A number of African countries are in the process of converting ‘take-or-pay’ clauses in power purchase agreements (PPAs) to ‘take-and-pay’ clauses, in an attempt to alleviate the financial burden of paying for gas or electricity that is not ultimately used or delivered.
However, a shift towards take-and-pay clauses will look unattractive to prospective lenders and investors, potentially hindering the promotion of future energy and infrastructure projects. What are take-or-pay and take-and-pay clauses?
Take-or-pay and take-and-pay clauses are well-established clauses used in PPAs – long-term gas or energy sale or purchase agreements under which a generator, producer or seller (‘producer’) is under an obligation to make a certain volume of electricity available to a purchaser. The obligations on the purchaser vary depending on which approach is adopted.
A take-or-pay clause refers to a situation where a purchaser agrees to either purchase a minimum threshold volume of gas or electricity or, if the purchaser opts not to offtake the minimum agreed volume, to make an agreed payment as a result of having not done so – usually based on a reconciliation calculation or formula.
A take-and-pay clause places an obligation on a purchaser to both take a minimum agreed volume of gas or electricity and to pay a contract price based on that minimum agreed volume on a yearly basis. Should the gas or electricity not be physically taken by the purchaser, the gas or electricity will be calculated and paid for on a deemed delivery basis.
These clauses are effectively designed to protect the producer by providing a guaranteed income even if the purchaser does not use the gas or electricity; giving them the assurance that the product will be sold and making the energy generation project commercially viable. The clauses serve as a type of commercial guarantee, without which investors and financial institutions would be reluctant to finance energy infrastructure projects.
However, these clauses are not always commercially viable when the position of the purchaser is considered, as the purchaser is required to pay for gas or electricity that it does not intend to use without any option to store the additional power. They also have a knock-on impact on the consumer price of gas or electricity, and relevant subsidies. Developments underway in Africa
In Africa, countries such as Kenya and Ghana are in the process of converting take-or-pay clauses in PPAs to take-and-pay clauses. The main reason for this shift is financial in […]