Whether it is under the South African Independent Power Producer Procurement Programmes (Wind, Solar, Battery Energy Storage, and Gas) or in the commercial and industrial sector, Power Purchase Agreements (PPAs) govern the production and sale of the electrical energy-generated by the Independent Power Producers (IPPs) in energy-focussed projects. Focusing on the construction, and operation and maintenance (O&M) obligations of the IPP under a PPA, the PPA, stipulates:

• the date of commencement of construction, along with the associated consequences for failure to meet this obligation;

• the Scheduled Commercial Operation Date by which date commercial operation must be achieved, failing which the IPP usually suffers the consequence of a reduction of the PPA term, negatively affecting the profitability of the IPP from the project;

• the Long Stop Commercial Operation Date by which final deadline commercial operation must be achieved, failing which the IPP will be in breach of the PPA, and usually face termination of the PPA;

• the IPP’s output, and reporting obligations towards the buyer over the term.

The IPP is not a construction contractor nor an O&M operator and is not best placed to ensure compliance with these obligations. The construction contractor under the construction contracts and the operator under the O&M contracts are the ones able to ensure such compliance. To mitigate its risks of non-compliance with its obligations under the PPA, the IPP passes appropriate compliance with these obligations through to the appropriate construction contractor or O&M operator. This is effectively done through bespoke pass-through and equivalent project document relief provisions catered for in the construction and O&M contracts. Even though the IPP passes these obligations through to the construction and O&M contractors, if these obligations are not met, the buyer’s recourse under the PPA lies against the IPP who may have recourse against the contractors.

Effectively, the pass-through principle allows the construction contractor or an O&M operator to claim from the IPP entitlements under the construction and O&M contracts if the IPP has similar entitlements under the PPA (or other project agreements). Pass-through claims usually involve project events such as unforeseeable difficulty, force majeure, system events, and changes in law. These provisions give construction contractors and O&M operators comparable entitlements and limit their claims against the IPP to what the IPP can claim under the PPA and other project agreements on the occurrence of such a project event.

To succeed in a pass-through claim, the IPP and the construction contractor, or the O&M contractor must work together in preparing and pursuing their respective claims. This involves coordinating responses, obtaining legal advice, and generally optimizing the chances of a favourable outcome.

The construction and O&M contractors should be eligible for relief or compensation for any of the mentioned project events to the proportionate extent that the IPP obtains relief or compensation for any such event under the PPA or any of the other project agreements. The fundamentals of pass-through claims should be two-fold: firstly, the construction contractor is not entitled to any greater relief than that which the IPP is entitled to under the PPA or project agreements. Secondly, the pass-through provisions contained in the construction and O&M contracts must reflect those outlined in the PPA or project agreements, with necessary adjustments made to cater for the construction and the operation and maintenance of the facility, with appropriate time buffers included for timeous issue of claim.

Appropriately drafted pass-through provisions, aligned with the PPA and other related project agreements, keep the construction contractor or the operator, as the case may be, bound to their particular obligations for which the IPP is ultimately responsible under the PPA and other project agreements. This is the manner in which a IPP under a PPA can mitigate its construction and operation and maintenance risks when appointing third parties to construct, operate, and maintain the project.