Force majeure risk

Solar PV Solar PV

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

The events that will be regarded as 'force majeure' is stated in the power purchase agreement, which includes, among others:

- Act of the Government, such as change in energy policy, change in law, which prevent any party from performing its obligations under the power purchase agreement;

- Act of war;

- Labour strikes, terrorism, earthquake, flood;

- Disruption of power distribution system.

The obligations of the party affected by the force majeure event will be suspended during the period of force majeure, but the affected party will be responsible for the expenses required for remedying such force majeure event, to the extent possible.

The power purchase agreement, however, does not contain a clause that extends the term of the power purchase agreement in case of the force majeure event.

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

If the force majeure has occurred and affected the Private Partner, the Private Partner will be exempted from performing its obligations under the power purchase agreement during the period of such force majeure. However, it is likely that there will be no revenues from the project during such period. The Private Partner shall seek to mitigate this risk through insurance.

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

The Contracting Authority will generally not take natural force majeure risk under the power purchase agreement. ? The power purchase agreement may provide for an extension of the term to the extent that the project could not deliver electricity due to such a force majeure event.

Comparison with Emerging Market

Private Partners will expect to rely on business interruption and material damage insurance policies to mitigate the risk of force majeure events.

Back to Solar PV

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 you can expect to see a fairly well developed list of events that entitle the Private Partner to relief.

Typical events could include:

- natural force majeure events, which typically can be insured (eg fire / flooding / storm, vandalism etc), and

- force majeure events which typically cannot be insured (eg strikes / protest, terror threats / hoaxes, suicide / accident, passenger emergency, emergency services, trespass etc.)

Force majeure events occurring during construction will cause a delay in revenue commencement. The ability of the Private Partner to bear this risk for uninsured risks will be limited, and the Contracting Authority will have to bear the risk after a certain period of time or level of cost has been exceeded.

During operation, the impact of the force majeure will interrupt the revenue stream and there is scope for the risk to be shared with the Contracting Authority, provided certain conditions are met.

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

The agreements with the Contracting Authority allow for a sharing of the risk of force majeure and provide relief to the Private Partner in certain instances provided specific conditions are met. To the extent that the conditions are met, the Private Partner can be relieved from liability under the Government agreement to the extent that it cannot perform all or a material part of its obligations thereunder as a result of a force majeure event.

If the force majeure event occurs prior to scheduled COD, scheduled COD shall be postponed by such time as is reasonable for the force majeure event, taking into account the likely effect of any such delay. If the force majeure event occurs after scheduled COD, but before COD (provided that the longstop date has not occurred) the longstop date shall be postponed by such time as is reasonable for the force majeure event, taking into account the likely effect of any such delay. To the extent an force majeure event occurs within specified time and continues for a specified time, then the Private Partner is entitled to an extension of term and/or other relief from the Contracting Authority which will place it in the same overall net economic position as it would have been in but for such force majeure event provided that any compensation shall not take a monetary form and the extension of the term shall not extend beyond 10 years.

Project insurance (physical damage and loss of revenue coverage) is the key mitigant for force majeure risks that cause physical damage. To the extent that the Private Partner is entitled to bring a claim under an insurance policy, it may not be entitled to enforce certain rights for relief vis a vis the Contracting Authority.

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

To the extent an force majeure event occurs within specified time and continues for a specified time, then the Private Partner may be entitled to an extension of term and/or other relief from the Contracting Authority which will place it in the same overall net economic position as it would have been in but for such force majeure event.

Comparison with Developed Market

Contracting Authorities often encourage Private Partners to rely? on insurance rather than allocate all force majeure risk to the Contracting Authority. If relief or compensation is payable this may be at a reduced rate which reflects the shared nature of the risk allocation.

Back to Solar PV