For a variety of reasons, the solar industry has seen record growth and will continue to do so. According to the Solar Energy Industries Association and Wood Mackenzie, a global energy and chemical research company, the US solar industry grew 43% and installed a record 19.2 gigawatts (GWDC) capacity in 2020, a pandemic year. Wood Mackenzie also predicts that the US solar industry will install a total of 324 GWDC of new capacity over the next decade.
In addition, as we wrote in a previous article, a major driver of the construction industry in 2021 and beyond will be President Biden's approval of the “Build Back Better” plan. The plan is expected to include significant investments in infrastructure, manufacturing and clean energy projects.
With the expected demand for such projects in the coming years, especially in the renewable energy space, it is important to understand not only the benefits of clean energy, but also best practices for solar construction contracts.
Benefits of clean energy
If history has taught us anything, industries tend to adapt every time there has been a crisis. During construction, we've seen advances in design and technology to make projects more climate-friendly, among other things. This promotes further future growth in the area of clean energy.
There are many benefits to using solar energy including, but not limited to:
- Reducing the carbon footprint;
- financial benefits in terms of longer equipment life, federal, state, and sometimes even local tax credits and discounts;
- increased reliability; and
- among other things, less dependence on foreign companies.
From a construction point of view, EPC (Engineering, Procurement and Construction) contracts are the most common type of contract for complex projects like this one. These types of agreements are arguably more complex than standard construction contracts. Hence, this article gives a brief overview of EPC contracts and identifies key areas that need to be reviewed before your next solar project.
EPC Contracting – General Concerns
EPC contracts cover everything from planning to purchasing equipment to building a solar project. In addition, they can add other performance guarantees as well. These can be specific start and test procedures, performance minima and target energy capacities that are linked to calendar dates. Therefore, the overall goal of a solar EPC contract is to minimize upfront risk while maximizing the long-term profitability of the facility. Of course, on complex projects like these, this is no easy task, especially given the dependency on utilities.
Important considerations for any solar EPC project
- Choose your project team carefully. As with any large project, it is important to select a contractor who has a deep understanding of the construction of a highly specialized project such as solar energy conversion. Additionally, your contractor's finances should be strong. This is partly due to the extended nature of the performance guarantees, which typically last many years after the project is completed. In the event there is a deviation from work that affects overall performance, you want to be sure that the contractor's business will continue to operate for many years after completion.
- Understand the supply chain project. Solar projects require a large amount of technology and equipment (e.g. photovoltaic modules, batteries, tracking systems, collection systems, etc.). Building a solid supply chain not only helps minimize project delays, but can also help keep costs in check.
- Establish strict project controls. Because solar projects involve significant purchases of sophisticated equipment and extended performance guarantees (tied to different calendar dates), planning delays can be common and extremely costly. Therefore, it is recommended that strict project controls and protocols be in place to mitigate expected problems before they occur. (i.e. planning, management controls, communication, change order process, etc.) Owners should also consider flat-rate compensation provisions to compensate the owner for lost tax benefits and problems with power generation.
- Understand the termination clause of the EPC. As with any contract, a proper understanding of the termination requirements and procedures is a best practice. However, a thorough understanding of a termination language in an EPC contract is of paramount importance as strict deadlines and completion dates must be adhered to to minimize potential damage caused by delay. If possible, it is advisable to be able to cancel at least partially in the event of a delay.
- Clearly define the scope of work. Commissioning and commissioning are important components of the scope of work on solar projects. Parties should include detailed language on how and when these activities will be carried out and what “closure” means. Finally, the parties should be concerned with the responsibility to conduct such activities so as not to create confusion. In other words, will the owner and contractor share responsibility, will a third party be involved, or will the contractor be solely responsible for such tasks?
- Establishing performance guarantees and warranty obligations. Warranties and performance guarantees are likely to be heavily negotiated. The performance guarantee provisions should also be taken into account as they relate to the overall performance of the project for many years after initial completion. If certain thresholds are not met, the subsequent purchaser of the project may be entitled to significant sums of money which could adversely affect profits. The performance guarantees should be well thought out and specific. Warranty provisions are also important. For example, if the project does not perform as required, it is likely that the work is non-compliant and requires rework. A solid warranty regime is especially important when trying to limit the future risk of production problems due to non-compliant work.
- Review of the limitation of liability provisions. As with any contract, each party tries to limit their potential risk. As the owner, you should consider the potential risks and costs associated with a non-compliant system and how limiting the contractor's liability can weigh on your bottom line. Consider “carve-out” language that seeks to extend the contractor's liability in certain situations. In addition, the waiver of consequential damage provisions can also be included in these sections. It is important to understand whether your anticipated risks can be considered excluded under a comprehensive consequential loss waiver or, alternatively, are beyond the reach of this language.
- Consider using an independent expert. The parties should also consider appointing an independent expert who agrees with both parties and has the authority to make change order assessments and interpret any applicable technical codes or standards. This can significantly speed up the resolution of technical disputes that would otherwise lead to delays.
Given the complexity of solar projects and the associated EPC agreements, it is important that the project team work together and create an agreement that adequately manages risk while respecting strict project deadlines. While the above areas are by no means intended to be a comprehensive list of items to consider when negotiating your next EPC contract, they are certainly among the most controversial subjects of contract negotiation.