The changing Generator Performance Standards landscape in EPC Contracts

Before I head down the path that winds its way through this post, I acknowledge that this topic is intensely complicated and differs from project to project.  I in no way claim to be a grid connection specialist.  This post only aims to set down some of my observations.  There are a multitude of people more qualified to discuss this, and in more depth.  If you’re one of those people, send me your thoughts.  We are all here to learn.  With my consultant’s disclaimer suitably covered, let’s kick off.

There are two aspects of grid connection works that I typically see in the projects I work on.  The first has to do with the negotiation and approval of the Generator Technical Performance Standards (GTPS) and the other has to do with connection works required to physically connect the facility to the grid.  This post deals with the first item, the GTPS.  I will attempt to tackle the second topic separately, as this is also fraught with interesting complexities.

Generator Technical Performance Standards.

This is a good paper by Dr Julian Eggleston of the Australian Energy Market Commission (AEMC) explaining the GTPS context, why they exist in the Australian electricity market, and how prospective generators go about complying with the requirements.  I’m not even going to pretend that I’m the right person to explain the process.

But in summary, there are three different access standards that are defined by the AEMC.  The paper referenced above provides a good overview of these:

A.      The automatic access standard

The automatic access standard reflects the level of performance required of a connection such that it does not adversely affect power system security or the quality of supply to network users, regardless of the size, technology and location of the connection point.

This means the automatic access standard should be set at a level that is a ‘safe harbour’ for connection applicants, and more importantly, for the power system and other network users. The automatic access standard is the level of performance that would be appropriate in any location of the power system, including under the poorest network conditions (relevant to that technical requirement) that are foreseeable across the power system.

B.       Minimum access standard

The minimum access standard reflects the lowest level of performance required of a connection such that it does not adversely affect power system security or the quality of supply to network users, taking into consideration the size, technology and location of the connection.

In practice, this means considering the lowest level of performance that may be acceptable for a connection to do no harm in the best network conditions (relevant to that technical requirement) that are currently seen across the power system. This is the key distinguishing factor between the automatic and minimum access standards.

As the access standards should reflect local power system conditions, it may be appropriate to set a minimum access standard for some technical requirements at no capability. However, for other requirements such as fault ride through capability, the access standards should set the minimum level of performance that is acceptable when connecting to the power system.

C.       Negotiated access standard

A negotiated access standard represents the point agreed by all parties to the negotiating process within the range provided by the automatic and the minimum access standard. It is the process that maintains system security and quality of supply at an efficient cost.

In practice, the projects we’ve seen always have some level of negotiation.  The automatic access standard would be overly expensive to implement and the minimum access standard is likely to not be adequate for the conditions specific to the proposed development. 

Projects that I was working on in 2017/18 placed the responsibility for grid connection modelling on the EPC Contractor.  They had to comply with the GTPS set out in the Connection Agreement, but then also had to do all works required to demonstrate that the facility could meet those standards.  They had to do the modelling, complete all the technical documentation and reporting and they were directly involved with the NSP in closing out any technical issues that were identified.  The Principal had ultimate registration responsibility, but the Contractor had to do most of the work to get the Principal to the finish line and bore the brunt of any changes in the interpretation of rules. Contractors, often new to the Australian market, were then responsible for meeting these standards that may be subject to change, with inverters that had not been tested in the market (and manufacturer models that were sometimes shaky at best.)

The upshot of all of this is that a number of Contractors struggled to demonstrate compliance.  And projects were delayed with an enormous financial impact on these Contractors.   In some cases these delays and associated damages were severe.  So severe that some Contractors have decided to pull out of the Australian renewables market altogether (e.g. Downer,  Biosar) and others have collapsed entirely (RCR Tomlinson.)

In 2018 I started to see some changes filter through in the EPC Contracts.  An example of this is the Contractor being able to rely on the GPS set out in the Connection Agreement.  Any changes required by the Market Operator deemed to be a change of interpretation of the Electricity Market Rules would be considered to be a change of law and the Contractor would be entitled to some sort of relief.  They were still responsible for the GPS modelling, but you could start to see some push back from the Contractors.

I went on maternity leave at the end of 2018 and came back to quite a different environment.  In the AEMC’s Final Determination on GTPS rule changes, effective from October 2018, they state the following:

AEMO considered the current arrangements for the negotiation of access standards are not adequate to support the ongoing security and efficient operation of the power system. It considered connection applicants often submit levels of performance at the level of the minimum access standard, which is not appropriate in many cases.

to address this, the final rule includes:

  • a requirement that when proposing a negotiated access standard a connection applicant must propose a level of performance that is as close as practicable to the automatic access standard, having regard to the need to protect plant from damage, power system conditions at the proposed location of the connection, and the commercial and technical feasibility of complying with the automatic access standard, and
  • where a negotiated access standard is proposed, a requirement for connection applicants to provide to the network service provider and AEMO reasons and evidence as to why the proposed negotiated access standard is appropriate.

My understanding of this determination is that a lot of the heavy lifting has to be done much earlier in the registration process than it used to.  We’re now seeing the modelling work taking place upfront, before the EPC Contract has even been signed. 

The Contractors are now responsible for meeting those standards, but they haven’t been lumped with the negotiations too.  They aren’t off the hook though. They still have a load of responsibilities.  They have to demonstrate that the facility designed and constructed complies with the GTPS.  They have to meet the requirements set out in the Connection Agreement, carry out any tests required by the NSP and have to complete R2 testing, submit the results to AEMO, and receive confirmation from AEMO that the results have been accepted.

Delay Liquidated Damages on solar farms

I’ve been finding myself doing a few technical due diligence reviews recently, and I thought it was time to do a write up about contracts again. It’s been a while. Today I thought I’d write about Delay Liquidated Damages.

Liquidated damages are a mechanism available to the Principal* when it is not possible to accurately predict what the financial impact would be from a failure on the part of the Contractor. The method for determining damages payable is then set out in the Contract with the idea being that the amount payable is commensurate with the loss the Principal would experience, as a result of that failure. It’s a best estimate, understood to be inexact and subject to negotiation.

Delay Liquidated Damages (DLDs) are payable if the project is not completed on time. They are becoming increasingly complicated. This is a small frustration for a technical advisor (or at least this technical advisor), as it becomes a bit trickier to assess the appropriateness of the rates set out and the methodology proposed.

In simpler days, the DLDs were typically a daily rate for any delay to achieving Commercial Operation/Provisional Acceptance (or whatever your final revenue generating milestone is called.) As an advisor I would then look at the rate and at how much energy was expected to be generated that day. I’d calculate the equivalent price/MWh and compare that against the assumptions in the financial model and by assessing the rate set out in the power purchase agreement, or looking at current market rates.

Things are becoming a bit more complex now. As facilities get bigger there are more completion stages – so damages may apply if each stage is delayed, but also if the facility is delayed as a whole. The energy yield assessment may not have been done on a staged approach. Typically we’d see some sort of output value per month based on the completed facility design. Maybe this will start to change.

Also, sometimes facilities can export power even if they’re not really finished according to the contract. So maybe they have approval to export 30% of their final capacity because they’re constrained for not successfully completing all their grid connection tests. And that 30% electricity that is exported results in some sort of revenue to the Principal. DLDs are then still payable because they haven’t completely finished, but the Principal would be double dipping if they claim the revenue and the full DLDs. After all, the DLDs are there to compensate the Principal for losses. If they’re getting some revenue then the losses aren’t all realised. So DLDs may be netted off against revenue realised.

Finally, DLDs can also be different for different months of the year. Say now a facility is meant to be finished in March (assuming one completion milestone…) March will have a different energy yield profile to August. So the daily compensation should be different. Imagine if Completion was scheduled for March, but through no fault of the Contractor (like grid connection delays), the Completion Date was extended to July. Then the Principal may be better or worse off if the DLDs remained the same if the Contractor was then further delayed. So linking DLDs to the month allows for a better alignment between DLDs and lost revenues.

There’s a lot to digest there.

*I use Principal in this post but different contracts may refer to the party as the Employer or Owner. Or Handsome Devil. The options are endless.

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Solar facility construction milestone and payment claim review

Large scale solar construction projects are typically made up of dozens of milestones, outlined in the contract, which need to be met before payments can be made to the contractor.  There are normally at least three parties involved in the processing of these payment claims, and they can cumbersome things to navigate.  This post looks at what the typical milestones in a solar project are and what documentation is important.

But first, a step back. To defining the milestones:

Prior to financial close (where the necessary contracts are executed, and financing is secured) there will likely be a bit of backwards and forwards on what the key project milestones will be, and how much of the overall lump sum contract price will be allocated to each.  The milestone schedule, payment schedule, project programme and financial model are all built and developed in parallel, and changing one may have an impact on the others.  The contractor is interested in making sure that they have healthy cashflow throughout the project.  Procurement activities in particular require a heavy outlay of cash, so they will want to get paid for completed procurement works, which typically take place towards the front end of the programme.  The owner, and lenders, will want to make sure that they are receiving value for these payments, so they will be interested in making sure that the payment amount is fair, given what works have been completed.

Some of the typical milestones (and therefore payment triggers) include the following:

Notice to proceed

This is a mobilisation payment, often made to the contractor upon the award of the contract.  For instance 10% of the contract price.  The evidence required from the contractor is typically a letter from the owner to the contractor confirming that they have permission to go ahead with the works under the contract and that any conditions precedent to them starting works have been met, or waived as required.  It may be accompanied by other documentation showing that the contractor has done all the necessary preparation works, such as securing insurance, accessing bank guarantees, appointing certain key personnel etc.  The level of complexity in assessing this milestone is very much dependent on the contract requirements, but it should not be overly complicated.

Equipment procurement

This shows that the contractor has place the orders for the equipment.  The evidence for these type of milestones is typically in an executed (and often redacted) contract with the equipment supplier.  Additional requirements may include the supplier’s quality management plan, factory acceptance test schedule, delivery plan, and transportation, storage and handling, and installation and operations & maintenance guidelines.  Reviewers should be checking that the specifications of what has been procured matches the contract employer’s requirements.  The product warranties should also match the contract.  Delivery schedules should be in line with the project schedule.  Key components and equipment in a solar facility included as milestones are typically PV modules, structures/trackers and inverters.

Equipment delivery

This is to demonstrate that the equipment procured has been successfully delivered.  These milestones should be accompanied by a lot of documentation.  This can be one of the most onerous milestone types and it’s very important that the contractor has good controls in place to make this easy to review.  For each equipment type, there should be a summary report which links actual equipment to containers or batches.  For instance, PV modules will likely be manufactured in batches.  Each PV module has a serial number, and these serial numbers are grouped together into pallets.  Which are grouped together into containers, which are grouped together into batches.  Which cumulatively make up the entire facility.

There should be documentation and reporting which allows someone to trace each module from the manufacturing line all the way to its delivery to site.  A summary report should be maintained, identifying the position of each container (ex-works, on a ship, at port, on site etc) and a reviewer should be able to identify which containers have been delivered to site.  This summary report should be supported by a myriad of documentation, including packing lists, waybills/bills of lading, serial number lists and delivery notes.  In addition, there should be factory acceptance test reports and any independent factory inspection reports provided, and any applicable certificates from the manufacturer.  The reviewer’s role here is not to go through everything in minute detail, but to carry out spot checks to verify that the contractor’s report is accurate, and that they are implementing proper logistical and document control throughout the whole process.  Site inspections are then often carried out to verify that the equipment is being delivered in good order and that the contractor is complying with the handling and storage guidelines.  It can be a big job, and messy and confusing paperwork makes it a whole lot bigger.

Keeping track of millions of components requires a lot of competent people doing competent people things
Keeping track of millions of components requires a lot of competent people doing competent people things

Construction completion

There are a lot of construction activities that can be considered for payment milestones: mobilisation to site, the completion of the boundary fence, access roads, O&M buildings and substations.  But it’s typically the repetitive activities that get most of the attention, which in the case of solar are largely piling, tracker installation, module installation and inverter (or MV power station) installation.

What’s important here is what is understood by both parties to be a completed construction activity?  On any project there will be some punch list activities that need to be closed out, but what is considered to be reasonable? Does everyone agree?  For electrical equipment, is it enough that the unit is physically in place or should it be connected, with cables plugged in?

How is the facility divided up into sections?  Is a milestone linked to an individual section of the facility?  Or can the contractor claim for a percentage of works completed, regardless of where the works are taking place.  Keep in mind that the first wave of construction activities can be fairly quick to do, but coming back and resolving quality issues, and closing off punch list items can take longer.

Quality documentation is the most important here, and what is inlcuded in the overall payment claim should match the contractor’s progress report, which, in turn, should align with the quality documentation.  Inspection and test plans (ITPs) should be followed, and there should be inspection and test checks that are provided.  Observations during walkarounds on site should align with the contractor’s quality documentation.

Mechanical Completion is often a key construction milestone.  For this, all construction activities should be completed, quality documentation should be available, the punchlist should be manageable, and not affect the facility’s performance or safety, the facility should be ready for commissioning, and all the little construction activities that may not have been included as individual milestones (such as the security system) should be in and ready to be commissioned.

Commissioning

Commissioning milestones may be separated into cold commissioning (commissioning activities that can be carried out before the facility is connected to the grid) and hot commissioning (after grid connection).  It is common that the owner, owner’s representative, independent or lender’s engineer may witness selected commissioning activities, to confirm that the data provided match the observations on site, and to verify that the contractor is following the commissioning plan.  But commissioning milestones are often overshadowed or substituted for major completion milestones, such as practical completion or even commercial operation.  These major milestones are influenced and informed by performance tests and grid compliance tests.

A portion of the contract price, such as 5%, is normally held for these milestones, and the contractor needs to demonstrate the facility’s performance and compliance with the network service provider/regulator/purchaser’s requirements.  The nature of tests to be conducted and paperwork to be provided is determined by the local regulatory requirements.

They will also need to show that the facility is able to perform, by applying the performance ratio (or equivalent) tests outlined in the contract.  Performance data should be provided for review, along with the application of calculations as defined in the contract, and any underperformance may be subject to performance liquidated damages.


I have worked on projects with nearly one hundred milestones, and others with only a few dozen.  What matters most is whether they are clearly defined, and whether the parties have agreed upfront what constitutes the completion of an activity and what information and documentation is required.  I couldn’t overstate the importance of having a session or two right at the beginning of the construction phase to clarify expectations as early as possible.

Contract administration – ugh, really?

Contracts are not for everyone.  They can be complicated, convoluted, repetitive, ambiguous, conflicting, confusing and very, very long.  The meaning can be wrapped up in legal speak, and the intention lost behind a wall of whatsoever’s, thereto’s and pursuant’s. 

But in a fully-wrapped EPC contracting arrangement, the contract is the biggest tool at the Employer’s disposal; the biggest weapon in the arsenal.  So if the Employer has a nice weapon at their disposal they should surely know how to use it, right?  Right.

Herewith a visualisation of a fully wrapped EPC contract.  Good for hitting irritating contractors over the head.  Especially if you make the rope nice and tight.
Herewith a visualisation of a fully wrapped EPC contract. Good for hitting irritating contractors over the head. Especially if you make the rope nice and tight.

Again, as ever, this post focuses on the technical aspects of EPC contracts.  The legal eagles will be better placed to discuss how and when the contract can be enforced, but here are some ideas for making sure the Employer has a handle on some of their rights and obligations.

Know the content

They run for hundreds of pages, but someone on the Employer’s side should have a good understanding of how the contract conditions translate into project execution.  What should the Contractor be doing right now? Should they be carrying out design works? Should they be submitting these for review?  Should they be developing a programme?  Should they be ordering equipment that will take a long time to deliver?  Should they be making sure that someone is reviewing and signing off on design documents?  Should they be preparing manuals/test plans/quality plans?  Should they be submitting progress reports?  What should these reports contain?

The Employer’s requirements, the programme of works (or project schedule), the milestone schedule, the scope of works, the list of deliverables, the other bits… they should all be providing a clear picture of what the Contractor should be doing and how they should be doing it.

If you don’t know what they should be doing, how can you issue warnings when they’re veering off the intended path?

Know your rights and obligations

So the Contractor thinks you should be approving their design drawings, do they? They think you’re at fault if the design is later found to be non-compliant?  If you know your rights you’ll be able to point them to the part of the contract that tells them that they keep that responsibility until the sun sets on the project.

Alternatively, if you don’t know what’s in the contract, you may miss the fact that you’re supposed to have reviewed a document within two weeks, and after that you have no more say.  Then you may be stuck with an O&M manual that misses the point entirely, and a very confused operator.  Oops.  You may also be required to provide the Contractor with a permit before they can finish some scope of works.

Know the limitations of what you can ask for

The Contractor needs to make sure that the facility is designed and constructed in a way that complies with the contract.  This means that they have the responsibility for interpreting the conditions and responding appropriately.  It doesn’t help if the Employer comes along and says ‘do it like this.’  What if ‘this‘ isn’t ‘that‘ and ‘that‘ was in the contract?  The when the thing blows up and it is found to be from ‘that‘, the Contractor can point to the request and put their hands in the air, decrying any responsibility.

Of if the Employer has someone on site, that person can raise a fuss when they see things being done in a way that hasn’t been agreed, but to ask the Contractor to do something directly, which may impact the progress or cost of the project can be a dangerous move.  Unless that request stops something physically dangerous from happening.

Notify the Contractor of an observation, inform them that this is not in compliance with their requirements, ask them what they intend to do about it, ask them for an assessment on how this may have impacted the project.  But it is for them to come up with a solution.  You can ask them strongly.  With some force.  With a LETTER (gasp).  But putting your foot too deeply into the runnings of a supposedly fully wrapped project can open up a can of liability worms.

Make sure they know what’s what

Belting out your version of what’s in the contract can make you feel contractually superior, but this is has a lot more of an impact if the Contractor has also read the thing.  Reminding them of some deliverable in advance can help prevent you from having to chase them for it later.  It also means that they know that you’re on top of things, and that you won’t be letting them sneak through their obligations.  Having a session at the beginning of the project where people who are involved in seeing the thing through get to sit down and discuss what is expected (and contractually required) of both is useful.  Because you don’t really want the lawyers involved if you can avoid it.

Hahahahaha, you didn't submit the programme in time, now you're going to be late...  Hahahahaha. Oh, wait. I'll be late too.
“Hahahahaha, you didn’t submit the programme in time, now you’re going to be late… Hahahahaha.”
“You’ll be late then too, numpty.”

 

 

Completion Certificates for major works

There are many milestones in a renewable energy facility project, and the contract should have a breakdown of these milestones in the milestone schedule.  These help everyone involved in the project to keep track of how works are progressing, and where there are possible risks to the project completion date.

There are a few major milestones that signify the end of a large piece of work, the shift from one activity to another or the handover of works from the Contractor to the Employer.  These major milestones may be accompanied by a certificate, included in the contract schedules, that formally recognise the completion of a certain aspect of works.

Let’s look at three major milestones that may merit the inclusion of completion certificates.

Mechanical completion

This milestone signifies the end of all construction and installation activities.  The facility is sitting there, like a dormant giant, ready to be switched on and commissioned.  All visual checks have been completed by the Contractor, as well as checks and tests that confirm that bolts have been tightened, cables have been connected properly, roads have been compacted, structures have been erected and equipment has been installed.  And these checks have been done in accordance with the accepted project inspection and test plan.  The resulting paperwork has been compiled and signed off by the Contractor’s duly authorised representative and it has been filed in a way that makes it available to the Employer to review (easily, so it needs to be filed logically).

This is a big milestone, because it means that the facility is considered to be safe to electrify.  The Contractor has done their due diligence through their quality inspections, and there is no perceived risk to human life in turning the thing on.  There may be minor works outstanding, but these should be just that, MINOR, and they should be recorded in detail on a snag list.  Snags should not affect how the facility operates, nor should they encompass a major portion of the works.

Practical completion

Also called commercial operation, this is the point at which the facility has been commissioned, initial performance tests have been completed, and the facility is ready to start exporting power to the grid.  This is a major milestone, as the facility can start generating revenue from the sale of electricity.  As mentioned in a previous post on commercial operation, this also typically triggers the Defect Liability Period, and is the start of the performance monitoring period.  Any adjustments to the contract price resulting from the actual installed capacity not meeting the contracted installed capacity are agreed here.

As I’ve covered this milestone already, I won’t talk in too much detail about it, other than to say that there will probably be a lot of stakeholders who have an interest in how the milestone has been achieved.  Independent engineers appointed on behalf of the utility, the lender or other interested or regulatory bodies may require access to test results and performance data.  They may also have a say in whether the milestone has been achieved.  This will depend on the contracting strategy, the local context and regulations and the number of stakeholder with a say in how the project is run.

There will probably be a lot of pressure from the Contractor, at this point, to confirm that this milestone has been achieved, as they will be looking to minimise the risk of liability for delay liquidated damages.  It can be quite a stressful part of the project, with pressure from all sides to ensure that data and information is reviewed thoroughly, without causing undue delays.  It is for this reason that the conditions to be met for practical completion should be clearly defined in the contract.

Schedule_programme

The contract should allow for the Employer to confirm that this milestone has been achieved even if all of the conditions have not been met, without giving up their rights under the contract.  It can be in the project’s interest to start seeing positive cash flow, before everything is 100% complete.  The big caveat here is that this should not be at the expense of the health and safety of those operating the facility, or result in any environmental damage.

Final completion

This is the milestone where the Employer and the Contractor shake hands and walk away from each other (with relatively small strings still attached).  This signifies the end of the Defect Liability Period and the performance monitoring period, and any compensation to the Employer resulting from facility underperformance is agreed.  The Employer is effectively saying that they accept the facility as it is, and that the Contractor has made good on any issues (mechanical or performance) that have come up since practical completion.

There are some conditions that will survive this milestone.  Most notably of which is the warranty on equipment (module performance warranty is typically 20 years at least).  Manufacturer warranties may be transferred from the Contractor to the Employer, and the Employer may follow up with the manufacturer if defects become apparent, or the the liability to resolve equipment malfunction may remain with the Contractor.

Latent defect warranties would also survive final completion.  These protect the Employer from construction issues that may only manifest way down the line, and are often linked to legal requirements (depending on the country).

Performance guarantees and liquidated damages

This follows on from yesterday’s post on Delay Liquidated Damages, as there are a few principles that overlap.  Most notably of which is that the Employer’s biggest stick in an EPC contract is the use of financial penalties if the Contractor doesn’t meet what they have agreed to in the contract.

Possibly my favourite cartoon ever.  Via XKCD.

Where DLDs are used to protect the Employer against delays, contracts make use of performance guarantees to ensure that the facility does what it was intended to do.  This post looks at two types of guarantees and penalties that exist.

Guarantee on installed capacity

Prior to achieving practical completion, or meeting the commercial operation date (COD), there will be a list of activities that need to be completed.  These will include (amongst others) commissioning activities, pre-COD performance tests, and the submission of required documentation.  The contract is likely to require the Contractor to demonstrate that the constructed facility meets the stated technical specifications, including the overall installed capacity.

For instance, for a PV facility, this may mean that the nameplate capacities of all the modules installed need to add up to, say, at least 100MW.  If the Contractor finishes the installation, and for one reason or another, the modules do not add up to 100MW, the Employer would naturally be disinclined to pay the full contract price for an inferior product.

It is at this stage that the contract would allow for a reduction in the overall contract price, if the Contractor has under-delivered on the facility’s capacity.  Note, the contract should not include any allowance for the Contractor to receive additional funds if the facility is over capacity.

The calculation for amounts owed may be as simple as a pro-rata adjustment of the contract price based on capacity delivered, but this may differ from project to project, and technology to technology.

Guarantee on facility performance

The performance tests that take place prior to achieving COD are typically carried out over a week or two.  They are there to show that the facility can perform as expected, but they are not long enough to show if there are operational issues that may only show themselves over a longer period.  For instance, the pre-COD tests may take place during the low-wind season.  This means that the tests show how the facility operates when wind turbines don’t have to rotate at high speeds.

Enter the performance monitoring period.  This often overlaps with the Defect Liability Period (during which the Contractor is on the hook for any equipment or construction defects that show their face), but is not necessarily directly linked to this (more on the DLP later).

The performance monitoring period is normally about a one or two year period, during which the facility’s operation is monitored.  Its performance is compared to what was expected, given the available solar/wind/other resources, and the Contractor is liable to compensate the Employer for any underperformance.

The method of determining the amount payable is carried out upfront, through the calculations specified in the contract for Performance Liquidated Damages.

PLDs should:

  • Be reflective of the losses incurred by the Employer for any facility underperformance
  • Be sufficient to compensate the Employer for the facility’s operational life (say 20 years)
  • Be a good balance between compensating the Employer without increasing the contract price to an excessive level
  • Not double-penalise the Contractor for any reduction in installed capacity, if there has already been an adjustment to the contract price, pre-COD
  • Clearly reflect any cap on PLDs that may apply (note there may be an aggregated cap on both PLDs and DLDs)

Lastly, as with DLDs, the Employer should be incredibly cautious of engaging in any activities during the Contractor’s execution of the works that may be construed as a direct request or order, which may be argued to have impacted on the facility’s performance.  While the Employer may choose to have close involvement during the project, the decisions made in designing and constructing the facility are up to the Contractor, and any direct instructions (not relating to H&S or environmental compliance issues) should be avoided wherever possible.

Delay liquidated damages – EPC contract watchits

In an EPC contract that Contractor has a lot of autonomy.  They get to define the details of the design, they manage the procurement, say how and when construction activities take place and they’re in charge of commissioning.  They need to deliver a completed product, in accordance with the specs outlined in the contract, to an acceptable quality and on time.

The Employer shouldn’t really have too strong a role in this scenario.  They have a couple of rights in the contract at their disposal to push or motivate the Contractor to ensure that they’re building the right thing and will have it finished on time.  These are largely big financial sticks.

Delay

If the Contractor runs overtime, the Employer has what are often called Delay Liquidated Damages (DLDs).  These damages are calculated ahead of time, based on the expected losses to be experienced by the Employer for every period of delay (most often calculated on a daily basis) and the method of determining the damages payable is included in the contract.

There are few things to consider when determining the rate of DLDs.

  • They need to be reflective of the actual losses to be experienced by the Employer, so should be based on expected revenue from electricity sales, costs to the Employer associated with construction delays, etc.  These should be linked to the project’s financial model.
  • They should be adequate to incentivise the Contractor to complete works on time
  • The higher the DLDs, the higher the level of risk to be carried by the Contractor, and this may impact the overall contract price.  This will naturally be discussed and agreed during contract negotiations.
  • There is likely to be a cap on the total DLDs payable, and this should be agreed upfront, and should be inline with industry standards and local regulations.

Something that the Employer should be particularly careful about once the Contractor has started works is making sure that they are extremely cautious about issuing any instructions to the Contractor that could be interpreted as having an impact on the project completion date.  This naturally excludes any instruction issued by the Employer as a result of having witnessed any non-compliance with Health and Safety and Environmental regulations, but putting their nose in how the Contractor goes about their work could be argued to have led to project delays.

Lastly, it may be in the Employer’s interest to forego DLDs, or to defer claiming DLDs.  This could be if the Contractor is short on cash, and needs all available cash to finish the project (especially if certain tasks need to be fast tracked).  The contract should allow for this without the Employer giving up any of their rights.

 

Technical specifications – listing performance obligations for equipment

The contract’s technical specifications (or the Employer’s Requirements) are typically included in a contract schedule, and they list the minimum technical requirements that are to be met by the Contractor in the design, construction, commissioning and operation of the facility.

The most important point in putting these together is that the specs need to be a good balance between detail and not over-specifying technical aspects of the facility.  What this means is that there should be enough defined in the specs to ensure that there is no ambiguity with regards to the Contractor’s obligations, without defining each technical item in its minutiae, to the point where the slightest change in the technical details of the facility requires a contract variation (even if there is no real impact on how the facility will operate).

SPECIFICATIONS

Let’s consider a bit of a silly example.

Say the contract defines the type, make and manufacturer of the DC cables to be used in a PV facility.  Let’s imagine that ACME inc has an 8mm aluminium cable, model XYZ.  According to the contract, the Contractor is required to use this type of cable for connecting PV modules.

Now imagine that for some reason that one of the following happens:

  1. ACME inc goes out of business and are no longer manufacturing cables;
  2. The interpretation of local legislations indicate that, after signing the contract, an 8mm cable is not compliant;
  3. In operations, it is discovered that this cable is not suitable for the facility design, and there is a risk of overheating/damage; or
  4. In operations, it is discovered that the cables have a much higher level of electrical losses associated with it than was anticipated when the cable type was specified.

Now, for scenarios 1, 2 and 3 it is probable that the cable type used would need to be replaced with an alternative make and model.  Clearly if you can’t get it any more, you’d need to find another type, if it doesn’t comply with local regs you can’t use it, and if it presents a danger to the facility’s operation or human safety, it cannot be used.  What this means is that a different cable type would need to be sourced.  Depending on the other terms of the contract (including force majeure with scenario 1), the Contractor may rightly claim that the responsibility for any additional cost or time associated with procuring, installing and testing an alternative cable should be borne by the Employer.

And in scenario 4?  What may come of this is that the overall operation of the facility does not meet the minimum performance requirements.  The Contractor may argue that they were obliged to use the cable specified in the contract, and if they can prove that this is the reason that the facility is underperforming, they may be able to argue their way out of paying performance liquidated damages.

So what to do?  Key components that have been selected based on a review of manufacturer track record, proven equipment performance, stated warranty considerations etc (such as the module type to be used) should be defined in terms of the make and model, as the Contractor should be obliged to procure that specific product.  But for other components, that are not so sensitive, the contract should rather specify the minimum performance requirements that are to be met by the equipment selected by the Contractor.

Should any of the above scenarios occur (outside of any triggering force majeure) the Contractor would be hard pressed to push any time or cost risks onto the Employer.  They should have designed the facility appropriately, selected suitable equipment and carried out energy yield assessments and calculations to ensure that the facility will operate as intended.

Things that should be considered when defining the performance requirements:

  • certification requirements required (e.g. IEC/TUV etc)
  • manufacturer track record requirements
  • compliance with local and/or international standards and regulations
  • equipment operational requirements (such as maximum loss allowance/minimum availability obligations etc)

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.

COD

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.

Milestone schedules in renewable energy EPC Contracts

A milestone, for those who don’t know, is a point in time, when you can stop what you’re doing and say “look at what we did.”  It’s an instant, and what you should be able to see from where you sit at that moment is a picture of parts, accumulated into a measurable outcome.  Sounds almost poetic.

Where the difficulty comes in is that the picture that an Employer expects to see for the same measurable outcome may be very different from that presented by the Contractor.  Put these various milestones together in a milestone schedule, and you have the potential for a lot of different expectations along the project programme.

It’s therefore very important that milestones are:

  • Clearly definable and measurable – Both parties should be able to agree easily that a milestone has been achieved when looking at the same evidence.  Should turbines be delivered to site, or is a holding point enough?  Should modules be connected, or is it fine that they’re installed on the mounting structure?
  • For a discrete piece of work or activity – the boundaries of activities making up a milestone should be known
  • For an appropriate amount of work – milestones for very small packages of work may become onerous to monitor. (If, however, they are for overly large pieces of work, it may be difficult to monitor if and when delays start occurring)

The milestone schedule should naturally be linked to the project programme of works.  This PoW will be refined after the completion of the contract, but the key project deliverables should be defined upfront, as these will inform the milestone schedule.

SCHEDULE

Things that should be considered in the milestone schedule (as they will undoubtedly be linked to the payment schedule – so many schedules) are:

  • completed detailed facility design
  • procurement and delivery milestones
  • construction milestones
  • testing and commissioning milestones, including completion certificates

The Contractor will need to be able to demonstrate that the milestone has been completed in accordance with the contract, and in order for the Employer to verify this, they will need to be able to provide relevant documentation, such as:

  • Purchase orders/waybills/delivery notes/inspection sign off slips
  • Construction progress reports
  • Quality inspection reports and check sheets/snag lists
  • Up to date construction programme of works
  • Up to date project risk register

The contract should outline the Employer’s right to request relevant documentation in order to carry out the verification of completed milestones.  It should also explain whether or not the Contractor is allowed to make claims for a portion of a milestone.