Where there is a significant risk that the Project Company is not able to obtain the necessary licences, the Procuring Authority should have plans in place on how to handle resulting delays.
It is common for energy generation plants in Brazil to encounter difficulties in obtaining the necessary permits or licences. If this risk has been transferred to the Project Company, the Procuring Authority needs to have a plan in place for managing the impacts of the delay, in particular, when it is due to factors outside the Project Company's control.
Where approval is needed from an external body, such as an environmental regulator, it is advantageous to engage with that body as early as possible, preferably before financial close.
Environmental licensing is a common challenge for project companies in Brazilian energy PPP projects. On the projects awarded at a similar time to this hydropower PPP contract award, five out of ten awarded projects failed to start construction and were subsequently terminated. To address this, the Procuring Authority has updated its procedures to require that the first of three stages of the environmental approval process is completed before the project is awarded. The new procedure is summarised below:
• The first stage is a design competition. Designers submit concept designs to the Procuring Authority, along with supporting environmental and social impact assessments;
• These concept designs are passed to the environmental regulator. The regulator's response states whether the project is feasible or not from an environmental point of view;
• If the regulator agrees that the concept design is feasible, the design receives the Procuring Authority's approval and the approved design goes ahead to procurement;
• If the regulator states that the concept design is not feasible, the designer is given an opportunity to submit re-designs addressing the issues of non-compliance and the procedure starts again;
• The second stage is the auctioning of the approved design. Bidders assess the proposed project design and submit their bids to obtain the right to build and operate the project and sell the generated energy. One of the bidders might include the original designer of the approved design but not necessarily. In the case the original designer is not part of the winning bid, the winning bidder is then required to reimburse the costs of the design development.
• Once the procurement phase is complete, the Project Company is still responsible for going through the remaining two stages of the environmental licensing process and the Project Company covers the costs associated with such environmental licensing.
A clear understanding of the Project Company's financial performance is important for effective management of the operations phase.
It was highlighted that the Procuring Authority did not have a clear view on the Project Company's financial performance. It was not clearly understood what the reasons were for the changes of ownership other than it was due to legal restructuring. Not having a clear view of the financial health and performance of the Project Company can put the Procuring Authority at risk of sudden insolvency of the Project Company.
Currently, the Procuring Authority is planning to include regular financial monitoring of the Project Company's performance in its remit. This will give the Procuring Authority the ability to assess the Project Company's financial difficulties and place itself in a position where it can better manage them.
Policies to reduce demand risk on Project Companies can provide a more sustainable investment environment for PPPs and increased private sector participation.
On early Brazilian PPP generation contracts, the Project Company was responsible for securing contracts to supply end users with electricity. This model did not provide high revenue certainty for the private sector as the market for large end-user contracts is not easy to forecast.
To remedy this issue and reduce the risk profile on Project Companies in energy PPP contracts, the Procuring Authority introduced a policy for future projects that provides a guarantee of a certain percentage of the generated energy to be bought by regulated utility providers. On new hydropower PPP projects, the Project Company signs two contracts; the first is the PPP contract, and the second is a PPA contract, which has a starting date approximately five years after the start date of the PPP contract. If the Project Company completes construction before the PPA start date, it can sell its electricity on the free market. Thus, in addition to allowing approximately five years to complete construction before the start of the PPA, this policy improved the revenue certainty for Project Companies, as regulated utility providers have more certain future demand.
Public perception of environmentally sensitive projects, such as hydropower plants in Brazil, can impact the long-term success of the sector.
The Procuring Authority noted that hydropower plants do not currently have a good reputation with regard to environmental impact, and that there are many stakeholders who wish to be involved in the discussions on future expansion of the sector. The Procuring Authority has responded to these concerns by improving its plans for the future development of hydropower plants, for example, by assessing what combination of plants would be a 'best fit' for a particular river and by involving environmental regulators at preliminary studies and planning for each individual project. How a central government addresses the energy needs at its national level is beyond the scope of this reference tool, however this example emphasises how stakeholder views can impact the direction and policy development of a sector.
In a liberalised market, policies can be put in place to incentivise continuous innovation in energy efficiency from the private sector.
The wire-charge mechanism generated substantial funds for investment in energy efficiency and research and development, which may not have occurred in a liberalised market without regulatory enforcement. The mechanism is therefore a tool that regulators can use to drive the private sector's involvement in improvement in the energy market.
Having a Procuring Authority contract management team that sits across several contracts can increase efficiencies.
The Procuring Authority generation team is a large team within the organisation, responsible for 200 large (greater than 30 MW) and 1,000 small hydro power projects. There are 40 people dedicated to administering the contracts and managing events such as changes and renegotiations, as well as 50 staff responsible for routine monitoring and operations. The Procuring Authority's team manages all contracts, and no dedicated teams are established for each individual project.