Risk mitigation in take or pay and take and pay contracts in project financing: the purchaser’s perspective

In off-take agreements purchasers commit themselves to purchase a predefined quantity of the commodity produced by the project. If the buyer fails to take the contracted capacity, he should pay a penalty. With the option capacity clause, the available capacity is offered to other purchasers, and to the extent that they purchase it, the initial buyer is relieved of the penalty. The aim of this paper is to develop a computational model based on real options to estimate the value of this risk mitigation tool from the buyer's perspective. The model and its results can be very useful for determining the fair value of the contract. Thus, they can be used by the buyer during the decision whether to enter into the contract or not, and during the negotiation phase.