Expanding the Understanding of Power Purchase Agreements

 

Multi partner process leads to publication of a new Power Africa handbook

By Mohammed Badissy,  Department of Commerce,  Commercial Law Development Program

Negotiating commercial contracts remains a significant challenge for businesses around the world, even with advances in technology, economic modeling and legal best practices. In negotiations, each party must strike a balance between advocating for its own interests and finding common ground.  Even after an agreement is formed, challenges can still remain in drafting a contract that accurately reflects the breadth and nuances of the agreement. Despite their enthusiasm at the outset of contract negotiations, the failure of any party to seek balance and clarity can quickly lead to apathy or, worse yet, a one-sided agreement that is doomed to fail.

In the power sector, the need for balanced and clear contracts is particularly urgent, where agreements can cover decades-long projects that involve multiple developers, financiers and buyers. As part of Power Africa’s focus on streamlining power project negotiations, U.S. Government officials and our key private sector partners identified the need to create a common understanding of the key elements of balanced project contracts. Focusing on the most important project contract, the Power Purchase Agreement (PPA), Power Africa set out to gather insights from all sides of the negotiation process to generate a consensus on what makes for a balanced and bankable agreement.

“The PPA project” as it came to be known, was developed through a partnership between the U.S. Department of Commerce's Commercial Law Development Program (CLDP) and the African Legal Support Facility (ALSF). The effort brought together public and private sector experts to identify the key risks in PPAs and layout the best practices for allocating those risks between developers, banks and host-governments.

CLDP and ALSF began the project in mid-2014 by conducting a series of consultations in the U.S. and in East and West Africa where PPA experts were encouraged to openly discuss failures and successes in past contract negotiations. From those consultations, a core set of PPA contract terms were identified as being the most difficult to negotiate.

Based on the myriad considerations and consequences involved in each of the core PPA contract terms, it was decided that rather than produce yet another standard PPA, CLDP and ALSF should produce a reference handbook that explained each contract term in detail. In November of 2014, CLDP and ALSF brought together a distinguished group of experts, including representatives from the Nigerian Bulk Electricity Trading PLC, Tanzanian Energy and Water Utilities Regulatory Authority, World Bank, OPIC, African Development Bank, African Finance Corporation and leading law firms from the US, Africa, Europe and Asia.

Using a rapid drafting method called the “Book Sprint,” the group of experts was able to put together and publish a handbook titled “Understanding Power Purchase Agreements” in just five days. The intensity of the drafting process in many ways reflected the balanced approach that is needed for successful PPA negotiation and the end result was a handbook that provides the reader with a complete understanding of these complex contracts.

Power Africa looks forward to continuing to engage the power project community on ways to streamline the PPA negotiation process and to expanding the consensus on how best to structure these complex agreements. CLDP and ALSF continue to work together in support of this mission, both by increasing access to the PPA handbook (it is currently being translated into French) and by drafting additional reference handbooks on other complex legal issues (such as Credit Enhancement and Fuel/Steam Supply Agreements). The hope is that through greater understanding of what makes for a successful PPA, we can move more quickly towards the goal of bringing electricity to millions of sub-Saharan Africans in the years ahead.

Note: “Understanding Power Purchase Agreements” is published under an open-source Creative Commons License and can be downloaded in both PDF and ePub format here: http://go.usa.gov/FBzH

Last updated: May 17, 2017

Share This Page