Wind power projectsWind power projects

Construction and Construction and O&MO&M

Weero KosterWeero Koster

25 April 201325 April 2013

Typical turbine structure

Typical PF StructureTypical PF Structure

3

PUBLIC ENTITY

CONCESSION CONTRACT

SPV

SPONSOR EQUITY

THIRD PARTY EQUITY INVESTORS

DUE DILIGENCE ADVISER 1

MEZZANINE FUNDERS

INSURERS

CONSTRUCTION

SENIOR FUNDERS (BANK/BOND)

SURPLUS REAL ESTATE DISPOSAL

DUE DILIGENCE ADVISER 2

SUBCONTRACTOR 1

DESIGNERS

EQUIPMENT SUPPLY

OPERATION & MAINTENANCE

DEVELOPER

DUE DILIGENCE ADVISER 3

INVESTORS

SUBCONTRACTOR 2

SUBCONTRACTOR 3

BONDS & GUARANTEES

SURETIES & GUARANTORS

Where does EPC fit in?Where does EPC fit in?

Except as otherwise stated in the Contract:Except as otherwise stated in the Contract:

a)a) the Contractor shall be deemed to have obtained all necessary information as to risks, the Contractor shall be deemed to have obtained all necessary information as to risks, contingencies and other circumstances which may influence or affect the Works;contingencies and other circumstances which may influence or affect the Works;

b)b) by signing the Contract, the Contractor accepts total responsibility for having foreseen by signing the Contract, the Contractor accepts total responsibility for having foreseen all difficulties and costs of successfully completing the Works; andall difficulties and costs of successfully completing the Works; and

c)c) the Contract Price shall not be adjusted to take account of any unforeseen difficulties or the Contract Price shall not be adjusted to take account of any unforeseen difficulties or costs.costs.

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Construction Management

Owner assumes risk

Contractor retains risk

Traditional Design & Build

LSTK/ EPC

R I S K S P E C T R U M

LSTK – Lump Sum TurnkeyEPC – Engineering Procurement and Construction

EPC Structure

Forms of ContractForms of Contract

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General applicationGeneral application• Yellow Book: design/build contract Yellow Book: design/build contract

electrical/mechanical works, including plant electrical/mechanical works, including plant supply and construction works; allocation of risk supply and construction works; allocation of risk on basis of insurability, project management on basis of insurability, project management principles and ability to foresee and mitigateprinciples and ability to foresee and mitigate

• Silver Book: fixed-price, date-certain, lump-sum Silver Book: fixed-price, date-certain, lump-sum turn-key contract:turn-key contract:• Little risk of price increase (but higher price) or delay Little risk of price increase (but higher price) or delay

for Employerfor Employer

• Shift of risks to Contractor: design and executionShift of risks to Contractor: design and execution

General risk profile: Shift of General risk profile: Shift of risksrisks

• Employer’s Engineer is Employer’s Employer’s Engineer is Employer’s RepresentativeRepresentative

• Employer’s ‘determinations’Employer’s ‘determinations’

• Setting OutSetting Out

• (No) Unforeseeable difficulties & (No) Unforeseeable difficulties & verification/ interpretation of Employer verification/ interpretation of Employer data (incl. sub-surface, hydrological and data (incl. sub-surface, hydrological and Employer Requirements)Employer Requirements)

• General design obligations, design errorGeneral design obligations, design error

Shift of risks, cont’dShift of risks, cont’d• No extension of Time for Completion No extension of Time for Completion

for:for:

• exceptionally adverse climatic conditions exceptionally adverse climatic conditions (except FM) (except FM)

• unforeseeable shortages in personnel or unforeseeable shortages in personnel or goods by epidemic or government actionsgoods by epidemic or government actions

• Errors in Employer’s RequirementsErrors in Employer’s Requirements

• Setting OutSetting Out

• Unforeseeable physical conditionsUnforeseeable physical conditions

Shift

of

risk

s,

Shift

of

risk

s,

cont’

dco

nt’

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• Employer’s Risk

Employer’s Risk excludes:excludes:• Use of works by

Use of works by Employer,Employer,• Design of works by

Design of works by Employer’s personnel,

Employer’s personnel,• Unforeseeable operation

Unforeseeable operation

of forces of nature

of forces of nature

General risk profile: General risk profile: key employer issueskey employer issues

• Contractor fully responsible for design and design Contractor fully responsible for design and design coordination (including Employer design)coordination (including Employer design)

• Full ground condition risk to ContractorFull ground condition risk to Contractor

• Employer to retain influence over projectEmployer to retain influence over project

• Right to VariationsRight to Variations

• Limited scope for Contractor claims for time/money; Limited scope for Contractor claims for time/money; Contractor will:Contractor will:• Price these risks, so increase initial Contract SumPrice these risks, so increase initial Contract Sum

• Do extensive due diligence to mitigate, leading to delay in Do extensive due diligence to mitigate, leading to delay in executionexecution

Payment & security: Payment & security: key employer issueskey employer issues

• Fixed price lump sum payments against schedule of Fixed price lump sum payments against schedule of payments & Performance Certificatepayments & Performance Certificate

• Long payment periodLong payment period

• No claim for additional time or money for e.g. No claim for additional time or money for e.g. Variations/innovations, ‘in country” Force Majeure, Variations/innovations, ‘in country” Force Majeure, Unforeseen ground conditions, setting out or Unforeseen ground conditions, setting out or discovery of fossilsdiscovery of fossils

• Robust security package: advance payment bond, Robust security package: advance payment bond, performance bond, retention of moneyperformance bond, retention of money

• Warranty bond after Taking Over (> 2yrs)Warranty bond after Taking Over (> 2yrs)

Progra

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• Liquidated Damages

Liquidated Damages

for delay (10 – 20 %, >

for delay (10 – 20 %, >

?)?)• Limited rights for

Limited rights for extension of Time for

extension of Time for

CompletionCompletion• Suspension by

Suspension by Employer entitles

Employer entitles Contractor extension

Contractor extension

of time/ costs

of time/ costs

Testing and defects, Testing and defects, insurance: key insurance: key

employer issuesemployer issues

• Suitable testing regimeSuitable testing regime

• Employer technical advisors to set Employer technical advisors to set performance/reliability standards and regime for performance/reliability standards and regime for testing/ performance guarantee levels testing/ performance guarantee levels

• Liquidated Damages for performance (10 – 20 Liquidated Damages for performance (10 – 20 %, > ?)%, > ?)

• Defects liability period (1 – 2 yrs): default is 1 yrDefects liability period (1 – 2 yrs): default is 1 yr

• Liability cap, sub-caps and ‘carve-outs’Liability cap, sub-caps and ‘carve-outs’

• Project specific insurance provisions; all Project specific insurance provisions; all insurance monies go in separate insurance insurance monies go in separate insurance proceeds account for benefit Employerproceeds account for benefit Employer

Permits, change in Permits, change in law, FM: key law, FM: key

employer issuesemployer issues

• Employer planning, environmental/ Employer planning, environmental/ Contractor construction and Contractor construction and transport: permit scheduletransport: permit schedule

• Change in law after contract signing/ Change in law after contract signing/ in force, EH&S developmentsin force, EH&S developments

• Exhaustive FM list ?Exhaustive FM list ?

• Location of FM, “in country” FM: costs Location of FM, “in country” FM: costs in addition to EOT ?in addition to EOT ?

EPC Construction EPC Construction contracting: key featurescontracting: key features

Turnkey-, date certain-, fixed price-, Engineering, Turnkey-, date certain-, fixed price-, Engineering, Procurement & Construction (EPC) contractProcurement & Construction (EPC) contract

Including Start-up, Testing & CommissioningIncluding Start-up, Testing & Commissioning

Bonus payment Bonus payment

Detailed scope of work (Employer’s requirements)Detailed scope of work (Employer’s requirements)

Performance testing & guaranteesPerformance testing & guarantees

LD’s for delay & performanceLD’s for delay & performance

Assurances of creditworthinessAssurances of creditworthiness

Construction Construction contractingcontracting

Main risks:Main risks: Experience, reputation, resources, credit ContractorExperience, reputation, resources, credit Contractor Increase in construction costsIncrease in construction costs Delay in completionDelay in completion PerformancePerformance Force majeure (& contractual co-ordination/ Force majeure (& contractual co-ordination/

resurrection)resurrection) Building materials: steelBuilding materials: steel Construction related facilitiesConstruction related facilities Raw materials & utilitiesRaw materials & utilities Coordination with employer/ other contractorsCoordination with employer/ other contractors IP rights/ escrowsIP rights/ escrows

Construction Construction contractingcontracting

Customary issues:Customary issues: What are the ‘Works’ ? WTG’s, SCADA, foundations, What are the ‘Works’ ? WTG’s, SCADA, foundations,

crane hardstands, roads, cables, substation, FCU ?crane hardstands, roads, cables, substation, FCU ?

Partial and deemed take overPartial and deemed take over Are all ‘Defects’ created equal ? Serial defects ?Are all ‘Defects’ created equal ? Serial defects ? How are measurements done ? SCADA, cup How are measurements done ? SCADA, cup

anemometers, metmast, Lidar ?anemometers, metmast, Lidar ? How is green and grey metering doen ? By whom ?How is green and grey metering doen ? By whom ? Grid connection interfaceGrid connection interface Site risks (nature, archeology, fossils, ordinance, Site risks (nature, archeology, fossils, ordinance,

boulders, excess/polluted water)boulders, excess/polluted water)

Operation & Maintenance Operation & Maintenance contractingcontracting

Issues similar to EPC contractIssues similar to EPC contract

Creditworthy, experienced Operator: turbine supplier ? Creditworthy, experienced Operator: turbine supplier ?

Can the Operator be replaced ?Can the Operator be replaced ?

What is ‘Operation” ? Scope of workWhat is ‘Operation” ? Scope of work

Agreed upon performance criteria at fixed/ predictable OPEXAgreed upon performance criteria at fixed/ predictable OPEX

Increased OPEX through latent defects/ new technology: Increased OPEX through latent defects/ new technology: typically defects warranty ends after 2-5 yearstypically defects warranty ends after 2-5 years

Performance guarantees with LD’s: Performance guarantees with LD’s:

Availability, power curve, soundAvailability, power curve, sound

cover variety of costs, but also PPA damages ?cover variety of costs, but also PPA damages ?

but usually low caps. What if operator cannot be replaced ?but usually low caps. What if operator cannot be replaced ?

Operation & Maintenance Operation & Maintenance contractingcontracting

What is the maintenance standard ?What is the maintenance standard ? Does maintenance include replacement of Does maintenance include replacement of

‘Components”: blades, nacelle, tower, gearbox ?‘Components”: blades, nacelle, tower, gearbox ?

Balance of Plant ?Balance of Plant ? Is maintenance work warranted for design, materials, Is maintenance work warranted for design, materials,

workmanship ? Serial defects ?workmanship ? Serial defects ? Is there access to the site for components ?Is there access to the site for components ? Is there an on-site stock and what’s in it ?Is there an on-site stock and what’s in it ? How long will spares remain available ?How long will spares remain available ? Condition of the Works at the end of the maintenance Condition of the Works at the end of the maintenance

term ? Testing ?term ? Testing ?

Power Purchase Power Purchase AgreementsAgreements

Linchpin energy project financingLinchpin energy project financing

Financing & operating agreementFinancing & operating agreement

Linkage with EPC/O&MLinkage with EPC/O&M

CP’s & milestonesCP’s & milestones

Delay in COD, testing, early production (at opex + Delay in COD, testing, early production (at opex + price ?)price ?)

Failure to construct or acheive nameplate capacityFailure to construct or acheive nameplate capacity

Approval by purchaser of project doc’s, e.g. pass-Approval by purchaser of project doc’s, e.g. pass-through OPEXthrough OPEX

Take-or-pay is not an absoluteTake-or-pay is not an absolute

Delivery point, connection & transportDelivery point, connection & transport

Main linkages EPC, O&M Main linkages EPC, O&M and PPAand PPA

Approval project contractsApproval project contracts

CP’s & Milestone scheduleCP’s & Milestone schedule

Testing procedures & take pverTesting procedures & take pver

Delay LD’s up to CODDelay LD’s up to COD

Nameplate capacity, defects- & performance LD’sNameplate capacity, defects- & performance LD’s

Early production revenuesEarly production revenues

Capacity and energy paymentsCapacity and energy payments

Delivery point & connection, meteringDelivery point & connection, metering

Term & terminationTerm & termination

Third party sales, RFR’sThird party sales, RFR’s

Force MajeureForce Majeure

Change in lawChange in law

IN SHORT: EVERYTHING !IN SHORT: EVERYTHING !