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"Take Or Pay" In PPA In Kazakhstan: For Or Against?

General information

“Take or pay” is a mid-twentieth-century mechanism for building contracts for the supply of goods. It was conceived of as a contractual structure in which the buyer had to purchase (take) the goods in a certain quantity at a certain time and to pay for the goods (pay), regardless of the buyer's actual ability to take delivery of the goods.

Overall, “take or pay” is commercially attractive for the supplier. This legal relationship mechanism guarantees a stable return that does not depend on the goods delivered. However, it may also be commercially attractive to the buyer: (1) guaranteed delivery over a period of time; and (2) reduced risk of changes in the value of the goods supplied, i.e. the value may be fixed for the duration of the contract and not be linked to market values.

“Take or pay” is often applied in investment projects (e.g., the construction of a plant and its operation, in which certain products to be delivered are produced). In such projects, large financing is usually required. In turn, such financing is provided by banks only if there is a guaranteed income that will allow the investor to fulfil its obligation to the bank. It is also essential for investors to have a stable income that can be projected for a return on the invested funds. Also, the supplying party may insist on a "take or pay" structure because of the limited market for a particular product, as well as to reduce the risk in selling that product.

“Take or pay” in power purchase agreement (PPA)

“Take or pay'' model is also used in the area of renewable energy sources (RES), in the development of PPA as part of the purchase and transmission to the grid of electricity generated from renewable energy facilities.

Under the model, the producer of electricity supplies electricity produced to the grid (specifying the maximum volumes fixed in the PPA), and the buyer pays for a certain portion of the electricity received, regardless of how much was taken into the grid during the PPA period.

As of today, “take or pay” is widely applied in many countries around the world, including such countries as Uzbekistan (where the state has assumed the obligation to pay for the electricity produced), Afghanistan (purchases electricity from Uzbekistan), China, Canada, the United States, India, Denmark, Germany, Ireland, Portugal, Spain, Sweden, Japan and New Zealand.

The introduction of “take or pay” in Uzbekistan was driven by the need to attract external investment for the development of the renewable energy sector and the economic progress of the country in general. Investors, under the terms of PPA, are provided with guarantees in the form of a state-accepted obligation to pay for the electricity produced by the electricity producer, regardless of the actual acceptance of electricity by the Uzbekistan electricity grid. These terms, in view of the existing large RES projects in Uzbekistan, are expected to be favourable to investors. However, the question of whether the actual payments to the electricity producers under the terms of such PPA are feasible is awaiting practical testing, i.e. will the Uzbekistan electricity grid, which has not been upgraded in several years, be able to accept all the electricity supplied properly when the active phase of transmission of generated electricity into the grid begins? Is this not a potential risk for the state party, which could incur large losses if grid failures do occur and the state is unable to receive the electricity produced? The questions remain open.

In Kazakhstan, “take or pay” in PPA is practically non-existent. However, there have been attempts to make proposals for the application of this mechanism. The proposals were based on a method to reduce risks of not allowing electricity into the grid. These risks appear to be possible due to the lack of envisaged liability of electricity transmission organisations (classical electricity generating plants) for refusing to accept and transmit the entire volume of electricity into the grid produced and transmitted by the electricity producers that use RES facilities (developers).

Under the current provisions of the RES support legislation, the centralised purchase and sale of electricity produced by RES facilities is carried out by the Financial Settlement Centre (FSC). The FSC is only obliged to make payments to the developer for the electricity supplied to the grid. Therefore, there is a risk that developers will not be able to receive certain additional payments from the FSC, due to possible limitations from the classical electricity generating organisations in accepting and transmitting the entire volume of electricity (generated by the developers) to the grid.

The introduction of “take or pay” in PPA would reduce this risk. In such a case, the developer would assume the obligation to generate and supply electricity to the grid (up to the maximum volumes fixed in the PPA), and the buyer (represented by the FSC) would undertake to make payments to the developer for a certain portion of the said volumes, regardless of how much electricity was actually taken into the grid.

Such terms appear to be favourable to developers (developer investors), and have therefore attracted great interest from various RES players, RES associations, and representatives of the banking system. However, representatives of the electricity buyer side do not fully agree with the introduction of “take or pay” in PPA. It is believed that this party does not want to assume more liabilities as well as bear the risk of potential losses due to possible failures of the existing grids.

Therefore, the question of introducing the take-or-pay mechanism in Kazakhstan remains open for all parties, taking into account the circumstances outlined above. However, the private party believes that, given the demand for this mechanism among potential developers and investors, the state party will still decide to introduce “take or pay” in the area of RES.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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