Defining the Commercial Operation Date in EPC Contracts

Reaching Commercial Operation is a massive project achievement.  I remember lying on the floor of my office with tears streaming down my face when the project I was working on for nearly two years reached this milestone.  So what is it?

Commercial Operation is the point from which the project becomes a revenue generating entity, the point at which electricity generated is being fed onto the grid, and the Employer can start receiving payment for each kWh.  It means that the construction and commissioning of the facility has been completed, with minor, immaterial snags still remaining, the facility is compliant with relevant grid codes and standards and all relevant parties are satisfied that it can operate as intended, and safely.  It is also typically the start of the defect liability period, meaning that the Contractor’s liability for the facility starts to tick down.

Clearly this is incredibly important, and therefore one thing that should definitely be well defined in the contract.

Some considerations:

• The contract should allow the Employer to confirm that Commercial Operation has been achieved, even if all the individual requirements making up the full definition of CO have not been fully achieved.  This means that the Employer can get the facility to CO, get some revenue coming in, without relieving the Contractor of any obligations that they may still have to meet.
• Once Commercial Operation is achieved, the actual Commercial Operation Date (COD) would likely be determined, and any delay liquidated damages (DLD) would therefore be applied up to that point.  If the Employer says that CO has been achieved prior to the Contractor fulfilling all the obligations, they can be let off the hook for any further DLD’s.  Depending on what rate has been set for the DLD’s, it may be better, financially, for the Employer to forego DLD payments, in favour of revenue from the sale of electricity.
• There is typically a certificate included in the schedules of the contract, outlining what the Employer is confirming has been achieved at CO.  This would refer to the definitions of Commercial Operations in the contract, and would include the conditions on which the Employer is signing it off as being completed.
• The contracts that I’ve seen have the requirements for Commercial Operation set out in the contract definitions.  These requirements may relate to the final completion of construction and commissioning activities, the inspection and sign off by external stakeholders (like the utility, lenders etc), in the projects in South Africa, the determination of Achieved Capacity and other requirements outlined in the PPA, the handover of all operational documentation, any relevant financial obligations relating to guarantees or insurance etc.  The requirements would vary by project, and would be negotiated based on the perceived risks particular to the project and Contractor.