Issue link: https://digital.shearman.com/i/1425143
1 0 INSIGHTS 02 Cross-border Renewable Power in Asia: A Sustainable Surge? Against this backdrop, a recent trend of cross-border renewable IPPs is emerging and is a potential game-changer. Early cross-border power projects in Asia, such as the Nepal-India Upper Karnali project, Azad Jammu & Kashmir-Pakistan New Bong Escape, Patrind and Gulpur projects and the Georgia-Turkey export projects we advised on, were based on non-intermittent hydropower either fully exported, or only exported during high water seasons. More recent cross- border projects like the Lao PDR-Vietnam Monsoon Wind Project and the Singapore 100MW import tender from Malaysia are based on intermittent sources such as wind or solar. The geographical layout and the comparative advantages in demand for power and supply of natural renewable resources among Asian countries make a strong case for cross-border renewable IPPs. However, they also throw up a number of specific challenges due to them involving power generation assets in one country, but power sales and revenue generation in another country. These include greater transmission risk, additional licensing and regulatory complexity, as well as the need for different political risk and currency and termination risk management structures. In this first part of the series, we focus on the additional transmission risks associated with cross-border IPPs. In cross-border IPPs, the delivery point for the power is usually at the border between the two countries. To deliver power, additional transmission infrastructure often has to be developed in both countries (and can be much longer than in conventional IPPs), giving rise to significant bankability issues. A key consideration, which drives the risk allocation on managing transmission risk in cross-border IPPs, is who should have responsibility for transmission/connection both within the generating country and the importing country. A. TRANSMISSION ASSETS WITHIN GENERATING COUNTRY The two main options to connect the generation assets to the delivery point at the border are to either have the project build and operate the transmission assets or for the project to use third party transmission assets. Both these structures are being considered in the renewable cross-border IPPs under development in the region. Project company builds and operates transmission lines This approach tends to be more common, and the one which facilitates bankability since the transmission assets are within the project scope. This means the project company has control and oversight over the construction and operation of the assets and can insure them. In this case, a key issue tends to be whether the project company will secure an EPC wrap that covers the construction of both the project and the transmission line and allocates a single point responsibility for both to the EPC contractor. While this option may be pricier, it will improve the bankability of the project. In its absence, sponsors and lenders will require assurance that the project- on-project risk has been appropriately mitigated. Given the value of the transmission EPC contract will usually be significantly lower than that of the rest of the project, contractual remedies such as liquidated damages for delay are unlikely to keep the project company whole. Therefore, sponsors and lenders will need to look at other pragmatic solutions to mitigate the key risks associated with the construction of transmission lines (such as the acquisition of land rights). It is not uncommon for sponsors to consider building transmission infrastructure that can accommodate more than their own power generation capacity if there are other potential projects in the area that can also make use of the same transmission facilities. This can result in long-term cost savings for the project company developing them (for instance if third-party users pay a fee covering their share of the capital expenditure and operating costs). However, if it chooses to do so, careful consideration will need to be given to the impact on project economics (and the risk that these additional projects are not developed). Careful structuring of the sharing arrangements will also be required to ensure the projects remain bankable despite having multiple users. A number of different options can be considered for this, from insolvency remote Special Purpose Vehicles who own the transmission assets, to a synthetic ownership arrangement with the third-party user.