Demand risk

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Description (What is the Risk)

The availability by both volume and quality of resource or inputs to a project or the demand for the product of service of a project by consumers/users.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The power purchase agreement may not contain a take-or-pay obligation on the Contracting Authority with the Private Partner to be paid on the basis of the power delivered to the Contracting Authority. These agreements often work on a "must take" basis as the electricity produced cannot be stored and the Contracting Authority takes the risk that the system does not require the electricity at the times that the solar PV project ?is generating. If the project is constrained by the system operator the Contracting Authority may be required to make compensation payments to the Private Partner.

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

It is common for renewable generators to have priority access to the electricity system? on the basis that renewable generation is being encouraged and the resource (wind and sun) is intermittent.

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

The Contracting Authority will assume primary demand risk for the electricity produced by the ?project.

Comparison with Emerging Market

In certain developed markets the Private Partner may be required to sell the output into a power pool. In such cases the power purchase agreement with the Contracting Authority will operate as contract for difference where the Contracting Authority pays the Private Partner the difference between market prices for the electricity and the fixed price agreed between the Contracting Authority and the Private Partner during the procurement process. If market prices are higher than the fixed price the Private Partner will owe the difference to the Contracting Authority. In many developed markets there may be green benefits associated with the production of renewable energy. These benefits are usually transferred to the Contracting Authority and are price is included within the fixed price per MWh agreed at the outset so there is no additional cost to the Contracting Authority. In some cases the green benefits may be sold to the market and the benefits shared between the parties.

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Description (What is the Risk)

The availability by both volume and quality of resource or inputs to a project or the demand for the product of service of a project by consumers/users.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Contracting Authority will assume the risk that there is no demand for the electricity produced.

The power purchase agreement may not contain a express take-or-pay obligation on the Contracting Authority with the Private Partner to be paid on the basis of the power delivered to the Contracting Authority. These agreements often work on a "must take" basis as the electricity produced cannot be stored and the Contracting Authority takes the risk that the system does not require the electricity at the times that the solar PV project ?is generating. If the project is constrained by the system operator the Contracting Authority will usually be required to make compensation payments to the Private Partner.

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

In certain emerging markers, in order to mitigate the demand risk associated with having to source solar PV panels locally, certain EPC contractors and/or Private Partners have opened up solar PV factors in the specific local market to both mitigate and comply with (i) the demand risk and (ii) local bidding requirements.

The Contracting Authority will mitigate the demand risk assumed under the power purchase agreement through system planning before and during the procurement process and operations. To the extent that supply exceeds ?demand in any period this is usually mitigated by reducing the output of flexible generation such as hydropower or thermal generators. As the storage technology improves and reduces in cost this will enable the Contracting Authority to mitigate the demand risk by storing power and then using it to meet system peak demand.

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

The Contracting Authority will assume primary demand risk for the electricity produced by the ?project. If the Contracting Authority is the local utility it is common for the government to stand behind the obligations of the utility as many utilities in emerging markets are reliant on insufficient and/or fluctuation in demand and consumer credit risk that raises concerns for utility credit.

Comparison with Developed Market

In most emerging markets the electricity sector has not been liberalised and the utility (the usual Contracting Entity) is vertically integrated. Demand risk for IPPs is borne by the Contracting Authority.

A recent trend is that the Contracting Authority may seek to retain any entitlement ?to carbon credits or other green benefits arising from the project.

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