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Gridworks Perspectives: ‘Allocating Risks in Independent Transmission Projects’

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By Chris Flavin and Ryan Ketchum.  Chris is Head of Business Development at Gridworks. Ryan is a partner at Hunton Andrews Kurth LLP.

 

This is the third article in a series on private investment in transmission. The purpose of our series is to explore ways to boost investment in the sector in order to reduce costs, facilitate the transition to energy systems that are less carbon intensive, increase system stability, and reduce the level of generation reserves that are required to maintain system stability.

 

Our first article discussed the need for increased levels of investment in electricity transmission systems to reduce costs, facilitate the transition to energy systems that are less carbon intensive, increase system stability, and reduce the level of generation reserves that are required to maintain system stability.  It also briefly introduced four business models that can be used to unlock new sources of capital by facilitating private investment in transmission infrastructure across most of Africa (and in emerging markets more generally).  Those four business models are:

 

  • whole of network concessions,
  • independent transmission projects (“ITPs”), which are also known as independent power transmission projects,
  • privatizations (a sale of shares by a government in a state owned utility or transmission company), and
  • merchant lines.

 

The second article in our series examined ITPs, including the circumstances in which an ITP may be attractive to both host countries and investors and some suggestions for structuring ITPs.  This article will examine risk allocation in the context of ITPs.

 

Allocating risks

 

One of the benefits of ITPs is that they can be structured to take advantage of project finance techniques.  Some of the advantages of properly structured project financed transactions are (i) the ability for a project to be financed with higher debt to equity ratios, and (ii) the ability for the project company to achieve longer loan tenors.  These advantages have the effect of lowering the cost of the services delivered by the project (in this case transmission capacity).

 

One of the keys to raising debt for project financed transactions is an appropriate allocation of risks.  Risks should be allocated to the party that is best able to manage each risk, and if no party is best able to manage a particular risk, it should be allocated to the party that has the most to gain from the project.  As a project is structured, all of the parties involved in the project should seek to identify and assess the risks that may arise.  In practice this means that most of the parties involved in a project will engage a wide range of advisors – including technical, financial, and legal advisors – to identify and assess those risks.

 

The risk matrix you can download below illustrates how a range of risks might be allocated in a typical ITP transaction where principles followed in other markets are applied to sub-Saharan Africa.  In practice there will be a range of approaches to each of these issues.

RISK MATRIX DOWNLOAD

 

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