Take-and-Pay agreement may jeopardise future investments in the power sector


The ill-advised statement by the Finance minister to renegotiate all take-or-pay power agreements to take-and-pay will certainly have negative repercussions.
It will scare away prospective investors not only in the power sector but even more in the development of any future gas Exploration and Production (E&P) field.

If investors agree to take-and-pay agreements, government will have to provide even greater security support packages to make the financing of the development of these gas fields intended for Gas2Power possible.

The finance minister has been misguided and it shows his team’s lack of experience in financing infrastructure projects.

An analogy is where a caterer agrees with a company to provide meals for 200 staff based on the demand forecast at the time.
She then gears up, enters into debt to buy equipment to provide 200 meals a day; only to find out later that the company decides unilaterally, or for some other reason, to reduce the meals to 150 people.
There will be grievous consequences for everyone involved – the off taker, the supplier, the supplier’s banks etc.
How does the caterer pay for the debt with reduced revenue and reduced margins?

It’s a joke; they cannot do it for new Independent Power Producers (IPPs) as no new projects will achieve Financial Investment Decision (FID). Perhaps, it can be done for old IPP plants that have fully amortised their initial costs.
The issue raised here is with the Minister’s statement that has to do with him saying that he will renegotiate “ALL” IPP Power Purchase Agreements to make them take-and-pay from take-or-pay.

It is possible to renegotiate those old IPPs that have most likely paid down all their initial capex but quite impossible to do that for relatively new IPPs, and impossible to do that for new IPPs.

However, If this is done unilaterally, or without Agreement with the stakeholders in the IPP financing; it may cause a breach of financial covenants between the IPP and its financial institutions. This could actually result in default, and potentially judgement debt against the state.

The first thing to consider is the fact the World Bank provided up to $700m in Guarantees – its largest ever financial guarantee to a project – to back a take-or-pay E&P Gas field development. They also financed 4 take-or-pay power plants in Ghana. Let’s see if they can go renegotiate with the World Bank – that’s where they need to start so we see how serious they are.
Then, the financial institutions that financed these plants. They most likely will not agree to a renegotiation unless government provides more support or guarantees in the form, possibly, of Standby Letters of Credit to provide comfort of default from the already bankrupt power sector.

A take-or-pay contract will have lower tariffs than a take-and-pay contract!

We should also not confuse the Put-Call Option Agreements (PCOA), with take-or-pay Agreements. PCOA replaces Government support and consent agreements that basically mitigates the political and country risk when a default occurs due to government interference.

That is, country specific – since government controls PURC, and the whole power value chain, government interference is a huge risk for the investors and their financial institutions.

The take-or-pay on the other hand is more related to off takers payments for power received – ensuring debt service payment of the capital expenditure financed by the investor’s financial institution. It is a project financing requirement in the power sector (and for most infrastructure projects).

It is noteworthy to add that both Bui and Sunon Asogli which were signed by the NPP government were take-or-pay Agreements.

If the IPP has paid off its initial capex then there is the need to renegotiate.
The IPP needed a take-or-pay Agreement in order to secure the original capex financing.

If we send a message to the power sector investor community that we would no longer be entering into take-or-pay agreements, as explicitly stated by the Finance Minister, it would be impossible for them to reach Financial Investment decision, nor raise the funding from the project finance banks.

Lastly, it was disingenuous of the finance minister to deceive the public with the amount of dependable (24/7) sustainable power generation capacity which is more in the neighbourhood of 3,500mW rather than the 4,593me. But that is a different topic for another day!

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