Module 5: Wind ProjectContracts

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Module 5: Wind ProjectContracts

Presented to:

DFCC Bank and RERED Consortia MembersJanuary 25– 27, 2011 | Colombo, Sri Lanka

Pramod Jain, Ph.D.

Agenda

Structure of wind project and relationships Power Purchase Agreement Turbine Procurement contract EPC contract O&M Contract

Module Objectives

Learning Objectives• Understand the entities involved in a wind project• Understand the nature of contracts• Understand how to protect and minimize risk with contracts• Understand contract with turbine suppliers• Understand contract with EPC contractors• Understand Power Purchase Agreements

Wind Project Structure & Associated Contracts, Similar to Any Other IPP

Lender

Project LLC

Equity Partners

LocalInvestors

OutsideInvestors

TurbineSupplier

O&M

Government

Utility

EPCContractor

LandOwners

Power Purchasing Agreement

O&MAgreement

Project Equity

Payments forWind Rights

ProjectEquity

ProjectProfits

Contract Types and Purpose

Type of Contract Areas of Focus

Turbine Supplier

Interconnection Agreement

Others

Type of legal entity: Partnership, corporation, special purpose entity.  Management rightsCash flow: Tax Incentives vs others

Securitized, Recourse

Buying, leasing, royalty payments

Long‐term PPA with credit‐worthy utility.Tariffs for supply of electrical energy, and rates for environmental attributesPenalties for delay, non‐performance, poor quality power.  Take‐or‐pay contract

Construction contract requiring completion dates and penalties.  Turnkey contract. Liquidated damages.

Turbine Supply contract.  Power curve warranty.  OEM warranty.  Commissioning and project handover. 

Access to grid, quality of power, protection systems, responsibility and payment of upgrades and new transmission

O&M, Insurance, employment

Ownership

Lender

Land

EPC Contractor

PPA with Utility

Ownership Contracts

Two types of ownership:• Corporate

– Project is in the balance sheet of a corporation– Lower cost of capital, depends on quality of balance sheet of sponsor– Example: Utility company, industrial conglomerate, etc.

• Special purpose entity– Established for the sole purpose of funding, owning and operating wind project. – Equity from shareholders that are commercial entities, investors, tax investors– Off the balance sheet of shareholders– No recourse or limited recourse to shareholders. Higher cost of capital.– Credit appraisal and lending decision is based on the inherent economics of the

project – not the credit standing or balance sheet of any sponsor• Contract will specify the allocation of cash flow and tax incentives as a

function of time• Example: Leveraged Flip structure.

Leveraged Flip Structure

• Initial Capital: 40% Equity, 60% Debt

• 95% Equity from tax investor, 5% from developer/sponsor

• Pre-flip: • Tax credit & losses: Tax

investor=95%. Sponsor=5%• Cash distribution: tax

investor=95%. Sponsor=5%• Post-flip

• Tax credits: None, fully utilized• Cash distribution: Tax

Investor=30%. Sponsor=70%• Tax losses: Tax investor=5%.

Sponsor=95%• Debt is paid from revenue

QUESTIONS?Questions?

Turbine Supplier

Types of contract:• Turnkey with turbine supplier (Common in SE Asia)• Equipment supply and commissioning (Common in USA, EU)

Scope of Supply and Services:• Equipment Supply:

– Blades, hub, nacelle, tower. – Spare parts, Special tools, Consumables– Others: Corrosion package, transformers, reactive power capability

• Services: – Site suitability– Instructions for transportation, handling, foundation, etc.– Supervision of installation– Start-up and commissioning– Operations training

Timeline for Turbine Supplier

Down payment: 25 to 60%. Delivery of turbines: 30% to 90%. 9 to 24 months Installation, assembly and erection: 2.5% to 10%. 1 to 2 months Commissioning, start of production: 5 to 10%

• Turbine operates as a single unit• Interconnection with utility and synchronization with grid• SCADA installed and commissioned. SCADA tested with live turbine data• Punch list of items remaining

Final project completion and handoff: 2.5 to 5%• Punch list items completed• All documents, manuals, designs, compliance certificates, training delivered• All equipment and debris removed from site• Ownership transfers from contractor to owner

Liquidated Damages with Turbine Supplier

Guidelines• Purpose is not to punish, but to compensate the affected party• Amount of damage is ascertained in advance or to be agreed/determined by court• Damages must be sufficiently uncertain at the time the contract is signed

Delay related• Related to delay of delivery or commissioning of wind plant• $ per turbine per day of delay, with an overall cap

Power curve related• 95 to 98% of warranted power curve is not achieved. Supplier has right to test• $ for deficient production until end of warranty period

Availability related• Hours turbine is ready to produce – hours allocated for scheduled maintenance• After ramp-up period, payments start. May have incentives for exceeding availability

Cap on liquidated damages, options:• Sub-caps apply to each items• Overall cap of 100%

Other Warranty, Defects Liability & Serial Defects

Noise level, similar to power curve warranty Defect causes part to fail

• Failure is: Break, failure to perform for which it was designed, intended or installed; or does not comply with specifications

• Serial defect: Defects that require replacement or repair of component in all turbines

• Supplier is obligated to fix Items excluded:

• Alterations by third party• Failure to service or maintain• Damage from force majeure• Improper foundation or installation

Warranty with Turbine Supplier

Alternatives:• Base warranty is 2 to 5 years• Performance warranty: 12 to 15 years

– “ENERCON guarantees its customers a technical availability of up to 97 % per year incl. a clearly defined maintenance factor. We offer this high availability for a service life of 15 years – this is unique on the wind market.

– From servicing to safety inspections, maintenance and repairs, all eventualities are covered by one single contract.

– Damage caused by unforeseeable events such as acts of nature and vandalism can be covered by a specially developed additional EPK insurance policy.

– The fees under the ENERCON PartnerKonzept contract are based on the annual wind turbine output. The customer pays a minimum fee depending on the respective wind turbine type plus a yield-oriented surcharge. The fee is calculated separately for each individual wind turbine / wind farm per year and according to the annual kWh produced during the elapsed operating year”

Source: http://www.enercon.de/en-en/673.htm

EPC Contractor

Engineering, Procurement and Construction contract• Turnkey• Delivers completed project• At pre-specified cost• Within pre-specified timeframe• With pre-specified production level and quality

Ideal EPC contract is:• Fixed price with fixed delivery date• Security deposit or performance bond to guarantee performance• Liquidated damages for delay in completion and substandard performance

Advantages of EPC: • Single point of responsibility

Disadvantages:• More expensive because of build in contingencies• In tight market contractors may not be willing to bid on fixed price contracts

QUESTIONS?Refer to Chapter 2 of Riso’s Burgos Project Review

Power Purchase Agreement (PPA) with Utility

PPA: Agreement between wind project owner (Independent Power Producer, IPP) and Utility• Simple exercise if PPA rates are mandated by legislation for wind projects• Complex if PPA is signed with Utility that will pass on rates to consumers

Components:• Price of energy and duration of purchase• Pricing or sharing of renewable energy credits and other incentives• Capacity contract versus energy delivery contract• Penalties/incentives related to planned vs actual date of commissioning• Allocation of risk related to permitting, siting and interconnection

PPA must have enough protection for IPP:• Utility should bear risks due to changes in law, and uncontrollable events

because it can pass on cost to consumers• IPP cannot pass on cost

PPA, Distribution of Risk (contd.)

Risk Borne by Developer Project risk related to:

Equipment, development, engineering, installation, commissioning, financing, and others that it can control

Equipment failure due to poor maintenance

Availability guarantee

Risk that Developer cannot Bear

Weather: Strength of wind• Cannot write long term climate

insurance

Change of laws• Cannot write change-in-law

insurance

Uncontrollable events Production guarantee without

force majeure

If IPP is assuming risks above and beyond the cost of producing power, make sure it is paid for it!In other words, ensure IPP is not in the insurance business, without collecting premium.

QUESTIONS?Review SDGE PPA Contract

Land Lease or Easement Contract

Scope of agreements with land owners:• Development period (met-tower, studies and survey):

– Fixed amount per acre per year– Tower fee per tower per year

• Construction period– Installation fee per MW or per turbine

• Operating period– Production payment: Based on amount of energy production– Royalty payment: Percentage of gross revenue (exclude tax credits)

• May be a minimum royalty payment: Per MW per year

Other Contracts

O&M: Based on availability of wind energy plant Interconnection agreement:

• Specifies the interconnection specifications• Quality of power in terms of:

– Low Voltage Ride Through (LVRT): Ability of plant to stay operational during a short duration fault

– Amount of reactive power consumed– Amount of reactive power that can be supplied– Limit high frequency harmonics– Limit amount of flicker– Voltage and frequency tolerances

Conclusions

There are numerous contracts in a wind project, akin to any other power project

In addition to good contracts, risks can be minimized by:• Experienced & proven engineer and contractor• Experienced & credit worthy operators for O&M• Experienced, credit worthy wind turbine supplier with long history quality

product