“Kazakhstan’s PPA lacks risk allocation, making it unfriendly to investors.”
PPA in Kazakhstan is executed with the Financial Settlement Center, which is an offtaker and only pays for the energy. The grid operator is a separate entity and is not a party to the PPA, although it signs the grid connection, transmission and other kinds of arrangements with the project company. This structure causes confusions and is not investor friendly in a general mechanism for allocating risks. Apparently, in a model form of the PPA available in Kazakhstan, the below risks are not addressed at all.
Outdated Grid, Delays and Depreciation
The connection to the electrical grid is one of the risks for the developer of a renewable energy project in Kazakhstan. The electricity distribution will be delayed if the project cannot be connected on schedule, which will further cause payment defaults for the energy delivered.
Another well-known concern is that a significant part of the transmission line infrastructure is fairly out of date and inadequate to meet rising demands. In Kazakhstan, electricity grid depreciation is typically around 60%. In certain areas, this percentage has reached 80%. A PPA’s value could be more severely affected by an aging grid that does not receive due maintenance and upgrading.
Some land plots simply lack the infrastructure to transmit the energy. The project company and the offtaker should agree, often very early on, who will be in charge of the transmission line’s construction as well as which party will be responsible for ongoing ownership and maintenance.
Failures of grid operator may result in reduced power supply. Unscheduled power reduction, also known as curtailment, is important to address. The factors and trends over several years should be analysed for improved remediation action plans.
Both the offtaker and the system operator are owned by the government of Kazakhstan. Investors would be concerned in the situation that the offtaker or the government might pressure the system operator to curtail generation in the event that the offtaker can obtain energy from other sources at a lower price.
These risks should be somehow allocated and managed by the parties to the PPA. The best international practice places this risk on the offtaker rather than a project company. Regardless of whether the system operator actually dispatches the power plant or merely “takes” the electricity that could be produced in a circumstance when the power plant is available to generate, the offtaker is still obligated to pay.
Therefore, the project company may be entitled to deemed availability or deemed energy payments that are also insurance-based in cases where the power plant is unavailable or incapable of producing electricity as a result of circumstances for which the offtaker (or government or the grid operator) shall agree to be responsible for the risk (including, among other things, political force majeure, force majeure affecting the offtaker, change in law, unavailability of the grid, system operator and/or offtaker default). These arrangements are essential for distributing risk among all stakeholders in a power project.
For further information, please contact:
Ayana Unerbayeva, Partner, Unicase
ayana.u@unicaselaw.com
