Wind and Solar Energy Projects:

Structuring EPC AgreementsUnique Issues in Wind and Solar PV Construction Contracts, including Guarantees and Warranties

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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 Agreements

November 20, 2019JAMIE J. HANSEN

Holland & Knight LLP

STEPHEN J. HUMES

Holland & Knight LLP

Steve Humes

Steve Humes practices environmental, energy, public utility and

infrastructure law at Holland & Knight and advises clients on renewable

energy regulatory, project finance and development issues, including

environmental issues and project contracts. He represents project

developers, sponsors and banks on wind, solar PV, biomass,

geothermal, and energy storage projects, among other technologies,

and represents green banks along with project owners and developers

from New Jersey to California and New York to Nicaragua. He counsels

clients on and negotiates EPC Agreements, Power Purchase

Agreements and other major renewable project contracts.

He also assists clients with state and federal environmental and energy

regulatory compliance and enforcement matters and counsels clients

on energy and environmental issues in corporate M&A transactions,

including acquisitions and divestitures of fossil and renewable power

plants.

Steve is based in Holland & Knight’s New York City office.

Steve Humes

New York

212.513.3473

steve.humes@hklaw.com

6

Jamie Hansen

Jamie Hansen focuses her practice on energy and infrastructure project

development, corporate and energy transactions, and securities law

matters. Jamie’s experience includes preparing engineering,

procurement and construction agreements for a range of project types,

including large-scale commercial solar power plants in the U.S. and in

Latin America.

Jamie previously worked as a mechanical engineer in the electric

power industry as well as the manufacturing industry. She is a licensed

professional engineer with experience in feasibility studies, design, and

construction of both traditional fossil fuel and renewable energy

facilities, including natural gas, coal, and solar power plants.

Jamie is an associate in the Denver office of Holland & Knight LLP.

Jamie Hansen

Denver

303.974.6546

jamie.hansen@hklaw.com

7

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

8

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.

• Interconnection Delays: Utility-specific, contractor experience

9

Owner Site Acquisition Risks• State and Local Regulations and Compliance

Obligations

• NIMBY Issues (e.g., Wind Farm or Solar Siting)

• Zoning and Permitting Requirements/Restrictions

• Access to Rights of Way

• Existing Easements/Land Use Restrictions

• Access to the Electrical Grid (Interconnection)

• Pre-Existing Environmental Conditions (e.g.,

Brownfields, Landfills)

• Suitability of Existing Ground Conditions

• Closure Requirements/Termination Assurances (e.g.,

Restoration of Site)

10

EPC Agreement Defined

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

11

Wind and Solar EPC Risk Allocation

12

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

13

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

14

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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?

17

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

18

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

19

Performance Risk (Cont.)

Will the Project Be Completed on Time and within

Budget?

• Project development risk is partially allocated to the

Contractor and insurers. The Contractor should

contractually assume the PPA’s COD and related

delivery obligations (performance guaranty, minimum

system size, etc.)

• LDs for Failure to achieve

• Warranties (linkage to O&M Agreement)

• Conditions Precedent: Interconnection

• Zoning and Land Use Approvals

20

Performance Risk (Cont.)• Capacity Guaranty:

• Minimum Guarantied Capacity

• 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

• Minimum guarantied capacity supports PPA capacity requirements

• Guarantied Capacity

• 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

21

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

22

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

23

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.

24

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.

25

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.

26

Issues Affecting Owner’s Risk

27

• 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).

28

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)

29

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.

30

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

31

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

33

• 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

▪ Gross Negligence/Willful Misconduct/Intentional Fraud

▪ Title

▪ Insurance

34

Limitations on Liability (Cont.)• Other Waivers:

− Warranties: The Contractor waives all representations and warranties that are not expressly provided in the EPC Agreement.

− Exclusive Remedies:

• Remedies expressly set forth in the EPC Agreement

• Missing schedule milestone

• Missing performance guaranties

− Consequential Damages: Each Party waives any right to claim consequential damages under the EPC Agreement.

• Third-party claims indemnifiable under the EPC Agreement

• Gross Negligence/Willful Misconduct/Intentional Fraud

• Liquidated Damages/Termination Payments

• Others

35

Change Orders• General: Each Party has certain rights to demand a change in

the terms of the EPC Agreement. This includes the

Contractor’s rights to receive additional time and money based

on the occurrence of specified events (but generally not

modifications to other terms of the EPC Agreement).

• Events:

− Force Majeure

− Owner-Caused Delay

− Change in Law

− Subsurface Issues

− Changes in Work Required by Owner

− Suspension

36

Change Order Limitations• Mechanics: The Owner often negotiates for procedural

requirements that, if not strictly followed for a specified

event, will result in the Contractor losing its rights to a

change order for that event.

• Thresholds: The Owner often negotiates for materiality

qualifiers or dollar thresholds that must be exceeded

before the Contractor is entitled to a change order for

money.

• Schedule: The Owner often negotiates so that the

Contractor is permitted a change order for time only if the

applicable event affects the critical path and exceeds a

threshold of days.

• Other Requirements and Considerations: (1) Mitigation,

(2) Over-Head Allowances, (3) PPA, (4) Lump-Sum Pricing

and (5) Other.

37

Force Majeure

• Definition: Force Majeure generally means any

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.

38

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.

39

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

40

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

41

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.

42

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.

43

44

Other Financing Issues

• Cooperation by Contractor/Guarantor

with Lenders:

• Direct Agreement/Consent to Collateral Assignment

• Legal Opinion

• Officer’s Certificate

• Financial and Other Information

• Independent Engineer

• Liens:

• Waivers

• Subordination

• Cure/Reimbursement/Indemnification

• Third-Party Beneficiaries

• Attachment to system

45

Other Financing Issues (Cont. )

• Termination Rights: The Contractor

should have limited rights to terminate

the EPC Agreement after FNTP.

• Default vs. Change Order

• Suspension

• Extended Force Majeure

• Insurance:

• Coverage

• Additional Insurance

• Subrogation

• Notice

• Payment of Proceeds

46

• Others:

• Setoff

• Title

• Risk of Loss

• IP and Other Indemnities

• Subsurface Risk

Other Financing Issues (Cont. )

Thank You

Partner | New York

212.513.3473

Steve.Humes@hklaw.com

Associate | Denver

303.974.6546

Jamie.Hansen@hklaw.com

47