delays before the Contracting Authority can terminate the Government agreements.

Generally, the Private Partner will seek to pass risks associated with delay in achieving commercial operation on to the EPC contractor in order to minimise potential impact on the project. EPC Contracts will often contain liquidated damages and financial penalties and can assist in enforcing construction deadlines. Private Partners often build in a degree of flat or buffer between the scheduled COD under the EPC contract and the scheduled COD under the power purchase agreement.

Government Support Arrangements (What other government measures may be needed to be taken)

An independent engineer is sometimes appointed by the Private Partner to act on behalf of the Contracting Authority in monitoring the Private Partner's compliance with the relevant construction milestones and the completion of the facility.

The independent engineer, on behalf of the Contracting Authority plays a critical role during the various stages of construction and the testing and commissioning process in terms of ensuring that the Private Partner reaches completion before or as close as possible to the scheduled COD.

The Contracting Authority will have a critical role to play at stages of the construction, testing and commissioning process in terms of ensuring that any rights that it has to comment on design development and testing results do not adversely delay the project. The Contracting Authority may allow for certain relief events or cost overruns have arisen from either the fault of the Contracting Authority or a host country utility, or natural force majeure events affecting the Contracting Authority.

If the Contracting Authority is required to build significant transmission facilities, the issue of delayed completion and ability to pay deemed commissioning payments to the Private Partner is a key risk.

The Contracting Authority's obligation to make deemed commissioning payments may need to be secured by a Government guarantee.

Comparison with Developed Market

Some emerging markets hydro projects have faced significant construction issues and the parties will need to be prepared to enforce their respective rights to manage the consequences of a failure to meet the construction milestones.

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