Who bears fuel supply interruption risk in a power project?

Fuel interruption risk in a Pakistani power project is allocated among the fuel supplier, generator, electricity offtaker and project lenders primarily through the executed contracts and regulatory framework. A gas shortage, delayed imported coal shipment, failure of a fuel supplier or governmental allocation order can have different consequences. The project company cannot assume that every fuel shortage qualifies as force majeure or that the electricity buyer must pay full capacity charges despite inability to generate. The power purchase agreement, fuel supply agreement, implementation agreement and operating documents must be analysed together.

Identify the fuel model

A plant may rely on domestic natural gas, regasified LNG, imported coal, local coal, biomass or another fuel. Availability and supplier structures differ. A merchant industrial power producer may purchase fuel directly at market price, whereas a contracted project may have dedicated supply terms and government support. The financial model should state who is responsible for fuel procurement, transportation, storage, quality and payment. General statements that "fuel is guaranteed" require evidence of an enforceable supply commitment.

Contractual supply obligations

The fuel supply agreement should identify daily or annual volume, delivery point, quality, nomination and shortfall remedies. A take-or-pay arrangement may bind the buyer even where it does not need fuel, while a supply-or-pay clause can address vendor failure. These are not automatically reciprocal or unlimited. The project should examine exceptions, liability caps and measurement procedures before deciding who bears a particular interruption.

Power purchase agreement consequences

The PPA can define available capacity, dispatch, energy payments, outages, deemed availability and force majeure. A plant that cannot run because it lacks fuel may be treated differently from one prevented from dispatch by the grid. Capacity-payment entitlement depends on the actual contract and applicable tariff framework. A lender should not assume that offtaker payments continue during every fuel shortage simply because the plant was mechanically ready.

Fuel risk passed through or retained

Some tariffs or contracts allow fuel costs to be passed through under approved adjustment mechanisms. That does not automatically cover lost revenue or finance charges caused by complete supply interruption. Other projects retain market and price risk. Counsel should identify whether the generator bears fuel procurement, price fluctuation, transport or scarcity. The risk matrix should be consistent across the concession, PPA and fuel supply documents.

Force majeure definitions

A fuel supplier's ordinary commercial difficulty may not qualify as force majeure unless the contract says so and legal conditions are met. Government embargo, blockade or extraordinary disruption may be treated separately. The parties should establish whether performance was prevented or merely more expensive, and whether alternatives were available. Notice, mitigation and termination thresholds can differ. A clause cannot be interpreted solely by labelling the event an emergency.

Change in law and allocations

A new import restriction, customs duty, environmental rule or government fuel allocation may change project economics. A change-in-law provision can provide relief if its trigger and baseline conditions are satisfied. The project should preserve official notifications and calculate actual incremental costs. A commercially higher LNG spot price alone is not necessarily a legislative change. Government supply commitments and statutory powers should be examined independently.

Transportation and port risk

Fuel may be available from the producer but unavailable at the plant due to pipeline outages, vessel delays, port congestion or road closure. Determine where title and risk of loss pass and which party contracted transportation. A supplier responsible only for delivery at a foreign port may not guarantee arrival at the plant. Incoterms and shipping documents can affect commercial allocation. Insurance coverage should be assessed separately from contractual liability.

Storage and inventory

A plant may be required to maintain a minimum number of operating days of fuel stock. Failure to do so can convert an otherwise external supply problem into operator noncompliance. The project should document stock levels, quality tests and inventory restrictions. Lenders may ask for larger reserves where supply is seasonal. The concession should identify whether storage requirements can lawfully be modified or waived during exceptional disruptions.

Equipment and operator failures

A fuel interruption can result from damaged pumps, pipeline interface or poor scheduling rather than vendor failure. The O&M contract should define operator duties and exclusions. If the operator neglected maintenance, it may bear liability under its contract, subject to caps and causation. The generator should not automatically pass its own preventable operational failure to the supplier. Technical reports and logs can identify the responsible interface.

Lender impact

Fuel interruption can reduce CFADS and lead to DSCR breaches or unpaid instalments. The facility should include notice, reserve and covenant remedies appropriate to the risk. A lender may expect sponsor support or government compensation in certain circumstances, but such rights must be documented. A technical force majeure event under the PPA is not automatically an event excusing repayment under the loan.

Insurance limits

Business interruption cover may require an insured physical-damage trigger and may exclude simple failure of a third-party supplier. Political risk cover may respond to defined government events rather than market scarcity. The project should not assume all lost generation revenue is insured. Read the actual policies, waiting periods and deductibles and coordinate claims with contractual notices. Dual recovery for the same loss should be avoided.

Supplier security and performance support

The generator can seek performance guarantees, parent company guarantees, reserve stock or liquidated damages from the fuel supplier. Each must be calibrated to realistic interruption exposure and bankability. A guarantee may cover monetary default but not secure physical fuel when supply is globally scarce. Lenders should evaluate the supplier's creditworthiness, not merely headline security value.

A natural gas example

A domestic gas-fired plant receives reduced volumes under an administrative supply restriction. The project should identify whether government allocation risk is assumed under its PPA or gas supply contract, whether relief from capacity penalties is available and what notice is required. The lender should assess cash shortfall and available reserves. The result cannot be determined solely from the government's public statement about seasonal shortages.

An imported coal example

A coal vessel is delayed after congestion at a foreign port. The fuel supplier argues force majeure, while the generator incurs capacity-payment deductions. The contracts may use different definitions of excusable delay. Analyse shipping responsibility, supplier mitigation and the PPA's consequences. The project company may bear a mismatch where relief under the supply agreement does not cover PPA exposure.

Dispute evidence

Collect fuel nominations, supplier confirmations, delivery records, stock reports, dispatch instructions, plant availability tests, government notices and invoice deductions. Quantify the shortage and causal generation loss rather than attribute every low-revenue day to fuel. Contractual experts and technical specialists may be required. A reliable chronology should distinguish fuel scarcity from unrelated maintenance outages and grid constraints.

Termination and prolonged interruption

A long-lasting shortage may activate suspension or termination provisions, including compensation mechanisms. The project company should compare fuel supply termination rights, PPA termination and financing defaults before exercising any option. Terminating one contract can leave substantial debt and no revenue. A negotiated alternative supply or restructuring may be preferable, subject to regulatory and technical feasibility.

Opinion and recommended course

Fuel interruption risk depends on the actual interconnected contracts and event. Identify who supplies, transports and stores fuel; how the PPA treats unavailable generation; and whether force majeure, change in law or insurance applies. Coordinate lender protections and notices. No single party automatically bears every shortage.

Principal authorities: Contract Act, 1872; Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997; applicable NEPRA tariff and licensing framework; executed PPA, fuel supply, O&M and finance documents; relevant insurance and foreign trade law.