Take-or-pay provisions in power purchase agreements: the Government's position

This briefing has been published by Araba Attua-Afari of Bentsi-Enchill, Letsa & Ankomah, Ghana, who have agreed to Simmons & Simmons making it available to elexica subscribers.

In the mid-year fiscal policy review of, and supplementary estimates to, the 2019 budget statement, the Minister of Finance stated the Government’s intention to convert take-or-pay obligations in power purchase agreements (PPAs) into ‘take and pay’ obligations. We outline below some thoughts on the implementation of this Government policy.

A take-or-pay clause is an agreement between the contracting parties that the offtaker will either ‘take’ power produced, ‘or pay’ for the power produced if it is not required. A take-or-pay provision in a PPA guarantees the power producer a pre-determined amount of revenue on the condition that the power producer makes the power available to the offtaker under the agreement. This, in turn, allows the power producer to cover its fixed costs. Take-or-pay provisions are critical for obtaining project financing, as they evidence certainty around project cashflows.

Along with other material terms in PPAs, they are the subject of heavy negotiation between the IPP and the offtaker – and rightly so. Simply put, where the offtaker does not take delivery of power produced, the take-or-pay obligation creates a debt owed by the Government to the IPP that made the power available. The take-or-pay clause is usually the only contractual remedy available to the IPP when the offtaker fails to take delivery of power. Their importance is underscored by the non-existence of an energy spot market in Ghana.

The Government’s intention to renegotiate the terms of executed power purchase agreements which include take-or-pay provisions requires the willingness of the IPPs to come to the table. The PPAs to which the Minister of Finance refers are enforceable contracts under Ghanaian law. One party cannot on its own vary the terms of that contract – this is a general principle of contract law. So, in the absence of a provision in the PPAs which allows the Government to unilaterally amend the take-or-pay provision (which is highly unlikely to be the case), any amendments would require the agreement of all the signatories to it. It is just as unlikely that IPPs will agree to the proposed conversion because it would create uncertainty around fuel supply and loan servicing during the operating period of a power project.

A move by the Government to replace a take-or-pay obligation with a take-and-pay obligation without the consent of the IPP who has the benefit of the take-or-pay would amount to a breach of contract. Given the importance of a take-or-pay clause to the success of a power project, such a breach would be fundamental and go to the root of the PPA. Thus, the IPP would be entitled to terminate the PPA, and international arbitration would most certainly follow to recover damages arising from the termination. Given the implications of such termination on a power project, the very real potential for substantial damages and associated costs may amount to larger sums than the payments required under the take-or-pay clauses.