Completion (including delay and cost overrun) risk

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Description (What is the Risk)

The risk of commissioning the asset on time and on budget and the consequences of missing either of those two criteria.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner will bear principal responsibility for delay and cost overrun risk, and will typically manage this through the engagement of a suitable EPC contractor.

The principal risk arising out of delay will be a delay liquidated damages payable to the contracting authority under the power purchase agreement, termination of the power purchase agreement after, loss of expected revenue, ongoing costs of financing construction and extended site costs.

A scheduled COD is fixed under the power purchase agreement. Failure to commence the commercial operation within the scheduled COD will result in the Private Partner being subject to delay liquidated damages, calculated on a daily basis and paid by deduction of a performance security placed with the contracting authority. Once the performance security has been fully deducted, and the facility has still not commenced its commercial operation, the power purchase agreement will be terminated.

In addition, any delay in achieving commercial operation of the facility will have the practical effect of a shorter term of the power purchase agreement, as the operating period of the power purchase agreement will be a certain period from the scheduled COD.

The Private Partner is best placed to integrate complex civil works, the delivery and commissioning of parts, despatching and operations, and preventative and lifecycle maintenance to ensure a reliable and punctual service for an efficient price. This may be managed through a single EPC joint venture or by the Private Partner managing a series of works, supply and operation/commissioning contracts.

The Private Partner will be expected to demonstrate adequate system performance before it is allowed to fully operate the system.

Mitigation Measures (What can be done to minimize the risk)

Generally, the Private Partner will seek to pass risks associated with delay in achieving commercial operation on to the EPC contractor in order to minimise potential impact on the project. EPC Contracts will often contain liquidated damages and financial penalties and can assist in enforcing construction deadlines.

Typically, the amount of the delay liquidated damages to be paid by the EPC contractor under the EPC Contracts will factor in the delay liquidated damages which the Private Partner is required to pay to the contracting authority under the power purchase agreement and the financing costs of the project during the period of the delay.

In relation to commissioning and connection to the grid, the EPC contract should contain an obligation that the EPC contractor design and construct the facility so as to be compliant with the relevant codes (as required in terms of the relevant Government agreements) and that the EPC contractor assists the Private Partner in providing the information required to evidence compliance with the codes (as defined in the relevant Government agreement).

Comparison with Emerging Market

The Contracting Authority may have a role of monitoring the progress of construction, compliance with permitting conditions and be involved in the connection and commissioning process. The Contracting Authority may allow for certain relief events, delay events or force majeure events where delays have been the fault of the Contracting Authority such as failure of the grid operator to connect the project in a timely manner.

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Description (What is the Risk)

The risk of commissioning the asset on time and on budget and the consequences of missing either of those two criteria.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner will bear principal responsibility for delay and cost overrun risk, and will typically manage this through the engagement of a suitable EPC contractor.

The principal risk arising out of delay will be the loss of expected revenue, the ongoing costs of financing construction and extended site costs.

Scheduled COD is hard wired in the PPA and any delay in achieving commercial operation by the scheduled COD will have the practical effect of a shorter agreement term. The operating period is reduced by an additional day and the expiry date is brought forward by one day. The last day by which the Private Partner is permitted to reach commercial operation is 18 months after Scheduled COD and failure to reach this target gives the Contracting Authority to terminate the PPA.

The Private Partner is best placed to integrate complex civil works, the delivery and commissioning of parts, despatching and operations, and preventative and lifecycle maintenance to ensure a reliable and punctual service for an efficient price. This may be managed through a single EPC joint venture or by the Private Partner managing a series of works, supply and operation/commissioning contracts.

The Private Partner will be expected to demonstrate adequate system performance before it is allowed to fully operate the system.

Mitigation Measures (What can be done to minimize the risk)

The Government agreements contain (i) a hard wired date by which the Private Partner must commence and continue construction after signature of the PPA, (ii) incentives for timely completion (in the form of allowing for an early operating period and for each unit of a facility to commence generating electricity prior to the facility being finally completed), and (iii) the implementation of a longstop date (18 months post scheduled COD) which creates the tension to incentivize timely completion while allowing the Private Partner a reasonable amount of time to meet its responsibilities in spite of delays before the Contracting Authority can terminate the Government agreements.

Generally, the Private Partner will seek to pass risks associated with delay in achieving commercial operation on to the EPC contractor in order to minimise potential impact on the project. EPC Contracts will often contain liquidated damages and financial penalties and can assist in enforcing construction deadlines.

It may be difficult for the Private Partner to mitigate integration risks solely through contractual risk allocation, as the financing cost / lost revenue impact is typically very high compared to the individual component parts of the project that can affect this. Ensuring that the construction programme has sufficient float periods for all critical stages and that parties are incentivised to work together to achieve the common deadlines may be more effective strategies.

In relation to commissioning and connection to the grid, the EPC contract should contain an obligation that the EPC contractor design and construct the facility so as to be compliant with the relevant codes (as required in terms of the relevant Government agreements) and that the EPC contractor assists the Private Partner in providing the information required to evidence compliance with the codes (as defined in the relevant Government agreement).

Government Support Arrangements (What other government measures may be needed to be taken)

An independent engineer is sometimes appointed by the Private Partner to act on behalf of the Contracting Authority in monitoring the Private Partner's compliance with the relevant construction milestones and the completion of the facility.

The independent engineer, on behalf of the Contracting Authority plays a critical role during the various stages of construction and the testing and commissioning process in terms of ensuring that the Private Partner reaches completion before or as close as possible to the scheduled COD.

The Private Partner should pass construction milestone reporting and testing obligations on to the contractors to ensure compliance with the Contracting Authorities rights and the role assumed by the independent engineer.

The Contracting Authority will be liable to make compensation payments (in relation to cost overruns) to the Private Partner to the extent that commercial operation is delayed as a result of the material breach of the relevant Government agreement by the relevant Contracting Authority.

The Contracting Authority will have a critical role to play at stages of the construction, testing and connection process. Examples include approval rights in respect of final design, obligations to construct grid infrastructure and participation in the connection process.

The Contracting Authority may need to take responsibility for delays caused by any act or omission by the Contracting Authority or any other public body such as failure to issue necessary consents in good time or failure to provide adequate grid infrastructure.

Comparison with Developed Market

The completion risk for solar PV projects in emerging markets is generally viewed as lower than other energy and infrastructure projects. This is due to the modular nature of the technology and the comparatively simple nature of the construction. This encourages Contracting Authorities to seek short construction timetables and pass risks to the private sector which may not be possible with other types of project.

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