In addition to the project company (investor), other stakeholders involved in the investment and construction of thermal power plant projects include: the power system management unit, construction contractors, lenders, power buyers, fuel suppliers, and plant operation and maintenance units. The role of each stakeholder is determined through agreements and contracts with the project company based on the allocation of obligations and risks to each party. The contracts concluded include: grid connection agreements, power plant construction contracts, loan agreements, power purchase agreements, fuel purchase agreements, and operation and maintenance contracts. The success of the project depends primarily on the successful implementation of contracts by the stakeholders and the project company’s close management of these contract interfaces.
This paper introduces the main characteristics of these contracts, identifies interface issues and associated risks, and highlights the need for effective management of contract interfaces based on a reasonable allocation of risks and the application of compensation mechanisms.
The grid connection agreement is a legally binding document between the grid management unit and the project company (the power plant investor), stipulating the rights and obligations of the parties involved regarding the connection point and connection equipment during the connection process, energizing the connection point, acceptance testing, commissioning, and operation.
According to the International Federation of Consulting Engineers (FIDIC), there are three types of power plant construction contracts: construction contracts, plant and design-build contracts, and EPC contracts. Of these, EPC contracts are favored by project companies and lenders and are commonly used in the construction of thermal power plants due to three main characteristics: a single entity responsible for the project (the EPC contractor); a lump-sum contract price; and a fixed completion date. Therefore, in this article, the EPC contract form is used when referring to a plant construction contract.
Loan agreements are contracts between the project company and lenders to finance the project’s capital needs. Project companies typically seek loans through project financing. Lenders will assess the project’s cash flow and income as sources of repayment and consider the project company’s assets, rights, and interests as collateral. However, in developing countries, project financing is often supported by government guarantees or guarantees from the project company’s parent company. To obtain the necessary project financing, the project company must negotiate loan agreements with lenders, usually multilateral and bilateral lending institutions, export credit agencies, and commercial banks both domestically and internationally. The following are typically considered by lenders and required to assess the creditworthiness of a loan agreement: a defined project completion time; fixed project costs; low or no technological risks; guaranteed capacity and heat loss; compensation for damages if the EPC contractor delays completion and fails to meet guaranteed operating parameters; a performance guarantee from the EPC contractor; and limitations on the circumstances under which the EPC contractor can appeal for extensions of completion time and additional costs. Loan arrangements are made during the project investment implementation phase and typically last about 2.5 years for thermal power plant projects.
A power purchase agreement (PPA) is a contract concluded between a project company and a state-owned power company (in Vietnam, this is Vietnam Electricity Group/the sole wholesale buyer) regarding the purchase and sale of electricity between the two parties, aiming to ensure the payment cash flow for the project company. A PPA has several key characteristics as follows:
– The purchase and sale of electricity is based on the buying and selling of available capacity and electricity generated and fed into the grid. The electricity price is calculated based on a fixed fee (capacity fee) to cover the fixed costs of the project company (including the recovery of the project company’s equity) and a variable fee (energy fee) to cover the variable costs of the project company, mainly fuel costs;
– Commitments of the Parties:
+ The project company’s commitments include: (1) making reasonable efforts to secure loan financing for the project, (2) making reasonable efforts to negotiate fuel purchase and plant construction (EPC) contracts, (3) making reasonable efforts to obtain permits from government agencies, (4) operating the plant according to the buyer’s dispatch orders and appropriate practices of the electricity industry;
+ The buyer’s commitments include: (1) equipping transmission and connection facilities before or on the date of commercial operation; (2) assisting the project company with procedures for obtaining permits from government agencies; (3) assisting the project company during the project company’s negotiation and implementation of project financing contracts; (4) cooperating with the project company regarding its rights and obligations under the power purchase agreement.
– Regarding electricity payment: Typically, power purchase agreements include a clause requiring the buyer to open an unconditional and irrevocable standby letter of credit (at a bank approved by the project company) to guarantee short-term compensation for the project company in case the buyer fails to fulfill contractual obligations, such as overdue electricity payments. Accordingly, this clause of the power purchase agreement stipulates that the letter of credit must always be opened for an amount equal to the estimated electricity bill calculated for a predetermined period;
– There is a clause specifying the testing and commissioning methods to demonstrate the contracted power levels, reliability, and heat loss rate, verified by an independent consulting firm;
– There is a clause addressing the impact on electricity prices in case of changes in applicable laws and a price adjustment mechanism.
A fuel purchase contract is an agreement concluded between the project company and the fuel supplier to ensure a reliable fuel supply for the project. For base-load thermal power plants, the project company usually signs long-term fuel purchase contracts. Some key characteristics of a fuel purchase contract include:
– Clearly stating the technical characteristics of the fuel, such as: commercial quality of the fuel, limits of mineral content (e.g., sulfur), minimum calorific value of the fuel, standards and testing procedures for verifying fuel characteristics;
– Including clauses on fuel measurement, procedures for determining the quantity of fuel supplied, fuel delivery methods and delivery points;
– Including penalty clauses stipulating the right of the fuel supplier to stop supplying fuel in case of overdue payments; the right of the project company to refuse to accept fuel if it does not meet the fuel characteristics as per the contract; and penalties for damages when one party violates fuel delivery obligations.
An operation and maintenance contract is a contract for the provision of operation and maintenance services for a power plant between the project company and an operating entity. The full scope of work of the contract typically includes: operation, maintenance, management, and repair of the plant, and operating power generation on behalf of the project company according to the power buyer’s schedule. The main characteristics of an operation and maintenance contract include:
– Clearly defining the objectives of the contract: ensuring the plant is operated and maintained regularly and in accordance with the technical requirements and warranty requirements of the manufacturer, especially ensuring minimal operating and maintenance costs; ensuring optimal net profit of the plant according to the power purchase agreement; optimizing the useful life of the plant and equipment; optimizing the plant’s operating time and revenue generation; maximizing the availability, efficiency, capacity, and reliability of the plant’s startup for electricity production; – Operating the generating unit/plant at optimal performance levels and generating electricity in accordance with the requirements of the power purchase agreement; maintaining the plant in good working condition and preventing premature aging of equipment; repairing/rectifying damage and malfunctions of plant equipment according to approved appropriate measures;
– Clearly stipulating that the operating unit, on behalf of the project company, performs the project company’s obligations related to the operation and maintenance of the plant as stipulated in the power purchase and fuel purchase agreements. For example: providing annual availability factor calculations; confirming electricity meter readings with the electricity buyer, providing this information to the project company for electricity and capacity billing; determining the expected net capacity; determining the availability and maximum daily generating capacity of the generating unit/plant for the next operating day; complying with operating instructions during normal operation and in emergency situations;
– There are clauses guaranteeing the operator’s achievement of power output levels, heat loss rates, availability factors, and environmental emission levels; there are provisions for incentive bonuses for the operator if the plant/unit operating performance (power, efficiency, availability factor) exceeds the specified performance levels; and there is a mechanism requiring the operator to compensate for damages if the actual operating performance is lower.
Given the above contract characteristics, to effectively manage the contracts and ensure project success, the project company needs to focus on the following issues:
+ Selecting contractors with the capacity and experience to execute the contracts (EPC, fuel procurement, operation and maintenance) to best control and manage their risks according to the nature of each contract;
+ Incorporate clauses and contracts containing provisions for compensation for damages, aiming to offset losses suffered by the aggrieved party due to the other party’s breach of contract;
+ Manage the harmonization of interfaces between contracts.
Harmonizing contract interfaces is achieved by reasonably allocating risks among contracts and applying compensation mechanisms that are compatible across contracts.
This article primarily focuses on analyzing several key interfaces in the investment implementation phase of a thermal power plant project, aiming to emphasize the necessity of managing risks and contract interfaces to ensure the financial soundness of the project company.
Accordingly, risks and contract interfaces need to be regularly identified, assessed, and managed by the project company to eliminate gaps in responsibility between contract parties. Risks that cannot be allocated to related parties should be borne and managed by the project company through appropriate insurance coverage or by setting aside a corresponding risk contingency fund. Furthermore, the project company needs to prioritize the synchronized negotiation and signing of contracts within appropriate timeframes to facilitate effective management of contract interfaces.