Developing and Financing Island Nation IPPs

Trinity’s London team is currently advising on three renewable power programmes in three developing island nations – the Seychelles, the Maldives and Papua New Guinea. A key component of combatting the effects of climate change, is to move island nations away from a dependency on expensive and polluting diesel-generated power, towards power generated from renewable sources. In most cases where Trinity is currently mandated, the focus is on procuring solar power – each of the relevant host states being blessed with an infinitely brighter climate than we enjoy here in London.

Geography plays a key role in shaping some of the challenges to international financing and development of these projects, and in this article we will take a brief look at some of these challenges and how they can be structurally or contractually addressed.

A hallmark of a significant number of island nation projects, is that they are small in scale compared to a typical international power project (an “IPP”), but are no less, and in most cases more, complex than larger IPPs. In most cases, island nation projects have more in common with mini-grid projects than larger IPPs. Island nations are not always simply one large geographical land mass, but a collection of numerous small islands, spread across large areas of ocean. As a consequence, an island nation project is unlikely to comprise one single power generating facility, as a single power generating facility on any one island is unlikely to be big enough to attract either developers or financing. Instead, an island nation project is more likely to comprise a large number of small power generation facilities spread across different islands, whereby the project capacity is ‘scaled-up’, by grouping multiple power generation facilities across multiple islands, into one project.

Multiple facilities within one project creates contractual challenges, and it is necessary to carefully consider the ‘baseline operational project capacity’ – i.e., the level below which it would be unfeasible to continue the project following the occurrence of an event of default or force majeure event which affects one or more of the power generation facilities. This baseline needs to: (i) take into account, the effects of the relevant event of default or force majeure event on the project as a whole; and (ii) be reflected in the power purchase agreement in a way which ensures that the offtaker or host government cannot trigger an early termination of the entire project, where there is an event of default or force majeure event impacting only one power generation facility (below a certain minimum generating capacity), or facilities which cumulatively represent only a small portion of the overall project capacity. This requires host governments and their legal teams to look carefully at the scope of events of default and termination rights in the underlying power purchase agreement or other project documents, as well as the mechanics for the payment of termination compensation and the transfer of a power generation facility to the offtaker or host government following an early termination (particularly where it may be necessary to remove just one non-performing power generation facility from a project due to an event of default or force majeure event). Agreeing the conditions for achievement of the commercial operation date (“COD”) under the power purchase agreement will also require a bit more thought than with a ‘typical IPP’ with a single power generating facility – for example, should there be a ‘staggered’ COD as power generation facilities are commissioned, or a single COD? And where there is a single COD, should this require all power generating facilities to be commissioned, or just a reasonable percentage of the overall power generation facilities?

In our experience, island nation projects are often technically more complex than renewable IPPs in other nations. The Seychelles solar procurement programme was one of the first procurement programmes in Africa to utilise floating solar technology, a technology which, at that time, many lenders and developers had little experience financing or developing. Another good example is the proposed Maldives solar procurement programme, which will utilise a mix of technologies across 20 islands or ‘atolls’ – floating solar, ground mounted solar and rooftop solar. It is not unusual to see this type of technological mix, which means that developers need to have requisite experience with multiple technologies. Floating solar in particular, may be difficult to develop, depending on the geography of the islands, and it can be challenging to find multiple marine sites that are appropriate. In 2023, it is far more common to see developers with floating solar and rooftop solar experience. However, it is critical that eligibility requirements set by host governments and regulators are not sized in a way which reduces competition by requiring bidders to have participated in projects which have capacity levels that are too high (being cognisant that with the exception of a few notable deals, particularly in South-East Asian nations, most renewable energy developers will not have developed floating or rooftop solar projects with capacity levels similar to those of a typical grid-connected IPP).

Land issues can be a significant roadblock to project development, and this is particularly relevant in Pacific Island nations, such as Papua New Guinea. Where land in Papua New Guinea is not already subject to a ‘State Lease’, such that it can be handed-over by government for use by a developer, the process of converting that land to a State Lease requires multiple stakeholder inputs, is subject to likely challenges by local islanders, and realistically could take many years to achieve. In states like the Maldives, land will be likely be procured and leased by the local council authorities on each island, although the process for land procurement by the state is significantly less complex than in other island nations, including Papua New Guinea. A challenge in the Maldives is availability of land, and in many cases where the project sites are not marine sites for floating solar, it may be that elevated ground-mounted solar PV facilities are more appropriate, to enable islanders to make use of the land beneath the structures.

Significant government support is a hallmark of island nation projects. As with any other IPP, in order to achieve a bankable risk allocation, government payment support and assistance with the procurement of licences and approvals, allocation of project sites and granting of foreign exchange guarantees, amongst other things, will need to be provided by host governments to mitigate all those risks that are typical of any emerging nation. Customs assurances are also important, given that in most cases, all project equipment will need to be procured offshore, and attention should be paid to any legal requirements for the local procurement of services or goods, which may be difficult to achieve.

Another important aspect when negotiating an island nation power purchase agreement, is to ensure that decommissioning obligations are very clearly defined in that agreement – the cost of dismantling and disposing of redundant power generating facilities upon an early termination or expiry of the project term will likely be extremely high – given the need to dismantle multiple facilities across multiple different islands and the likelihood that the island nation may not have capacity to dispose of any redundant or waste facilities onshore.

Developers and investors are often reluctant to invest in smaller, more complex transactions, but with the global media focused on investment in climate change mitigation, solar PV projects such as those being rolled out in the Seychelles and the Maldives, and those being developed in Papua New Guinea, have provided an opportunity for development finance institutions (“DFIs”) and climate change funds to help support island nations by providing grant funding to assist developers in reducing their capex costs, and to enable governments to provide payment support acceptable to international investors. In addition to grant funding for project developers, significant technical assistance is being provided by DFIs to create updated and adequate legal and regulatory frameworks, to enable the implementation of island nation power procurement programs, in addition to investment in upgrading inadequate or non-existent transmission and distribution systems. As a number of barriers to the successful implementation of island nation IPPs are removed, it is clear that there are an increasing number of opportunities for both investors and developers, and we as a firm, are looking forward to what appears to be a very bright future for solar and other renewable energy IPPs in some of the world’s most vulnerable island nations.

Fiona Gulliford, Partner