PPA Training & Case Simulation

ADVANCE GUIDANCE NOTES

GRETEN 100 MW HEAVY FUEL OIL (HFO) FIRED POWER PLANT
CASE STUDY NO. 1B: Heavy Fuel Oil (HFO) Fired Power Plant

BACKGROUND
The Republic of Greten is a small nation in Central Asia land-locked on three sides and having a sea-
port on her east side. The country historically used gas-based power plants and used natural gas
sourced from the neighbouring countries Harkand and Gilliad to generate the nation’s electricity.
However, in recent years, the gas reserves in Harkand have depleted leading to Harkand rationing gas
exports to Greten. Also, the diplomatic relationship between Gilliad and Greten has been downgraded
prompting Gilliad to impose restrictions on gas exports to Greten. These events are causing insufficient
supply of gas for the gas-fired power plants and the total electricity supply is unable to meet the
demand of the system resulting in intermittent load-shedding and power failures. Greten has started
the negotiation for the construction of an LNG gas-terminal on her east sea-port, but the LNG terminal
will take 5-6 years to complete. There are moderate coal resources in Greten but the plans for coal-
based power plants have been halted due to extensive criticism from the country’s environmentalists.

Therefore, Government of Greten is facing an urgent need for some intermediary power plants until
the LNG terminal is completed. The Government of Greten (GOG) had privatized the country’s power
sector through tendering independent power projects (IPPs) over a decade ago. Most of the IPPs used
for producing power are owned by international companies and some by Greten’s entrepreneurs.
Currently there is no liberalised electricity market in the country and Greten Power Development
Board (GPDB) is the state-owned Single Buyer. All IPPs are required to sell their power production to
GPDB, who in turn sells the bulk power to the regional distribution companies. Power is wheeled
through the transmission network by the state-owned Transmission Grid Company of Greten (TGCG).

A number of private developers have submitted unsolicited proposals for intermediary power plants,
including a USA-based power sector equipment vendor and IPP developer, Tennessee Manufacturing
Corporation Limited (TMCO). TMCO has submitted a PPA proposal for a 100 MW HFO plant located at
Ushia, very close to the country’s main seaport, where HFO in adequate volumes can be readily
sourced from the Singapore-based Fuel Supplier, SOTCO.

GOG uses standardised and internationally competitive procurement processes for all its solicited and
unsolicited IPPs. GPDB supervises the IPP procurement process and prepares the draft Power
Purchase Agreement (PPA). For each IPP, GPDB has a dedicated committee that drafts the terms and
conditions (T&C) for the PPA. Therefore, negotiation on the T&C by tenderers for solicited IPPs has
limited scope. The primary input sought from the tenderers is pricing details. However, for the
unsolicited IPP by TMCO for Ushia in Greten has more scope for the T&Cs to be negotiated.

TMCO proposes that the 100 MW HFO power plant in Greten is to be developed as an IPP on a build-
own-operate (BOO) basis.

Over the 15-year term of the PPA, the plant’s load factor will be higher for the first few years and after
the construction of the LNG terminal and additional power plants, the load factor will be lower.
The following are the areas for negotiation with the relevant PPA clauses:
 Area for negotiation Relevant PPA clauses Points available during
simulation
Pricing Section 13.1 40 points
Section 13.2
Schedule 6
Performance Risk Mitigation Section 4.2 (d) 30 points
Section 8.1
Insurance Coverage Section 14 30 points

Note: These Advance Guidance Notes are supplied to all participants in Simulation Case Study, together with a
Financial Model and a redacted copy of the PPA relating to the case study. Fuller details on the case study and
the objectives of each negotiating party will be issued immediately before the simulation, and after the teams’
roles have been assigned. The simplified financial model is provided with all the cost data available to the
developer. However, the pricing data in the model, as supplied, are dummy values and need to be replaced with
values consistent with your own team’s negotiating position. Inputs in the financial model that are subject to
negotiation are highlighted in yellow and more information will be provided regarding these inputs during the
simulation. Inputs not highlighted can be assumed to be fixed for the simulation.

OVERVIEW OF THE SIMULATIONS

The simulation will involve three parties:

Buyer – GPDB, the single buyer

Developer –TMCO, a tenderer for the Greten IPP

Lender – CA Bank, the Bank/Finance House providing the Developer with around 80% of the
required funding for the project

Teams of 5 people will represent the interests of one or other of the three parties in a simulated
negotiation. Teams will not be assigned their roles – Buyer, Developer or Lender – until the day of the
simulation. The objective for each team will be to obtain the best possible outcome from their
respective organisation’s perspective. The team will be scored on the basis of the deal they have
negotiated for their organisation, relative to the adjudicator’s assessment of an optimum outcome.

Due to time constraints, the scope of the negotiations will be restricted to a limited number of areas

1. Pricing,
2. Performance Risk Mitigation
3. Insurance

These are elaborated below:

Pricing: The Developer is required to propose their pricing formula for the first year of operations,
together with all the related price escalation details, where applicable. The payment formula
proposed by the Developer needs to be tested – by both the Buyer and the Lender - for robustness in
terms of a range of outcomes in the volume of energy generated, and a range of outcomes in the
various price escalation parameters, to ensure that their own interests are safeguarded. The Buyer is
seeking good value for money, whilst the Lender requires assurance that cash flows will be adequate
to enable the debt to be serviced. All parties are provided with a rudimentary financial model, which
may require a degree of modification to produce outputs that meet their needs.
Performance Risk Mitigation: Since power generation is subject to a number of technical factors, this
aims to mitigate, reduce or eliminate the risk of non-performance or lower performance than
stipulated by the power-plant as agreed by the Buyer and Developer under the terms of the PPA.

Insurance: Being an integral and important part of the PPA document, insurance covers multiple issues
ranging from safeguarding the project from accidental hazards to safeguarding sustained operations.
Due to time constraints, the insurance negotiations are limited to selected sections.

Following a short period for the negotiating parties to reach an agreement, there are subsequent
short periods for the parties to prepare and present their final positions to the Simulation Adjudicator.
Each negotiating position will be marked on its merits. Failure to reach an agreement on any issue
will be zero-scored for that particular issue.

Timetable for the Negotiation Simulation

Only 3.25 hours is available for the entire PPA negotiation simulation event, from start to finish.
Good discipline is essential to ensure the success of the event as a worthwhile capacity building
exercise. The Facilitator(s) will provide guidance throughout to help ensure strict adherence to the
timetable and to ensure that excessive time is not spent on individual issues to the detriment of
other important issues. Briefly, the timetable is as follows:

Time Allocation Activity

1 hour Preparation for negotiations
1 hour 15 minutes Negotiations
15 minutes Preparation of presentation of negotiation outcomes
30 minutes (10 mins per team) Presentations to Facilitator(s)
15 minutes Facilitator feedback