Power purchase agreements: Who will pay the generator and who will pay for transmission andgenerator and who will pay for transmission and 

distribution?Dr. Adeoye AdefuluOdujinrin & Adefulu

Barristers  Solicitors & Notaries PublicBarristers, Solicitors & Notaries PublicLagos – Abuja – Port‐Harcourt

OutlineOutline 

• Background– Pre EPSRA structures

– Post EPSRA structures

• Power Purchase Agreementsg

• Appropriate Offtaker

• Cashflows• Cashflows

• EPSRA transitional trading arrangements

• Paying for Transmission

Odujinrin & Adefuluestd. 197221/09/2009 2

Pre‐EPSRA power provisionp p

• NEPA operated as a verticallyintegrated monopoly

I 1998 d t d

GENERATION

• In 1998, amendments were madeto the Electricity Act & NEPA Actwhich removed the utility’s TRANSMISSIONwhich removed the utility smonopoly, whilst it remained avertically integrated monopoly

• This reform allowed for IPPs andfor power to be sold through PPAS

DISTRIBUTION

primarily to NEPA

CUSTOMER

Odujinrin & Adefuluestd. 197221/09/2009 3

EPSRA reform initiatives

h l f d d f• the Electric Power Sector Reform Act, 2005 introduced extensive reforms and created a pathway to the establishment of an electricity market

• Provides for:– establishment of an initial holding company to hold the assets & liabilities of 

NEPA (PHCN)

– unbundling of the entity along functional lines– unbundling of the entity along functional lines

• 6 generation companies

• 11 distribution companies

• 1 transmission company

– the establishment  the Nigerian Electricity Regulatory CommissionCommission

– evolution of the electricity market

Odujinrin & Adefuluestd. 197221/09/2009 4

EPSRA reform initiatives & PPAs

• the unbundling of PHCN as well as the introduction of new IPPs requires a new method of securing the provision of generated power– At least 24 new generation licenses have been issued

G & S l d d i d S– AGIP & AES are already producing under pre‐EPSR Act PPAs 

• NERC currently considering the introduction of i & d l PPAvesting contracts & model PPAs

– Vesting contracts – Successor Gencos, New IPPs & NIPP

PPAs for existing IPPs (AES AGIP & Shell)– PPAs for existing IPPs (AES, AGIP & Shell)

Odujinrin & Adefuluestd. 197221/09/2009 5

Power Offtake AgreementsPower Offtake Agreements

• “a legal contract between an electricity generator and a purchaser of energy or g p gycapacity (power or ancillary services).” – Serves to allocate risks between the partiesServes to allocate risks between the parties

– defines the rights and obligations between the buyer and seller

– sets the price for energy

– Defines the output and associated revenue stream of theDefines the output and associated revenue stream of the plant

• Provides basis for non‐recourse financing

Odujinrin & Adefuluestd. 197221/09/2009 6

Classic IPP StructureClassic IPP StructureShareholders O&M Contractor

GovernmentC i A t

Shareholders Agreement O&M Agreement

Concession Agreement

Power Off-takerPower Purchase

EPC ContractorEPC Contract

IPP Project Company

Agreement

Fuel Supplier RegulatorLi

Fuel Supply Agreement

Water Supplier

Licence

Insurance Co.

Globeleq 2007

Water SupplierWater Supply Agreement Lenders

Loan Agreement

Insurance Agreements

Odujinrin & Adefuluestd. 1972

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21/09/2009 7

Who pays the generator?Who pays the generator?

• PPA – who is the proper offtaker?PPA  who is the proper offtaker?– Credit worthy

Fi i l t t t• Financial statements

• Assets 

• Where is the cash coming from?

Odujinrin & Adefuluestd. 197221/09/2009 8

Proper OfftakerProper Offtaker

Cashfrom

Bulk P r h r

Transmission

Distributionfrom

consumersPurchaser

Generation

Distribution• Step-down voltage,

Transmission• Transmit power

Generation• Manage fuel

Consumer

Globeleq 2007

distribute and sell power to end-consumers

over long distance in high voltage systems

delivery• Produce electric

power

Consumer

Odujinrin & Adefuluestd. 1972

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21/09/2009 9

What does the law say?What does the law say? 

• Section 25 of EPSRA provides for the trading arrangements during the transition or pre‐privatisation stage– anticipates the establishment and licensing of a trading licensee holding a bulk purchase and resale license

• Shall purchase and resell power from IPPs & successor Gencos

Odujinrin & Adefuluestd. 197221/09/2009 10

What does the law say? (contd)What does the law say? (contd)

– Successor Gencos shall sell power to:• the Trading Licensee; 

• successor Discos; and

• Eligible customers

– IPPs shall sell power to:• The Trading Licensee; andg ;

• Successor Discos

Odujinrin & Adefuluestd. 197221/09/2009 11

EPSRA – Transitional trading arrangementsEPSRA  Transitional trading arrangements

IPP GENCOGENCOIPP

TRADINGLICENSEE DISTCO ELIGIBLE

CUSTOMERDISTCO

CUSTOMER CUTOMERCUSTOMERCUSTOMER

Odujinrin & Adefuluestd. 197221/09/2009 12

CashflowCashflow

CashfromSubsidiesSubsidies

Bulk Purchaser

Transmission

Distributionfrom

consumersSubsidiesSubsidies Purchaser

Generation

Distribution• Step-down voltage,

Transmission• Transmit power

Generation• Manage fuel

Consumerdistribute and sell power to end-consumers

over long distance in high voltage systems

delivery• Produce electric

power

Consumer

Odujinrin & Adefuluestd. 197221/09/2009 13

Cashflow (contd.)Cashflow (contd.)

• Subsidy– Who pays?p y

• FG, States, FG +States?

– Where is it coming from?Where is it coming from?• Budgetary allocation

What is the mechanism for disb rsing?– What is the mechanism for disbursing?

Odujinrin & Adefuluestd. 197221/09/2009 14

Transmission – who pays?Transmission  who pays?

• Transmission provides the hub

• Payments must be made for:Payments must be made for:– Connection of generators

Sh ld t f t i i• Should generators pay for transmission 

– Continuous use of system • Generator, distributor or both

• Balancing risk

Odujinrin & Adefuluestd. 197221/09/2009 15

Odujinrin & Adefulu has acquired significant experience in the Nigerian power industry. We have advised government entities and private sector entities in a range of areas which include:entities in a range of areas, which include:– Advising the Nigerian Government on the drafting of the Electric Power Sector

Reform Act;– Advising NEPA on Power Purchase Agreements;– Principal counsel in energy litigation;– Advising a private equity firm on acquiring a significant interest in a Nigerian IPP g p q y q g g g

project;– Advising NERC on aspects of the Electric Power Sector Reform Act;

Advising a major manufacturer on aspects of captive power generation projects– Advising a major manufacturer on aspects of captive power generation projects in two locations in South-west Nigeria.

Odujinrin & Adefulu

1 Fl Ch h H1st Floor, Church House

29, Marina, Lagos

Odujinrin & Adefuluestd. 1972

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