EPC Contract Overview

Solar Utility PPA EPC d O&M A tPPA, EPC, and O&M Assessment

September 2010

Contact: [email protected]@scottmadden [email protected]

Copyright 2010 by ScottMadden. All rights reserved.

PPA OverviewPPA Overview

A power purchase agreement Sources of Revenue from a Solar Project

Renewable Energy Credits

Sale

A power purchase agreement (PPA) is a contract to buy the electricity generated by a power plant

These agreements are a critical part of planning a successful solar

AgreementPower

Purchase Agreement

(PPA)

part of planning a successful solar project because they secure a long-term stream of revenue for the project through the sale of the electricity generated by the project

Securing a good PPA is often one

Solar Project

Securing a good PPA is often one of the most challenging elements of solar project development

Securing a PPA will also be a condition to any equity and debt financing of the project

Tax Benefits Investment Tax Credit (or Treasury Grant)

Accelerated Depreciation Schedules

financing of the project

Power may be sold through a PPA to an investor-owned, municipal or rural electric cooperative utility in the local market or, in some cases to more distant utilities or

State Incentive Programs

Grants Public Benefit Charge

Incentives

cases, to more distant utilities or wholesale or retail customers in unregulated markets. Often a business or government will seek out a solar company to put panels on its property for a PPA type arrangement

Copyright 2010 by ScottMadden. All rights reserved. 1

Other Programsarrangement

Solar PPASolar PPAA solar PPA is a unique arrangement and allows a firm, government entity, or non-profit to gain the benefits of solar energy without the high initial up front costs of putting in a Photovoltaic (PV) asset. The PPA agreement usually involves several parties including:several parties including:

Consumer (energy purchaser): The purchaser often has a desire to purchase energy using a solar asset for a specific use (school, base, government building, office building), but does not have the capital to invest in the up front costs of PV installation

System owner and investors: A system owner will provide or gather a team of investors to provide the up front capital and sell power to a purchaser. In addition to the re en e of sales from the cons mer the s stemto the revenue of sales from the consumer, the system owner and investors will often benefit from the tax credits and other incentives of the solar asset and will be able to sell credits to the utility as well

Contractors: Outside vendors will often be contracted Contractors: Outside vendors will often be contracted by the purchaser or seller (depending on the PPA structure) to perform work including initial construction, O&M, security, and legal services. Contractors can be a signing party to a PPA

An illustration of the money, credit, and electricity benefits of a solar PPA structure

The solar PPA is unique, as the asset will often be located on the Utility: The local utility can benefit from this

arrangement by purchasing excess power or credits (if required). The utility will also be relied upon if the consumer needs excess power

purchasers property (a school, building, etc.). The PPA must list out property rights during the term and after. Often the PPA includes a buyout provision for the purchaser to buy the asset outright at the end of the term or early. This might be the goal of the purchaser when entering into a PPA


Source: Cory, Karylynn, Jason Coughlin and Charles Coggeshall Solar Photovoltaic Financing: Deployment on Public Property by State and Local Governments Technical Report, National Renewable Energy Laboratory, May 2008

Key Elements of a Solar PPAKey Elements of a Solar PPAA PPA is a legal document. While details are case specific and will need to be addressed by the purchaser and power provider. A solar PPA will usually list several parties: the purchaser, the seller, and the contractor (party responsible for construction). It can be signed by all three parties, but as a minimum by the purchaser and the seller. A solar PPA canconstruction). It can be signed by all three parties, but as a minimum by the purchaser and the seller. A solar PPA can cover multiple locations in a single document. Some key elements of a solar PPA include:

PPA Attribute Description

The stated term of most solar PPAs is between 20 and 25 years, although a term ranging anywhere from 15 to 30 years is not unusualLength of Agreement anywhere from 15 to 30 years is not unusual The PPA is usually legally binding once it has been executed by representatives of both the seller and the purchaser, subject to early termination rights

Seller or contractor must demonstrate to purchaser that: All permits, consent licenses, approvals and authorizations required by any government

th it h b bt i d

Commissioning Process

authority have been obtained The seller has completed all testing required by the financing documents, government

permits, interconnection agreement, sellers operating agreement, sellers engineering, procurement and construction agreement and any manufacturers warranties

An officer of the seller has certified that the equipment installed at the facility has a maximum designed output equal to the agreed megawatts (MW)Commissioning Process maximum designed output equal to the agreed megawatts (MW)

An independent professional engineer has certified that the facility has been completed in all material respects in accordance with the PPA

No interference exists with the Generating Facilities insolation and access to sunlight or will exist to the seller and contractors knowledge

An operation and maintenance (O&M) agreement is in place for the PV assets that is p ( ) g pagreeable to the provider and purchaser

Security arrangements have been made for the facility


Key Elements of a Solar PPA (Contd)y ( )PPA Attribute Description

The PPA will usually require that one party (seller, purchaser, or contractor) have specific

Insurance

y q p y ( , p , ) pinsurance policies

Policies typically required include: commercial general liability insurance; workers compensation insurance; automobile liability insurance; all-risk property insurance; and business interruption and extra expense insurance

If an event other than a force majeure event causes a temporary or permanent shutdown of theTemporary or Permanent Facility Shutdown

If an event other than a force majeure event causes a temporary or permanent shutdown of the generating facility, either the seller or purchaser (depending on the type of event) will need to be responsible for ensuring the contract does not go into default

The purchaser and seller will agree to a price for the power generated from the solar assets and list the price in the PPA. Typically this price will start below market rate and will escalate on a fi d l b i Thi t t ll th h t l k i i d ill t b d ith

Power Salefixed yearly basis. This strategy allows the purchaser to lock in a price and will not bend with the fluctuations of the commodities market like fossil fuel generated power does

The purchaser and seller can also agree on a generation amount. If the purchaser has excess power from the generating asset, it can sell the excess power to the utility under a separate purchase agreement

Credit

Many purchasers require sellers to provide some form of credit enhancement to cover expected damages to the purchaser if the project does not meet construction milestones or is not commercially operational by the agreed date

This credit enhancement may take several forms, including guaranties by creditworthy affiliates, cash collateral or escrow accounts, irrevocable standby letters of credit or performance bonds

Warranties and O&M

O&M can be one of the challenges of a solar facility. The PPA should usually provide warranties on the PV from the contractor or seller on the assets

If the solar asset will be on the purchasers property, it is important to spell out in the PPA that the contractor or other O&M third parties have access to the asset for routine maintenance


Key Elements of a Solar PPA (Contd)Key Elements of a Solar PPA (Cont d)PPA Attribute Description

Construction or development milestones are intended to allow the purchaser and seller to track the projects development progress

Milestones

p j p p g The PPA may identify a variety of milestones, including: acquisition of all permits needed for

construction; execution of a construction contract; commencement of construction; and, ultimately, commercial operation

If the PPA addresses milestones, typically the seller and contractor must meet the dates established in the PPA for each of the milestones or risk paying delay damages

Defaults

PPAs include detailed sections related to events of default. Events of default are situations where the action or inaction of one of the party significantly jeopardize the overall project

Many events of default are curable, which means there is an opportunity to resolve the issue. However, when one party is responsible for an event of default, the other party is typically entitled to damages if the default cannot be cured

Environmental Attributes and Credits

All PPAs include provisions that assign ownership of the environmental attributes or credit to oneof the parties. In some cases, the seller will retain the credits and rights as part of the investment; in other cases the purchaser will get the credits

Utilities will often have an interest in purchasing RECs, providing an additional revenue source for the party that owns the creditsfor the party that owns the credits

The PPA will often have agreed upon conditions for the solar assets after the termination of the initial PPA. These can include: Asset removal: the purchaser does not want the asset or the generating power, and the seller

must remove from purchaser property after the termination datef (End of Term and Buyout Options PPA renewal: the purchaser can renew upon similar terms of the original terms (likely on shorter terms)

Asset purchase: the purchaser can buy the assets from the seller at fair market value and continue the generation

Early buyout: The purchaser is often able to buy the assets from the seller and end the agreement earlier than the termination date These terms are written into the PPA


agreement earlier than the termination date. These terms are written into the PPA

Advantages and Disadvantages of a PPAAdvantages and Disadvantages of a PPAThe PPA system has many advantages and disadvantages for a power purchaser and seller

Benefits include: Ability to monetize federal tax incentives. If the purchaser is a government entity or non-profit, the third party can

benefit from the incentives through ownership. Utilities can also purchase these credits, creating another market and potential revenue source for the seller or purchaser

Low/No up front costs for the purchaser Predetermined electricity price (or cash flow) for 20-25 years for the purchaser (seller) Shift O&M responsibility to a qualified third party PPA can include a path to ownership, a potential benefit for both seller and purchaser

Disadvantages include: How credits are used and distributed can create a challenge for the seller and purchaser. A thorough study of

l ti di t i ti i d dregulations surrounding government incentives is needed Ownership and facility access can be challenging. Building occupants, citizens, or other stakeholders might not

want a third party to have access to private or government property Transaction costs can be high. The PPA is a complex document and attorneys will be needed to hash out the fine

details. This can be expensiveUnsure horizon The incentives and regulations surrounding energy is constantly changing While the PPA might Unsure horizon. The incentives and regulations surrounding energy is constantly changing. While the PPA might be a good idea now, in the long run it could be challenged

S C K l J C hli d Ch l C h ll S l Ph t lt i Fi i D l t P bli P t b


Source: Cory, Karylynn, Jason Coughlin and Charles Coggeshall Solar Photovoltaic Financing: Deployment on Public Property byState and Local Governments Technical Report, National Renewable Energy Laboratory, May 2008

EPC ContractEPC Contract

An engineering, procurement, and construction (EPC) contract is a common form of contracting arrangement within the construction industry. Under an EPC contract, the contractor will design the installation, procure the necessary materials, and

Financing an EPC contract typically requires the following elements:

f

y , g , p y ,complete construction, either through own labor or by subcontracting part of the work.

A fixed completion date A fixed completion price No or limited technology risk O t t t Output guarantees Liquidated damages for both delay and performance Security from the contractor and/or its parent Caps on liability (ideally there would be no caps on liability however given the nature of EPC contracting and the risks to the Caps on liability (ideally, there would be no caps on liability, however, given the nature of EPC contracting and the risks to the

contractors involved, there are almost always caps on liability)

Restrictions on the ability of the contractor to claim extensions of time and additional costs


EPC Contract OverviewEPC Contract Overview

Project Activities Covered in EPC Contracts

A single point of responsibility The contractor is responsible for all design, engineering, procurement, construction, commissioning, and testing activities

A fi d t t i Risk of cost overruns and the benefit of any cost savings are to the contractorsA fixed contract price Risk of cost overruns and the benefit of any cost savings are to the contractor s account

A fixed completion date EPC contracts include a guaranteed completion date that is either a fixed date or a fixed period after the commencement of the EPC contract

Performance guarantees The project companys revenue will be earned by operating the facility; therefore, it is vital that the facility performs as required in terms of output, efficiency, and reliability

C li bilit Most EPC contractors will not as a matter of company policy enter into contracts with Caps on liability os C co ac o s o as a a e o co pa y po cy e e o co ac sunlimited liability

Security It is standard for the contractor to provide performance security to protect the project company if the contractor does not comply with its obligations under the EPC contract


EPC Contract Overview (Contd)EPC Contract Overview (Cont d)

Project Activities Covered in EPC Contracts

Variations The project company has the right to order variations and agree to variations suggested by the contractor

Th t t t th t it h i ht t ll th i t ll t l t d i thIntellectual property

The contractor warrants that it has rights to all the intellectual property used in the execution of the works and indemnifies the project company if any third parties intellectual property rights are infringed

F j The parties are excused from performing their obligations if a force majeure event Force majeure p p g g joccurs

Suspension The project company usually has the right to suspend the works

Termination The contractor usually has very limited contractual termination rights; the project company will have more extensive contractual termination rights

Performance specification Unlike a traditional construction contract, an EPC contract usually contains a performance specification


What Makes for a Successful EPC ContractWhat Makes for a Successful EPC Contract

EPC contracting has many advantages:

One point of contact One point of contact Hands off approach Minimal staffing requirements Minimal legal risks* Minimal legal risks

An effective EPC contract will include:

Contractor management procedure Contractor management procedure Definitive SOW and scope freeze defined for specific sites Scope change procedure A project management plan A project management plan Permit management plan Commissioning and testing plan review process Warranty management plan in place y g p p Issues management log and issues resolution procedure Punch list management process


*http://prodigyengr.com/front/showcontent.aspx?fileid=73

Operations and Maintenance Strategies and NeedsOperations and Maintenance Strategies and Needs

The various types of maintenance strategies for a PV plant include:

P t ti M i t i l d ti i ti d i i f i t t t b kd d d ti l Preventative Maintenance includes routine inspection and servicing of equipment to prevent breakdowns and production losses Corrective or reactive maintenance addresses equipment breakdowns after the occurrence. This break and fix method has

low upfront costs, but bears the risk of unplanned downtime and higher costs on the backend. This is the current industry standard

Condition based maintenance (CBM) uses real time data to prioritize and optimize maintenance and resources Condition based maintenance (CBM) uses real time data to prioritize and optimize maintenance and resourcesThe reality is more than one of these types of maintenance is needed, but a proper strategy can limit the amount of surprises and will decrease the amount of unplanned downtime

When establishing a preventative maintenance schedule it is important to do so based upon each component and system manufacturers recommendations. Corrective maintenance procedures should also be established to address items that require immediate repairs and items that can be repaired with routine maintenance visits Some typical maintenancerequire immediate repairs and items that can be repaired with routine maintenance visits. Some typical maintenance needs at PV plants include:

Over the course of time, dust collects on the PV panels significantly affecting system efficiency. Panels must be cleaned regularly to minimize efficiency loss

PV operators and suppliers have found that one to two cleanings per year will adequately serve most plants needs

System components must go through a thorough maintenance checklist at least once or twice per year. The checklist should include such items as:

Checking connections of wires Testing voltage / current through wires and PV modules Inspecting components for moisture Greasing actuator gears and topping off hydraulic fluid on tracker components, if applicable Testing of SCADA and meteorological systems communications Confirming settings on the inverter Resealing of system components

Additional maintenance needs include the removal of snow, ice, grass, and vegetation to ensure effective system operation


Additional maintenance needs include the removal of snow, ice, grass, and vegetation to ensure effective system operation

Source: Electric Power Research Institute, Addressing Solar Photovoltaic Operations and Maintenance Challenges, July 2010

O&M: The Plant Operational Support ModelO&M: The Plant Operational Support ModelRegardless of what maintenance strategy a firm chooses, the operational support model defines how the new plant will be run on a daily basis including who will perform system monitoring, plant repairs, and scheduled maintenance. The model addresses the mechanical and electrical needs of the plant as well as maintaining the grounds and communicationaddresses the mechanical and electrical needs of the plant as well as maintaining the grounds and communication systems

In House Staff: Existing staff may be leveraged if the plant is adjacent to existing generation facilities. For example: System monitoring and plant operation may be performed by fossil operators throughout the course of their shift Mechanical engineering not included in the warranty may be handled by onsite fossil maintenance staff Site electrical maintenance may be supported by plant operations crews or transmission maintenance crews The advantages of this system include: better visibility on personnel and equipment issues, greater quality control,

ability to use existing personnel and assets, and it will lead to a standard PV O&M process The disadvantages of this system include higher upfront costs, increased risks, and the need to develop an expertise

quickly in your work force

EPC Contractor: The utility may opt to use the Engineering, Procurement, and Construction (EPC) contractor that sold and built the system to oversee an O&M contract

This limits the use of multiple contracts and simplifies dealing with warranty-related repairs versus maintenance

Third Party Provider: Another option for O&M services not covered under the warranty is to use a third party provider which supports multiple PV sitessupports multiple PV sites

Use of a third party for an organizations first PV plant helps instill best management practices for maintenance schedules and for system repairs

One variation of this model is to contract some functions (i.e., mechanical engineering, grounds maintenance, and panel cleaning) to a third party while keeping some tasks (i.e., communication and monitoring, electrical engineering) in-house

Advantages of both the EPC and third party option include lower upfront costs and greater flexibility, lower upfront risk, less drain on the current labor force, and potentially greater expertise

Disadvantages of the EPC and third party option include less understanding of the O&M process, higher back end cost potential, and it requires dependence on an outsourced contractor


Support options include using in-house staff, the plant EPC contractor, or third parties

Source: Electric Power Research Institute, Addressing Solar Photovoltaic Operations and Maintenance Challenges, July 2010.

O&M: Solar PV Plant Types and Components O&M: Solar PV Plant Types and Components A utility-scale solar PV plant is made up of the following*:

Photovoltaic panels The PV panels are composed of solar cells that convert the suns rays or photons into DC electric powerThe PV panels are composed of solar cells that convert the sun s rays or photons into DC electric power Panel trackers are mechanisms used on some PV systems allowing the solar panels to track the sun throughout the

day for optimal power production Trackers can enable the system to produce more power but also require more maintenance than stationary

systems

Th b l f t (BOS) t The balance of system (BOS) components The BOS components include such things as wires, combiners, junction boxes, mounting equipment, conduit runs,

and communications equipment**

The inverter The inverter is the unit that conditions or converts the DC electricity produced by the solar cells into AC electric powerThe inverter is the unit that conditions or converts the DC electricity produced by the solar cells into AC electric power

Panel cleanings Meteorological systems communications testing

An effective solar plant maintenance plan will include routine upkeep to address the following:

g

Wire connection inspection Voltage testing (wires and PV modules) Moisture/rust inspection

g y g

Inverter settings inspection System component resealing Controller/sensor calibration

Actuator gear lubrication Hydraulic inspection

Pest infestation checks Seasonal removal of snow, ice, grass, and vegetation


*U.S. Department of Energy, 2010, www.doe.gov**Banke, Bryan. Solar Electric Facility O&M: Now Comes the Hard Part three-part series, Oct-Dec 2009, www.renewableenergyworld.com

O&M: Additional Considerations for PV O&M Costs*O&M: Additional Considerations for PV O&M CostsAs more utility-scale PV plants come online, more being learned about system performance and capacity. This includes a better understanding of what to expect with regard to system operation and maintenance. The following are lessons learned from Bryan Banke with Solar Power Partners and the Electric Power Research Institute:

Preventative Maintenance:

Focus on design, engineering, and the initial build of the PV plant Target a downtime of 1 percent (3.7 days/year) and prepare for 10 percent downtime (36.5 days/year) M t d d ti ti d l l h th t f l t h th t f l i Measure system degradation over time and clean panels when the cost of lost power approaches the cost of cleaning Mitigate risk by using multiple smaller inverters rather than one large inverter Perform site visits at least 1-2 times/year Consider transitioning outsourced O&M to in-house Recognize workforce enthusiasm and consider integrating PV O&M responsibility into the traditional maintenance functionMonitoring:

Consider monitoring the system at the string level for plants between 250kW to 2 MW and use the data to address maintenance needs Larger plants may not see the cost benefit from this level of detailLarger plants may not see the cost benefit from this level of detail

Automate system monitoring and supplement by reviewing system reports multiple times throughout the day Assure good access to historical data Perform simple site analytics once per month Id tif f t th t d t i th i t d ff f it i l ti Identify core factors that determine the economic tradeoffs of monitoring resolutionWarranty:

Make sure warranty terms are clear; avoid vague clauses Perform due diligence before agreeing to a construction contract


Source: Electric Power Research Institute, Addressing Solar Photovoltaic Operations and Maintenance Challenges, July 2010* Banke, Bryan, Solar Electric Facility O&M: Now Comes the Hard Part three-part series, Oct-Dec 2009, www.renewableenergyworld.com

Contact UsContact Us

For more information on how we can assist you with determining your solar PV operating and maintenance costs, please contact us.

Richard D. StarkweatherPartner

ScottMadden, Inc.2626 Glenwood Avenue

Jere (Jake) JacobiSustainability Practice

ScottMadden, Inc.3495 Piedmont Rd Bldg 10 Partner 2626 Glenwood Avenue

Suite 480Raleigh, NC 27608

Phone: 919-781-4191

Sustainability PracticeLeader

3495 Piedmont Rd Bldg 10Suite 805

Atlanta, GA 30305

Phone: 404-814-0020 Phone: 919 781 4191Mobile: 678-345-9871

[email protected]

Phone: 404 814 0020Mobile: 262-337-1352

[email protected]


Documents

EPC Contract Overview