LNG to Power is an effective, flexible solution to the expanding demand for power, particularly in developing economies, with interesting challenges as it combines traditional elements of the LNG value chain with the downstream power market. Floating regas is growing as an answer to address LNG to power issues.
Why floating regas?
Reasons to pick a floating structure are several: eliminating land-based storage and regas facilities reduce project development time and capital expenditure; less onerous regulatory burdens; provides more optionality, permitting redeployment of assets; and floating regas has been successfully implemented worldwide. Moreover, technical and operating risks associated with floating regas have been significantly reduced.
Recent industry developments have improved floating regas’s viability.
A growth in size and capacity of floating storage and regasification units (FSRUs), and floating storage units (FSUs), addresses “capacity” concern.
Moreover, the floating option is flexible – using large FSRUs in conjunction with an additional FSU (for storage) and an increasing pool of vessel owners in the market has boosted competition.
Models
Choice is determined by the characteristics of the project and factors that could include risk allocation between stakeholders, economic/market factors, laws and regulations, political factors and government preferences.
Basic project models are (i) Integrated – common ownership/control of all assets across value chain; (ii) Merchant – different stakeholders have different interests in different assets; and (iii) tolling – project owns/controls relevant assets but only provides a service.
Structure
Elements that will determine the project structure can include risk allocation, economic, political and market factors, relevant laws and the preferences of government and other stakeholders.
As the Power Purchase Agreement (PPA) and power market are drivers for an LNG to power project, local power market factors will have a significant impact.
These could be local laws and regulations, the role of government/government entities in the power market and local energy infrastructure and third party access rules.
Alignment/Incentives
The LNG to power value chain has interdependent activities relying on the same project revenue derived from the relevant gas or power offtake agreement. Each activity has its own commercial agreements and arrangements connecting the stakeholders. The fundamental economics of the project must align for it to be viable.
Contractual devices (i.e., take-or-pay, deliver-or-pay, liquidated damages for delay or failure to perform) and termination payments can promote alignment. These are unlikely to keep each counterparty up and down the value chain whole in terms of downside risks, so should be proportionate to the contribution of each party, and therefore coverable.
Important terms to align are start-up or delivery windows, testing and commissioning, liquidated damages for delay and failure to perform, delivery schedules and volumes, force majeure and events of default and termination.
There is no standard formula for allocation of risks. The rule is that risks should be allocated to those best able to manage or mitigate them, within an appropriate contractual framework. A failure at any link could cause a failure across the entire chain.
Baker Botts Global Projects Group partner John White, based in Moscow, focuses on development and financing of large-scale energy and infrastructure projects.
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