Energy experts caution gov't on Take-and-Pay idea
Adnan Adams Mohammed
Ghana’s key energy industry players have described the
decision by the government to renegotiate all take-or-pay power agreements to
take-and-pay as ill-advised and will certainly have negative repercussions on
the country’s economy.
Alex Mould, former Ghana National Petroleum Corporation
(GNPC) has noted that, 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.
In his mid-year budget review statement the Finance minister,
Ken Ofori-Atta disclosed government will review all electricity generation and
supply agreements the Independent Power Producers (IPP) have with government
from take-or-pay power agreements to take-and-pay to ensure that government
does not pay for unused power produced by IPPs.
“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 energy cum financial expert intimated when reacting to the
minister’s statement last week. He added that, the finance minister has been
misguided and it shows his team’s lack of experience in financing
infrastructure projects.
Also, the Chamber of Independent Power Producers,
Distribution Companies and Bulk Consumers (CIPDiB) has called on the government
to tread cautiously before taking a decision to review take-or-pay power
purchase agreements to avoid litigation that could prove costly to the nation.
The C.E.O of the Chamber, Mr Elikplim Kobla
Afetorgbor revealed that, the
government had not engaged the IPPs on any move to renegotiate the agreements.
“We only heard the Minister of Finance, Mr Ken Ofori-Atta,
in Parliament announcing that pay-or-take agreements will be reversed, but we
have not had any notification about the renegotiation,” he said in an
interview.
Consequently, Mr Mould in his submissions on the government
intention to opt for the take-and-pay gave an analogy that, assuming 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 among others. 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 capital expenditure but quite impossible to
do that for relatively new IPPs, and impossible to do that for new IPPs”, he
said.
Mr Mould, however, said 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 judgment debt against
the state.
“The first thing to consider is the fact the World Bank
provided up to US$700 million 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.”
“We should also not confuse the Put-Call Option Agreements
(PCOA), with take-or-pay Agreements. PCOA replaces government support and
consent agreement 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 neighborhood of 3,500mW rather than the 4,593me.
But that is a different topic for another day!
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