PROJECT ENGINEERING & DESIGN
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The design and construction of facilities for the generation of electrical power from solar resources is an area that is filled with risk and opportunity. The goal of this chapter is to provide an overview of the legal issues encountered in the course of engineering and constructing utility-scale solar energy projects so as to identify key risk allocations that are commonly used in this sector to create the legal framework necessary for a successful solar energy project.
This overview is written from the perspective of a solar energy project owner/developer; however, this information may also interest design and engineering, construction, operations and maintenance, and financing entities as well. Further, the lines between owner/developer, contractor, and equipment supplier are often blurred in the solar energy industry, as contractors and/or equipment suppliers increasingly are taking on the role of developer (sometimes through joint ventures) and panel suppliers often perform the duties of the contractor. As with any complex negotiated transaction, there is significant value to be won or lost by all parties and the potential for creative legal strategies to enhance value for all parties.
I. Construction-Related Agreements. Critical to the development of any solar energy project are the various agreements a project owner must enter into for:
- Design and engineering of site improvements, adaptations, expansions or alterations of existing facilities and related infrastructure, electrical systems including interconnection facilities, and transmission and distribution systems;
- Procurement of power generation equipment, such as photovoltaic (“PV”) panels, mounting racks, tracker systems, inverters, transformers, and collection systems;
- Construction management services necessary to successfully schedule, coordinate, and oversee the engineering, procurement, and construction of the power generation equipment and the balance-of-plant facilities; and
- Operation and maintenance of the completed facility.
Frequently, engineering, procurement, and construction tasks are combined within a single agreement called an Engineering, Procurement, and Construction agreement or “EPC agreement” or (if substantially all project tasks are assigned to a single entity) a “full-wrap” or “turnkey” agreement. The historic traditional development model for risk allocation is the design-bid-build method using the EPC agreement, versus the turnkey design-build package agreement that may offer a more palatable risk allocation to owner/developers. It is also common to have separate agreements for procurement and installation of major power generation equipment supplemented by a “balance-of-plant” agreement for the construction of ancillary facilities.
As an alternative to the single-entity EPC approach, the project developer may enter into separate agreements with a key equipment supplier, such as a panel manufacturer, in order to secure favorable terms and a direct relationship with this key project player. If this structure is used, a key risk area is in matching up delivery, warranty, insurance, and project completion details from the equipment supply agreement with the terms of design, construction, and operation agreements with other contractors. It will be critical in such cases to coordinate each of these EPC agreements to make sure that they collectively produce a complete project, and that the owner/developer is aware of risk allocation and any risk gaps that will be held by the owner/developer.
Depending on the contractual structure, product or service warranties, insurance, and other matters may be addressed in the full-wrap agreement or may be addressed in individual agreements. Understanding how these issues impact and interrelate to each other is essential for creating a set of coordinated agreements.
II. Design and Engineering Services. Solar power projects require certain design and engineering expertise that is unique to this sector of the power generation industry. The designers and engineers must coordinate their services with the structural and electrical designers and engineers working on the structure to ensure proper integration and scheduling. Historically, relatively few companies designed, engineered, and manufactured solar energy generation equipment, PV or thin film panels, or solar thermal and concentrated solar units. Today there are a number of manufacturers in each of these areas.
With the growth and monetization of the industry and the maturation of incentives, new vendors are entering the market regularly. For several years, PV panel prices plummeted as manufacturing capacity increased worldwide. Currently, solar technology provides for various systems, from solar thermal hot water or concentration systems to silicon cell or PV or thin film generation panels. The needs and requirements for any particular project, however, are in part dictated by its operating parameters, which are in turn dictated by the project’s purpose, energy load, and location.
For instance, the weight tolerance of a rooftop installation may be different from the weight tolerance of a ground-mount installation, and the available mounting options will be different as well. These and other factors must be considered for proper project design and risk/opportunity assessment.
III. Construction and Installation Services. Solar systems are generally assembled from predesigned components that are aggregated and installed to suit the project’s needs. Nonetheless, substantial design and engineering work will typically be required to integrate the chosen system or systems into the existing environment, topography, and existing conditions at the project site, including the necessary interconnection requirements. These design and engineering services, and related procurement and construction work, may be performed by the supplier of the solar equipment and materials under one or more agreements, but are often provided by a third-party consulting engineer contracting directly with the owner/developer or design-builder.
IV. Typical Contractual Structure for a Distributed Generation Solar Project. Given the multiple factors influencing the development of a distributed generation solar energy project, no single contractual structure applies to all projects. However, the following example of a contractual structure used for a particular distributed generation solar project illustrates, in a limited way, how a project owner, its design-builder or general contractor and prime architect, and a solar equipment supplier might address certain common concerns. Many of the concepts discussed below also apply to utility-scale solar projects.
In this example, a project owner wants to install a PV system on its building to provide a portion of its electrical needs. The owner wants to have the same entity design, install, test, and commission the system, as well as construct the electrical interconnection facilities and ensure a minimum yearly electrical output. The owner also wants to make sure it can enforce any warranties provided by third-party subcontractors and suppliers of materials and equipment, and wants liquidated damages for any delays that might affect its business and undermine the owner’s expectation regarding the project’s ability to claim tax credits and incentives for the system under state and federal regulations.
The project owner and the solar contractor may enter into a solar installation agreement whereby the contractor agrees to design, install, test, and commission a PV electric generating system, including necessary interconnection facilities, on the owner’s property.
Under the agreement, the owner has the right to review all subcontracts for equipment, design, and installation services entered into by the contractor, and any such subcontracts are required to contain certain provisions for the benefit of the owner. The agreement also provides for delay liquidated damages, whether or not tax credits or incentives are lost due to the delay. Finally, due to the electrical integration element of such a project, the agreement provides that final completion (whereby final payment is due to the contractor) is conditioned on approval of the project by the local utility and receipt of all appropriate electrical inspection certificates.
The slate of issues that the parties address in the installation agreement includes the scope of work, inspections and testing, liens, change orders, consequential damages, indemnification, measures of completion, liquidated damages, rebates and subsidies, system and work warranty obligations, coordination of activities, permitting reports, title and risk of loss, energy guarantees, and limitations of liability.
A. Scope of Work. In the example above, the parties placed great emphasis on the description of the scope of work set forth in the installation agreement. In general, except in true turnkey projects based solely on performance specifications, the parties’ scope-of-work provisions should describe, in detail, the actual design, engineering, and construction obligations of the contracting parties, as well as their coordination with other service providers on the project. The scope of work should incorporate the system’s performance and design specifications by reference to either an attached annex or a specific set of separately prepared plans and specifications. Generally, whatever is not provided for in the contractor’s scope of work is the project owner’s responsibility to complete or to contract with third parties to complete. A solar energy system contractor’s scope of work typically includes the design and engineering of the system, including its principal parts and components, as well as certain obligations relating to commissioning and performance testing of the major components of the system, and related warranty work. The contractor’s scope of work may include providing operations and maintenance services for a set number of years after completion of the system. These services are often the subject of a separate agreement. As with other aspects of such an agreement, the scope-of-work provisions will probably be heavily negotiated. Care must be taken to coordinate the scope of services being provided by the contractor with the scope and timing of services being provided by third parties on the project to minimize conflicts or gaps.
B. Measures of Completion and Start-up Obligations. The scope-of-work provisions of the relevant agreements typically determine who will be responsible for facility start up and commissioning and when and how such activities will be accomplished. Given a solar system supplier’s in-depth knowledge of its products, the supplier (or its design subcontractor) will, at a minimum, supervise system start-up and may also be engaged to commission and optimize the products and systems it supplies. However, this work can also be undertaken by the project owner/developer (with assistance from the supplier) or by a third party contracting directly with the project owner/developer. In any case, the relevant agreements must address the stages of completion, such as actual delivery of the equipment to the project site, followed by installation, start-up, and testing. Once these progress milestones are established, completion is generally evidenced by certifications of, for example, “mechanical completion,” “substantial completion” (or “commercial operations”), and “final completion.” Each such certification is considered an incremental measure that the project must satisfy in order to progress to the next measure. As with other supply- and construction-related agreements, progress payments by the project owner/developer to the supplier/contractor (as set forth in the relevant agreement) will be based, in part, on the milestones described above. For instance, the owner/developer typically pays a certain amount toward the agreed-on contract price when the order for major equipment is submitted and then makes additional payments upon (1) the delivery of the major equipment to the project site, (2) the installation of the equipment, (3) successful testing of the control and monitoring system, and (assuming the foregoing stages are executed properly) (4) the final sign-off by the parties on the project. The payment schedule can also be based on monthly applications for payment based on expenses and labor incurred in the foregoing period, with a percentage holdback or retention amount (for possible repairs, claims, or liens) to be released at the time of final sign-off. Alternatively, the parties can negotiate milestones that suit the project or their desire or ability to manage certain specific risks.