equal to up to 25 per cent of the contract price for each project. The EPC contracts also con-
tain extensive warranty packages covering design, engineering, construction work and
equipment. RW Beck commented that the terms and provisions of the new SNC–Lavalin
EPC contract, as well as those of the gas pipeline, water supply facility and electrical con-
nection EPC contracts, were adequate, with well-defined schedules of events from startup
to completion.
Technology risk
Both projects use advanced models of the GE Frame 7FA turbine technology. R.W. Beck, Inc.
concluded that the projects use sound technology, and that the proposed method of design and
construction conformed to accepted industry practice for combined-cycle facilities. The firm
noted that GE has an evolutionary approach to the development of its combustion turbine
generator, making incremental enhancements from one model to the next. Further, the risk of
part failure or unplanned part replacement is mitigated by long-term service agreements and
warranty agreements.
Electricity price risk
As explained above, the projects are intended to apply a portfolio sales approach by negoti-
ating contracts with a variety of terms and pricing structures, a mixture of short-term, medi-
um-term and long-term sales agreements, and a mixture of fuel-indexed and fixed-energy
pricing along with tolling arrangements. The sponsors believe that such a mixture should
allow the projects to be flexible, and capable of adapting to changes in the fuel and electric-
ity markets.
Fuel price risk
At the time of the project financing, approximately 27 per cent of the maximum daily fuel
requirement for the Union project was under contract at an index-based price, but, because of
unusually high prevailing natural gas prices in its market area, the Gila River project had not
yet executed any contracts to purchase natural gas. Pace Global Energy Services, an inde-
pendent fuel and energy management consultant, projected that these high prices would
decline and then rise by 0.5 per cent annually during the life of the projects. Reasons for the
expected decline in natural gas prices included:
- downward price pressure from increased US production;
- sufficient and growing reserves to support increased production;
- downward price pressure from increased imports, particularly from Canada;
- technological advances in production; and
- interfuel competition from advanced crude oil projects and high-grade coal.
Fuel supply risk
To reduce supply risk, long-term firm transport has been contracted for 52 per cent of the
Union project’s maximum daily requirements. Risks that the remainder of the project’s needs
POWER PLANT