THE power purchase agreements (PPA), which reflect the viability and attractiveness of independent owner producers (IPP), have evolved over the years. These agreements also deter­mine the creditworthiness of the IPPs.

Rating Agency Malaysia Bhd (RAM) points out that power purchase rates have been trend­ing downwards, from an average tariff of as high as 15.5 sen/kWh for the earlier batch of IPPs, to as low as 10-11 sen/kWh for the second generation ones. Also, the requirements imposed under the newer PPAs (in order to qualify for full capacity payments) are more onerous, thereby imposing greater operational discipline on the IPPs.

The second generation PPAs allow for the renegotiation of the PPAs In the event of an industry restructuring (something lacking in the first generation PPAs which would have triggered off several legal obstacles had the earlier planned power pooling system not been scrapped).

RAM says making room in the PPAs for future industry reforms does add an element of uncer­tainty to the IPPs' future credit profiles. Given these differentiations, the debt ratings of first and second generation IPPs are typically differ­entiated by at least one notch.

Also, in July last year, the first of the third generation PPAs was signed between Tenaga Nasional Bhd and SKS Power Sdn Bhd. SKS Power will share the cost of spare capacity (pre­viously it was borne entirely by Tenaga) under a demand-risk sharing concept, setting a prece­dent for future PPAs.

While the intention is to promote greater efficiency in the allocation of resources for the power industry, RAM says these moves indicate that more risks will inevitably be transferred to IPPs, and consequently, to their financiers.

Summary of salient differences between first-and second-generation PPAs

First-generation PPAs

Second-generation PPAs

1) Average rates range from 13.5 sen/kWh-15.5 sen/kWh.

1) Average rates range from 10.6sen/kWh-14.3 sen/kWh.

2) Less stringent performance requirements:

• Scheduled and unscheduled outages to be managed within a combined limit, resulting in greater flexibility.
• - IPP eligible to earn additional bonus payments if availability is above a specified level

2) More requirements:

• Separate limits for scheduled and unscheduled outages.

• Penalties if unscheduled outages exceed a certain limit.

3) Terms of the PPA are binding for 21 years.

3) Terms of the PPA can be renegotiated to allow full participation of the IPP in any industry restructuring. If the IPP and TNB fail to reach and agreement within 6 months, TNB can terminate the IPP and acquire the project at a pre-agreed amount.

4) TNB is not excused from making capacity payments I the event of force majeure.

4) There are many variations to the force majeure provisions. Most of the PPAs make a differentiation depending on which party is affected by force majeure . More often than not, TNB will pay to the shareholders are not paid. In some circumstances, TNB will make capacity payments to the IPP, but only to the extent that the Facility is available.