Power and the power sector is a core focus of the One Belt One Road initiative. In March 2015 China’s National Development and Reform Commission (NDRC), Ministry of Foreign Affairs and Ministry of Commerce jointly issued the Visions and Actions on Jointly Building Silk Road Economic Belt and 21st Centruy Maritime Silk Road (Visions and Actions Plan) for the One Belt One Road initiative. One of the priorities marked in the Visions and Actions Plan is to: "promote cooperation in the connectivity of energy infrastructure … build cross-border power supply networks and power-transmission routes, and cooperate in regional power grid upgrading and transformation."
However, successfully implementing power projects along the One Belt One Road will not be without risks and challenges. Based on our experiences of international power investments, we have set out below some details on key issues companies may encounter in international power projects.
Ensuring successful implementation of One Belt One Road projects
Power companies now have the opportunity to embrace the opportunities available by the One Belt One Road, with the Chinese Government actively advancing the implementation of the One Belt One Road policy, so as to lay a foundation for PRC companies' investment in power projects along route. However, successfully implementing projects along the One Belt One Road will not be without risks and challenges.
Overcoming these risks will require thorough due diligence exercises and robust partnership and joint venture arrangements. More importantly, success will depend on enterprises finding the right partners and having the right support networks providing a thorough understanding of local conditions, regulators, market players and, generally “ways of doing business” in the foreign host jurisdictions.
This will be essential to be able to adequately identify, quantify and overcome risks and opportunities; to achieve this, an on the ground presence and knowledge of suitable partners and relevant contacts is of the utmost importance.
Map showing the One Belt One Road route (both the 21st Century Maritime Silk Road and the New Silk Road Economic Belt).
Key issues encountered in international power projects
Our energy team has advised governments, sponsors, lenders and consortia on all facets of the energy sector. We have advised in relation to project structuring, land rights, environment issues, permitting, construction, supply arrangements, electric transmission and distribution, fuel transportation, fuel supply/storage, water supply and transportation, regulatory and financing.
Based on our experiences of international power investments, we have set out below some details on key issues companies may encounter in international power projects.
Project structuring – establishing the appropriate corporate structures and joint venture arrangements is always critical for power projects. This is especially important when entering into partnership with local partners, as power projects are often structured for long term investments (e.g. 25 years). Therefore ensuring a robust project structure is essential to ensuring that parties’ rights are adequately protected for many years to come.
Power purchase agreements – power purchase agreements are key to any power project, underlying the viability of an entire project. We have advised sponsors and electricity boards on power purchase agreements, energy conversion agreements and tolling agreements across China, Asia, Europe, US, Caribbean, and Australia. These agreements are often based on local law precedents in the respective jurisdictions and Government purchasers may offer limited opportunity to negotiate these terms – therefore a highly focused approach to the negotiations is often required to ensure that key interests are protected.
Electric transmission and distribution arrangements – effectively delivering generation capacity resolves only half the power challenge: ensuring connection with sufficient electricity transmission and distribution infrastructure to get power to customers is of equal importance. In some parts of the world, transmission infrastructure is old and insufficiently maintained and not able to deal with the growth of generation and significant energy losses continue to occur between sources of supply and points of distribution. Generators need to ensure that the risks in this regard are appropriately understood, allocated and documented in the electricity transmission and distribution agreements.
Fuel supply – advising sponsors in relation to fuel supply, transportation and storage arrangements involving different fuels (namely, coal, gas and oil and nuclear) requires a nuanced approach. For each different fuel type, consideration must be given to its unique characteristics, both now and into the future. Volatility of price for certain fuel types may lead a closer consideration of appropriate pricing benchmarks and/or including price re-opening clauses in the fuel supply agreements. Whilst for other fuel types, consideration of the changing global regulatory context (including considering appropriate risk allocation for future matters such as the price of carbon emissions) is important. Power projects along the One Belt One Road vary from hydro (such as in Laos and Nepal), nuclear (in countries such as Pakistan, the UK and France), wind (such as in India and Kenya), gas (such as in Africa) or coal (such as in Indonesia and Vietnam).
EPC agreements – A technical understanding of the context of an EPC is crucial. Our team have detailed knowledge of the contracting and procurement industry in power projects globally, successfully negotiating EPCs (including split EPCs), LTSAs and O&M arrangements on numerous power projects. Our construction team has numerous lawyers with engineering experience and qualifications (civil engineering, electrical and mechanical). Additionally, it is crucial that the EPC contract is consistent with the entire project arrangements – for example, the consequences of a delay under the EPC contract should be considered in respect of the Power Purchase Agreement.
Regulatory – our team has significant regulatory experience dealing with energy regulatory commissions and public utilities commissions while developing and operating independent power projects in the US, the Caribbean, Asia, Europe and Australia including the implementation of electricity regulation and licensing activities. We work closely with local offices around the world, to ensure that our China and international teams have a thorough understanding of the local power regulations in each respective market.
Financing – as part of the One Belt One Road initiative, the Chinese Government recently launched key funding institutions such as the $100bn Asian Infrastructure Investment Bank (AIIB), the $100 billion BRICS New Development Bank and the $40 billion Silk Road Infrastructure Fund Silk Road Fund. These institutions offer companies unique opportunities to project finance their investments. Our team have advised sponsors and syndicates of international commercial banks in establishing financing and security arrangements related to power projects. Crucially the financing arrangements must work closely with the broader project structure to ensure that funding priorities and cash flows operate to the satisfaction of all parties.
Renewables – A thorough understanding of the local and international regulatory regime (including relevant rebates and concessions) is crucial for the successful implementation of renewable energy projects. We have advised on a range of renewable energy projects such as acquisitions and financings of wind farm, solar and waste to energy projects and accumulated a broad experience of such projects.
Avoiding and resolving disputes – Our preference is to always help our clients avoid disputes in the first place. Our team focuses on assisting clients with risk management and dispute resolution strategies prior to starting a business relationship and taking decisive action should a dispute or investigation arise. Nevertheless, our dispute resolution team have acted on some of the largest construction projects and complex disputes related to the power sector in the Middle East, across Asia, Africa and Europe and can help clients learn from these experiences.
Country specific due diligence investigations – our team has undertaken due diligences on power assets across Asia, Middle East, Africa, Australia and elsewhere. Working closely with our local specialists on the ground in each jurisdiction we advise on country-specific matters and risks to ensure that clients are fully aware of all the issues relevant to their project.
Understanding and responding to Governments requests for procurement programmes – we have advised a number of governments in the Middle East on their procurement programs in the energy sector and the subsequent concession arrangements (in IWPPs and IPPs); we have also advised numerous Chinese and international power companies responding to these programmes. A thorough and detailed understanding of procurement processes and market expectations and standards is essential to ensure that our clients can make competitive bids.
Our on the ground team, coupled with the experience of our industry leading lawyers in China, South East Asia, Middle East, Africa, Central Asia, Russia and Europe, is recognised amongst the leading global practitioners for power projects and transactions. They combine their detailed legal knowledge of the sector with a commercial and technical awareness of the industry and previous working experience outside the legal services industry, which is unrivalled by our competitors.
For further information, please contact the authors.