Deal analysis: Genesis Energy thermal power plant IPP

Onyinye Chukwu and Okechukwu Okoro of G Elias & Co disucuss their roles advising Genesis Energy on the power purchase agreements for a thermal power plant it is builiding in Nigeria

The Genesis Energy thermal power plant independent power project (IPP) was a two-phase project that involved the provision of legal advice to Genesis Electricity (Genesis), a full service energy company, in relation to its proposed sale of power to the Nigerian National Petroleum Corporation (NNPC), Nigeria’s state-owned oil company, under a power purchase agreement (the project). Phase one of the project required the NNPC to utilise 24MW of the installed capacity of 84MW, while an additional 250MW will be installed under phase one. Under phase one, the power purchase agreement (PPA 1) provided for an installed capacity that was more than the size of the contracted capacity. Phase two involved the sale of the excess capacity under phase one as well as the additional installed capacity to the Nigerian Bulk Electricity Trading (NBET) under a separate power purchase agreement (PPA 2) between NBET and Genesis. The project was unique in the sense that it provided for the supply of off-grid electric power by Genesis to the Port Harcourt Refinery Company (PHRC), a subsidiary of the NNPC, a non-contracting party to PPA 1.

Genesis constructed the power plant on a build, own and operate (BOO) basis. Critical to the success of the project was its unique structure especially in view of the existing federal laws on off-grid generation licensing by the Nigerian Electricity Regulatory Commission and the need to comply with those laws.

The deal

The project involved independent power production actualised through turnkey project engineering, procurement and construction. The key contractual documentation under phase one include, a long term power purchase agreement, a gas supply agreement (between the Nigerian Gas Company (NGC) and Genesis) to match the term of the power purchase agreement and a land allocation agreement to situate the plant close to the end-user, PHRC. Phase one required Genesis to install the power plant within the premises of the PHRC under a BOO structure.

G Elias & Co had a team of five lawyers on the project. The team advised on all the phases of the project including, the operation and maintenance agreement and the engineering, procurement and construction contract both with Walters Power Africa, BVI, as contractors and operators of the power plant. G Elias & Co also advised on the financing of the project and on the gas sale contract with the NGC. As security for phase one of the project, an escrow account was established under an escrow agreement between the NNPC, Genesis and First Bank of Nigeria, as the escrow agent or bank. NNPC was required to fund the escrow account at all times to cover its payment obligations under the PPA 1. The additional capacity was to be sold to NBET under a separate power purchase agreement with Genesis.

Under phase one, G Elias & Co advised Genesis on the installation of an addition capacity of 250MW. The additional capacity is to be sold entirely to NBET. Phase two also involved the sale to NBET of any additional capacity which the PHRC did not buy under the PPA 1. Under PPA 2, NBET agreed to a cost reflective tariff to cover the additional capacity procured.

Challenges and innovations

A unique feature of the deal was that although NNPC was the buyer of record, power supplied under PPA 1 was to be utilised by PHRC. From a commercial perspective, the parties agreed that capacity was to be built from multiple turbines with dual-firing capability enabling the plant to run alternatively on both diesel and gas and eliminating the need for a complete shutdown of the power plant during maintenance. The installation of multiple turbines threw up the problem of how, or, more importantly, when, to achieve commercial operations, especially in view of the parties’ desire to commence commercial operations within the shortest possible time. The innovation from a legal perspective was the particularisation of three commercial operations dates to the three turbines. PPA 1 was thus drafted to allow the seller to commence commercial operations with respect to capacity covered by each of the turbines after commissioning of each turbine (with the pro-rata take or pay obligation on the buyer), thus providing better financing terms from a bankability perspective for the seller.

The project took cognisance of the challenges prevalent in the gas supply sector in Nigeria. The dual-firing capability of the turbines was thus imperative to the project. Under the PPA 1, the buyer was also obliged to source for alternative gas where the NGC for whatever reason, failed to perform its obligation to supply gas. It was thus important to have a turbine that could operate with either gas or diesel, to prevent a total shut down where there is gas supply failure.

Situating the plant within PHRC premises and as close as possible to NGC’s gas pipeline assisted in eliminating transmission losses which would have been borne by the seller, the capital expenditure on procuring land for the power plant, installing transmission lines from the plant to the delivery point and from the delivery point to the buyer’s connection facility, real estate, security and infrastructure. To address the effect of the common law principle (a part of Nigerian law) to the effect that the owner of land also owns fixtures on the land, the project had a land allocation agreement between the seller and PHRC that expressly provided for a lease that matched the tenor of the PPA, specifically delineated the area of land for the construction, nstallation and commissioning of the power plant and also specifically provided for the de-commissioning of the power plant by the seller upon completion of the term.

Another innovation in phase one was the security arrangement which is the creation of an escrow account that is required to be funded at all times by the NNPC to cover its three months payment obligations under the PPA. Its uniqueness turned on the fact that the escrow agent was the buyer’s banker and had the authority to draw from the buyer’s account to replenish the escrow account once draw-down had been made by the seller.

Also of particular importance to the seller and significant in PPA 1 was the ‘change of law’ provision. The political climate at the time required PPA 1 to deal with the effect of the proposed reorganisation of the petroleum industry. The Petroleum Industry Bill was considered one which when passed into law, would involve the corporate reorganisation of the NNPC. It was therefore important to the seller to protect itself from the effect of any change of structure or transition by the buyer as a business entity under the Petroleum Industry Bill upon its passage into law.

Liquidity also played a key role in structuring the project from a bankability perspective. The project was structured to meet the majority of the seller’s recurring expenditure in dollars so as to avoid any foreign exchange risk which the seller would bear, were the payment to be in the Nigerian local currency. The project was thus structured as a currency pass through with the payments covering costs in dollars being made to be payable in dollars. The parties agreed that where a change in law became a force majeure event, the seller would still be entitled to its monthly payments until PPA 1 was terminated under the ‘Prolonged Change of Law’ provisions.

Phase two was essentially an amendment of the PPA 1 under phase one to provide for the installation of additional turbines to achieve an additional capacity of 250MW to the existing installed capacity of 84MW. The amendment of the project structure in phase two threw up issues vis-à-vis phase one: tenor of the PPA in view of the tenor of the lease under the land allocation agreement; and increase in gas supply and the need to renegotiate the gas supply agreement. The parties agreed that an additional fee was to be paid by Genesis to NNPC for the land within the PHRC premises to house the turbines for the additional capacity of 250MW. The tariff under PPA 2 was made cost reflective to cover the additional capacity installed. There were also issues as to which obligation will take priority in the event that Genesis is unable to produce up to the contracted capacity within a specified time-frame. PPA 1 was to take precedence and so in such an event, Genesis was obliged to supply PHRC the available power.

A key issue that arose subsequent to the phase two was in relation to the operation of the escrow account. In 2015, the Treasury Single Account (TSA) policy of the Federal Government of Nigeria became effective. According to the TSA policy, all government ministries, agencies, parastatals and corporations (including the NNPC) were required to remit their earnings into a single account. It thus became difficult for the NNPC to meet its obligations under the escrow agreement. This was because the NNPC’s revenue bank accounts with the escrow agent, from which the escrow account had hitherto been fed under the escrow agreement, no longer constituted a source of revenue for the escrow account. There was also no alternative source that was available for funding the escrow account. The parties have been negotiating to find a solution and do not have any yet.

It is pertinent to mention that the Project is one of the few power projects in Nigeria with foreign investment. The Project was sponsored by investors from three continents, two foreign investors from North America and Asia respectively, and Genesis, as the local partner. Both foreign entities have been involved in several power deals in their respective countries.

Lessons learnt

The project in a way offers an off-grid solution, driven by the private sector, as viable alternative to the challenge of on-grid power in Nigeria. The structure employed in the two phases of the project has subsequently encouraged more private sector participation and the diversification of energy generation sources. The structure has also made the IPP operational and increased the supply of petroleum products in the Nigerian market through the increased efficiency of the PHRC. The PPAs has formed a precedent for subsequent power deals where available capacity is to be sold to more than one end-user. In fact, phase one of the project was rated and awarded the Africa deal of the year by Africa Utility award in 2014.

Onyinye Chukwu
Senior associate
G Elias & Co

About the author

Onyinye Chukwu holds a master of laws degree from University College, London. She has advised on numerous transactions in the Nigerian energy sector including advising on the largest acquisitions to date of electricity generation and distribution companies. She also advised on the development and negotiation of the precedent power purchase contracts and vesting contracts for the Federal Government-backed single buyer of grid electric power. She has advised on a number of on-grid and off-grid power projects including the Genesis deal.

Okechukwu Okoro
Associate
G Elias & Co

About the author

Okechukwu Okoro holds a Bachelor of Law degree from Ebonyi State University. He has been involved in several of the firm’s energy deals. He has been actively involved in the legal review of gas sale documentation and is currently advising three embedded power projects. He was on the team that recently advised two distribution companies on the Central Bank of Nigeria’s Nigerian Electricity Supply Industry Power Intervention Fund. He was part of the team that advised on the Genesis deal.