Over and over and over again: serial defect clause

The serial defect clause is a warranty frequently requested by customers.

It belongs to a classic “tryptic” of warranties allocating risk on the turbine suppliers:

  • General warranty, for defect in design, manufacturing, installation, etc.
  • Power curve warranty
  • Serial defect warranty

Generally speaking, a serial defect is a component defective on a significant number of turbines. If there is a certain percentage of defective components, the warranty force the turbine seller to replace it on all the turbines.

As you will imagine, the tricky part is the specific definition of the clause.

Among the key point to be defined these are specially important:

  1. The definition of defect / defective.
  2. The time-frame for the defect to appear. How many years?
  3. The reason for the defect. Is the root cause the same? You can have for instance many blade failures caused by different problems.
  4. The percentage of failures needed to declare a serial defect. Is it 10%, 20%, more?
  5. The population of turbines used to calculate the percentage of failure. Only the wind turbine in the wind farm, all the turbines of the same model owned by the customer, all existing turbines of the same model?
  6. Who should confirm the existence of the defect. A reasonable compromise for this point can be an independent third party.

The reason behind this clause is that such serial defects happened in the past - not only in the infancy of the wind industry, but also in more recent years when components have been replaced on massive numbers of turbines, even of Tier 1 manufacturers.

Without this clause the buyer can be left in a very uncomfortable situation where maybe he is aware of the (latent) problem but only if the components that fail during the Warranty or Service period are replaced.

Transfer of title & transfer of risk

Transfer of title and transfer of risk are 2 key concepts in wind farms contracts (and, presumably, in many other comparable businesses). They appear in both EPC and Supply Only agreements.

This is what they usually means:

Transfer of title (ToT): the ownership (of the entire turbine or of one of the component of the wind farm, such as the foundation) is transferred to the buyer.

Transfer of risk (ToR): risk of damages and losses is transferred to the buyer.

Although it may look counterintuitive they do not have to happen at the same point in time: for instance, an EPC contract could have transfer of title when a certain percentage of the wind turbine is paid -for instance, 80%- and transfer of risk only after commissioning (that is, the turbine is installed, tested and ready for production).

When the relevant percentage is paid is defined in the projects cash flow. In general, it could happen that the transfer of title happen many months before wind turbine installation.

The percentage of the wind turbine price to be paid to have transfer of title is usually one of the key negotiation topics. For the sake of clarity, the wind turbine seller would retain some case of security (e.g. a bank bond) until the equipment is paid in full in case the buyer stop the payments after the transfer of title.

It is worth to notice that one party (or both) might be interested in an early ToT or ToR, for instance if they are linked to revenue recognition. For instance, in some Supply Only or Supply and Install contracts revenue recognition is at ToR, so the turbine seller want to have it as soon as possible.

For a variety of reasons, it could be the buyer interested in an early ToT or ToR, possibly even before the completion of the wind farm balance of plant (basically, when the wind farm is not ready for installation). In a similar scenario the turbines would be delivered to a temporary storage area where the ToT and ToR would happen.

One more interesting point is that, in some jurisdictions, a sales tax could become applicable when the ownership of the turbines is transferred. This could be a good reason for an early or late transfer of title in a different jurisdiction.

 

Wind turbines defective parts warranty

Lately I’ve been spending some time trying to learn something more about quality. Although I see that there is no consensus on the business effectiveness of some of these technique I’ve decided to take a certification (ASQ Six Sigma Green Belt) to have a first-hand experience.

One of the first concept I’ve learnt is the difference between defect and defective. This is the standard definition in the wind industry:

“Defect” is defined as a non-conformity, a failure to comply with the Technical Specifications, a flaw in design, manufacturing, workmanship or damage.

“Defective” is defined as a part that has one or more defects and fail due to it.

The key concept here is that in principle it is possible to have one or more defect on a component without having safety or operational problems.

Wind turbines warranties (and presumably other similar equipment) usually are based in the concept of defective – that is, of failure of the component to operate correctly.

The logic is that a failure is usually a black or white concept: either the gearbox is working or it is broken.

However, seen from the perspective of the customer, this definition is not reassuring: a component could have a defect that, even if it’s not preventing the turbine to work, is making it underperforming, unreliable, deteriorating quicker than usual, etc.

Basically the concern of the customer is that the turbine seller will simply “try to keep the turbine alive” until the defect warranty expire (usually after 2 years). Afterwards, it will become a problem of the customer.

For this reason the clause with the definition of defect and defective is usually extensively negotiated. Some possible wording, from the least to the most favourable to the customer, are:

  1. Defective is a part that fails due to a defect
  2. Defective is a part that has a defect that could reasonably cause adverse effects on production or safety
  3. Defective is a part that doesn’t match the Technical Specifications
  4. Defective is a part that contain a defect

Obviously the last one is very onerous for the company who has to mantain the turbine, while the second can offer a reasonable level of protection to both parties.

I trust you, but… Professional Indemnity insurance

The Professional Indemnity insurance, also known as Professional Liability or “PI” here in Europe and “Errors & Omissions” at the other side of the ocean is an insurance who protect individuals (engineers, geologist, topographer…) and companies in case they made gross mistakes, negligence and similar errors causing losses to the counterpart who purchased their service.

In the majority of the projects I’ve worked at I have had the pleasure to know very good professional working for external subcontractors - people who helped us develop wind farms in faraway countries providing a variety of services.

Even if many work for “big names” in the business and I know many of them personally, it’s always a good idea to have a PI insurance in place when you purchase a professional service (in my case, something related to civil or electrical engineering).

The amount of the insurance should be related to the potential damage – in my case, the bigger the wind farm, the bigger the insurance that will let me feel comfortable.

However,  this type of insurance is not cheap – the more onerous the request, the more expensive the service will become because the consultant will (obviously) ask you to pay for the policy extension.

As far as I know, PI is not mandatory (at least, not for all professions and not in all countries). However the vast majority of companies and individuals I’ve worked with had it in place.

It’s also worth mentioning that such insurance will also need to stay in place quite a lot of time – some design errors are not self-evident and are usually discovered after a few years.

Lastly, I want to highlight that every now and then I see a new technical solution in the market (for instance, I’m currently studying at least 3 alternative foundation types).

As this are new, unproved technologies the need for a strong Professional Insurance insurance in place becomes even greater.

Time is never enough: Early Works

Early Works, sometime also called Preliminary Works, Limited Notice To Proceed or something similar, are a common project strategy that is currently more frequent than ever before.

Basically, it means that some field works, engineering tasks and/or procurement activities are done before that the EPC contract enter into force.

EPC contracts have usually a long list of condition precedents to be fulfilled – basically things that should happen to give validity to the contract.

However, due to demanding planning and “hard” deadlines such as changes in the regulatory framework or a variety of other issues, it’s often difficult to wait for that point in time.

Additionally, negotiations can be longer than expected or problem with project finance closure are a reality in the majority of the developments.

Therefore Early Works are often the only chance to keep the project alive. Basically is a separate agreement between the customer and the contractor where both party acknowledge the situation and recognize that some tasks need to be performed immediately to keep the time schedule of the wind farm feasible.

It’s usually a “light” contract, a few pages highlighting the main terms and conditions. The content of the early works is obviously project specific.

Some activities that are frequently performed upfront are:

  • Geotechnical investigations
  • Foundation design
  • Finalization of the internal layout
  • Engineering and procurement of the main transformer

However, in the past I’ve seen a variety of tasks included in the Early Works, from the engineering of the substation to support to permitting for wind turbine transportation (in some countries authorities can be VERY slow).

I’ve also read of a wind farm in a very remote area with an Early Works package including an air runways, so as mentioned before the type of early works are dependent on the specific wind farm planning.

Everything fine? Defects Notification Period

The Defects Notification Period (DNP) is a certain number of day counted from the date of completion of works that allow the customer to notify defects to the Contractor. In the Wind Energy business is usually 12 months, but in principle can be longer (2 years, 5 years, etc.) or shorter.

There are also situations where there are different type of DNP, shorter for not critical items and longer for critical items.

It is usually start from the certified completion of works (the day the Taking Over Certificate is issue). It is interesting to consider that the majority of contract also include a “deemed taking over” – basically a set of circumstances that constitute a “de facto” taking over.

During the Defects Notification Period the subcontractor will probably need to do some minor works to solve the problem listed in the Defects Punch List. If new problems are discovered by the customer, that the contractor is obliged to fix them.

Finally, a point worth mentioning is that the subcontractor is usually obliged to repair also defects not attributable to him (in this case he is obviously entitled to payment via Variation Order).

I can’t believe they invented it: “factual” vs “interpretative” geotechnical report

One of the things I’d like the most about my job is the fact that I still learn new things, even on topic were I wrongly believe there is not much more new to see.

This week during a telco with my accomplice in crime Eduardo I’ve discovered a new trick that I suspect has been invented by someone in the US (or possibly in the UK) – the split between “factual” and “interpretative” geotechnical report.

In the countries were I’ve worked until today, the geotechnical survey is usually a huge package of documents full of formulas, picture, diagrams and numbers. I’ve been never touched by the idea that part of the content was somehow different.

However, I’ve discovered that somebody (I bet a lawyer) introduced this categorization.

The Geotechnical Data Report (AKA the “Factual stuff”) would be the part including things like:

  • Pictures
  • Boring logs
  • Trial pits logs
  • Field test (SPT, cone penetration, etc.)
  • Laboratory data (water test, CBR, etc.)

This is the type of things that could safely land in a contract and that should be shared and used by the subcontractor.

However, a civil engineer would like to see other information to do his work. He would expect the type of information that should appear in the Geotechnical Interpretative Report (AKA the “don’t rely on me stuff”), with things like:

  • Ground behaviour of geotechnical units
  • Slope stability
  • Seismicity
  • Geotechnical cross sections
  • Construction methods and proposed technical solutions

Basically, nothing connected with design and construction.

Know you know that, wherever possible, you should ask to the geotechnical survey company for the full package (factual + interpretative) but keep them separate – at least if you face a big project with a high geotechnical risk.

Said that, I also want to reiterate my opinion that a good geotechnical survey can make the difference between a successful project (at least for roads and foundations) and a nightmare project with claims and over cost.

It might be difficult to find the budget for this kind of investigation in the early phases of the project but believe me, it’s worth every euro that you will spend on it.

The gentle art of EPC wind farms: design responsibility

In the ideal FIDIC world there is little space for the discussion about design responsibility.

Either the Employer (FIDIC Red) or the Contractor (FIDIC yellow & silver) is going to do all (or almost all) the design.

Unsurprisingly, real life is more complicate than this. You will have an hard time trying to get reasonable offers from subcontractors without providing at least a preliminary design: subcontractors are usually bidding on many project at the same time, and their engineering department is often quite busy with running projects.

There are basically several different scenarios:

Employer provide the design, contractor build the wind farm. This happen often. In this situation, you will have a tight control over what it’s build. However, if something goes wrong it can be a problem to prove that the problem has been the construction and not the design – that is, you are left with an interface risk.

Employer provide the preliminary design, contractor provide the constructive project. This second option is very common as well. The gentle art here is to force the subcontractor to take full responsibility on the existing design.

Design “started” by employer and completed by the subcontractor. The main difference with the previous point (preliminary design for tender) is that something more detailed than a preliminary design but less detailed than a ready for construction project. Same story, you will usually want the subcontractor to warrant the existing documentation to avoid disputes.

Both design and construction provided by the contractor. This would be the “pure” EPC. In the wind energy business is not as frequent as you might think.

In general, the employer will try to retain some control on the design process and at the same time unload the risk and responsibility on the subcontractor. The gentle art consist in incorporate in the contract provision for design review.

Additionally, the employer will need to drive the subcontractor in the right direction using the proper mix of technical specification, quality requirements, industry standard and a properly drafted scope of work.

Last but not least, sometime the employer has a “main employer” or commitments with other parties (e.g. lenders) – all this obligation that can (and usually will) impact the design must be passed down as back to back as possible.

What is wind turbine certification?

Wind turbine type certificate: certification process steps

Wind turbine type certification is the accreditation, done by a reputable third party (“Certification Body”), that a manufacturer is selling a wind turbine that meet relevant standards and codes.

TUV, DNV-GL, Bureau Veritas (among others) are examples of Certification Body.

The scope of certification, according to the industry standard IEC 61400-22, can be:

  • Prototype certification: the evaluation of a new wind turbine design
  • Type certification: the evaluation of a wind turbine design and serial manufacturing process

Additionally, there are 2 other type of certifications are available:

  • Component certification: this is usually done for the most critical main components (e.g. the gearbox, transformer, etc.)
  • Project certification: the expected behavior of a group of WTGs on a specific project site. It would include the assessment of country specific laws and regulations, foundations, electrical network, etc.

In general type certification has several benefits, such as better credibility of a new WTG model and easier access to financing and to new markets. It makes clear that it’s possible to manufacture, install and maintain wind turbines of a certain model.

Therefore the type certification process is usually the most important - even if it's often achieved starting with prototype certification in a previous phase.

Type certification goes through several steps, some mandatory and some optional.

Mandatory steps are:

  1. Design basis evaluation. This step check if standards, assumptions, methodologies, etc. used in the design are in line with IEC 61400-22.
  2. Design evaluation. In this step the certification body verify that the design has been made following the design basis of the previous step.
  3. Manufacturing evaluation. Here a quality system evaluation and a manufacturing inspection are performed.
  4. Type testing. This is a set of laboratory and field tests to blades, gearbox, loads and power performance.
  5. Final Evaluation. In this step the findings of the evaluation are provided.

 The optional steps are the evaluation of the foundation design and foundation manufacturing plan and the measurement of type characteristics.

Land lease and site access: 5 usual mistakes

You would be surprised to discover the amount of problems that are generated by missing, uncomplete or wrongly defined land lease and site access agreement.

Land lease contracts must be negotiated by the project company (that is, the developer of the wind farm) with the landowners.

It’s extremely rare to have the whole wind farm built on the land of a single owner. Usually, wind farms are built in agricultural areas – therefore these contacts must be negotiated with several counterparts.

The most usual problem connected with such contracts are:

  • Incomplete land acquisition. I’ve frequently seen layout changes at the very last minute because the project company couldn’t close one (or more) leasing agreement. The consequence is that roads, crane pads and/or wind turbines have to be repositioned.
  • Wrongly defined land occupation. A classic situation – it could happen for instance that the developer has a contract granting few meter of width to build a road. The problem is that to build a 5 meters wide road, you will need much more space to move with construction equipment, to store materials, to have space for embankment, etc.
  • Right of way wrongly defined. This is a classic as well – developers are sometime not aware of the amount of space needed to move the blades. This might force you to touch wall, trees or other properties not included in the agreement.
  • Social conflicts due to different payment terms. In some situations, a conflict may occur if neighbors are getting paid different amount of money for the same land lease agreement. Correct strategy here is to offer a fixed sum to all.
  • “Aerial” rights. I’m not sure about the terminology. However, I’ve worked on a project where, when the WTG was orientated in a certain way, the blades were rotating over a land plot without a land lease. Guess what? Yes, we had to move the turbine.