In the first week of September 2015, the Nigeria Bulk Electricity Trading Plc. (NBET) announced that it had initialed its first coal as fuel based Power Purchase Agreement (PPA) in Nigeria with the Itobe-1 Coal Power IPP. The PPA is for the first phase of 300MW to be developed by the IPP and with plans to fully develop the project to a 1200MW power plant after completion of the four phases. This represents a significant milestone in the privatization of Nigeria’s electric power sector.
Our law firm, Edward Ekiyor & Co., is advising Itobe-1 Coal Power Limited on the project and negotiated on its behalf the first on grid Coal PPA as its Nigerian legal Counsel.
The fact that this was a PPA for a coal-fired power plant impacted on the risk allocation matrix and key bankability provisions of the PPA in many ways. Obviously, the source of fuel is a critical factor in any PPA. Apart from the fact that many financiers choose to stay away from certain types of fuel, the bankability threshold increases with certain types of fuel. For example, in Nigeria while security of transportation of gas will be a key issue with a gas-fired power plant, specification or grade of coal will be as important in a coal-fired power plant. But with both fuel, the likely occurrence of negative local political situations will be key issues within the Force Majeure provisions of the PPA.
Another dichotomy between gas and coal template PPAs in Nigeria is in that the actual generating capacity of the power plant will be calculated in the PPA taking into cognisance a number of factors, chief among which are: the scheduled maintenance outages, the site's ambient conditions and fuel (coal) availability. Meaning coal availability and supply risk will be taken into cognisance in projecting the plant's available capacity. Since coal and gas availability and supply will pose risks in different manners, technical calculations will thus differ in both PPAs. Plant availability for new coal plants will differ from new gas plants as the former is expected to have higher outage rates than the latter. Therefore the coal PPA will prescribe a lower availability threshold than a gas PPA.
The power plant’s auxiliary load is usually reserved at a percentage of the contract capacity under the PPA. Coal plants require a higher auxiliary plant load than gas fired plants. MYTO II stipulated an auxiliary usage of 2% of plant capacity for gas plants and 7.5% for coal plants. Likewise, the thermal efficiency of both plants., with a coal plant typically expected to provide a higher efficiency.
The construction period for a coal-fired power plant in Nigeria is considerably longer than the conventional gas thermal plants, so the time period within which a coal plant will be required to achieve commercial operations will also be longer. Construction period under the coal PPA will be agreed at somewhere between forty-two and forty-eight months (with both extremes a likely assumed position). This will have a domino effect on how the liquidated damages (LDs) regime is structured and debt service and interest during construction.
The energy charge of the PPA tariff will reflect the price of coal which is not predetermined by any applicable regulation unlike with gas prices that are determined by the National Domestic Gas Supply and Pricing Regulation. However, under MYTO II coal price reflects the price of imported coal unlike the gas PPA which presupposes that gas is locally sourced. The implications of this are that fuel cost may be invoiced in the foreign currency and that there is an additional foreign exchange risk to the project. This invariably has cash flow implications for the project company. Of course, project developers can go for an open book approach for this component of their tariff. A crucial aspect of fuel cost is fuel transportation and the attendant necessary infrastructure that follow it. Gas-fired power plants will usually require the construction of gas pipeline from the plant to the Nigerian Gas Company’s (or a transporter’s) gas pipeline facility through which gas is delivered by the gas supplier. Coal fired plants also require construction of some transportation and storage infrastructure, the capex of which will differ considerably from that of a gas pipeline.
Environmental standard that is required of coal projects are higher but with the development of clean coal technology, this concern to a large extent is taken care of.
With Nigeria’s first on grid coal PPA coming on stream, it is our hope that this will clear the path for a diversified power plant source base that will help the Federal Government plug that wide power supply deficit in the country.
*This points discussed above are not meant to be exhaustive. A coal-fired power plant developer would need to seek technical and legal advice in negotiating its Power Purchase Agreement.
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David Y. Amakiri