Session 16 contract structure & agreement
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The document provides information on key agreements and contract structures for solar photovoltaic rooftop projects, including power purchase agreements. It discusses the main components and considerations for engineering, procurement, and construction contracts; power purchase agreements between developers and off-takers; and rooftop lease agreements. The document also presents a case study of agreements for solar projects with Indian Railways and summarizes various contract relationships and components to address in lease and power purchase agreements for solar rooftop projects.
Session 16 contract structure & agreement
- 1. Partnership To Advance Clean Energy-Deployment (PACE-D) Technical Assistance Program Presented by USAID PACE-D TA Program Apr-18 Solar PV Rooftop Training Program For Entrepreneurs Session: Contract Structure & Agreement
- 2. Contents Key Agreements in an SPVRT project Case Study - Agreements – Indian Railways, RESCO Model Solar Lease / PPA – Contract Relationships Rooftop Lease / Rent Agreement – Items to consider Power Purchase Agreement- Operation, Financing, Risks
- 3. What is a Contract A contract is a voluntary arrangement between two or more parties that is enforceable at law as a binding legal agreement A contractual relationship is evidenced by an offer acceptance of the offer and a valid (legal and valuable) consideration Each party to a contract acquires rights and duties relative to the rights and duties of the other parties However, while all parties may expect a fair benefit from the contract (otherwise courts may set it aside as inequitable) it does not follow that each party will benefit to an equal extent
- 4. Contracts used for SPVRT Projects CAPEX Model RESCOM Model Agreement EPC Agreement Power Purchase Agreement (PPA) Scope Turnkey Agreement – Design, Supply, Construction, Installation Commissioning Sale of Electricity from solar rooftop project Signatories Consumer/Buyer and Developer Consumer and Developer Period of Agreement Short term Execution of project (~3-6 months) O&M (~1-5 years) Long term – 10-25 years Risk Profile Construction period – Developer Operations – Developer to the Construction period – Developer
- 5. Key Features of EPC Contract Scope of Work for Contract Payment Terms with well defined Milestones Advance, Supply, Installation, Commissioning etc. Warranties and Guarantees Warranties for equipment Generation/Performance ratio guarantee Obligations of each Party Obligations of Developer Obligations of Consumer Obligation of other parties like Project Management Consultant etc.
- 6. Key Features of EPC Contract Project Schedule Define major (and minor) milestones and deadlines Design Approvals Procedures for design approvals Quality of the Plant Standards and certifications to be followed Quality check process Safety Features Earthing, lightning protection, signage etc. Default Events For developer For consumer
- 7. Key Features of EPC Contract Responsibility of Net/Gross Metering System Unrestricted Access to Site Penalties Project schedule related Performance standards related Default events Late payment penalties Dispute Resolution Force Majeure Events and Action Change of Law Indemnity Tenure of O&M Documentation and Manuals
- 8. Key Features of PPA Scope of Work Tariff – Constant, Varying Tenure of agreement Billing and payment cycle Late payment penalty Payment security Deemed Generation Due to grid outage Due to shadow generating structures coming up in future Due to temporary restrictions
- 9. Key Features of PPA Obligations of each party Obligations of Developer Obligation of Consumer Obligation of other parties like Project Management Consultant etc Unrestricted access to roof Generation guarantee and penalties (Performance Bank Guarantee) Dispute Resolution Force Majeure Indemnity Buyback clause
- 10. Key Features of PPA Events of Default Events of default for Developer Events of default for Consumer Termination Events of termination for developer Events of termination for consumer Compensation for developer Compensation for consumer Responsibility of Net metering connection Damage to roof Due to consumer Due to developers Actions
- 11. Case Study – Agreements: Indian Railway, RESCO Model
- 12. Solar Lease / PPA – Contract Relationships The table below is showing various arrangements among the parties involved in rooftop solar power and their contractual relationship in terms of Lease Agreement or Power Purchase Agreement (PPA) The third party in above table refers to the rooftop owner who is not the consumer of electricity
- 13. What needs to be reviewed Does rooftop lease / rent agreement provides legal access to develop the solar project? What is the tenure of the agreement? If lesser than PPA, can it be extended? Extended up to what tenure? Does the agreement clearly mentions the responsible party to repair the roof in case of damage and maintain it? Is the rooftop owner willing go for net metering and grid interconnection? What are the termination clause and the penalties in case of early terminations? Are they strong enough to safeguard the rooftop solar power project? Solar Lease / PPA – Items to Consider
- 15. Conditions Precedent Activities need to completed prior to the execution of PPA are listed as conditions precedent. The conditions precedent is important to specify in PPA to indicate the activities without the PPA can not be signed by the parties. For example the model PPA by Indian Railways have following conditions precedent: Performance Security/Guarantee to Railways by developer Execution of Escrow and Substitution Agreement Drawings and Project completion schedule (Approved by Railways) Execute Financing Agreements (Deliver copies to Zonal Railway)
- 16. Payment Security Mechanism A mechanism which is adopted to avoid the default against performance and payment for solar power. It could be a Letter of Credit or a Bank Guarantee. It gives the party the authority to retain the amount equivalent to the amount defaulted by another party. For Example: In the PPA of Indian Railways the Solar Power Developer will be providing Rs. 20 lakh per MW. This will be retained by Indian Railways for a specified period and then returned to the solar power developer. This will protect Indian Railways against generation below the promised benchmark due to poor performance
- 17. Right of Way Some of the building, their premises and rooftops may not have a general access due to security reasons. The installation and operation of the rooftop solar power may require such access which shall be agreed in the PPA. For Example: In the PPA of Indian Railways the Right of Way means the access to the site with the intention of using it for installation of Project, including the way from the entry point to the rooftop through the shortest accessible way, easements and other rights of way, howsoever described, necessary for construction, operation and maintenance of the Projects.
- 18. Deemed Generation This is a concept to address any loss of generation due to any reason beyond the control of the rooftop developer and not covered under Force Majeure Deemed generation protects the developer and the lender from delays in the repayment of the loan. It is crucial to assess whether the deemed generation clause has been included in the contract and appropriately worded to cover all eventualities The key eventualities have been highlighted below: In the event of consumer failing to off-take the electricity generated due to non- availability of reference voltage or lack of demand Non-availability of adequate space for solar rooftop installations or unplanned displacement of the system Any loss of generation due to shadow by new buildings or objects in the future
- 19. Performance Indicators The project is structured based on an estimated revenue earned, based on certain estimated performance of the rooftop solar power system. A minimum performance level can be guaranteed as agreed under PPA This can be assured in terms of a benchmark Capacity Utilization Factor below which the developer has to bear a penalty in addition to the loss This assures the developers implement best available technology in the market to achieve the benchmark CUF. However the CUF of the project is also largely based on the location of the project and the local weather conditions. Hence the benchmark CUF shall be estimated carefully so as to be in the interest of both the parties Benchmark CUF/ Performance Ratio in the existing PPA in the location or CUF calculated by State Electricity Regulatory Commission for solar could be a fair indicator to derive the benchmark CUF
- 20. Tariff The price agreed under PPA to be paid for a unit of electricity generated from rooftop solar power plant is called the tariff. It is applicable for the complete tenure of the PPA, however the structure of the tariff can be combination or any of the following: Constant Tariff – Under this condition, a constant levelled tariff is agreed upon for the tenure of the agreement Constant Escalation – A tariff structure which starts from a base tariff in year one and escalates based on a predefined rate can also be used. For example the period of escalation may vary in 5 years, 10 years, 15 years or for full tenure of PPA Variable Escalation – A variable tariff with variable escalation can also be used. For example 5 per cent from 1st to 5th year, 6 per cent from 6th to 10th year, 7 per cent from 11th to 15th years and so on
- 21. Central Financial Assistance (CFA), if Applicable CFA is the support from Central Government in form of subsidies. If applicable then following shall be included in the PPA Pre conditions to avail the CFA shall be indicated e.g. MNRE requirements on Domestic Content ,Technical Specifications to be followed and empanelment The modalities of channelling and disbursal of CFA shall be indicated Buy Back Option In case the buyout condition is included in the contract, the contract will also clearly define the circumstances situations where the Buyout Clause will be invoked and the price at which the buyout will be undertaken
- 22. Escrow Account It means an Account which the Solar Power Developer shall open and maintain with a Bank in which all inflows and outflows of cash on account of capital and revenue receipts and expenditures shall be credited and debited, as the case may be, in accordance with the provisions of the PPA. Example of deposits all funds constituting the Financial Package all payments on account of tariff and any other revenues from or in respect of the solar power projects, including the proceeds of any rentals, deposits, capital receipts or insurance claims; and all payments by consumers, after deduction of any outstanding Agreement Fee Example of the preference of withdrawals All taxes due and payable by the developer All payments relating to construction of the solar project system O&M Expenses Debt Service due in an Accounting Year etc.
- 23. Termination due to Default on PPA by Consumers The occurrence of default on consumer side will not be limited to but cover the following: How many months of delay after the credit period will be considered as default? For non-availability of synchronizing power, what per cent of operating hours lost is considered as default? For non-availability of access to roof, what per cent of days in a year is considered as default? In case of temporary non-availability of roof, what period of non-availability of roof is considered as default? In case of damage of major equipment caused by consumer, to what extent of damage leads to termination?
- 24. Termination due to Default on PPA by Sellers / RESCO The occurrence of default on seller / RESCO side will not be limited to but cover the following: How many months of non-availability of solar plant will be considered default? How many years of not achieving minimum guaranteed (Benchmark) CUF leads to default? Are there any pre mature termination clauses? What will be the impact of pre-mature termination on project feasibility? What is the compensation for pre mature termination? Are there any other termination clauses? What will be the impact of pre-mature termination on project feasibility?
- 25. Risk of Non-indemnity Indemnified clause is included to indemnify, hold harmless and defend the parties to the agreement from and against any and all loss and/or damages. situation where the indemnity clause is applicable will be clearly defined. For a fair agreement it is important to assess that indemnity clauses adequately indemnify both the parties. Dispute Resolution The dispute resolution process will be clearly laid out in the agreement with the appointment of authorities to resolve the dispute. The arbitration process will also be clearly defined in case the dispute is not resolved in the given period.
- 26. Other Conditions to be Agreed to in PPA Technical specifications and standards agreed to be provided by seller/ RESCO shall be clearly laid down in the agreement Grid Inter Connection if applicable shall be done following the applicable regulations and codes All approvals, permits safety requirements shall be clearly laid down for the project
- 27. 27 Anurag Mishra Senior Clean Energy Specialist USAID/India Email: amishra@usaid.gov Disclaimer: This training material is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this material are the sole responsibility of Nexant, Inc. and do not necessarily reflect the views of USAID or the United States Government. This material was prepared under Contract Number AID-386-C-12-00001.