Presenting a live 90-minute webinar with interactive Q&A Solar Energy Projects: Structuring EPC Agreements Navigating Contract Structure Issues, Unique Issues in Solar PV EPCs, Performance Guarantees and Defect Warranties TUESDAY, NOVEMBER 24, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Drew Baldinger, Partner, DLA Piper , Houston Stephen J. Humes, Partner, Holland & Knight , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Solar Energy Projects: Structuring EPC Agreements November 24, 2015 DREW BALDINGER STEPHEN J. HUMES DLA Piper LLP (US) Holland & Knight LLP 5
Drew Baldinger • Drew Baldinger has several years of experience representing developers, financial institutions, electric utilities, private equity, contractors and other investors in the development, construction, operation, acquisition, divestiture, ownership and debt and equity financing of domestic and international energy projects and companies. • In particular, Drew has represented domestic and international developers, electric utilities and investors in connection with various aspects of solar (photovoltaic and thermal), wind and geothermal energy generation projects, conventional energy generation projects and transmission projects, in addition to gas-to-liquids projects and upstream and midstream oil and gas investments. 6 • Drew is a partner in the Houston office of DLA Piper LLP (US).
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 solar PV, biomass, geothermal, and energy storage projects, among other technologies, and represents the Connecticut Green Bank and New York Green Bank along with project owners and developers from New Jersey to California and New York to Nicaragua. 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. 7 • Steve is based in Holland & Knight’s New York City office.
Overview of a Solar PV Project Transaction Structure • Introduction to 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 • Solar PV Panel Module, Racking System and Inverter Supply Agreement (if applicable) • Real Estate Entitlements 8 • O&M Agreement
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 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., 10 Restoration of Site)
EPC Agreement Defined Engineering, Procurement and Construction Agreement (EPC) – the design-build contract between Project Owner (“ Owner ”) and General Contractor (“ 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 • Modules • Inverters • Racking Systems • Often Links Performance Guarantees with O&M Agreement 11
Solar EPC Risk Allocation IT’S ALL ABOUT RISK ALLOCATION… • CONSTRUCTION • Price Risk • Permitting Risk • Performance Risk • Schedule Risk • EXCEPTIONS • OTHER FINANCING ISSUES 12
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 (Con’t) • Exceptions: • Equity assumes risk that delays in issuing the Full Notice to Proceed (“ FNTP ”) will result in price increases. • Negotiate a sufficient time period between execution of 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 14 • Contractor-Issued Change Orders • Other Negotiated Exclusions
Permitting Risk Permits • Land use, zoning • Building Permits • Federal and State Authorizations • Environmental • Brownfields • Closed Landfills • Open Landfills – Solar built into cap/remediation design 15
Permitting Risk ( Con’t ) • 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 Owner’s name, but Contractor typically applies for and pursues applicable permits (with Owner’s cooperation). • Since Project Permits typically contain conditions to construction, Contractor should be directly responsible for satisfying permit conditions. 16 • Contractor responsible for permits applicable to 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 EPC contractor fail to complete construction? 17
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