given that there are generally other material risks present. Furthermore, changes in the off-taker's rating
could affect the project's risk rating. For example, if an operating project were rated A (high), based
primarily on an off-taker's AA (low) rating, and the off-taker were downgraded to A (high), all else equal,
the project debt would likely be notched down to "A". Where a project has a superior market-based
competitive position (e.g., an established hydroelectric power generation project in a market region with
higher-cost power and suitable transmission and market access), off-taker strength could be less
important.
Fixed or variable revenue flows can increase or decrease risk, depending on how well they match the cost
components and how the operating margin is protected. Variable revenues (revenues with a market-based
pricing component) can increase risk if most costs are relatively fixed. Conversely, a fixed-price revenue
contract can increase risk if costs, especially fuel costs, are highly variable.
Fixed capacity payments are charged to the off-taker based on "availability" of power and not on the
actual dispatch of electricity. The capacity payment is independent of demand or off-take volume and is
often sized to ensure that all fixed costs, including debt service obligations, are covered. Some pipelines
have fixed/variable tolls under which contracted shippers pay the fixed component regardless of usage
and pay the variable component according to actual usage.
ing and maintenance costs. Where the variable component of power price is based upon a market index,
the index should mirror fuel costs. Basis risk can arise from differences in the index used to calculate
power prices and the index used to calculate fuel costs, which may pose risks to cash flow. The variable
component of fuel pricing may have certain "fixed" rate factors for example, total fuel costs may be
"fixed" by a ceiling on recovered cost but vary with output volume up to that ceiling. If the fuel compo-
nent in an off-take contract is fixed as to price or quantity, basis risk may be reduced by corresponding
fixed fuel supply contracts. Long-term fuel supply contracts can include certain "minimum takes," which
can generate inventory charges. In those cases, minimum t a k e s should be part o f the operational risk
evaluation.
or very few outages, if set at levels close to the attainable plant and equipment performance range. Failure
to meet such requirements could cause penalty payments flowing from the project to the off-taker, or
a deduction in the revenue payments. Contracts with stringent availability conditions can increase risk.
Accordingly, availability clauses are carefully reviewed and are normally included within the IE's scope
of engagement, with peer group comparisons and known equipment ratings, to ensure that they are
reasonably achievable.
term contracts that impose onerous "above-market" obligations on ProjectCo may be difficult to honour
and may be no better than short-term contracts with few obligations. For example, if a long-term contract
imposes abnormally high availability standards on a project (e.g., very limited downtime allowed for
outages), and performance below the onerous standard becomes a termination event with tight cure
periods, then contract risk is high.