An old construction delivery model making a comeback
The usual model by which owners construct utility-scale renewable energy projects, wind and solar farms, in Australia is by using an Engineering, Procurement and Construction (EPC) model. However with the market maturing there has been a revival of an older alternative, called here the “split contract” model.
A split contract model was used to construct the recently completed Biala Wind Farm in NSW, and may have applications for solar farm project owners given some of the issues and significant problems we have seen in the solar EPC sector.
AltEnergy asked AECOM’s Team Lead and Principal Engineer Angela Rozali to walk us through the key differences between the EPC and split contract construction models, and assess if the latter could be successfully applied to the construction of both wind and solar farms.
Angela Rozali: Split contract versus EPC models
There is a revival of the “split contract” model in the wind industry as owners seek an alternative to the traditional Engineering, Procurement and Construction (EPC) model. In the split contract model used at Biala Wind Farm, NSW, the owner separately contracted the civil balance of plant (BOP), electrical BOP and wind turbine supply & installation.
This contract model differs from the usual EPC model where a single contractor wraps all supply, installation, construction and commissioning scope in a single ‘turnkey” contract. The EPC model is well understood in the Australian market to provide comprehensive transfer of risk to the contractor – in particular overall plant performance risk and the construction and commissioning civil, electrical, wind turbine and grid connection interface risk. The EPC contract model has been the renewable energy industry standard in Australia and has often been a default prerequisite of project financing.
Split contracts have been used before in Australia for the construction of large-scale wind farms including Crookwell 2 recently and a number of the earlier developments by Pacific Hydro and Hydro Tasmania. There are multiple ways a contract may be split, the simplest of which is a two contract model which splits the BOP from the wind turbine supply and install.
Historically, split contracts have been considered less bankable than EPC contracts and hence rarely if ever secure project finance in Australia. But with a growing number of split contracts being used in the local market and increasing confidence in this model, things are changing. Some of the advantages of a split contract model over a traditional EPC model include:
- Owners can save millions of dollars by accepting some interface risk, managing the contracts themselves.
Every EPC contractor calculates and allocates contingency for interface risk differently, but it will often be more than double the cost it would take for the owner to effectively manage this risk in performing the project management and contract administration.
- Owners can also save money from increasing competition in the market
Initially, it requires additional work for the owner to procure an Original Equipment Manufacturer, BOP contractor and potentially project management team. Yet, it also means owners can create a more competitive and efficient procurement process by reducing uncertainties early on through selection of an OEM and obtaining the BOP contractors’ price.
- Some owners are more prepared to manage their project.
EPC contracts can be taken for granted because it is often assumed that “all” the risk is transferred to the contractor and gives the impression an owner can be more hands-off. However, there are always risks that remain with the owner and risks that cannot be fully compensated with liquidated damages. EPC contracts, however comprehensive the contractual risk transfer, still require active management to minimise risk to all parties and avoid protracted and costly disputes.
- Owners have greater visibility and negotiation power over issues that may arise.
One of the characteristics of an EPC contract is that you have a single point of responsibility but that in turn can reduce the owner’s visibility and options to negotiate. That said you could be exposed to more issues, however you can prepare for this. If an issue arises, the owner may find themselves on the outside looking in, while the EPC contractor manages the issue amongst its subcontractors. Meanwhile this can lead to program delays that do not appear justified. With a split contract, the owner has more visibility of more key contractors and can offer incentives, negotiate or use the contract to more directly address issues. This power to directly influence the contractor is unencumbered by the EPC lead’s own agenda, program float and management of their own contracts with the subcontractors.
Could split contracts be used for solar farm construction?
Is there an opportunity for the split contract model to be useful in the construction of solar farms particularly with large players discontinuing EPC activities? Owners can already have solar photovoltaic (PV) module and inverter supplier contracts separate to the EPC contract. However, this is still not considered a variation of split. So let’s test the following points:
- Split contracts can bring out the best in every contractor.
If you are good at designing and laying cables, then stick to your area of expertise. If you know nothing about roads, then stick to your area of expertise. In this way, contractors can price their risk differently and more cost effectively. The key for the owner is splitting the contract in the correct way that suits the project and understanding who is best placed to carry certain risks or share risks. However, who could be the solar equivalent of the wind turbine supply and install contractor?
The reason why wind turbines are separate from the electrical balance of plant is that it is an off-the-shelf product that connects into the balance of plant, whereas no one company provides both the solar PV module and inverter as the generator. Could a model exist where an inverter vendor subcontracts out the solar PV modules and the installation? The individual parties exist in the market but would inverter and PV module suppliers take on the other party’s risk?
- Who would own the grid connection risk?
Grid connection risk has been one of the main reasons why large EPC contractors have left the solar industry. In my opinion, inverter manufacturers are better placed to take on this risk given they own the grid connection model and have the capability to meet the grid connection requirements.
Should the inverter manufacturer accept the grid connection risk, could the owner obtain enough protection from the contract? These days balance of plant components are making up to 50 percent of the total capital costs whilst the solar PV modules and inverters make up the rest. Would the owner be limited by the total amount of liquidated damages it could gain as a percentage of the contract price due to inverters making up a small portion of the total capital value of the project? Given lenders focus on this ability and security provided by the contractor– the numbers may not stack up.
Angela Rozali has developed a strong presence in the fields of renewable power project development across the APAC region. Driving this is honed experience in multiple large scale wind farm projects in Australia, Antarctica and the Philippines where she has led in project management, contract administration, owner’s engineer, design and review capacities. She has complete end to end experience covering the entire project development cycle from feasibility through to operations and maintains a commitment and oversight on all stages of her projects. She is proud to be currently working on the construction of Biala Wind Farm administering a split contract model involving three main contractors and integrating it into the existing Gullen Range Wind and Solar Farm. She is in a unique position to be the project manager, contract administrator and owner’s engineer for this project. Combining her technical rigour with an open and collaborative approach she promotes best-for-project outcomes. Angela is an active member of the CEC community, participating in the Wind Directorate and Energy Storage Working Group.
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