An engineering, procurement, and construction (EPC) contractor wanted analysis, in anticipation of arbitration, on the nature of damages that could be alleged in relation to the breach of a power purchase agreement (PPA). In addition, the EPC contractor also wanted to understand how these damages were calculated and what were the factors that could influence the total level of penalties imposed on a plant operator that failed to meet its contractual obligations. The client also wanted to understand how much control a plant operator enjoyed on the level of operational obligations defined in a PPA. Finally, the client wanted to know whether the plant operator could have adopted a different auction strategy to reduce its contractual obligations and therefore minimize the financial penalties stemming from a potential breach of contract.
DHInfrastructure reviewed the PPA, the market rules, and other contractual and regulatory clauses related to power plant reliability. We also reviewed local legislation around energy and capacity auctions, in addition to reviewing the strategies adopted by other bidders during similar auctions in the country. We used historical operational data from the plant, combined with financial data from the regulator, to show that the level of penalties imposed on the plant were determined primarily by external factors (such as the amount of rainfall and level of hydropower plant reservoirs), rather than by factors under the operator's control. As a final step, we then advised on the nature of damages that could be alleged in case an operator falls short of obligations to deliver energy, capacity, and ancillary services, while also identifying how the strategy adopted by the power plant operator at the time had influenced the plant's level of operational commitments (and therefore the level of damages assessed due to its failure to meet contractual obligations).