Developing the solar project: EPC contract in the Alberta solar section By Bennett Jones LLP

Developing the solar project

EPC Contracts in the Alberta Solar Sector

By Jason Roth, Head of Capital Projects Industry Team; Geoffrey Stenger, Partner; Victoria Tulk, Associate; Bennett Jones SLP, Calgary

Jason Roth Geoffrey Stenger Victoria Tulk

Contracting strategies for solar projects in Alberta are anything but one-size-fits-all. This is hardly a surprise as every project has different priorities and concerns to focus on, including project financing requirements, schedule, panel sourcing and environmental attributes. Many solar projects are currently being delivered under an “owner-controlled program,” where the owner enters into all engineering, procurement and construction (EPC) contracts separately rather than one overarching EPC contract.

Where an EPC contract is being used, there is no one agreed form. There is a mixture of bespoke owner contracts, bespoke contractor contracts and, for projects of a smaller size, some use of the CCDC-14 design build contract with supplemental conditions created for the solar industry. Most importantly, whichever form of contract of is selected, the form should adequately reflect the riskallocation needs of the project.

KEY CONSIDERATIONS FOR SOLAR EPC CONTRACTS

The following is by no means exhaustive but are issues that commonly require the attention of the solar project developer. Selecting the right contractor. A unique element of a solar EPC contract is that the value of the long-lead items is often much greater than the construction or installation costs. Developers or purchasers need to carefully focus on hiring the right EPC contractor for the project. It is extremely important that a contractor has supply chain expertise and the ability to source the long-lead items into Canada at a reliable price. The EPC contractor must be financially capable of performing its obligations under the contract or have sufficient financial security available to the owner in the event of a breach.

Supply chain issues. Supply chain disruption and lack of supply is of particular concern in the intensely high-tech solar industry. Can the EPC contractor actively manage this risk? Components are sourced from around the world, some regions are still recovering from the pandemic, and an unpredictable geopolitical environment is upending many areas of global trade. Covenants for evolving supply chain issues such as anticorruption and prohibiting forced labour are typically demanded in EPC contracts.

Clearly define project requirements. The complexity and scope of solar projects (like any project) means that clearly defining who is responsible for what, timelines, and how risk will be allocated are essential in an EPC contract. Matters such as compliance with other project requirements must be adequately addressed, as these deal with permits, financing arrangements, offtake and other project agreements which require a ‘flow-down’ of provisions into the actual EPC contract.

Fixed price contracts. The ability to obtain true fixed price contracts is becoming more difficult due to inflation and other cost increases. EPC contractors are sometimes reluctant to provide a fixed price, although there is still a desire to provide all of the services. In certain circumstances a middle ground may be found (e.g. provisional sums, escalator clauses).

Long-lead items. Some project owners are responding by purchasing long-lead items (e.g. panels, inverters) and entering into separate installation contracts, with the result that the owner takes on the project contract’s “interface” risk, rather than the EPC contractor. Other owners want a more traditional one-stop, fixed price EPC contract approach, which ideally provides a “wrapped” schedule and performance certainty. This pushes many of the project risks onto the EPC contractor and enables the owner to attract third-party financing.

Connecting to the grid. Completion and turn-over provisions in EPC contracts are often linked to connecting to Alberta’s electric grid. A lack of timely access can be a key reason for owner delay issues. Some solar projects only progress if thirdparty offtake contracts are in place, for both power and/or GHG attributes. Other owners are pursuing a “build it and they will come” approach, which relies on the ability to sell power to the Alberta grid on a merchant basis, if needed.

ADDITIONAL CONSIDERATIONS INCLUDE:

Warranties. For certain longlead items used in solar projects, warranties are often far longer than standard 1-2 year limits in other industries.

Dealing with the unexpected — including performance guarantees and contractor performance, solar project insurance, and determining what is the “market” standard for delays and delay LDs.

Alberta’s Prompt Payment & Construction Lien Act comes into force on August 29, 2022, and it will impact all EPC contracts signed after the date.

LOOKING AHEAD

The EPC contract remains attractive to the Alberta solar industry developer. However, with the rise of inflation and other risks, both project developers and contractors will need to be flexible in the finalization of their risk-profile for the EPC contract.