In a process plant project, a reliable supply of fuel or other raw materials, on an
appropriate pricing basis, is essential. Lenders are unlikely to accept the Project
Company taking an open risk on the availability of its main fuel or raw material
supplies. Unless it can be clearly shown that the fuel or raw material concerned is
a widely available commodity, a long-term Input Supply Contract is required,
even if the project has not got an Offtake Contract (e.g., in the case of a merchant
power plant project).
Similarly, some form of hedging or other protection is needed against the risk
that the price of the fuel or raw material increases so much that the project be-
comes unable to operate. This can be achieved by:
Passing the risk through to the Offtaker (e.g., through an Energy Charge in a
PPA (cf. §6.1.6 and §7.3.3)
Linking the price paid to the Input Supplier to the market price for the pro-
ject’s product (cf. §7.3.3)
Long-term hedging of supply requirements in the commodity market
(cf. §6.1.1)
The risks involved in Input Supply Contracts are further discussed in §8.9.1,
and the acceptability of doing without them in §8.9.2.
Certain other inputs may be free, but still represent a risk for the Project Com-
pany, for example, water for a hydroelectric power project, or wind for a wind
power project (cf. §8.9.3). Similarly, the “reserve risk” has to be assessed for proj-
ects extracting oil, gas, or minerals (i.e., the risk of whether the oil or gas field or
mine has the volume of reserves projected cf. §8.9.4). Risks involved in the sup-
ply of other utilities are discussed in §8.9.5.
§8.9.1 I
An Input Supply Contract provides the Project Company with defined volumes
of fuel or other raw materials on an agreed-upon cost basis. The contract therefore
should eliminate supply or price risks for the Project Company, but there remain
some risk issues that require examination in the due-diligence process:
Credit of supplier. As with Offtake Contracts, the credit risk of the supplier
has to be considered, not just in the context of a corporate credit analysis, but
also taking into account the place of the supply arrangements in the sup-
plier’s business. The supplier’s experience, ability, and resources to manage
its side of the project must also be considered.
Issues of direct or indirect political risk on the supplier may arise in some
170 Chapter 8 Commercial Risks

Get Principles of Project Finance now with the O’Reilly learning platform.

O’Reilly members experience live online training, plus books, videos, and digital content from nearly 200 publishers.