Force majeure risk

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Description (What is the Risk)

The risk that unexpected events occur that are beyond the control of the parties and delay or prohibit performance.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Force majeure is a shared risk and a fairly well developed list of events entitles the Private Partner to relief.

Typical events include (i) war, armed conflict, terrorism or acts of foreign enemies; (ii) nuclear or radioactive contamination; (iii) chemical or biological contamination; (iv) natural disasters; or (v) discovery of any species-at-risk, fossils, or historic or archaeological artefacts that require the project to be abandoned.

The Private Partner takes the risk of force majeure that prevents or delays generation or receipt of energy by the Contracting Authority. Whilst the Private Partner will be excused from default, it will not receive revenue if it is unable to generate.

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

Project insurance (physical damage and loss of revenue coverage) is the key mitigant for force majeure risks that cause physical damage.

Comparison with Emerging Market

The Private Partner is not typically entitled to compensation from the Contracting Authority and will also look to insurance to manage this risk.

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Description (What is the Risk)

The risk that unexpected events occur that are beyond the control of the parties and delay or prohibit performance.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Force majeure is a shared risk and a fairly well developed list of events entitles the Private Partner to relief.

Typical events include (i) war, armed conflict, terrorism or civil disturbance; (ii) strikes; (iii) natural disasters. In addition change in law, lapse of consents and acts or omissions by Governmental authorities are included within the definition of force majeure. However, this latter group of politically motivated events are treated separately for risk purposes. See political risks.

In emerging markets, the Contracting Authority often takes the hydrology risk and abnormal water levels (outside of the plant's design parameters) will be considered as a force majeure event.

The Private Partner takes the risk of force majeure that affects the Private Partner or its contractors and prevents or delays generation. Whilst the Private Partner will be excused from default, it will not receive revenue if it is unable to generate. It may, however, be entitled to an extension of the term of the power purchase agreement.

The Contracting Authority generally takes the risk of force majeure affecting it or the grid and prevents the Contracting Authority taking delivery of the energy that the Private Partner was capable of producing. The Contracting Authority pays for energy deemed to have been generated in these situations. There may be a degree of risk sharing as to the amount of payment.

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

Project insurance (physical damage and loss of revenue coverage) is the key mitigant for force majeure risks that cause physical damage.

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

Generally speaking, where parties are unable to agree on a way forward following a force majeure event affecting the Contracting Authority, an amount of compensation should continue to be payable by the Contracting Authority to the Private Partner in order to service the Private Partner 's debt obligations during the course of the event. Where the project is terminated, the Contracting Authority may be required to fully compensate the Private Partner for debt owed to the lenders.

Comparison with Developed Market

The Contracting Authority often does not provide compensation for termination arising from a 'natural' force majeure affecting the Private Partner, on the grounds that this should be insured. But it will compensate for 'natural' force majeure affecting the Contracting Authority or political/host country events.

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