PV Performance Guarantees (Part 1)
Inside this Article
PART ONE: CREATING A PERFORMANCE GUARANTEE
Performance guarantees are widely used in the commercial solar industry, yet they are frequently misunderstood. Their purpose, however, is no mystery. To finance and construct a large-scale solar project, there has to be a risk-mitigating mechanism in place to reassure investors, which include large banks and institutional investors. A PV performance guarantee contract is the tool used to give the at-risk owner confidence that the system and investment will perform as expected.
The starting point of the agreement is determining the appropriate contract terms and conditions. There are many competing ideas about what constitutes a good PV performance guarantee, and the debate is often heated. A complex team is required to deliver a large-scale solar project (see sidebar, below). Each involved party— owner, developer, contractor, sponsor and financier—has a distinct point of view. Creating a successful PV performance guarantee is both a multidisciplinary exercise and a balancing act. It requires both a technical and holistic understanding of the factors that affect PV system performance and reliability. It requires financial vision. It requires complex contracts. Given thoughtful and thorough understanding on the part of all stakeholders, a PV performance guarantee can help make a good project happen and keep it operating properly for the life of the system.
Protagonists in the PV Performance Guarantee Debate
The following parties are typically involved in the deployment of large-scale solar projects using PV performance guarantee contracts.
Owner: The owner, or purchaser, is the party who eventually runs, operates and derives revenue from the project. Because revenue is used to service debt, pay investors and so on, the clearest definition of owner is the person or people who coordinate and run the project from start to finish.
Developer: The developer, who may also be an investor, helps make the project happen by coordinating commercial and construction contracts. The key distinction between the owner and the developer is the latter’s direct tie to project design and construction.
Contractor: The engineering, procurement and construction contractor designs and constructs the project and is the main holder of project risk with respect to the performance guarantee. In most cases, the EPC contractor is the guarantor in contract language.
Sponsor: The sponsor is either the developer or the EPC contractor. The sponsor’s role is to negotiate and enforce the performance guarantee.
Financier: The financier provides most of the money for the project and the framework for the PV performance guarantee contract. Typically, the financier builds the language of the guarantee to help ensure a cash flow throughout the project life cycle. This role can loosely be defined as the project debt and equity provider.
In our current positions, working in project development and construction, we represent two of the protagonists in the PV performance guarantee debate: the project developer and the engineering, procurement and construction (EPC) contractor. We attempt to represent other points of view in this article as well. Together we provide some background and context for understanding this complex topic. We define essential concepts and consider their practical implementation. We describe the current market expectations of the main parties at the negotiating table and examine the obvious tension between the investors’ wishes and the EPC contractor’s abilities in some detail. While we provide some concrete examples of what might be considered best practices for PV performance guarantees, our intent is not to define a one-size-fits-all solution—which would not be realistic—but rather to elevate the general level of discussion and understanding across the industry.