There are several contracts that need to be in place before a wind project enters commercial operations. During the development phase, the Turbine Supply Agreement (TSA), the Balance of Plant (BoP) Engineering, Procurement, Construction, Installation (EPCI) Contracts, and the WTG Service and Maintenance Agreement (SMA) are the focus, but project agreements needed goes far beyond those ones.
As such, a wind project owner shall:
- Procure and contract O&M and asset services prior Commercial Operations Date (COD)
- Secure project financing
- Manage warranty provisions under the EPCI contracts
- Comply or manage obligations and rights under the project agreements
- Fulfil taxes, legal and regulatory obligations
- Procure or renegotiate project agreements due to expiry and/or subject to termination
Why read this article?
This article provides an overview and introduction to project agreements that typically exist, from the owner’s perspective, and are managed during the Operational phase of a wind project. It gives both a brief description of the scope and also presents key topics, that from an operations and asset management perspective, shall be addressed during the negotiations or managed during the execution.
Agreements during the Operational phase
We often see that several of these agreements are forgotten or procured last minute, leading to bad agreements, lost production or even project standstill.
The typical project agreements are summarized in Figure 1 below.
Figure 1. Typical agreements to negotiate or manage during the Operational phase of a wind project.
The WTG Agreements
As complete articles have been written and shared in the past on the WTG agreements, these will not be described in more detail. For further details on this topic, see the articles below.
The * indicates that such agreements would be expected to be signed prior to financial close.
Turbine Supply Agreement (TSA) *
The TSA is not just a construction contract, as it also contains several O&M related sections.
Read more at Successful Operations management. Part 2: Securing the Foundation
WTG Service Agreement *
It is probably the most important service and maintenance contract.
Read more at Successful Operations management. Part 3: Turbine Service Contracting
Agreements
Although the number of contracts and contractual structure will depend on the asset and operations strategy defined by the owner, the following agreements or contracts are expected to be in place and managed during the operational phase. Further, depending on the sourcing strategy chosen by the asset owner, the different scopes can be covered under few bundled contracts or contracted individually. The sections below highlight certain key focus areas or relevant procurement topics, which shall be considered when negotiating those agreements.
Development and grid connection related agreements
The following agreements relate to the interface with grid operator or Transmission System Operator (TSO) and relationship with landowners where wind farm is located.
Grid connection Agreement *
It is the agreement with the grid network operator or TSO, and outlines the granted capacity, connection fees, duration, and related terms and conditions for injecting electricity to the grid.
- Termination: Are the termination provisions controllable, reasonable and well assessed by the project?
- Compensation for power curtailment: Is this addressed in the agreement? How is it regulated and compensated?
Land leases / access rights (onshore) *
Subject to the specific terms and conditions, it defines the compensation, if any, for having the wind farm (e.g. turbine, substations and access roads) within his/her property.
- Fee definition: Is the mechanism for the compensation fee clearly defined? How certain is the fee for the overall project business case (e.g. is it fixed or variable depending on actual production)?
- Notification process: Are contact details clear once project is built and final affections have been confirmed?
Balance of Plant related agreements
The following agreements relate to the construction, service and maintenance of the Balance of Plant:
Balance of Plant (BoP) EPCI *
As with the TSA, the BoP EPCI contracts contain several O&M related provisions. Typically, it has a 2-5 year warranty period and subsequently the risk is fully transferred to the owner.
- Warranty scope: Does the warranty cover materials only, or does it include labour and logistics as well? Is there any clear obligation on the remediation timeframes? Is the warranty subject to a rigid maintenance/inspections regime which makes it impractical?
- Documentation and software: Are the deliverables well defined? Will the content and quality of such documentation and software enable the owner to service/troubleshoot the asset from day one?
BoP Service*
The scope depends on whether it is an onshore or an offshore wind farm, contractors’ capabilities, and the sourcing strategy.
- Scope: Is the scope well-described (e.g. inspections, preventive maintenance, stand-by teams, etc.) and covering the different packages (substation, foundation, cables, etc.)?
- Unscheduled Maintenance: Does it include an efficient procedure for unscheduled maintenance, with predefined rates?
- Response Time: Is there a response time/availability commitment to incentivize a quick reaction and good quality workmanship?
BoP Spare Parts
Consumables and minor spare parts are often covered by the fixed fee under the BoP Service agreement, while key BoP components (e.g. transformer, cables, busbars, switchgear) are often owners’ responsibility and a separate agreement may be required.
- Ownership & Availability: Subject to the O&M strategy, shall the project own spare parts, or shall these be provided by a supplier? Is there a commercial mechanism that can ensure a prompt delivery?
- Price and conditions: Are prices, lead times, liquidated damages (LD), and warranties well defined for key spare parts?
O&M Facility *
The owner is usually responsible for providing the O&M office, warehouse, harbour, helicopter base, as well as its maintenance.
- Permitting: Have the permitting timelines been considered for the establishment of the O&M Facility? Is there an existing facility nearby which can be refurbished to reduce permitting times?
- Operatively: Is the harbour within reasonable distance to the wind farm? Any congestion or tide restriction limiting its accessibility? Can the facilities be shared with other projects?
If you want to learn more about operational synergies, read more at Capturing synergies in operational offshore windfarms.
Road Maintenance (onshore)
The owner shall provide unrestricted access to the turbines. For onshore wind farms, roads shall be kept in good condition otherwise the OEM may claim availability relief.
- Scope & price: Is the scope properly framed (e.g. inspections at request for a fixed priced, corrective work at predefined rates)?
- Reaction times: Is there a commitment to perform road work within a short time window?
Asset and Operations Management
The following agreements relate to the operations and asset management:
Operations Management Agreement / Asset Management Agreement *
This agreement is required when an asset owner chooses an operational strategy where a 3rd party manages the asset, on behalf of the owner. The scope typically covers the management of project contractors, delivery of owner’s scope, project compliance and reporting on asset performance. Further, several services can be bundled under this agreement (e.g. logistics, finance and accounting, documentation management system, O&M Facility, communications, employer’s technicians, if any).
- Transparency: Does the agreement provide the right level of transparency between the services provided, resources, obligations and management fees? Does it clearly define what is the fixed or variable fee?
- Governance and level of authority: Is it clearly defined what decisions can be done by the asset Operator, on behalf of the owner, without affecting the normal operations and/or enabling agile and efficient asset management?
Logistics (offshore) *
Only applicable for offshore wind farms. Subject to the WTG Service Agreement and BoP Service, the owner is responsible for providing vessels for the O&M scope.
- Availability and Reliability: Is there an availability warranty to incentivize proper maintenance and limit commercial exposure towards other contractors (.e.g. WTG Service Agreement)?
- HSE Compliance: Are there provisions on applicable best practice/guidance for the operation of the CTVs?
HSE Legal Compliance
The site and O&M facilities may need to be inspected by a certified 3rd party before starting Operations and periodically, validating it meets local legal and HSE requirements.
- Legal compliance: Is it considered whether similar legal requirements in your operations preparation plan as well as annual project plan?
Environmental Monitoring and Compliance
This relates to the obligations and commitments from the Environmental Impact Assessments (EIA), e.g. bird surveys, species population studies, inspections, and reporting.
- Scope and reporting obligations: Is it confirmed whether the scope and reporting obligations are aligned with the project commitments agreed under the EIAs?
- Transparency: Does the agreement provide the right level of transparency between the services provided, resources, obligations and rates?
Bird anticollision system
The environmental authorities have recently started requiring the installation of devices to deterrent birds or stop the turbines. Reporting of such events shall be done to the authorities.
- Warranty: Is there any warranty protection for poor performance?
- Communications requirements: Are the technical specifications of the system reasonable and within the available communication network at the project?
Waste Management
While the service providers are typically responsible for bringing waste from the turbines or substation, the owner is responsible for disposing such waste in accordance with local regulations.
- Rates: Does the agreement provide the right level of transparency between the services provided, reporting and rates?
- Liabilities: How have you approached liabilities in the event of damages or HSE accidents?
Security
The O&M Facilities and substations shall have the relevant security surveillance systems.
- Services: What kind of services (e.g. surveillance, webcam) have been included in the scope?
Weather forecasting
It supports the service planning and estimation of future production, limiting the LDs from imbalances. Further, it allows the owner to verify weather days called off by the WTG service provider.
- Reliability: Does the forecasting company have a good track record for the site-specific location?
- Scope: Does the scope include all weather elements: average wind speed, gust, lightning risk, wave high, etc.?
Communications
The agreements provide the communication channels to the SCADA systems (WTGs, substations), and other equipment on the project (radars), including redundancy connections, with the right bandwidth, speed and continuity.
- Quality and Redundancies: Have the right service providers and technologies been selected enabling the required signal quality and communication redundancies?
IT network and cybersecurity
The project IT networks shall be managed and updated to comply with the local regulations, protect asset connectivity, data, information, and deter from cyber-attacks. Wind power plants are typically considered essential services and therefore cyber-attacks shall be reported to authorities.
- Network design & updates: Has the network been designed, and delivered in accordance with IT best practices? Shall the hardware or software be updated to reflect actual/new cyber threats?
- Compliance & reporting: Is a support scope for annual maintenance defined and a clear procedure to report potential cyber-attacks?
2nd layer SCADA
This enables the owner, operator or asset manager to improve the performance monitoring of the assets, visualizations, especially if there are several sites, SCADA servers or WTG makes.
- Features: Does the system provide the right visuals and reporting level, both with live and historical performance data? Can the user enter notes to track lost production?
- Scalability: Does the agreement provide a good commercial framework to easily scale (up or down) the projects connected to the monitoring tool?
Grid and market interface agreements
The following agreements relate to energy markets and grid interface:
Control Center (Dispatching Center + Substation remote Operations)
A control center is responsible to engage with the TSO, regulate power plant output upon requests, as well as to monitor (and operate) the substation in case of alarms or warnings.
- Scope: Is the contracted scope fully aligned with operational and overall regulatory requirements?
- Ramp-up: Does the contractor have the technical capabilities and experience to support the ramp-up of new projects and establish the right connections between the systems?
Market Agent *
The market agent represents the project in the wholesale power market, selling the energy at market price for a fee. Imbalance costs, production forecasting, and the control center may also be included.
- Payment terms: Are the payment terms aligned with other financial obligations of the project? How is the project cashflow, considering the different income and payment streams?
- Production forecasting and Imbalance cost: How is the process to forecast the production, and who covers the imbalance cost due to production deviation?
Power Purchase Agreement (PPA) *
A PPA is a critical project management tool not only to secure project financing but also to optimize the project’s economics during the operations phase.
- For further details, read more at Revenue and Energy Offtake Management in Offshore Wind. Part 1. What are the key levelers in a PPA negotiation
Financial and Asset Management
The following agreements relates to fiscal compliance and financial risk management:
Tax advisors and compliance
Taxes can be a complex matter and unless the owner has a local and dedicated tax team, contracting tax compliance services is a good idea, so nothing is missed or misunderstood.
- Scope: Does the scope of the services include all taxes and filing documents e.g. corporate, revenue, VAT, real state, income at local, state, or federal/national level?
- Liabilities: How are liabilities defined and limited? What if a mistake by the advisor leads to fines?
Financial Auditors
Review of project’s financial books (e.g. annual report) to comply with legal, regulatory and commercial commitments.
Legal advisors
It is expected that project owners will need legal services, due to, for example, claims with contractors, change in law cases, divestment processes, or renew/procure service agreements.
- Rates: Legal hours tend to be quite expensive. Is there a rebate mechanism for advisory hours greater than those initially anticipated?
- Track record & ways of working: Do they have the right expertise for the specific subject? Have you previously aligned on ways of working so business expectations are met?
Insurance *
Insurance agreements relate to the Operational All Risk, Business Interruption and other minor insurances that is usually taken from an owner’s perspective.
- Coverage: Is the coverage, deductibles and excluded events aligned with the risk appetite of the asset owner, the project characteristics and the location of the assets?
- Claim notification: Does the notification process allow reasonable time following the occurrence of an event? Is there a clear a reasonable process timeline to handle claims?
Investors or lenders related agreements
The following agreements can provide an important financial upside to the owner’s business case.
Credit Facility Agreement
The credit facility agreement provides financing to the project. It details the borrower’s responsibilities, amounts, interest rates, drawdown conditions, duration, default penalties, and repayment terms & conditions.
- Reporting obligations: Does it include reasonable reporting obligations to the lenders and balanced governance to handle unexpected operational events in the project?
- Events of Default: Are the default events reasonable and waiver mechanism in line with normal operational events e.g. a major component failure, a less windy period?
Tax Equity Financing (applicable in the US only)
The tax equity financing is the “sale” of federal tax credits that legally binds the tax equity investor and the project company. It is a financing tool used in USA regarding the investment tax credit (ITC) or production tax credit (PTC) given to wind projects.
- Reporting obligations: Does it include reasonable reporting obligations to the tax equity investors and a balanced process to inform unexpected operational events in the project?
- Structure of the agreement: What other benefits have been agreed with the investor? Can he/she claim additional tax incentives, operating income and losses, a share of capital gains, etc.?
Advisors to lenders
Legal, financial and technical advisors that oversee project performance and compliance, are typically required by the investors as a condition for financing. They are usually selected by the investors but paid by the project company.
- Transparency: Does the agreement define a balanced level of intervention or queries from the lender’s advisors?
- Fees and rates: As the lenders select the advisors, but expenses are paid by the project, have the project negotiated competitive rates, including fixed fees for certain items?
Keep in mind…
- A well-planned procurement and asset management strategy can provide a vital uplift to the business case, and/or make a difference during the operational life of a wind project.
- Even small project agreements can create “head-aches”, especially during the ramp-up phase. Ensure trusted partners are selected and the wording phrased in the contracts is clear now and in the future.
- Understand the market dynamics and contractual/commercial risks. Keep the right balance between flexibility and certainty, as well as reliability and price.
Want to learn more about successful operations?
Just reach out to us, we are always happy to answer your questions and get into discussions on optimized operations and asset management!
Juan Pinilla Lopez | Chief Consultant and Country Director Korea | Get in touch
Lars Conradsen | Co-founder and Head of Technology | Get in touch
