Design, Engineering, Construction, and Procurement

This chapter provides an overview of the contractual structures commonly applied to the construction of wind energy projects, including (i) design, engineering, and construction of project infrastructure facilities (e.g., access roads, foundations, crane pads, substations, transmission lines, and maintenance facilities), (ii) procurement of wind turbine generators and related equipment, and (iii) erection of wind turbine generators and construction of ancillary facilities. This discussion is written from the perspective of a wind energy project developer; however, the information set forth below should interest design and engineering, construction, and operations and maintenance contractors and major equipment suppliers. As with any complex negotiated transaction, there is considerable value to be gained or lost by all parties and, therefore, significant potential for creative legal and commercial strategies to enhance value for all sides.

I. Construction-Related Agreements. Critical to the development of any wind energy project are the various agreements that a project developer must enter into for:

• design and engineering;
• procurement of wind turbine generators (including nacelles, blades, and towers) as well as the main power transformer and collection system equipment;
• assembly, erection, installation, and commissioning of the wind turbine equipment;
• materials and services to construct balance-of-plant facilities, such as foundations, roads, crane pads, lay-down areas, collection systems, interconnection and transmission facilities, substations, and maintenance and support facilities;
• service and maintenance of the wind turbine equipment; and
• operation and maintenance of the completed facility.

Frequently, engineering, procurement, and construction tasks are combined in a single agreement (an “EPC agreement”). Separate agreements may provide for or anticipate other services, such as warranty services or operations and maintenance services for the completed facility.

Sometimes, all the design and engineering, procurement, and construction and erection services for the entire project are addressed in a single agreement (“full-wrap agreement”) pursuant to which a single entity is responsible for executing the entire project. However, full-wrap agreements are vendor specific, are not an option with all wind turbine suppliers, and are more common for wind projects outside the United States. In North America it is more common to break up the execution of the works into separate agreements, such as design, engineering, construction, and erection agreements (“balance-of-plant agreements”), and procurement agreements for major pieces of equipment, using one or more contractors for each of the various services. Depending on how the contract is structured, warranties, insurance, and other matters may be addressed in a single master agreement or in individual agreements.

II. Design and Engineering Services. Wind power projects require design and engineering expertise that is unique to the wind power generation industry. Turbine capacity is, in part, dictated by the operating parameters of a project, which in turn are dictated by the project’s location and meteorological conditions. A turbine supplier may offer a developer several variations of its wind turbine products so that the developer can select different tower and hub heights, blade lengths, control systems, and related equipment to optimize power production in different environments. Each of these variations is designed and engineered by or for the turbine supplier. Average wind turbine sizes for onshore projects have twice doubled and rotor diameters more than doubled since the modern phase of wind development started in the United States in the late nineties. Offshore wind turbines are now well into the double digits of nameplate capacity (MW), increasingly being built to withstand or operate in extreme wind conditions, and with capacity factors over 60%. Increases in size, height, and rotor diameter allows a single turbine to capture more and stronger wind while also reducing the direct footprint. It also creates for more complex design, transportation, and other logistical challenges.

III. Balance-of-Plant Design, Engineering, and Construction Services. When a developer acquires wind turbine generators, it also acquires license rights in certain vendor technology. This technology may include the turbine vendor’s turbine control and monitoring system experience, components and materials experience, and weather mitigation packages. This still leaves substantial design and engineering work to be performed, including geotechnical studies, micrositing, design and engineering of crane pads and turbine foundations, road design and other earthworks, environmental mitigation, and related activities, as well as collection systems. In addition, high-voltage work associated with the project’s switch yards, substation and interconnection, and, possibly, transmission lines can be included in the balance of plant but is often provided under a separate contract specific to the high-voltage work. This design and related procurement and construction balance-of-plant work is typically provided by a third party contracting directly with the project developer pursuant to a balance-of-plant agreement.

IV. Typical EPC Agreement Structure for a Wind Project. In light of the multiple factors influencing the development of a wind energy project, no single contractual structure applies to all projects. However, the following example is typical of how many developers address certain common issues.

In this example, a project developer wishes to acquire wind turbine generators (the design of which is proprietary) and to use the turbine supplier’s services to commission the wind turbine generators. The developer also wants to contract with the turbine supplier to provide certain operations and maintenance and warranty-related services.

The developer and the turbine supplier enter into a turbine supply agreement whereby the project developer agrees to purchase a specific number of wind turbine generators from the turbine supplier, along with the turbine supplier’s services to deliver the turbine equipment to the project site and commission the same.

The project developer also enters into a balance-of-plant agreement with an experienced contractor whereby the contractor will design and construct the other necessary facilities for the project, such as turbine foundations, roads, crane pads, lay-down areas, collection systems, and maintenance facilities. The high-voltage work including the project substation, transmission lines, and in some cases interconnection facilities under a self-build election pursuant to the interconnection agreement, may be included in or part of a separate high-voltage contract. The balance-of-plant contractor will also receive, inspect, unload, and erect the turbine equipment. Care must be taken in the relevant agreements to carefully match up the work scope and schedule interfaces between the turbine supplier and contractor(s). The agreements must avoid interference, duplication, or omission between the scopes of work of the turbine supplier and the EPC or balance-of-plant contractor(s), and they must ensure that, collectively, the agreements will result in a fully constructed, integrated, and operational project. Close coordination between the turbine supplier and the EPC contractors can help mitigate delays.

The issues that the parties address in the turbine supply and balance-of-plant agreements include the scope of work, payment provisions, measures of completion, warranty obligations, and limitation of liability (particularly as it relates to the turbine supplier’s and balance-of-plant contractor’s liability for failure to complete their obligations by certain key dates tied to the developer’s power purchase commitments). These issues are discussed below.

A. Scope of Work. The scope of work should describe, in detail, the actual design, construction, and equipment installation and schedule obligations of the contractor. A turbine supplier’s scope of work typically includes the manufacture and delivery of the wind turbine generators, including principal parts and components such as nacelles, hubs, blades, and towers, as well as the commissioning of the wind turbine generators. The turbine supplier’s services might also include aviation lighting as well as light mitigation technology capability and weather mitigation packages as options to the turbine equipment. The scope may also include transportation to a port of entry or to the project site and pursuant to a pre-determined delivery schedule that can be costly to adjust. The balance-of-plant contractor’s scope of work may include transportation, if not provided by the turbine supplier, and will typically include crane pad and wind turbine foundation engineering and construction, road design and construction, earthworks, collection and electrical systems, transmission lines and structures, and erection of turbine equipment and related work. As with other aspects of such an agreement, the scope-of-work provisions will probably be heavily negotiated. Some developers routinely contract with separate entities for one or more of the sub-disciplines mentioned above, including but not limited to the high-voltage scope. Care must be taken to carefully integrate and coordinate the scopes of each to minimize conflicts or gaps in the scope.

B. Payment Provisions. In order to ensure timely procurement of wind turbines and other materials and the progress of the balance-of-plant works, the project sponsor must make timely payment to the turbine supplier and balance-of-plant contractor, respectively. In the case of the turbine supplier, the project sponsor typically provides a down payment sufficient to permit the turbine supplier to initiate the manufacture and delivery process. The remaining contract price is typically paid to the turbine supplier upon (1) the shipment ex works of the wind turbines and related components, (2) the delivery of the wind turbines and related components to the project site, (3) the commissioning of the wind turbines, (4) the installation and related testing of the control and monitoring system, and (5) the final sign-off by the parties on the project. Similarly the contract price is paid out to the balance-of-plant contractor in any variety of early interim milestones to help with mobilization and long-lead-time procurement items (e.g., upon notice to proceed) and then upon stages of mechanical completion (by turbine, circuit, and/or project), substantial completion (the project is available for commercial operation and the works are generally done except for a mutually agreed “punch list” of remaining work to finalize) and final completion. In each case, which milestones trigger payment and the portion of the contract price due at each milestone are a matter of significant negotiation under each contract. Upon completion of each milestone, the balance-of-plant contractor is required to submit a payment certificate to the project sponsor describing the completed milestone along with lien waivers from the contractor and its subcontractors. Once the project sponsor has confirmed completion of a milestone, it will issue payment. Non-justified payment delay would provide the balance-of-plant contractor the right to suspend performance or terminate the agreement if payment is not received within the time period specified in the balance-of-plant agreement.

C. Completion and Start-up Obligations. How, when, and by whom the wind turbine generators are to be commissioned should always be set forth in the scope-of-work provisions of the relevant agreement. The turbine supplier delivers the turbine generators to the site, and they then become the responsibility of the contractor. The contractor then erects and makes the units “mechanically complete” and then turns the units back over to the turbine supplier. Once a unit is mechanically complete and backfeed power is available, the turbine supplier commissions each unit and makes it ready to generate power to the grid. These interfaces are key milestones in the development of the project, and failure by one party to timely perform its obligations will lead to schedule and cost impacts to other parties. Accordingly, the details of when and how those interfaces occur and are determined become very important. When these progress milestones are achieved, completion is generally evidenced by certifications of, for example, “delivery” (to be accomplished by the turbine supplier), “turbine mechanical completion” (to be accomplished by the contractor), or “commissioning completion” (to be accomplished by the turbine supplier). Each such certification is considered an incremental milestone that each wind turbine generator must satisfy in order to progress to the next milestone. Upon completion of all milestones the project will reach substantial completion. Failure to achieve substantial completion by a date agreed to by the parties may subject the balance-of-plant contractor to liquidated damages.

D. Warranty Obligations. Warranty obligations are likely to be an issue of substantial negotiation between the parties to turbine supply, installation, and balance-of-plant agreements. The nature and scope of a contractor’s warranties will, however, depend on what services, materials, and/or equipment the contractor is required to provide. A turbine supplier’s warranties generally include such things as a general parts or component warranty (the definition of a defect can be important when determining what is included or excluded as a defective or non-conforming part or component in a wind turbine or related facility), a power curve warranty (this refers to the measurement of a wind turbine generator’s power performance), an availability warranty (this refers to whether the wind turbine generators are actually available to generate power), a sound-level guaranty, and related matters. For a contractor providing non-turbine services and materials such as balance-of-plant services, the warranties may extend to the goods and equipment provided as well as any design and construction services provided under the contract. While turbine and major equipment warranties provided from the manufacturer are considerably longer, the warranties for engineering and construction services are more commonly one- to two-year warranty periods running from substantial completion.

The issues that contracting parties consider in respect of warranties include: (1) the period or term of a particular warranty and whether the term can be extended for a price, (2) the definition of a defect, non-critical deficiencies and a serial defect if available (wind turbine generators use identical parts and components; serial defects are those that appear in multiple units or components), (3) exclusions to the warranty obligations (e.g., acts of the owner or third-party repairs contrary to applicable law or applicable manufacturer requirements, force majeure, or natural wear and tear), and (4) the remedial measures that a contractor may take to cure any defect. Additionally, a project developer may require that any third-party or subcontractor warranties that the turbine supplier or contractor possesses with respect to any parts or components used in its wind turbine generators are “passed through” to the project developer.

E. Limitation of Liability. Like other contractors and vendors, turbine suppliers and balance-of-plant contractors invariably seek to limit their liability to a project developer. A common request is for a waiver of consequential, indirect, incidental, and special damages. Such clauses and any exclusions contained therein must be negotiated carefully, because the definitions of such damages may be ambiguous. Both the turbine supplier and contractor will usually seek to have their respective liability for damages for late performance limited to liquidated damages of a certain value, with a maximum cap equal to an agreed-on percentage of the value of the relevant agreement. The parties may specify the maximum aggregate liability a contractor can have; however, the parties can, by agreement, carve out additional liability for the contractor. For instance, the contractor could agree that the contractual limit on its aggregate liability would not apply in cases where the developer has failed to (1) satisfy its contractual commitment under a power purchase agreement, or (2) obtain a certain time-sensitive tax benefit or credit because of contractor-caused delays.

F. Certain Tax Benefits. A wind energy project’s economic viability often depends on obtaining certain benefits provided under federal and state law for renewable-resources energy projects. Federal production tax credits (PTC) and investment tax credits are available to wind projects at certain rates and based upon the project’s construction and procurement schedule. Accelerated depreciation (MACRS) is also part of the federal scheme to support and provide incentives for wind development. In addition to federal tax incentives, many states provide tax incentives for wind energy projects. The project developer must be aware of the specific requirements that it must satisfy to obtain these benefits when negotiating the turbine supply and balance-of-plant agreements. A broader discussion of these issues is set forth in Chapter 10 of this book.

V. Build Transfer.

In some cases, the construction arrangements described above are combined with an acquisition agreement whereby the developer builds a wind project for an acquiring utility. While risk adverse utilities have tended to pursue power purchase agreements particularly in the first phases of a technology’s introduction into the market, traditionally regulated utilities can see greater financial benefits to bringing the capital costs of the project into its rate base. That, combined with an interest in obtaining tax benefits while still available, has generally increased utility interest in build transfer types of arrangements. These arrangements often pre-arrange for the start of construction to commence once the project is shovel ready but also once any necessary state regulatory approvals have been obtained by the utility in order to purchase the project and recover the costs of such purchase (with a rate of return) through the rates the utility charges its customers. In many cases the developer maintains ownership until mechanical (more common for solar) or substantial completion (more common for wind), after which closing on the acquisition may occur and title transfers to the utility while the developer continues to see through the works to final completion. These are generally a single contract build transfer arrangement. Another model would transfer ownership to the utility under a separate purchase agreement and then issue notice to proceed under a related turnkey EPC agreement pursuant to which the developer manages construction through to final completion for the utility owner. For the developer, negotiating the former “single-form” agreement is often an exercise in trying to reduce any uncertainty by the time construction commences in order to minimize the utility’s offramps, termination rights, or ability to avoid closing under the agreement after significant procurement and construction costs have been expended. Some utilities and developers prefer to arrange for the closing first and then manage the construction costs through the payment process under the sister turnkey EPC agreement. In either case, care needs to be taken to make sure the build transfer agreement construction and technical specifications line up with procurement and construction contracts the developer may have or engage in for the project. The utility may also expect to review and approve the same, particularly where such agreements (or at least the warranties included therein) would be transferred to the utility. Another key area of negotiation is generally whether the developer wraps the warranties for the project so that the utility looks to a single point of contact via the developer to resolve any project warranty issues or whether certain primary warranties are instead transferred directly to the utility to manage directly and leaving the developer with somewhat more limited warranty obligations.

VI. Other Issues.

A. Financing Issues. A wind energy project developer often requires some form of substantial debt financing or joint venture financing to pay for the design, engineering, procurement, construction, and initial operation of the project. Financial institutions and potential investors will demand the opportunity to review and comment on the suite of turbine supply and balance-of-plant agreements (as well as related operations and maintenance and warranty agreements) before committing funds. Of special interest to prospective lenders and investors are any provisions in the agreements that provide the lender or investor with the ability to take over the project if the project developer (the borrower) defaults, and any provisions that specify the extent and nature of any damages available to a project developer from a contractor for late completion or for failure of the project to generate expected amounts of power. Additionally, financial institutions will want to comment on the payment plans, security, warranty, and inspection provisions set forth in the project agreements. Due to such involvement, and to avoid issues arising from any potential inconsistencies, the project developer should be prepared to present a consistent and cogent set of project agreements to lenders and investors and to listen to their suggestions for such agreements. Depending on the structure and the details, build transfer transactions can also help the developer minimize the need for financing if the payment schedule is properly designed to coincide with the developer’s spending under its various subcontracts.

B. Performance and Payment Guarantees Issues. A project developer will usually cause the various balance-of-plant contractors to procure, for the benefit of the project developer, performance and payment guarantees in the form of payment and performance bonds or a standby letter of credit to secure the obligations of the various contractors (whether engineers, constructors, or procurement contractors) to complete their work on time and in accordance with the requirements of their various agreements, and to protect against liens and claims from unpaid subcontractors. Some of the issues arising with respect to these guarantees are described below.

• Performance Bond: A performance bond is usually issued by a bank or bonding company, selected or approved by the project developer, and states an agreed-on “penal sum.” This sum is payable upon the project developer’s demand if the contractor fails to perform its contractual obligations in a proper and timely manner. For instance, if the contractor defaults on or cannot complete the project, the project developer may call on the bond to pay another contractor to complete the project. The project developer will want to reserve its other rights against a defaulting contractor if the performance bond does not fully cover the project developer’s costs (1) of completing the project or (2) associated with damages the project developer may owe to a third party as a result of any default by the project developer. Care should be given to the surety notice requirements to ensure consistency with the construction contract default terms to avoid inconsistent timing and notice requirements, as well as any unanticipated surety added language in the bond.
• Payment Bond: A payment bond is intended to ensure that if the contractor defaults on the project, its subcontractors and suppliers will be paid without the necessity of filing liens or other security interests against the project developer’s property. If a lien claim is asserted, it may be “bonded-over” so that it attaches to the payment bond or other security instead of the property. Lenders, upon their review of the agreements, may require payment bonds or other guarantees to enhance their security interests in the project.
• Standby Letter of Credit: When project financing is involved, the project developer may require that the balance-of-plant contractor provide a standby letter of credit (“SLC”) issued by a financial institution (the “issuer”) approved by the project developer. The SLC essentially substitutes the creditworthiness of a financial institution for that of the balance-of-plant contractor and ensures timely payment of any amounts claimed under the balance-of-plant agreement. In the event of a balance-of-plant contractor default, the project developer may draw upon the SLC by submitting a drawing request to the issuer. In most instances, SLCs are issued and valid for a period of 12 months, which may require the balance-of-plant contractor to renew the SLC during the execution of the project. Failure to maintain or renew an SLC is typically regarded as a material default under the balance-of-plant agreement.

The project developer or the lenders may require other security from contractors, such as parent guarantees, reserve accounts, and other forms of assurance that the contractors will perform. The contractors will demand to be given ample opportunity to cure any default or delay and will seek to limit the project developer’s ability to draw on SLCs or call in performance or payment bonds without notice. Further, contractors may demand some form of reciprocal payment security issued by the project developer or its parent company, including parent guarantees, payment guarantees, and the like.

C. Lien Release Issues. When the project developer pays a contractor, it should obtain subcontractor lien releases as confirmation that the contractor has paid its subcontractors. A lien release will help protect the project developer from liens being filed on the project. Such liens are undesirable because, once filed, they can delay or interfere with the project’s financing and/or require potentially expensive lien release bonds to clear title on the project. Even worse, if a lien claimant is successful when there is no lien release bond secured, such a lien could be used to force the sale of the project, or part of it, as well as to interfere with the sale of the project by the project developer. As noted above, lien releases will be a condition for receiving milestone payments and for certification of final completion.

D. Insurance and Indemnity Issues. A project developer should obtain appropriate indemnities and insurance coverage from the various parties with which it contracts, including the turbine supplier and balance-of-plant contractor, and should require those parties to obtain similar protections from their subcontractors and material suppliers for the benefit of the project developer. Relevant indemnities may include a general indemnity for personal injury, death, and property damage claims arising from the indemnitor’s activities; the contractor’s indemnity against subcontractor liens; an indemnity for taxes (other than those payable by the developer); an indemnity for violation of applicable laws; and an indemnity for intellectual property infringement claims. Appropriate insurance policies may include commercial general liability, workers’ compensation and employer’s liability, automobile, errors, and omissions (for design and engineering services), commissioning, “testing,” or “start-up” (for economic losses when liquidated damages are or may not be applicable), and builder’s all-risk (property insurance for the project which may include “testing or commissioning” insurance by rider, but not including losses caused by faulty design or workmanship or materials, however). Such policies should, if permitted, name the developer and its financing party as additional insureds and contain appropriate waivers of subrogation. Appropriate policy limits will vary with respect to the nature of the work being performed and the scope of the project. A project developer should consult with an insurance or risk management specialist to ensure that appropriate types and levels of coverage are obtained.

VII. Current Developments.

A. Repowering. Repowering can take a variety of forms from a more modest replacement of key equipment to essentially building a new facility in the footprint of the existing facility. In a partial repowering, existing wind power projects are updated with more modern equipment that increases energy production, reduces machine loads, increases grid service capabilities, and improves project reliability. A partial repower project involves the integration of new, upgraded parts and equipment with the existing project infrastructure. In many cases, a turbine supplier has developed a retrofit kit for existing turbines designed to improve the capacity and efficiency of the existing equipment. These changes typically take the form of installing new blades, rotors, drive shafts, and control systems while reusing the existing tower and foundation. With the increased capacity of repowered turbines, the developer may also be required to carry out upgrades to the existing electrical system and interconnection substation. The integration of existing infrastructure with new equipment may present a number of challenges. First, the existing infrastructure including towers or foundations must have sufficient structural integrity to support the load profile of the new equipment. If the wind regime at the project site is aggressive, the stress placed on the existing foundation may have decreased the structural integrity of the foundation rendering the existing foundation unsuitable for repowering without a costly retrofit. A second consideration involves obtaining adequate warranty protection. While new turbines and upgraded electrical equipment will typically come with a manufacturer’s warranty, the protection afforded by the warranty may be impaired if the damage caused to the covered equipment is caused by a failure of the original equipment or infrastructure. This will result in greater risk to project developers. While repowering may appear to be a more cost-effective way of extending the life of a proven wind energy resource, the performance risks associated with integrating new equipment with older infrastructure may be challenging.

In a full repowering, the old turbines, foundations, and electrical systems are decommissioned, demolished, and removed from the project and thereafter new turbines are erected on fresh foundations designed specifically for the new turbines. Developers are able to reuse previously constructed access roads, pads, and lay-down areas and may upgrade substations and shared facilities rather than constructing new facilities, which reduces that overall cost when compared to a new greenfield generation facility.

In either case, a repowered project will have to ensure that it does not exceed the performance criteria set out in the interconnection agreement with the grid operator. In the event a repowered project is expected to exceed the grid operator’s operational parameters, the project developer may be obligated to perform additional interconnection studies at its own expense. Revenue may also be impacted. It is common in power purchase agreements to have a maximum production cap. In the event the repowered project exceeds the production cap, the project may be subject to a secondary pricing structure that would reduce the revenue of the project. Due to possible contractual constraints, project developers are encouraged to carefully review all existing contractual relationships and evaluate the operational and revenue impacts of repowering.

B. Offshore Wind. While Europe advanced offshore wind more quickly than the United States and now has well over 25GW of grid-connected offshore wind, some of the earliest planned offshore developments in the United States ran into road blocks. More recently, however, wind projects off the coast of Rhode Island and Virginia have been successfully built, and the Biden administration has set a federal target of 30 GW of offshore wind energy by 2030, indicating that U.S. offshore development is poised to gain momentum. From a supply and construction perspective, the execution of an offshore wind project is a vast logistical challenge. Such projects typically involve multiple contracts and require the coordination of complex marine logistics in an evolving supply chain that increases the risk of delays, cost overruns, and weather-related delays. Multiple delivery and staging locations can give rise to Jones Act U.S.-flagged carrier issues. Access to installation or maintenance vessels capable of erection or major warranty work of large offshore units is limited and needs to be carefully coordinated. As a result, construction risk for offshore wind projects is higher than for land-based wind projects. Given the unique and challenging nature of offshore wind projects, successful execution will depend on the participation of experienced contractors and turbine vendors, prudent structuring of the interface between equipment suppliers and specialized contractors, as well as a reasonable construction schedule that takes into consideration the impacts of weather-related delays, and other risks commonly associated with complicated marine construction.

More information on offshore wind development is presented in Chapter 4.