Wind and Solar Energy Projects: Structuring EPC Agreements Unique Issues in Wind and Solar PV Construction Contracts, including Guarantees and Warranties Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1. WEDNESDAY, NOVEMBER 20, 2019 Presenting a live 90-minute webinar with interactive Q&A Jamie Jackson Hansen, Attorney, Holland & Knight, Denver Stephen J. Humes, Partner, Holland & Knight, New York
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Wind and Solar Energy Projects:
Structuring EPC AgreementsUnique Issues in Wind and Solar PV Construction Contracts, including Guarantees and Warranties
Overview of a Wind or Solar PVProject Transaction Structure
• Introduction to Wind and Solar PV
Transactions
• Power Purchase Agreement
• Owner Buys Turnkey Project
• Regulatory Considerations (Net Metering
vs. Wholesale Power Project; PPAs vs.
Solar Leases; Size Limits)
• Summary of Key Ancillary Agreements
• PPA/REC Offtake Agreements
• Interconnection Agreement
• Wind: Turbine Supply Agreement
• Solar: PV Panel Module, Racking System and Inverter Supply Agreement (if applicable)
• Real Estate Entitlements
• O&M Agreement
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Wind and Solar Project Regulatory Considerations: Net Metering and Interconnection Issues
State Regulatory Requirements Vary Significantly
• Distributed Generation: Project is “inside the fence” and interconnected electrically to host behind the utility meter.
• Net Metering: Revenue meter tracks electric usage both ways – when host uses less electricity than the wind farm or solar PV system generates, surplus flows to local electric utility – issue is who gets the credit for surplus power and for how much?
• DG Size Limits: Could be 2 MW or less; 6 MW or less; or less than host’s annual consumption needs – states allow utility’s interconnection tariff to limit size of project.
• EPC Contract: Performance contingent on Interconnection.
Engineering, Procurement and Construction Agreement
(EPC) – the design-build contract between the Project Owner
(the “Owner”) and General Contractor (the “Contractor”)
• Types of EPC Agreements – Contract Structure
• Wrap vs. No Wrap
• General Overview on Interplay with Other Agreements
• Supports PPA Performance and Schedule Obligations
• Often Relies on Supply Chain Agreements
• Often Links Performance Guarantees with O&M Agreement
Solar Wind
• Modules• Inverters• Racking Systems
• Turbines• Monopoles• Foundations
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Wind and Solar EPC Risk Allocation
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IT’S ALL ABOUT RISK
ALLOCATION…
• CONSTRUCTION
• Price Risk
• Permitting Risk
• Performance Risk
• Schedule Risk
• EXCEPTIONS
• OTHER FINANCING
ISSUES
Price Risk
• General:
• It is unlikely that a sophisticated offtaker will agree to pay for construction cost overruns through an increase in PPA pricing.
• Non-recourse construction financings are sized based on PPA pricing, PPA term and offtaker creditworthiness, with a small contingency to cover construction cost overruns, among other things.
• Accordingly, lenders will not generally take construction cost risk, and therefore require that the EPC Agreement be fixed-price, with only limited, customary exclusions that permit price increases.
• Payment Mechanics:
• Milestones vs. Schedule of Values
• Invoice approval process
• Lien waivers
• Right to dispute in good faith
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Price Risk (Cont.)
• Exceptions:
− Equity assumes the risk that delays in issuing the Full Notice to Proceed (“FNTP”) will result in price increases.
• Negotiate a sufficient time period between execution of the EPC Agreement and the initial drawdown of the construction financing.
• Negotiate specified price increases for a limited period.
− Scope of Work
• Wrapped vs. Unwrapped Risk
• Owner-Supplied Equipment, Other Owner Obligations and Owner-Issued Change Orders
▪ Permits and Real Property Rights
▪ Interconnection Provider
− Contractor-Issued Change Orders
− Other Negotiated Exclusions
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Permitting Risk
• Land use, zoning, noise
• Building Permits
• Federal and State Authorizations
• Environmental
− Brownfields
− Closed Landfills
− Open Landfills – Wind or solar built into cap/remediation design
Permits
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Permitting Risk (Cont.)
• What is the timeline for issuing permits?
− Do all timelines match those of leases, PPAs and loan documents?
• Are public hearings required?
− Are hearings necessary to gain public support?
• Who is responsible for obtaining permits?
− Project Permits are obtained in the Owner’s name, but Contractor typically applies for and pursues applicable permits (with the Owner’s cooperation).
− Since Project Permits typically contain conditions to construction, the Contractor should be directly responsible for satisfying permit conditions.
− The Contractor is responsible for permits applicable to the Contractor’s tools, equipment, personnel and operations.
Performance Risk
• Will equipment and/or technology fail?
• Is the site suitable for construction and operation of the
facility?
• Will the EPC contractor fail to complete construction?
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Performance Risk (Cont.)
TOOLS TO MANAGE RISK:
• Who has Permitting Responsibilities? (Deadlines,
Cooperation, Effects of Delay)
• Liquidated damages for performance
• E&O/Environmental Insurance
• Construction/Stop Loss Insurance (controls cost
overruns from unexpected conditions)
• Credit Support
• Owner Controlled Insurance Program (OCIP)
• Environmental Surveys
• Geotechnical Studies and Surveys
• Warranties
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Performance Risk (Cont.)Will the Project Be Completed on
Time and within Budget?
• Completion is typically phased
• Mechanical Completion: Construction completion
• Substantial Completion:
• Required capacity tests and interconnection are complete
• Commercial Operation Date (COD)
• Typically, signifies transfer of project ownership for ITC purposes
• Final Completion:
• Final capacity tests are complete, if applicable
• Completion of all EPC scope, including punch list items and any site restoration
• Delivery of remaining documentation, including final lien waivers
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Performance Risk (Cont.)
Will the Project Be Completed on Time and within
Budget?
• Project development risk is partially allocated to the
• Achievement of the minimum guarantied capacity is a condition to substantial completion, resulting in delay liquidated damages if such minimum guarantied capacity is not timely achieved
• Failure to achieve the guarantied capacity results in performance liquidated damages, supporting lost revenue and a buydown of debt
• Cure Period
• Period
• Cooperation
• True-Up Payment
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Performance Risk – Solar PV• Adjusted Energy Performance Test:
− Generally a long-term test (365 days) that occurs multiple times (1-5) after substantial completion, comparing actual energy performance to expected energy performance.
• Performance Liquidated Damages
• Module warranties last longer, but remedy is generally repair, replacement or supplemental panels.
− Adjustments are required to remove weather and operational affects, including for soiling, temperate, force majeure and irradiance.
− Risk of monitoring equipment inaccuracies increases.
• Redundancies
• Calibration requirements
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Performance Risk – Wind• Guaranteed Power Curve Test:
− Tests the wind project’s ability to meet a Guaranteed Power Curve (wind speed vs. MWh), typically during the first year after substantial completion
− The parties may specify their own procedure, or reference the standards set forth by the International Electrotechnical Commission (e.g., IEC 61400), allowing for updates to standards between EPC contract and PPA signing and substantial completion
• Testing requirements should be aligned between the
EPC contract and the PPA
• Other tests may be required, such as sound level testing
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Schedule Risk
• General:
− A sophisticated offtaker will impose an outside date by which the facility must be constructed, enforced through payment of delay liquidated damages and, eventually, the right to terminate the offtake agreement.
− The lenders are primarily concerned with a delay in construction resulting in the PPA being terminated (and potentially lost tax consequences, when applicable).
− The Owner is incurring delay damages, interest during construction, and other fixed costs in the event of a construction delay, and is also foregoing revenue from the sale of power.
− Accordingly, the Owner requires a guarantied milestone date(s) from the Contractor, as well as other provisions to mitigate construction schedule risk or otherwise share construction schedule risk with the Contractor.
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Schedule Risk (Cont.)• Guarantied Milestones: The Parties will negotiate guarantied
substantial completion dates for individual turbines or blocks of PV
panels (in larger projects) and/or an overall substantial completion
date.
• If the Contractor fails to achieve any guarantied milestone date, the Contractor will pay, as the Owner’s sole remedy, a daily amount constituting liquidated damages until such milestone is achieved.
• Sizing delay liquidated damages
• Costs (in terms of money and schedule)
• Limitations on Liability/Performance Excuses
• Delay-In-Startup Insurance
• Termination: If the Contractor is too delayed, the Owner may want
the right to:
• Declare a default and terminate the EPC Agreement upon the Contractor missing an outside date; or
• Prospectively declare a default and terminate the EPC Agreement if the Contractor could reasonably be expected to miss an outside date.
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Schedule Risk (Cont.)• Bonus: The Owner may consider offering a bonus for
early block substantial completion or overall substantial
completion.
− Calculation and Limitations
− Negotiation Strategy
• Acceleration: The Owner usually has the right to issue
a change order accelerating performance under the
EPC Agreement.
• Subcontractor Limitations: The EPC Agreement often
specifies permitted material subcontractors and requires
the Owner’s consent to change material subcontractors.
• Other Mitigation: Diligence on Contractor selection,
management team and labor supply, progress reporting,
PPA, others.
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Issues Affecting Owner’s Risk
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• Credit Risk
• Limitations on Liability
• Change Order and Force
Majeure Provisions
• Tax Issues
• Assignment
• Dispute Resolution and
Governing Law
Credit Risk• General:
− From a practical standpoint, the value of a contract is based both on the terms of the contract, and the ability of the parties to perform the terms of the contract.
− Lenders want an entity with an investment grade rating from Moody’s and/or S&P to guarantee the timely construction and performance of the project for a fixed-price in accordance with the EPC Agreement.
• Guarantee also secures other obligations of Contractor under the EPC Agreement, including warranty obligations
• The Contractor provides the primary warranty, and subcontractor credit risk may arise after the expiration of that primary warranty
− The Contractor wants to secure the Owner’s timely payment of the contract price (primarily to protect profit margin and payments to third parties).
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Contractor Credit Support• General: If the Contractor as counterparty to the EPC
Agreement is not itself creditworthy, credit support will
be required.
• Forms of Credit Support: The Contractor’s credit
support is provided in one or more of the following
forms:
− Payment and Performance Guaranty
− Payment and Performance Bond
− Retention (regardless of the Contractor’s creditworthiness)
− Other rights of the Owner to withhold payment in defined circumstances from invoiced amounts under the EPC Agreement
− Insurance (regardless of the Contractor’s creditworthiness)
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Owner Credit Support
• General: In a non-recourse financing, the Contractor will
generally mitigate its concerns regarding the Owner’s ability to
pay the contract price by:
− Conditioning FNTP upon the initial drawdown of the construction financing; and
− Structuring the milestone payment schedule to include an upfront down payment at FNTP, as well as “front-weighted” milestones that keep the Contractor ahead of its expected costs.
• Flow through termination provisions in subcontracts
• Owner will be concerned with ROI for “front-weighted” payments
• Other Protections: (1) Suspension rights for failure to pay, (2)
limitation on Owner-Issued Change Orders, and (3)
mechanics’ liens.
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Guaranty• General: A separate payment and performance guaranty is
executed by a parent or affiliated company of the Contractor
simultaneously with the signing of the EPC Agreement.
• Basic Obligation: The Guarantor unconditionally, absolutely
and irrevocably guarantees the full and timely payment of all
amounts when due, and performance when due, by the
Contractor under the EPC Agreement.
• Limitations:
• In addition to “joint efforts” drafting clauses, a guaranty will contain a number of defense waivers.
• The Guarantor reserves any right, counterclaim and defense of the Contractor with respect to the guarantied obligations, other than specified defenses.
• Monetary and Temporal Limitations and Exceptions
• Governing Law: New York
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Retainage• General: A percentage of each payment is withheld by the
Owner as performance security for the Contractor’s obligations
under the EPC Agreement, or a letter of credit is issued in lieu
thereof.
• Release:
− Most of the retainage is released at substantial completion.
• Except for amounts needed to complete punchlist items
• Occasionally, a minimum amount is maintained until final completion
− Post-substantial completion retainage is generally released as punchlist items are completed, with the remainder released as of final completion.
• Except for amounts spent by Owner to complete punchlist items
• Occasionally, a minimum amount is maintained through the general warranty period
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Letter of Credit
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• Easy execution and
provides liquidity
• Issued by a financial
institution that is sufficiently
qualified
• Irrevocable for a period of
time, but may be
automatically renewed
• Form of demand typically
attached
− Draw Conditions
Limitations on Liability• General: The Contractor’s return on investment is not substantial and
thus, the Contractor is generally not willing to expose its organization
to unlimited risk for one project. This is particularly true in a fixed-price
contract with schedule and performance guaranties that are supported
by a creditworthy parent.
• Caps on Liability:
− Delay Liquidated Damages
− Performance Liquidated Damages
− Overall Liquidated Damages
− Overall Limitation on Liability
• Before vs. After Substantial Completion
• Exceptions
▪ Third-party claims indemnifiable under the EPC Agreement
circumstance not within the reasonable control of the
claiming Party, but only if (a) such event is not due to
such Party’s negligence or willful misconduct and is not
due to such Party’s failure to perform any of its
obligations under the EPC Agreement; (b) such Party
could not have reasonably avoided such event and has
taken commercially reasonable efforts to mitigate and
eliminate the effects of such event; and (c) such Party
has provided the other Party with notice thereof within
three (3) days after such event has occurred.
• Examples: If the definition is satisfied: war, riot,
sabotage, acts of public enemy, terrorist acts, severe
and unusual weather, flooding, explosions, fire arising
from natural causes, earth quake, hurricanes, tornados,
forest fires and hailstorms.
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Force Majeure (Cont.)• Exclusions: The following are typically excluded:
• Changes in interest rates, inflation rates, insurance premiums, commodity prices, exchange rates, availability of financing or other general economic conditions;
• Changes in financial condition of the Owner or Contractor;
• Any strike, lockout or other labor dispute of the Contractor or its subcontractors that are not regional or national;
• Equipment or labor pricing increases or labor unavailability; and
• Subcontractor’s failure to perform, mechanical failure of equipment or delays in receiving equipment or materials, in each case, to the extent not resulting from a specified Force Majeure.
• Termination: The Owner often has the right to terminate for
extended Force Majeure claimed by the Contractor.
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EPC Agreement and Tax Issues• Role of Federal Investment Tax Credit
− § 48 ITC (Solar): 30% of basis after placed in service, phased out through 2022
− § 45 PTC (Wind): 2.5 cents (for 2019) x kWh produced for 10 years after placed in service, phased out through 2019
Date Construction Begins Placed in Service Date ITC Amount
Before 1/1/2020 Before 1/1/2024 30%
1/1/2020 to 12/31/2020 Before 1/1/2024 26%
1/1/2021 to 12/31/2021 Before 1/1/2024 22%
Before 1/1/2022 On or after 1/1/2024 10%
On or after 1/1/2022 Any 10%
Date Construction Begins PTC Reduction Amount
After 12/31/16 and before 1/1/18 20%
After 12/31/17 and before 1/1/19 40%
After 12/31/18 and before 1/1/20 60%
After 12/31/19 N/A – Ineligible for PTC
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EPC Agreement and Tax Issues (Cont.)
• “Placed in Service” Issues – Don’t throw the switch on
until the Owner is Ready
− Tax Equity Investor does not want EPC Risk so Tax Equity Investor will typically not accept project ownership until Substantial Completion or just prior to “Placed In Service”
• State Tax Incentives and Grants
• Understand Documentation Required to Show
Completion and Project Costs
− Accountants must certify to Treasury Qualifying Cost of Project
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Other EPC Agreement Issues
• Assignability: Assignment is generally subject to
consent.
− Collateral assignment is required for a non-recourse financing.
− Assignment to an affiliate is generally acceptable if credit support remains or is provided and such affiliation continues.
− Assignment by the Owner to a successor to the project is generally permissible in a non-recourse financing.
− Change of control is usually not restricted.
− Breach of assignment restrictions causes assignment to be void.
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Other EPC Agreement Issues (Cont.)
• Dispute Resolution
− Arbitration, Expert Determination or Court of Law
− If Arbitration, consider:
• Number of arbitrators
• Location
• Sharing of Costs
• Final and Binding
• Permitting injunctions/interim court relief
− Consider including officer escalation process
• Choice of Law
− Owner typically specifies governing law.
− The Contractor may have objections based on familiarity/limits on liability.
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Other Financing Issues
• Cooperation by Contractor/Guarantor
with Lenders:
• Direct Agreement/Consent to Collateral Assignment