ANNEX 1

RISK
[Source: IED Occasional Paper No. 2 - "Submission and Evaluation of Proposals for Private Power Generation Projects in
Developing Countries" published by the World Book and USAID in April, 1994]

1. Power projects involve risk for all parties - the power purchaser, project developer, and
lenders. Generally, project developers take risks that are foreseeable and manageable
or for which they are adequately rewarded. However, when developers are unable to
provide guarantees adequate to satisfy lenders, the lenders will seek government
guarantees. The ability of the parties to agree on how risks will be shared is often the
key to initiating a successful project. These risks fall into one of three categories:
COMMERCIAL RISKS, POLITICAL OR COUNTRY RISKS, and NONPOLITICAL OR
FORCE MAJEURE RISKS. Commercial risks can arise during the construction phase
and relate to variations in costs, schedule, and ability to meet completion requirements
(completion risks). They can also arise during the operating phase (operation risks) and
relate to the project's ability to generate projected revenues or cash flow and meet the
needs of the market (supply or market risks). Project investors will be exposed to risks
that could impair or jeopardize the project company's ability to repay debt and maintain
dividend payments. Mitigation of those risks, or transfer of them to parties best suited to
bear them, is essential to obtain financing. Country or political risks are those that are
beyond the control of negotiating parties, such as foreign exchange or expropriation
risks. Last are the nonpolitical or force majeure risks of natural disaster.

2. Successful mitigation of the risks of commercial, political, and nonpolitical or force

majeure events is critical to a project's financial feasibility. The agreements, contracts,
and measures associated with a project are designed to maximize risk mitigation, and a
risk matrix should be prepared by potential investors as a tool to analyze the extent of
mitigation and residual risk. That residual risk, together with the financial rewards, will
determine investor interest in participation in the project.

COMMERCIAL RISKS

3. Commercial risks are faced by both the power purchaser and the project developer. For
example, the power purchaser faces the risk that the electricity it is seeking to procure
will not be required. In addition, the power purchaser faces risk from a delay in project
completion. Such a delay may require the power purchaser to obtain power from
another source, possibly at a higher cost. The commercial risks faced by the power
purchaser can be addressed contractually. The commercial risks faced by the project
developer are generally under its control. For example, the failure to meet contractual
obligations is a risk that arises primarily from the performance of the project developer
and its contractors. Evidence of that failure during the construction phase can be
manifested through delays in completion or increases in construction costs. For
example, problems related to improper management practices, such as improper
budgeting and cost overruns, can increase the project costs substantially. During the
operating phase, the failures are manifested through poor technical and financial
performance. These risks are mitigated by arranging well-thought-out project structure
with reliable and experienced construction companies and operations and maintenance
contractors.

4. The key to a sound financial structure is risk management. Every project risk should be
 transferred or mitigated. Risk must be allocated properly among all parties through the
various contracts, insurance policies, bonds, or letters of credit. The important element
is that risks are accepted by the project parties most suited to bear them. Often it is
worthwhile to consider local participation in risk sharing. This can involve equity
participation in a joint-venture project company or partnership or association with local
construction or operating contractors. Such arrangements can also facilitate the
negotiation of contracts, and they can help to secure government commitments and
guarantees.

5 In a private power project, the central contract is the power purchase agreement (PPA).
It is from the obligations set forth in this contract that the project generates revenues.
The sale of power provides the revenues or cash flow to meet debt service, operating
costs, maintenance, and return on investment. For this reason, the creditworthiness of
the power purchaser is a key factor in assessing commercial risk. A project must first be
structured around a purchaser that needs the power, can fulfill payment obligations,
and has demonstrated creditworthiness. If the power purchaser has anything less than
an impeccable history of debt servicing and management, as is frequently the case with
state-owned utilities, a counter-guarantee will be required. This additional layer of risk
mitigation can be provided through a sovereign guarantee of the utility's obligations,
multilateral support, or irrevocable letter of credit facility. In addition, it is most important
from the power purchaser's perspective to be able to pass through all power purchase
costs in the tariffs. The ability to do this will depend on the regulatory arrangements.

6. Once the parties to the PPA have been established, a contract must be structured to
provide an un-interruptible cash flow when the power produces are fulfilling their
obligations. Often developers seek a take-or-pay or firm-capacity sale arrangement to
assure a minimum cash flow. "Take or pay" refers to an agreement to purchase power
or otherwise pay for capacity (i.e., availability regardless of whether energy is actually
produced). This process guarantees the producer that fixed costs such as debt-service
payments, fixed O&M costs, and return on equity will be covered. Variable costs, such
as fuel costs, will be paid only if power is actually purchased. Firm capacity also
guarantees the producer that at least fixed costs will be covered from project revenues.
Regardless of the arrangement adopted, the obligation of the purchaser must be clear
and absolute - to pay under all circumstances, as long as the producer has the
available capacity. However, from the perspective of a purchasing utility, it is more
desirable to have plant that is dispatchable. This enables operation of the entire system
on a merit-order-dispatch basis.

7. Plant downtime can expose the project to interruption in cash flow and therefore can
disrupt debt-service payments. Because the producer is responsible for all risk
associated with the operation of the power plant, adequate risk transfer and mitigation
becomes necessary outside the PPA. The risks include fuel interruption, variations in
the quality of supply, machinery breakdown, poor O&M, and poor plant performance.
Losses incurred because of scheduled maintenance should be covered by a well-
funded sinking fund or reserve for maintenance. This fund or reserve is the
responsibility of the power producer or its O&M contractor.

8. Machinery breakdown can cause extended downtime and substantial repair costs. This
risk can be reduced by selection of experienced contractors and proven equipment, and
it can be further mitigated by comprehensive (and usually expensive) insurance not
only for repair of machinery but also for business interruption or loss of revenue.
9. Fuel risk must be mitigated by a long-term fuel supply agreement (FSA) guaranteeing
quality, quantity, and delivery. Fuel-price changes should be reflected in the energy
component of the purchase price. Strong penalty clauses must be incorporated into the
FSA to ensure that contracted quantities and quality are delivered. The penalties should
be sufficient to cover the project's basic cash flow needs (such as debt service and
ongoing costs) if there is a shutdown caused by interruption of fuel supply. If the private
producer is purchasing from a state-owned fuel supply company - as in Mexico, India,
and Malaysia - the fuel risk is assumed by the state.

10. Poor or inefficient operating and maintenance can cause plant performance to fall
below levels stipulated in the PPA. It also can cause premature wear and tear on plant
components. The project company can mitigate this risk by entering into a long-term
O&M contract with a reputable operator. The guaranteed availability and minimum
operating parameters stipulated in the PPA thus can be passed on to the operator. The
O&M contract should have incentives for encouraging good maintenance and high plant
availability, and it should contain a significant penalty clause covering the operator's
performance obligations. Because there is a limit to such penalties, this risk cannot be
entirely assumed by the O&M contractor. Hence, a certain degree of confidence in the
operator's experience and plant operating history is required, and some of the risk
should be retained by the project company.

11. Technical quality also affects performance. A plant producing at less than expected
capacity, for example, can have severed effects on the producer's ability to meet
obligations. This risk is substantially mitigated by having a strong engineering,
procurement, and construction (EPC) contract, which must have a fixed price and a firm
completion date (delays in commercial operation will cause default). The scope of work
also must be complete. In other words, a strong turnkey contract is required.
Substantial damages for failure to meet guaranteed or specified performance during a
plant commissioning must be incorporated into the contract and be backed by
performance bonds and letters of credit. It is important to note that a strong EPC
contract, or turnkey construction contract, is the responsibility of the project company
and not the power purchaser. However, the purchaser should make sure than an
adequate contract exists and should not rely solely on penalties to minimize delays in
construction. Primary responsibility for construction risks and the availability and
performance of the plant, however, rests with the project company.

12. The degree to which commercial and operational risks can be reduced depends largely
on the quality of the construction contractors. Accordingly, it is essential that
construction contractors possess the technical, managerial, and financial capabilities to
assure completion of the project and its continuing operation. This may be
accomplished by prequalifying construction contractors and carefully reviewing the
contractors' past experiences on similar projects and commitment during construction.
Liquidated damages provisions in the construction and operation contracts are a
second line of defense. Further mitigation is provided by securing completion
guarantees from the consortium responsible for construction. The project company can
minimize risks through the quality of its own management and technical resources and
through its ability to manage the contractors and the project's financial and commercial
agreements.

POLITICAL OR COUNTRY RISKS

13. Political or country risks are inherent to the country in which the project is being
implemented and are of greatest concern to lenders because such risks could
adversely affect the development and operation of the project. A prerequisite of a
successful project, therefore, is commitment by government to reforms that will
encourage private power investment, and developers will specifically assess the degree
of the government's commitment and the risk that the government will lack the political
will to reform. Some of the primary political risks developers will consider include
availability of foreign exchange to service the project debt and to pay dividends to
offshore investors; potential for default on the part of the government or its agencies in
meeting contractual obligations; risks of expropriation; and possibilities of political
turmoil. Some of these risks can be mitigated by a number of different public and
private means. Mitigation of risks by the government - through new laws, regulations, or
institutions, or through guarantees - reflects a trade-off between the costs of mitigation
and the risk premiums that will be paid through either the purchase price or other
means. In the event, to the extent the government plans to take steps to facilitate the
development of private power projects, it should act in a timely manner so that the
expected reductions in risk will be reflected in any bids that are received. Those bids
will then identify the project developers that will assume the remaining risks at the
lowest cost.

14. An example of country risk is the need to convert revenues from local currency.
Currencies of different countries are not perfect substitutes for each other, and without
an ability to convert local revenues to a hard currency, a project may not be
financeable. The lack of availability of hard currency can cause default, because the
project company is typically required to pay its suppliers and lenders in hard currency.
Similarly, devaluation of the host-country's currency exposes a project to reduced
revenues and can have a severe impact on the rate of return and, ultimately, on the
ability to service project debt. These risks can render a project virtually impossible to
finance.

15. Currency risk is usually mitigated through establishment of a currency risk management
program using instruments such as currency swaps and purchase of forward currency.
The project company must be allowed access to hard currency through the central bank
at free-market rates. In addition, government regulations should not prohibit the project
entity from maintaining foreign bank and escrow accounts with hard currency deposits
to protect against devaluation of local currency. These foreign deposits should then be
allowed to pay the project's foreign cost components. In countries where inflation is a
significant factor, project revenues and expenses specified in the project documents
can be denominated in hard currency if allowable by law. This greatly commercial
default arising from an unwillingness to make hard-currency payments is mitigated by
the ability of the project entity to sue the counterparties and seek judgments in hard
currency. If the counterparty is a strong exporter another possible protection is to allow
the project company to attach foreign receivables. Finally, the project company can
take out inconvertibility insurance from the bilateral, multilateral, or private insurance
markets.

16. To attract investors and lenders, governments should expect to reduce political risks by
creating and implementing policies and legislation that provide the necessary
institutional and legal environment. This involves actions such as providing sovereign
guarantees to attract investors, legislation that will provide adequate protection to
investors against political risks, and streamlining of bureaucratic processes associated
 with project implementation.

17 Where, for example, government guarantee of the contractual obligations may be

required, the extent to which these mitigating measures will be required depends on the
country's political and financial conditions. In addition, investors may obtain insurance
against political risks from multilateral and bilateral financial institutions, such as the
World Bank's Extended Co-financing (ECO) guarantee program, the Multilateral
Investment Guarantee Agency's (MIGA) insurance program, and various political risk
insurance programs available from export credit agencies and country agencies to
commercial lenders and investors. ECO provides guarantees largely for commercial
lenders and also offers extended maturities to facilitate financing of private power
investments. MIGA can provide coverage against specified political risks such as
currency convertibility, expropriation, and civil disturbance. Protection of this kind can
extend for up to 20 years, but the coverage is limited to a maximum of US$50 million
per project. The applicability of these programs and the extent of coverage will differ
from project to project depending on man variables. In the long run, the best approach
to reducing country risks is for governments to adopt sound macroeconomic policies.

NONPOLITICAL OR FORCE MAJEURE RISKS

18. Nonpolitical or force majeure risks are caused by natural disasters or accidents such as
fires, flood, storms, or earthquakes. In the section above on commercial risk, mention
was made that investors and lenders should be expected to assume commercial risks
to a limited extent. However, nonpolitical or force majeure risks can generally be
mitigated through commercial insurance. The project company is responsible for
obtaining and paying for the insurance coverage, which should be comprehensive
throughout the construction and operation phases of the project. It should cover not
only any asset loss such as construction risk but also business interruption, including
loss of revenues for delays in plant operations caused by natural disasters.
Furthermore, the insurance should cover at least six months to one year of debt service
and fixed costs (depending on investors and lenders' requirements). The ability to
obtain insurance and account for it in the proposal is crucial to securing project
financing and a good indicator of the developer's standing.

SOVEREIGN GUARANTEES

19. Sovereign or government guarantees are often needed to assure the project company
that certain events within the government's control will or will not occur. If such
assurance is breached, project companies and investors will be compensated or
relieved from the consequences of these events. Most of these events would fall within
one of the political, legal, regulatory, and financial risk categories discussed above.

20. Comprehensive coverage of all project risks through a blanket government guarantee is
not feasible. The actual requirement for government guarantees will depend on the
characteristics of the project and the extent of risks. The ability of the sponsors to
structure the various agreements so that those risks are mitigated will minimize the
need for government guarantees. Normally, government guarantees are a product of
extensive negotiation and compromise.

21. Availability of government guarantees also will depend on the host government's
commitment to the project, which depends on factors such as the size of the power
 development program, the current balance between power supply and demand, and the
ability of private investors to finance projects without government guarantees. The
perception of the host government of what the financial community will require to
support the project also is important. A well-structured project implemented by an
experienced power producer selling to a creditworthy purchaser that has a good track
record of meeting debt-service commitments should not require a government
guarantee where the country's political and economic environment is favorable.
However, this is seldom the case; most lenders require some form of sovereign
guarantee.

22. There are a few rules about government guarantees, but all are linked to the
sophistication and detail of host-country laws and regulations regarding foreign
investment and private power generation, transmission, and distribution. Hence,
government guarantees may take one or more of the following forms:

 Explicit guarantees of power purchaser obligations

 A simple comfort letter indicating the host government's support of the private
power initiative
 Public proclamation of the host government's commitment to encourage foreign
investment in private power
 Adaptation of laws supporting private ownership of power generation facilities
 Establishment of retail tariffs permitting recovery of actual costs and reasonable
return on equity
 Government participation in implementation agreements with private power
project companies
 Direct government guarantees of privately funded debt.

THE SECURITY PACKAGE

1. The security package (SP) is established through the various contractual arrangements
and comprises the key agreements, contracts, and government undertakings. These
seek to reduce lenders' and investors' risk by establishing legally binding obligations,
financial structures, and operational procedures. Before loan funds can be disbursed,
the lenders will wish to be satisfied that all the main agreements meet their
requirements and have been executed. Lenders may want legal opinions, independent
engineering report, and copies of government approvals. In addition, they will want to
confirm that the parties to each agreement are creditworthy and capable of performing
under the terms of their respective contracts. Lenders look to the SP to provide security
for the loan, and in the event of a breach of any of the agreements they may seek the
right to take over the company and install their own managers within the framework of
the agreements. The preparation of the various agreements thus must be coordinated
so that there is no conflict between them. The main agreements that make up the SP,
which are described in more detail here, are as follows:

 Implementation agreement
  Power purchase agreement
 Land conveyance agreement
 Ownership structure and agreements
 Supply agreements
 Construction contract
 Operation and maintenance agreement.

IMPLEMENTATION AGREEMENT

2. The implementation agreement (IA), or state support agreement, as it is sometimes

described, is between the project company and the government agencies that have the
authority to provide the guarantees, assurances, and support necessary for private
power development. The IA may contain a variety of commitments, inducements, and
guarantees that can be given only by the recognized governmental authority. Issues
range from authorization to do business to granting of certain tax benefits or
exemptions from customs duty. If government policy has not been established in areas
that could affect the project company, lenders will require that the government make
appropriate commitments.

3. Often, the IA will contain terms and conditions necessary to ensure the effectiveness of
other key project agreements, such as the power purchase agreement (PPA) or fuel
supply agreement (FSA). In effect, the IA seeks to guarantee the performance of
government entities involved in the project. All of these agreements have interlocking
terms and conditions and need to be supported by the IA, since lenders are particularly
concerned about government actions that might jeopardize their loans or investments.
Moreover, in projects with long payback periods, this concern is compounded in host
countries that lack a record of strong support for political, regulatory, economical, and
financial reforms.

4. If the legal, institutional, political, and regulatory environment is conducive to private

power development, the IA may be relatively simple and straightforward. Moreover, if
the public sector is not a party directly involved in the obligations to private power
developers, an IA would not be required. However, in such a case the risks that would
have been transferred to the public sector must be shared, in some form, among the
private parties, both power producer and purchaser. Even if a portion of the power
generated is purchased by the government, a well-structured project with the private
sector as a purchaser may not require an IA. In essence, the private sector would be
providing any necessary guarantees. This approach was used recently on the Mamonal
project, a private power development in Colombia, where the private sector purchasers
guaranteed the 30 percent portion purchased by the government entity.

POWER PURCHASE AGREEMENT

5. The PPA establishes the power sales obligations between the private producer and the
power purchaser and identifies the type of transaction (e.g. BOO or BOOT). Although
the terms and conditions are often complex, the PPA commits the producer to specified
conditions (e.g., maximum output, total electrical generation in kilowatt hours) over a
defined period and commits the purchaser to compensate the producer by an
established amount and tariff rates whenever the facility is available and capable of
generating power.
6. Because the PPA provides the only revenue stream for repayment of debt and return to
investors, it is important to the lender. Consequently, the terms and conditions of this
agreement will be heavily influenced by the lender's desire to enhance potential
revenue and minimize risk. In this case, the risk to be avoided is the reduction of
termination of the revenue stream, regardless of the cause. the greater the real or
perceived risk to the power producer, the higher the price the purchaser can expect to
pay.

7. In reality, the purchaser can reduce or even terminate the revenue stream under some
conditions. For example, if the purchaser has fulfilled all obligations and power is not
being provided, the purchaser has the right to decrease (through penalties) or suspend
payment until the situation is remedied. However, depending on the insurance carried
by the producer (as mandated by lenders), debt service may be maintained for some
period. The PPA often provides for the producer to compensate the purchaser should
power production cease or fall below a specified level.

8. Producers may want a PPA with an extended duration, typically 15 years, for a BOOT-
type project that provides for a revenue stream beyond the point of debt repayment,
thus enhancing return to investors. For BOO projects, the producer may seek a PPA
that extends to the point where the costs of maintenance and capital improvements
make the project financially unattractive. The latter approach (i.e., BOO) should be
preferred, so that the producer is committed to maintain the plant adequately after the
debt has been repaid.

9. The task of establishing specific performance guarantees, future adjustments to the

tariff, and penalties or bonuses for exceeding or failing to meet performance guarantees
are the heart of the PPA and usually require lengthy discussions. These include not
only the purchaser, producer, and lending institutions but also the construction
contractor, equipment suppliers, and O&M organizations. Each participant that can
affect the facility's performance must provide an acceptable undertaking with respect to
its respective obligations. For example, the construction contractor may offer a turnkey
project. the price and construction period effort will be fixed and the contractor's
performance guarantees. Each of these items affects the cost of production and the
purchase price. Even though the producer may have obtained certain preliminary
commitments and guarantees from the contractor, modifications may be required based
on negotiations between the producer and the purchaser. The contractor's offer may
have to be modified to include certain contingencies. Each participant has a "bottom
line" that establishes the maximum risk-and-reward scenario it is willing to accept.

LAND CONVEYANCE AGREEMENT

10. The land conveyance agreement (LCA) transfers land ownership to the project
company, which purchases the land or executes a long-term lease. The LCA covers the
land required for the power plant and for the adjacent switchyard, which interconnects it
with the purchaser's transmission lines.

11. Land use must be exclusive to project purposes and must be assignable to the lenders
 so that they can take over the facility in case of default by the power producer. The LCA
term commences no later than the start of construction, and the duration should be at
least commensurate with the term of the PPA. Under certain circumstances it is
desirable and usually more financeable to have a LCA term greater than the term of the
PPA to provide for construction delays or force majeure events that typically extend the
PPA on a day-to-day basis. Without this extension, the terms of the LCA and PPA may
not match, and that could mean that the term of the PPA could be terminated
prematurely.

12. The LCA (or PPA) generally divides the responsibilities for the installation of water,
sewer, gas, electricity services, fuel transmission, and fuel storage. Existing or newly
required covenants, easements, or other restrictions are identified, regulations, and
other requirements (or to obtain necessary variances). In addition, the parameters and
procedures for access to the site by personnel other than the project owner and
operator are agreed upon. Any sharing arrangements for existing or new site facilities
(such as fuel handling, water treatment, access operation, and related financial
arrangements) are also agreed upon.

13. The LCA also identifies the party responsible for payment of government charges or
taxes levied on the site, equipment, structures, or other personal property.
Responsibilities for existing and future conditions at the site (suitability of soil
conditions, environmental contamination, etc.) are agreed upon. In addition, governing
laws, regulations, and methods of dispute resolution are defined. Finally, arrangements
for disposition, at the termination of the LCA, of the land, power generation facilities,
and other related constructions are outlined.

OWNERSHIP STRUCTURE AND AGREEMENTS

14. Ownership agreements describe the structure and obligations among the owners
comprising an entity, often referred to as the "project company". This company is
separate from its sponsor so that liability and risk to the project are limited. Project
ownership can be structured in a number of ways, depending on host- and home-
country tax laws, customs duties, and liability environments.

15. The project company incorporates the liabilities of associated project risks. When a
project is financed against the balance sheet of its sponsor ("recourse finance" or
"corporate finance"), all the project risks run directly to the sponsor, which is therefore
the final recourse in the event of default by lenders and other investors.

16. In a typical limited or nonrecourse financing structure, the entity formed by the
ownership agreement is the central point to which all project documents connect and is
where the ultimate recourse to the lenders and other parties lies. Consequently, the
entity is limited in all matters relating to its business and is referred to as "single
purpose". The project company is obligated to cause all other parties to perform under
the project agreements, limit other parties' indebtedness and investments, and furnish
documentation required by the company or lenders. Similarly, the operational limitations
imposed on the company; on its financial, tax, and liability structure; and on its ability to
continue its obligations under the project documents are designed to protect assets
from the actions of any of the project parties. For example, the project company cannot
create liens on collateralized assets or sell project assets. It is limited in its ability to
make certain investments or amend the project documents.
17. Equity investment in a project can be protected (although in all cases subordinate to
creditors) using appropriate all-risk, machinery breakdown, general liability, and political
insurance in the market. All-risk and machinery breakdown coverage should be slightly
more than the value of the asset to account for legal and other indirect expenses
related to the adjustment of a claim. General liability coverage depends on the size of
the project but is generally between $10 million and $20 million. Political risk insurance
usually covers less than the full value of assets to provide a parallel incentive for project
parties to prevent insurable events and commit to their resolution.

18. The unique advantages of a project finance structure are not without substantial risk in
allocation and mitigation, all of which are embodied in the structure and obligations of
the project company to protect the assets and the resulting cash flow.

FUEL SUPPLY AGREEMENT

19. Firm and reliable long-term fuel supply and transportation agreements will be required
by investors and lenders before financing is provided and construction commences.
They also will require evidence (an independent engineering evaluation) of the
existence and dedication of fuel reserves sufficient to meet the project's needs for the
duration of the contract. If the supplier or transporter are government entities, additional
sovereign guarantees of their obligations may be required.

CONSTRUCTION CONTRACT

20. The project company will enter into a contract with a reputable contractor for design,
equipment procurement, and construction in accordance with the power supply
requirements of the PPA. This is usually written as a turnkey contract for complete
supply, erection, and commissioning. The turnkey contract provides a singly source for
all responsibilities and guarantees associated with plant performance, project schedule,
plant warranty, and project completion. Depending on the financing arrangements,
schedule, and technical specifications, larger projects may require a construction
consortium or award of a number of separate contracts with contractors and equipment
suppliers.

21. The terms, conditions, and obligations of the construction contract support those
contained in the PPA unless the project company has other means to limit risk.
Consequently, although discussions between the project company and the construction
contractor establish cost, schedule, performance, and other standards and criteria, the
construction contract cannot be finalized until after the PPA has been negotiated. The
construction contractor will try to limit risk by obtaining favorable terms and passing
along as much risk as possible to material and equipment suppliers and subcontractors.
Generally, for a project to be financeable, the construction contractor will need a fixed-
price contract with a specified completion date and a guarantee of performance. Failure
of the contractor to meet obligations will result in substantial financial penalties.

OPERATIONS AND MAINTENANCE AGREEMENT

22. The project company may choose to enter into an O&M agreement with a reputable
operations and maintenance contractor to run and maintain the facility. This
arrangement has the advantage of a single source of responsibility, professional
personnel, and experience with required spare parts and consumables. Because of the
importance of operations management and maintenance practices to the long-term
 performance of the facility, the power purchaser also has a keen interest in the ability of
the O&M contractor. That interest may be protected by reserving in the PPA a right to
approve the contractor.

23. Whether the O&M contractor is affiliated with the developer or project company, the
agreement should

 Reflect the obligations of the developer under the IA and PPA.

 Specify price component tied to the tariff under the PPA and provide an
explanation and adequate information for future adjustments.
 Be specific in regard to spare parts and consumables, responsibilities, and
requirements.
 Establish commitments necessary to commission and operate the plant.
 Address future improvements and additions.
 Provide for operations during emergencies.
 Specify that operations and maintenance will be consistent with the standards
set forth in the PPA. In the event of failure to do so, the O&M contractor will be
required to pay damages sufficient to cover a percentage of the liquidated
damages assessed under the PPA.
 Establish standards for plant availability, heat rate, and performance efficiency.
 Establish requirements for maintenance, outage management, and necessary
equipment overhaul.
 Clarify whether the O&M contractor's performance should be guaranteed by a
performance bond or whether a corporate guarantee is sufficient.
 Reflect lines of communications with the power purchaser for plant dispatch
and operation.