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What if the wind stops blowing?

More and more we realize that good questions matter more than answers.

 

 (Subsecretaría de Energías Renovables - República Argentina) 

 

A few days ago, I finished my first semester teaching at Georgetown Law Center. Since the course has concluded (and papers are already graded), I can share some insights here. I had a great group of 18 students, from more than 10 different countries, pursuing either their J.D. or LL.M. degrees. As you can imagine, the course was around energy and extractive industries around the world. We discussed almost every relevant topic in the area: transparency and anticorruption, project finance, environment and social issues, FDI, rule of law, etc.

 

I can affirm (after more than 10 years teaching in several countries in the Americas) that the professor learns more than the students in every class, and I feel privileged of having this activity as an important part of my professional career.

 

Now, to the point. We were talking about risks in the development of energy generation projects. As you can imagine, the usual suspects were criticized: expropriation, natural catastrophe, economic crisis…Suddenly, one student raised her hand and asked: What if the wind doesn’t blow anymore?

 

After a few minutes of discussion, we realized that this question might have two ramifications: a) What is the consequence of non-provision of electricity under a PPA (power purchase agreement) in terms of obligations between the seller and buyer?, and b) What will happen in practical terms with the buyer (government, city, etc.) when it actually stops receiving power from the seller?

 

To answer these questions, I decided to check several PPA contracts and I decided to work with this, coming from the Republic of Argentina. Argentina, a very important country of Latin America, has lately made a push in order to return to normal economic development under President Mauricio Macri, after being stuck in a close-minded political regime for more than 10 years. The President, a well-seasoned businessman and skillful politician, is in the process of implement economic and legal reforms to secure Argentina long-term growth. Here you can see an analysis of his general energy policy and here a news report about the 2016 PPAs on renewable energy projects. (I have to admit that I like Mr. Macri policies and plans, and knowing the region as I know it, I really hope he succeeds). 

(President Macri, left).

 

About the first question, regarding obligations between buyer and seller, there are several clauses where such a phenomenon as wind stop blowing might be considered. First of all, it might be a force majeure issue (because there is no way to prevent it or control its effects), and the result could be that both parties would be excused of complying their obligations, following clause 15 and 15.1. That might look simple if the event is temporary, but if weeks and months pass and there is no further generation? The company would be left with stranded assets (in this case similar to an oil pipeline or refinery in an energy-transition economy), debts that cannot be honored; and in the other side, the buyer will be left without enough power to serve its final customers, having to rely on very expensive and/or very pollutant generation facilities or options (imports). As you can imagine, the seller has a strict obligation of providing the committed energy (9.2) and even fines for the lack of compliance, but that will be of little use in practical terms if wind stops blowing.

 

There is, evidently, a guarantee of performance in the contract (clause 17). However, this provision has very little meaning in a scenario as the one explained in the previous paragraph. There is also the stabilization clause (16), which is focused on economic terms, and is not designed to think about a possible substantial reduction of energy generation. That might be an option if wind decreases its speed.

 

The second question is, in a way, more complex than the first. This uncertainty means that cities or countries need to have back-up energy sources, in case wind stops blowing? That is simply not viable from an economic perspective, neither from a technical standpoint. Even the most powerful energy storage system would not be useful to overcome a long-term lack of generation, and having double generation capacity “just in case” is not justifiable.

 

I have no answer for these challenges. However, as the planet is changing and its natural phenomena are not as they used to be (maritime flows, water streams, etc.), it might not be too bizarre to start thinking about these possibilities.

Thanks again to my students of Spring 2018 Georgetown Law Center, for collaborating in the creation of such a nice learning environment. Hope that the experience was as enriching for you as it was for me. My best wishes for your professional/academic endeavors.

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