Solar Utility

PPA EPC,
PPA,
EPC andd O&M Assessment
A
t
September 2010

Contact: jjacobi@scottmadden.com
rstarkweather@scottmadden com
rstarkweather@scottmadden.com

Copyright 2010 by ScottMadden. All rights reserved.

PPA Overview
A power purchase agreement
(PPA) is a contract to buy the
electricity generated by a power
plant

Sources of Revenue from a Solar Project

Renewable
Energy Credits
Sale
Agreement

These agreements are a critical

part of planning a successful solar
project because they secure a
long-term stream of revenue for
the project through the sale of the
electricity generated by the project
Securing a good PPA is often one
of the most challenging elements
of solar project development
Securing a PPA will also be a
condition to any equity and debt
financing of the project

Power
Purchase
Agreement
(PPA)

Solar
Project
Tax Benefits

Power may be sold through a PPA

to an investor-owned, municipal or
rural electric cooperative utility in
the local market or, in some
cases to more distant utilities or
cases,
wholesale or retail customers in
unregulated markets. Often a
business or government will seek
out a solar company to put panels
on its property for a PPA type
arrangement

Copyright 2010 by ScottMadden. All rights reserved.

State Incentive
Programs

Investment Tax Credit

(or Treasury Grant)
Accelerated
Depreciation Schedules

Grants
Public Benefit Charge
Incentives
Other Programs

Solar PPA
A solar PPA is a unique arrangement and allows a firm, government entity, or non-profit to gain the benefits of solar
energy without the high initial up front costs of putting in a Photovoltaic (PV) asset. The PPA agreement usually involves
several parties including:
Consumer (energy purchaser): The purchaser often has
a desire to purchase energy using a solar asset for a
specific use (school, base, government building, office
building), but does not have the capital to invest in the
up front costs of PV installation
System owner and investors: A system owner will
provide or gather a team of investors to provide the up
front capital and sell power to a purchaser. In addition
to the re
revenue
en e of sales from the cons
consumer,
mer the ssystem
stem
owner and investors will often benefit from the tax
credits and other incentives of the solar asset and will
be able to sell credits to the utility as well
Contractors: Outside vendors will often be contracted
by the purchaser or seller (depending on the PPA
structure) to perform work including initial construction,
O&M, security, and legal services. Contractors can be a
signing party to a PPA
Utility: The local utility can benefit from this
arrangement by purchasing excess power or credits (if
required). The utility will also be relied upon if the
consumer needs excess power

An illustration of the money, credit, and electricity benefits of a solar

PPA structure
The solar PPA is unique, as the asset will often be located on the
purchasers property (a school, building, etc.). The PPA must list
out property rights during the term and after. Often the PPA
includes a buyout provision for the purchaser to buy the asset
outright at the end of the term or early. This might be the goal of
the purchaser when entering into a PPA

Source: Cory, Karylynn, Jason Coughlin and Charles Coggeshall Solar Photovoltaic Financing: Deployment on Public Property
by State and Local Governments Technical Report, National Renewable Energy Laboratory, May 2008
Copyright 2010 by ScottMadden. All rights reserved.

Key Elements of a Solar PPA

A PPA is a legal document. While details are case specific and will need to be addressed by the purchaser and power
provider. A solar PPA will usually list several parties: the purchaser, the seller, and the contractor (party responsible for
construction). It can be signed by all three parties, but as a minimum by the purchaser and the seller. A solar PPA can
cover multiple locations in a single document. Some key elements of a solar PPA include:
PPA Attribute

Description

Length of Agreement

Commissioning Process

Copyright 2010 by ScottMadden. All rights reserved.

The stated term of most solar PPAs is between 20 and 25 years, although a term ranging
anywhere from 15 to 30 years is not unusual
The PPA is usually legally binding once it has been executed by representatives of both the
seller and the purchaser, subject to early termination rights
Seller or contractor must demonstrate to purchaser that:
All permits, consent licenses, approvals and authorizations required by any government
authority
th it h
have b
been obtained
bt i d
The seller has completed all testing required by the financing documents, government
permits, interconnection agreement, sellers operating agreement, sellers engineering,
procurement and construction agreement and any manufacturers warranties
An officer of the seller has certified that the equipment installed at the facility has a
maximum designed output equal to the agreed megawatts (MW)
An independent professional engineer has certified that the facility has been completed in
all material respects in accordance with the PPA
No interference exists with the Generating Facilities insolation and access to sunlight or
will exist to the seller and contractors knowledge
An operation
p
and maintenance ((O&M)) agreement
g
is in p
place for the PV assets that is
agreeable to the provider and purchaser
Security arrangements have been made for the facility

Keyy Elements of a Solar PPA ((Contd))

PPA Attribute

Description

Insurance

Temporary or Permanent Facility

Shutdown

If an event other than a force

force majeure
majeure event causes a temporary or permanent shutdown of the
generating facility, either the seller or purchaser (depending on the type of event) will need to be
responsible for ensuring the contract does not go into default

The purchaser and seller will agree to a price for the power generated from the solar assets and
list the price in the PPA. Typically this price will start below market rate and will escalate on a
fi d yearly
fixed
l b
basis.
i Thi
This strategy
t t
allows
ll
th
the purchaser
h
tto l
lock
k iin a price
i and
d will
ill nott bend
b d with
ith
the fluctuations of the commodities market like fossil fuel generated power does
The purchaser and seller can also agree on a generation amount. If the purchaser has excess
power from the generating asset, it can sell the excess power to the utility under a separate
purchase agreement

Power Sale

Credit

Warranties and O&M

Copyright 2010 by ScottMadden. All rights reserved.

The PPA will usuallyy require

q
that one p
party
y ((seller,, purchaser,
p
, or contractor)) have specific
p
insurance policies
Policies typically required include: commercial general liability insurance; workers compensation
insurance; automobile liability insurance; all-risk property insurance; and business interruption
and extra expense insurance

Many purchasers require sellers to provide some form of credit enhancement to cover expected
damages to the purchaser if the project does not meet construction milestones or is not
commercially operational by the agreed date
This credit enhancement may take several forms, including guaranties by creditworthy affiliates,
cash collateral or escrow accounts, irrevocable standby letters of credit or performance bonds
O&M can be one of the challenges of a solar facility. The PPA should usually provide warranties
on the PV from the contractor or seller on the assets
If the solar asset will be on the purchasers property, it is important to spell out in the PPA that
the contractor or other O&M third parties have access to the asset for routine maintenance

Key Elements of a Solar PPA (Contd)

(Cont d)
PPA Attribute

Description

Milestones

Defaults

Environmental Attributes and

Credits

End of Term and Buyout Options

Copyright 2010 by ScottMadden. All rights reserved.

Construction or development milestones are intended to allow the purchaser and seller to track
projects
j
development
p
p
progress
g
the p
The PPA may identify a variety of milestones, including: acquisition of all permits needed for
construction; execution of a construction contract; commencement of construction; and,
ultimately, commercial operation
If the PPA addresses milestones, typically the seller and contractor must meet the dates
established in the PPA for each of the milestones or risk paying delay damages
PPAs include detailed sections related to events of default. Events of default are situations where
the action or inaction of one of the party significantly jeopardize the overall project
Many events of default are curable, which means there is an opportunity to resolve the issue.
However, when one party is responsible for an event of default, the other party is typically
entitled to damages if the default cannot be cured
All PPAs include provisions that assign ownership of the environmental attributes or credit to one
of the parties. In some cases, the seller will retain the credits and rights as part of the
investment; in other cases the purchaser will get the credits
Utilities will often have an interest in purchasing RECs, providing an additional revenue source
for the party that owns the credits

The PPA will often have agreed upon conditions for the solar assets after the termination of the
initial PPA. These can include:
Asset removal: the purchaser does not want the asset or the generating power, and the seller
must remove from purchaser property after the termination date
PPA renewal: the purchaser can renew upon similar terms off the original terms (likely
(
on shorter
terms)
Asset purchase: the purchaser can buy the assets from the seller at fair market value and
continue the generation
Early buyout: The purchaser is often able to buy the assets from the seller and end the
agreement earlier than the termination date.
date These terms are written into the PPA

Advantages and Disadvantages of a PPA

The PPA system has many advantages and disadvantages for a power purchaser and seller
Benefits include:
Ability to monetize federal tax incentives. If the purchaser is a government entity or non-profit, the third party can
benefit from the incentives through ownership. Utilities can also purchase these credits, creating another market
and potential revenue source for the seller or purchaser
Low/No up front costs for the purchaser
Predetermined electricity price (or cash flow) for 20-25 years for the purchaser (seller)
Shift O&M responsibility to a qualified third party
PPA can include a path to ownership, a potential benefit for both seller and purchaser
Disadvantages include:
How credits are used and distributed can create a challenge for the seller and purchaser. A thorough study of
regulations
l ti
surrounding
di governmentt incentives
i
ti
iis needed
d d
Ownership and facility access can be challenging. Building occupants, citizens, or other stakeholders might not
want a third party to have access to private or government property
Transaction costs can be high. The PPA is a complex document and attorneys will be needed to hash out the fine
details. This can be expensive
Unsure horizon
horizon. The incentives and regulations surrounding energy is constantly changing
changing. While the PPA might
be a good idea now, in the long run it could be challenged

Source: C
S
Cory, K
Karylynn,
l
JJason C
Coughlin
hli and
d Ch
Charles
l C
Coggeshall
h ll S
Solar
l Ph
Photovoltaic
t
lt i Fi
Financing:
i
D
Deployment
l
t on P
Public
bli P
Property
t b
by
State and Local Governments Technical Report, National Renewable Energy Laboratory, May 2008

Copyright 2010 by ScottMadden. All rights reserved.

EPC Contract
An engineering, procurement, and construction (EPC) contract is a common form of contracting arrangement within the
y Under an EPC contract,, the contractor will design
g the installation,, procure
p
the necessaryy materials,, and
construction industry.
complete construction, either through own labor or by subcontracting part of the work.

Financing an EPC contract typically requires the following elements:

A fixed
f
completion date
A fixed completion price
No or limited technology risk
Output
O t t guarantees
t
Liquidated damages for both delay and performance
Security from the contractor and/or its parent
Caps on liability (ideally
(ideally, there would be no caps on liability
liability, however
however, given the nature of EPC contracting and the risks to the
contractors involved, there are almost always caps on liability)
Restrictions on the ability of the contractor to claim extensions of time and additional costs

Copyright 2010 by ScottMadden. All rights reserved.

EPC Contract Overview

Project Activities Covered in EPC Contracts
A single point of responsibility

A fixed
fi d contract
t t price
i

A fixed completion date

The contractor is responsible for all design, engineering, procurement, construction,

commissioning, and testing activities
Risk of cost overruns and the benefit of any cost savings are to the contractors
contractor s
account
EPC contracts include a guaranteed completion date that is either a fixed date or a
fixed period after the commencement of the EPC contract

Performance guarantees

The project companys revenue will be earned by operating the facility; therefore, it is
vital that the facility performs as required in terms of output, efficiency, and reliability

C
Caps
on liliability
bilit

Most
os EPC
C co
contractors
ac o s will not
o as a matter
a e o
of co
company
pa y po
policy
cy e
enter
e into
o co
contracts
ac s with
unlimited liability

Security

It is standard for the contractor to provide performance security to protect the project
company if the contractor does not comply with its obligations under the EPC contract

Copyright 2010 by ScottMadden. All rights reserved.

EPC Contract Overview (Cont

(Contd)
d)
Project Activities Covered in EPC Contracts

Variations

The project company has the right to order variations and agree to variations
suggested by the contractor

Intellectual property

Th contractor
The
t t warrants
t that
th t it has
h rights
i ht to
t allll the
th intellectual
i t ll t l property
t used
d iin th
the
execution of the works and indemnifies the project company if any third parties
intellectual property rights are infringed

F
Force
majeure
j

The p
parties are excused from p
performing
g their obligations
g
if a force majeure
j
event
occurs

Suspension

The project company usually has the right to suspend the works

Termination

The contractor usually has very limited contractual termination rights; the project
company will have more extensive contractual termination rights

Performance specification

Unlike a traditional construction contract, an EPC contract usually contains a

performance specification

Copyright 2010 by ScottMadden. All rights reserved.

What Makes for a Successful EPC Contract

EPC contracting has many advantages:
One point of contact
Hands off approach
Minimal staffing requirements
Minimal legal risks*
risks

An effective EPC contract will include:

Contractor management procedure
Definitive SOW and scope freeze defined for specific sites
Scope change procedure
A project management plan
Permit management plan
Commissioning and testing plan review process
g
p
plan in p
place
Warrantyy management
Issues management log and issues resolution procedure
Punch list management process

*http://prodigyengr.com/front/showcontent.aspx?fileid=73

Copyright 2010 by ScottMadden. All rights reserved.

10

Operations and Maintenance Strategies and Needs

The various types of maintenance strategies for a PV plant include:
Preventative
P
t ti Maintenance
M i t
i l d routine
includes
ti iinspection
ti and
d servicing
i i off equipment
i
t tto preventt b
breakdowns
kd
and
d production
d ti llosses
Corrective or reactive maintenance addresses equipment breakdowns after the occurrence. This break and fix method has
low upfront costs, but bears the risk of unplanned downtime and higher costs on the backend. This is the current industry
standard
Condition based maintenance (CBM) uses real time data to prioritize and optimize maintenance and resources
The reality is more than one of these types of maintenance is needed, but a proper strategy can limit the amount of
surprises and will decrease the amount of unplanned downtime
When establishing a preventative maintenance schedule it is important to do so based upon each component and system
manufacturers recommendations. Corrective maintenance procedures should also be established to address items that
require immediate repairs and items that can be repaired with routine maintenance visits.
visits Some typical maintenance
needs at PV plants include:
Over the course of time, dust collects on the PV panels significantly affecting system efficiency. Panels must be cleaned
regularly to minimize efficiency loss
PV operators and suppliers have found that one to two cleanings per year will adequately serve most plants needs
System components must go through a thorough maintenance checklist at least once or twice per year. The checklist should
include such items as:
Checking connections of wires
Testing voltage / current through wires and PV modules
Inspecting components for moisture
Greasing actuator gears and topping off hydraulic fluid on tracker components, if applicable
Testing of SCADA and meteorological systems communications
Confirming settings on the inverter
Resealing of system components
Additional maintenance needs include the removal of snow, ice, grass, and vegetation to ensure effective system operation
Source: Electric Power Research Institute, Addressing Solar Photovoltaic Operations and Maintenance Challenges, July 2010
Copyright 2010 by ScottMadden. All rights reserved.

11

O&M: The Plant Operational Support Model

Regardless of what maintenance strategy a firm chooses, the operational support model defines how the new plant will be
run on a daily basis including who will perform system monitoring, plant repairs, and scheduled maintenance. The model
addresses the mechanical and electrical needs of the plant as well as maintaining the grounds and communication
systems
In House Staff: Existing staff may be leveraged if the plant is adjacent to existing generation facilities. For example:
System monitoring and plant operation may be performed by fossil operators throughout the course of their shift
Mechanical engineering not included in the warranty may be handled by onsite fossil maintenance staff
Site electrical maintenance may be supported by plant operations crews or transmission maintenance crews
The advantages of this system include: better visibility on personnel and equipment issues, greater quality control,
ability to use existing personnel and assets, and it will lead to a standard PV O&M process
The disadvantages of this system include higher upfront costs, increased risks, and the need to develop an expertise
quickly in your work force
EPC Contractor: The utility may opt to use the Engineering, Procurement, and Construction (EPC) contractor that sold and built
the system to oversee an O&M contract
This limits the use of multiple contracts and simplifies dealing with warranty-related repairs versus maintenance
Third Party Provider: Another option for O&M services not covered under the warranty is to use a third party provider which
supports multiple PV sites
Use of a third party for an organizations first PV plant helps instill best management practices for maintenance
schedules and for system repairs
One variation of this model is to contract some functions (i.e., mechanical engineering, grounds maintenance, and
panel cleaning) to a third party while keeping some tasks (i.e., communication and monitoring, electrical engineering)
in-house
Advantages of both the EPC and third party option include lower upfront costs and greater flexibility, lower upfront risk,
less drain on the current labor force, and potentially greater expertise
Disadvantages of the EPC and third party option include less understanding of the O&M process, higher back end
cost potential, and it requires dependence on an outsourced contractor
Support options include using in-house staff, the plant EPC contractor, or third parties
Source: Electric Power Research Institute, Addressing Solar Photovoltaic Operations and Maintenance Challenges, July 2010.
Copyright 2010 by ScottMadden. All rights reserved.

12

O&M: Solar PV Plant Types and Components

A utility-scale solar PV plant is made up of the following*:
Photovoltaic panels
The PV panels are composed of solar cells that convert the suns
sun s rays or photons into DC electric power
Panel trackers are mechanisms used on some PV systems allowing the solar panels to track the sun throughout the
day for optimal power production
Trackers can enable the system to produce more power but also require more maintenance than stationary
systems
The
Th balance
b l
off system
t
(BOS) components
t
The BOS components include such things as wires, combiners, junction boxes, mounting equipment, conduit runs,
and communications equipment**
The inverter
The inverter is the unit that conditions or converts the DC electricity produced by the solar cells into AC electric power
An effective solar plant maintenance plan will include routine upkeep to address the following:
Panel cleanings
g

Meteorological
g
systems
y
communications testing
g

Wire connection inspection

Inverter settings inspection

Voltage testing (wires and PV modules)

System component resealing

Moisture/rust inspection

Controller/sensor calibration

Actuator gear lubrication

Pest infestation checks

Hydraulic inspection

Seasonal removal of snow, ice, grass, and vegetation

*U.S. Department of Energy, 2010, www.doe.gov

**Banke, Bryan. Solar Electric Facility O&M: Now Comes the Hard Part three-part series, Oct-Dec 2009, www.renewableenergyworld.com

Copyright 2010 by ScottMadden. All rights reserved.

13

O&M: Additional Considerations for PV O&M Costs

Costs*
As more utility-scale PV plants come online, more being learned about system performance and capacity. This includes a better
understanding of what to expect with regard to system operation and maintenance. The following are lessons learned from Bryan
Banke with Solar Power Partners and the Electric Power Research Institute:
Preventative Maintenance:

Focus on design, engineering, and the initial build of the PV plant

Target a downtime of 1 percent (3.7 days/year) and prepare for 10 percent downtime (36.5 days/year)

M
Measure
system
t
degradation
d
d ti over ti
time and
d clean
l
panels
l when
h th
the costt off llostt power approaches
h th
the costt off cleaning
l
i

Mitigate risk by using multiple smaller inverters rather than one large inverter

Perform site visits at least 1-2 times/year

Consider transitioning outsourced O&M to in-house

Recognize workforce enthusiasm and consider integrating PV O&M responsibility into the traditional maintenance function

Monitoring:

Consider monitoring the system at the string level for plants between 250kW to 2 MW and use the data to address maintenance needs

Larger plants may not see the cost benefit from this level of detail

Automate system monitoring and supplement by reviewing system reports multiple times throughout the day

Assure good access to historical data

Perform simple site analytics once per month

Id tif core ffactors

Identify
t
that
th t determine
d t
i the
th economic
i tradeoffs
t d ff off monitoring
it i resolution
l ti

Warranty:

Make sure warranty terms are clear; avoid vague clauses

Perform due diligence before agreeing to a construction contract

Source: Electric Power Research Institute, Addressing Solar Photovoltaic Operations and Maintenance Challenges, July 2010
* Banke, Bryan, Solar Electric Facility O&M: Now Comes the Hard Part three-part series, Oct-Dec 2009, www.renewableenergyworld.com
Copyright 2010 by ScottMadden. All rights reserved.

14

Contact Us
For more information on how we can assist you with determining your solar PV operating and maintenance costs, please
contact us.

Jere (Jake) Jacobi

Sustainability Practice
Leader

ScottMadden, Inc.
3495 Piedmont Rd Bldg 10
Suite 805
Atlanta, GA 30305

Richard D. Starkweather
ScottMadden, Inc.
Partner
2626 Glenwood Avenue
Suite 480
Raleigh, NC 27608

Phone: 404
404-814-0020
814 0020
Mobile: 262-337-1352
jjacobi@scottmadden.com

Phone: 919
919-781-4191
781 4191
Mobile: 678-345-9871
rstarkweather@scottmadden.com

Copyright 2010 by ScottMadden. All rights reserved.

15