Force majeure in the power sector
Castalia’s John Sachs shares his thoughts on recent developments in the sector.
Like many in the industry, we have spent the last few weeks trying to understand how the COVID-19 crisis will impact electric utilities and IPPs in emerging markets. Our early fears, raised in our late April blog “Assessing the impact of force majeure on emerging markets PPPs”, are starting to come true. The COVID-19 pandemic is putting many state-owned electric utilities in emerging markets under increasing financial stress and jeopardizing not only their IPP programs but also risking wider contagion in the economies. We are seeing this across the globe, IPPs receiving notices of payments being deferred, or threats of declaring force majeure, often with no details of for how long or if or when the IPPs will ever be made whole. The latest example of this financial stress, and the threat of declaring force majeure, was reported this week in Kenya.
This financial stress—resulting from a mix of reductions in demand, consumer tariff forgiveness and deferrals granted by the Governments for social reasons, and greater difficulty in accessing finance—is likely to last beyond the immediate period of emergency pandemic response. An additional source of stress may also be originating from the independent power producers (IPPs), who in some cases may be unable to fully satisfy their Operations and Maintenance responsibilities, import parts, or be faced with foreign exchange constraints due to the pandemic.
What we recommended in April remains even more true today, “Governments and authorities managing infrastructure concessions should get ahead of this through a rapid assessment of their PPP portfolios to identify and measure risk factors, including exposure under their force majeure clauses, develop action-oriented steps to manage the risks and, when appropriate, commence early engagement with private sector operators.” This early engagement to amicably work-out a solution with investors and their lenders could help avoid damage to their investment climates, cost of capital, and resulting cost of service from future PPP projects.
