Performance/price risk

Hydro power Hydro power

Description (What is the Risk)

The risk that the asset is able to achieve the output specification metrics and the price or cost of doing so.
Damage pollution accidents.
Meeting handback requirements
Health and safety vandalism.
Equipment becoming prematurely obsolete.
Expansion.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner bears the risk of setting and meeting the performance specification in the power purchase agreement.

The Private Partner will be paid based on the actual amount of power sold under the power purchase agreement. If the facility runs at a lower capacity than initially intended, it will effectively result in less payment received by the Private Partner.

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

The Private Partner will mitigate its risk through the terms of the EPC and O&M contracts with third parties. EPC contractors will typically be obliged to pay liquidated damages where tested capacity and efficiency are short of guaranteed levels. Operation and maintenance contractor are also often penalised for poor performance, but noting that limits on liability may be modest compared to the loss that may be suffered.

Comparison with Emerging Market

Availability/capacity risks will generally be considered manageable through pass down to experienced subcontractors.

The Private Partner receives will generally receive no 'political' force majeure protection.

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Description (What is the Risk)

The risk that the asset is able to achieve the output specification metrics and the price or cost of doing so.
Damage pollution accidents.
Meeting handback requirements
Health and safety vandalism.
Equipment becoming prematurely obsolete.
Expansion.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Having negotiated and signed the power purchase agreement the Private Partner bears the risk of achieving the availability and capacity levels specified.

The Private Partner may be liable for liquidated damages if the plant fails to meet the minimum contracted capacity. This compensates the Contracting Authority for the reduced benefit from the river resource.

The Contracting Authority will generally bear the risk of political force majeure, defaults by the Contracting Authority or Government parties or force majeure affecting the Contracting Authority. Where performance has been interrupted by these events, the Private partner can expect deemed energy payments.

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

The Private Partner will mitigate its risk through the terms of the EPC and O&M contracts with third parties. EPC contractors will typically be obliged to pay liquidated damages where performance levels are short of guaranteed levels. Operation and maintenance contractor are also often penalised for poor performance, but noting that limits on liability may be modest compared to the loss that may be suffered.

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

The Private Partner will expect host country/'political' force majeure protection in respect of events which might reduce availability.

Comparison with Developed Market

Additional availability adjustments may be required in respect of political force majeure and natural force majeure events affecting the Contracting Authority.

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