Australia: EPC Contracts In The Australian Renewable Energy Sector – Wind Farms, part 3

Last Updated: 28 October 2012
Article by Damian McNair
This article is part of a series: Click EPC Contracts In The Australian Renewable Energy Sector – Wind Farms, part 2 for the previous article.

Grid access

Clearly, EPC contracts will not provide for the handover of the wind farm to the project company and the PPA will not become effective until all commissioning and reliability trialling has been successfully completed. This raises the important issue of the contractor's grid access and the need for the EPC contract to clearly define the obligations of the project company in providing grid access.

Lenders need to be able to avoid the situation where the project company's obligation to ensure grid access is uncertain. This will result in protracted disputes with the contractor concerning the contractor's ability to place load onto the grid system and to obtain extensions of time in situations where delay has been caused as a result of the failure or otherwise of the project company to provide grid access.

Grid access issues arise at two differing levels, namely:

  • The obligation to ensure that the infrastructure is in place
  • The obligation to ensure that the contractor is permitted to export power.

With respect to the obligation to ensure that the infrastructure is in place, the project company is the most appropriate party to bear this risk vis-à-vis the contractor, since the project company usually either builds the infrastructure itself or has it provided through the relevant concession agreement. Issues that must be considered include:

  • What are the facilities that are to be constructed and how will these facilities interface with the contractor's works' Is the construction of these facilities covered by the PPA, connection agreement, concession agreement or any other construction agreement? If so, are the rights and obligations of the project company dealt with in a consistent manner?
  • What is the timing for completion of the infrastructure – will it fit in with the timing under the EPC contract?

With respect to the contractor's ability to export power, the EPC contract must adequately deal with this risk and satisfactorily answer the following questions to ensure the smooth testing, commissioning and entering of commercial operation:

  • What is the extent of the grid access obligation? Is it merely an obligation to ensure that the infrastructure necessary for the export of power is in place or does it involve a guarantee that the grid will take all power which the contractor wishes to produce?
  • What is the timing for the commencement of this obligation? Does the obligation cease at the relevant target date of completion? If not, does its nature change after the date has passed?
  • What is the obligation of the project company to provide grid access in cases where the contractor's commissioning/plant is unreliable – is it merely a reasonableness obligation?
  • Is the relevant grid robust enough to allow for full testing by the contractor - for example, the performance of full load rejection testing?
  • What is the impact of relevant national grid codes or legislation and their interaction with both the EPC contract and the PPA?

Many EPC contracts are silent on these matters or raise far more questions than they actually answer. Given that the project company's failure will stem from restrictions imposed on it under either or both the PPA or the concession agreement, the best answer is to back to back the project company's obligations under the EPC contract (usually to provide an extension of time and / or costs) with the PPA. This approach will not eliminate the risk associated with grid access issues but will make it more manageable.

A variety of projects we have worked on in Asia, particularly in China and the Philippines, have incurred significant amounts of time and costs in determining the grid access obligations under the EPC contract. This suggests that it is a matter which must be resolved at the contract formation stage. Therefore, we recommend inserting the clauses in Part III of Appendix 1 28 .

Interfacing of commissioning and testing regimes

It is also important to ensure the commissioning and testing regimes in the EPC contract mirror the requirements for commercial operation under the PPA. Mismatches only result in delays, lost revenue and liability for damages under the PPA or concession agreement, all of which have the potential to cause disputes.

Testing/trialling requirements under both contracts must provide the necessary project company satisfaction under the EPC contract and system operator/offtaker satisfaction under the PPA or connection agreement. Relevant testing issues which must be considered include:

  • Are differing tests/trialling required under the EPC contract and the PPA/connection agreement? If so, are the differences manageable for the project company or likely to cause significant disruption?
  • Is there consistency between obtaining handover from the contractor under the EPC contract and commercial operation? It is imperative to prescribe back-to-back testing under the relevant PPA and the EPC contract, which will result in a smoother progress of the testing and commissioning and better facilitate all necessary supervision and certification. It must not be forgotten that various certifications will be required at the lender level. The last thing the lenders will want is the process to be held up by their own requirements for certification. To avoid delays and disruption it is important that the lenders? engineer is acquainted with the details of the project and, in particular, any potential difficulties with the testing regime. Therefore, any potential problems can be identified early and resolved without impacting on the commercial operation of the wind farm.
  • Is the basis of the testing to be undertaken mirrored under both the EPC contract and the PPA? For example, what basis are various noise tests to be undertaken?
  • What measurement methodology is being used? Are there references to international standards or guidelines to a particular edition or version?
  • Are all tests necessary for the contractor to complete under the EPC contract able to be performed as a matter of practice?

Significantly, if the relevant specifications are linked to guidelines such as the relevant International Electrotechnical Commission (IEC) standard, consideration must be given to changes which may occur in these guidelines. The EPC contract reflects a snapshot of the standards existing at a time when that contract was signed. It may be a number of years post that date in which the actual construction of the project is undertaken thus allowing for possible mismatches should the relevant standards guidelines have changed. It is important that there is certainty as to which standard applies for both the PPA and the EPC contract. Is it the standard at the time of entering the EPC contract or is it the standard which applies at the time of testing?

Consideration must therefore be given to the appropriate mechanism to deal with potential mismatches between the ongoing obligation of complying with laws, and the contractor's obligation to build to a specification agreed at a previous time. Consideration must be given to requiring satisfaction of guidelines "as amended from time to time". The breadth of any change of law provision will be at the forefront of any review.

The above issues raise the importance of the testing schedules to the EPC contract and the PPA. The size and importance of the various projects to be undertaken must mean that the days where schedules are attached at the last minute without being subject to review are gone.

Discrepancies between the relevant testing and commissioning requirements will only serve to delay and distract all parties from the successful completion of testing and reliability trials.

In addition, there is a need to ensure that the interface arrangements in relation to testing and commissioning are appropriately and clearly spelled out between the EPC contractor and the operator under the EPC contract, the O&M contract and any other relevant interface agreements to avoid any subsequent interface disputes.

These are all areas where lawyers can add value to the successful completion of projects by being alert to and dealing with such issues at the contract formation stage.

Interface issues between the offtaker and the EPC contractor

At a fundamental level, it is imperative that the appropriate party corresponds with the relevant offtaker/ system operator during construction on issues such as the provision of transmission facilities/testing requirements and timing.

The project company must ensure the EPC contract states clearly that it is the appropriate party to correspond with the offtaker and the system operator. Any uncertainty in the EPC contract may unfortunately see the EPC contractor dealing with the offtaker and/or the system operator thus possibly risking the relationship of the project company with its customer. Significantly, it is the project company which must develop and nurture an ongoing and long term relationship with the offtaker. On the other hand, it is the contractor's prime objective to complete the project on time or earlier at a cost which provides it with significant profit. The clash of these conflicting objectives in many cases does not allow for such a smooth process. Again, the resolution of these issues at the EPC contract formation stage is imperative.

Interface issues on site access

Access to land for the siting of wind turbines involves negotiations with the landowner or the appropriate statebased land authority. More often than not, the coexistence of wind turbines with rural holdings will result in the project company entering into access agreements with the landowners. The more common arrangements will be land leases providing possession and site access for the duration of the construction and operation of the wind farm. While the leasing of land to wind energy companies provides long-term income that complements farming income, the substance of the land lease agreements with landowners is the subject of much discussion and negotiation, principally to ensure that the environmental and development impact of the wind farm development is considered and managed properly. Securing land rights for good development sites may be difficult if there is community opposition to these developments, particularly given controversy in recent years relating to aspects of wind farm development such as noise and "flicker" issues from wind turbines. However, there is also a large body of community support for wind farms demonstrated by pro-wind rallies.

Principal responsibility for obtaining access to the site and negotiating the terms of the lease agreements will lie with the project company. However, in order for the project company to comply with the terms of the land lease or other access agreements, the project company will have to ensure that the contractor under the EPC contract complies with all the terms and conditions of the land lease agreements. The contractor must also accept some degree of responsibility for the ongoing liaison and coordination with landowners during the construction and operation of the wind farm 29 . Given that considerations and concerns will often differ between landowners, the specific requirements of the landowners should be taken into account at an early stage in the negotiation of the terms of the EPC contract. Such concerns will vary from prohibitions on the depth of excavation to allow farming activity, to controlling the spread of horehound 30 .

The project company should only be required to provide possession and access as permitted under the negotiated land lease or site agreements, and the obligations of the project company under the land lease or site agreements should be flowed down into the EPC contract. The contractor should be appraised of the specific conditions and requirements of the landowners to ensure that the contractor is aware of the limits on access to the site on which the wind farm is to be constructed and operated. The contractor must formally acknowledge the project company's obligation to comply with the terms of the land lease or site agreements and must accept responsibility for compliance with the terms of the land lease or site agreements which are affected by the contractor's design and construction obligations under the EPC contract.

Development and environmental considerations

The responsibility for the environmental issues surrounding the construction and operation of a wind farm must be set out clearly in the EPC contract. Wind farms have a range of environmental impacts which need to be considered and managed properly and the sponsor or project company will have to investigate if any aspects of the project are likely to be subject to scrutiny under the Environmental Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act) 31 or other environment or planning legislation such as the relevant state planning scheme provisions.

Certain factors relating to the location of the wind farm or its effect on particular environmental features may limit development or trigger the need for reports or assessments to be conducted and approvals obtained before construction can proceed. For example, as outlined above, if turbines are located close to dwellings, written consent may be required from the owners before development is allowed. Depending on the relevant state legislative framework, if the facility will require the clearance of native vegetation, a native vegetation offset management plan may need to be prepared, and if flora and fauna will be affected, surveys and assessments may be required.

Environmental and development impacts include:

  • Concern for the visual impact of wind energy development
  • The effect of shadow flicker and blade glint which must be avoided or mitigated by design and siting
  • Noise from the swishing of the blades and mechanical noise associated with noise from the generator and compliance with prescribed noise standards and guidelines
  • The impact on listed threatened species that inhabit the nearby area, whose habitat or surrounding ecological community may be impacted by the development
  • The impact on migratory species that may fly or move through the wind farm area, even if they do not inhabit the area
  • Potential electromagnetic interference with microwave, television and radio signals
  • Effects caused by the clearance of native vegetation and revegetation during construction
  • Effects on areas of high conservation and landscape values, such as national and state parks, Ramsar Wetlands, World Heritage properties and National Heritage Places, which may limit or prevent development
  • Effects on particular locations of high amenity or tourist value, which may limit or prevent development
  • Construction issues such as the impact of construction traffic and the construction of access road
  • Archaeological and heritage issues including the impact on cultural heritage values and sites of significance to indigenous peoples.

Many of these issues will be most relevant at the stage of seeking approval for the development of a wind farm and will be the responsibility of the sponsor or project company. The list of development permits, approvals and licences that must be obtained by the project company should be clearly identified in the EPC contract, with the balance of construction permits and approvals being the responsibility of the contractor. However, responsibility for adherence to the conditions attached to the development approvals, permits and the risks identified in the environmental impact assessment, must be passed on to the contractor. For instance, planning approvals for wind farms are generally subject to permit conditions about noise limits. The contractor must adhere to the required noise specifications and provide warranties that the wind farm will comply with the noise curves required by the specifications.

If the environmental assessment has identified areas of ecological or archaeological importance, then these preconstruction site conditions must be documented in the EPC contract and accepted by the contractor.

The contractor must also develop an environmental management plan to identify risks, mitigation and monitoring processes during construction of the wind farm. This should take into account factors such as erosion, dust and sediment control, storage of hazardous materials, weed control and waste management.

Wind turbine certification

The provision of design certificates or a statement of compliance from an independent certifying body is essential for the project company to ensure that the wind turbines provided by the contractor have been designed in accordance with industry standards and will fulfil the required design parameters. Certification of wind turbines has a history of almost 25 years and different standards apply in Denmark, Germany and the Netherlands (which pioneered the development and application of certification rules). In recent years, other countries, as well as financiers, have realised the necessity of a thorough evaluation and certification of wind turbines and their proposed installation. The certifications are commonly divided into type certification and wind turbine certification. The certification is usually required to be carried out by an independent certifying body such as Germanischer Lloyd Industrial Services GmbH (GL Renewables) (an international operating certification body for renewable energy equipment, including wind turbines), and is performed in accordance with that body's rules, and in the case of GL Renewables in accordance with the Regulations for the Certification of Wind Energy Conversion Systems, 1999 edition and the Guideline for the Certification of Wind Turbines, 2010 edition 32 . Under these regulations, type certification comprises design assessment, evaluation of quality management and prototype testing and is preferably obtained by the project company prior to shipment of components to site. Where possible, the certification should encompass confirmation on the design life of the wind turbines.

Wind turbine certification involves a complete third party assessment and certification of specific wind turbines from design assessment to commissioning, witnessing, site assessment and periodic monitoring. Wind turbine certification can only be carried out for type certified wind turbines and on locations for which the necessary data is available.

The project company may also require a site certification to be provided by an independent certifying body confirming that real site conditions of the wind farm as a whole (including factors such a wind, climate, topography and WTG layout) complies with the design parameters of the relevant international standard. The real climatic conditions of the relevant site will be provided to the certifying body for assessment of factors such as the wind conditions prevalent at the site as compared with standard wind conditions and the calculation of loads for the site conditions compared with the design basis.

Staged completion of wind turbine generators

As each wind turbine generator on a wind farm is usually constructed sequentially, each wind turbine generator may be taken over by the project company as it passes the required tests on completion. While the taking over of each wind turbine generator and associated equipment as and when it is installed and commissioned is not unusual, it is important to ensure that the issue of a taking over certificate for each individual wind turbine does not affect the contractor's obligations under the EPC contract. Issues such as the management of staggered defects liability periods, the method of calculation of the availability guarantees and the point at which performance security held by the project company should be released are among the important issues that must be considered carefully by the project company when contemplating staged taking over of wind turbine generators.

Despite taking over individual wind turbine generators, the performance security held by the project company should only be reduced or released when the wind farm has passed all tests required for commercial operation of the entire wind farm. Factors such as the time period between taking over of each wind turbine generator and the generation of electricity by wind turbine generators taken over by the project company, will influence the point at which it is reasonable to reduce the performance security held by the project company. If the operation and maintenance obligations of an operator of the wind farm commences on the taking over each wind turbine generator, the performance security to be provided by the operator can be increased in accordance with the number of wind turbine generators taken over.

The issue of a taking over certificate for individual wind turbine generators will also trigger commencement of the defects liability period for that wind turbine generator. If a wind farm has between 20 and 25 wind turbines, this could mean that the project company will have to administer defects liability periods equivalent to the number of wind turbines on the wind farm. If there is a substantial gap between taking over of the first wind turbine and the last wind turbine, this could also result in the defects liability period for the first wind turbine expiring substantially earlier than the last wind turbine taken over and could affect the contractor's defects rectification or warranty obligations for defects affecting the entire wind farm. The ideal position would be to require the defects liability period to commence on taking over of each wind turbine but to expire only from a set time from taking over of the entire wind farm. If this proves too onerous for the contractor, the wind turbine generators could be divided into circuits of wind turbines, for instance, two or three circuits of wind turbines each comprising a separable portion. A taking over certificate will therefore only be issued in relation to each circuit, making it easier to administer the defects liability periods or to manage other issues such as the reduction of security.

The availability guarantee provided by the contractor in each operating year of the wind farm should ideally commence from commercial operation of the entire wind farm and not from the time revenue is generated from commercial operation of each wind turbine generator. However, as with the defects liability period, whether or not this is acceptable to the contractor will depend on the length of time during which the project company has commenced generation of electricity from individual wind turbine generators taken over prior to commercial operation of the entire wind farm. In some contracts, the availability guarantee in the first operating year has been calculated from the average date of completion of the individual wind turbines.

Another important consideration is to ensure that the delay liquidated damages imposed for failure to complete the entire wind farm by the required date for practical completion takes into account any revenue that may be generated by the project company from individual wind turbine generators that are taken over and operated prior to commercial operation of the entire wind farm. This is to ensure that the delay liquidated damages represent a genuine pre-estimate of the project company's loss.

KEY PERFORMANCE CLAUSES IN WIND FARM EPC CONTRACTS

Rationale for imposing liquidated damages

Almost every construction contract will impose liquidated damages for delay and impose standards in relation to the quality of construction. Most, however, do not impose PLDs. EPC contracts impose PLDs because the achievement of the performance guarantees has a significant impact on the ultimate success of a project. Similarly, it is important that the wind farm commences operation on time because of the impact on the success of the project and because of the liability the project company will have under other agreements. This is why DLDs are imposed. DLDs and PLDs are both "sticks" used to motivate the contractor to fulfil its contractual obligations.

The law of liquidated damages

As discussed above, liquidated damages must be a genuine pre-estimate of the project company's loss. If liquidated damages are more than a genuine pre-estimate they will be a penalty and unenforceable. There is no legal sanction for setting a liquidated damages rate below that of a genuine pre-estimate, however, there are the obvious financial consequences.

In addition to being unenforceable as a penalty, liquidated damages can also be void for uncertainty or unenforceable because they breach the prevention principle. Void for uncertainty means, as the term suggests, that it is not possible to determine how the liquidated damages provisions work. In those circumstances, a court will void the liquidated damages provisions.

The prevention principle was developed by the courts to prevent employers, ie project companies, from delaying contractors and then claiming DLDs. It is discussed in more detail below in the context of extensions of time.

Prior to discussing the correct drafting of liquidated damages clauses to ensure they are not void or unenforceable it is worth considering the consequences of an invalid liquidated damages regime. If the EPC contract contains an exclusive remedies clause the result is simple – the contractor will have escaped liability unless the contract contains an explicit right to claim damages at law if the liquidated damages regime fails. This is discussed in more detail below.

If, however, the EPC contract does not contain an exclusive remedies clause the non-challenging party should be able to claim at law for damages they have suffered as a result of the challenging party's non or defective performance. What then is the impact of the caps in the now invalidated liquidated damages clauses?

Unfortunately, the position is unclear in common law jurisdictions, and a definitive answer cannot be provided based upon the current state of authority. It appears the answer varies depending upon whether the clause is invalidated due to its character as a penalty, or because of uncertainty or unenforceability. Our view of the current position is set out below. We note that whilst the legal position is not settled the position presented below does appear logical.

  • Clause invalidated as a penalty
  • When liquidated damages are invalidated because they are a penalty (ie they do not represent a genuine preestimate of loss), the liquidated damages or its cap will not act as a cap on damages claims at general law.

    We note that it is rare for a court to find liquidated damages are penalties in contracts between two sophisticated, well-advised parties.

  • Clause invalidated due to acts of prevention by the principal
  • A liquidated damages clause will cap the contractor's liability where a liquidated damages regime breaches the prevention principle because this gives effect to the commercial bargain struck by the parties.

  • Clause void for uncertainty
  • A liquidated damages clause that is uncertain is severed from the EPC contract in its entirety, and will not act as a cap on the damages recoverable by the principal from the contractor. Upon severance, the clause is, for the purposes of contractual interpretation, ignored.

    However, it should be noted that the threshold test for rendering a clause void for uncertainty is high, and courts are reluctant to hold that the terms of a contract, in particular a commercial contract where performance is well advanced, are uncertain.

Footnotes

28 These clauses will have to be modified to ensure compliance with the relevant regulatory regime.
29 These same issues will need to be reflected in any operating and maintenance agreement entered into by the project company.
30 A type of weed that is widespread in South Australia and horehound burrs are considered a vegetable fault contamination of wool. It has been conservatively estimated at costing the wool producers in Australia $AUD680,000 per annum.
31 The EPBC Act prescribes the Commonwealth?s involvement in environmental matters where an action has or will have a significant impact on "matters of national environmental significance". Detailed administrative guidelines are found at www.environment.gov.au/epbc .
32 Other certifications include certification according to the Dutch prestandard NVN 11400-0, Wind Turbines - Part 0: Criteria for type certification-technical criteria", Issue April 1999 and certification according to the Danish Technical Criteria.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.


DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

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This article is part of a series: Click EPC Contracts In The Australian Renewable Energy Sector – Wind Farms, part 2 for the previous article.
This article is part of a series: Click EPC Contracts In The Australian Renewable Energy Sector – Wind Farms, part 4 for the next article.
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