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.

Split EPC contracts

As you probably will be aware of if you are reading this blog, an EPC is a typology of contract where a company agree to develop the engineering, procurement and construction of a facility (in this blog, a wind farm) for a fixed, “lump sum” amount.

The key advantage of this type of contract is the existence of a single point of responsibility.

This improves in some situation the bankability of the project, as it puts the investors in a simpler position - if somethings go wrong, they have only one counterpart to deal with and there is no room for common discussions like “it has been built correctly but the engineering is wrong” or “I was on schedule, but this other subcontractor is late”.

However, sometimes the EPC contract is split. This word can be used with different meanings.

If it is referred to the contract between the wind farm developer and the main EPC contractor, it usually means that 2 different contracts are created, one for the onshore construction and another for the offshore supply. This is normally done for taxes purposes.

The second meaning refers to the fact that 2 different contracts are created – one for the supply of the wind turbines and another for the balance of plant. In this case, there are 3 parties involved: the developer of the wind farm, the wind turbines supplier and the construction company.

With this setup, a third agreement is needed to deliver a single point of responsibility despite the split. This third agreement will “wrap-around” the other 2 contracts defining coordination, interfaces and guarantees. Obviously, the lender will try to keep the other 2 parties jointly liable as much as possible.

The third meaning arise from the main contractor perspective. In this case, splitting a contract means dividing the task between 2 or more subcontractors (usually one for the civil works and another for the electrical works).

For instance, the main EPC contractor (for example, the wind turbines manufacturer) could be interested in closing 2 other EPCs – one for the civil works and another for the electrical works. Usually, splitting contracts will reduce cost and increase the risk and complexity of the project.

Technical due diligence of a wind farm

It is a hard task to compress in a blog post the reasons behind the technical due diligence of a wind farm and the several points that must be evaluated.
In a nutshell, in the clear majority of the wind farms developments are built using borrowed money.
The equity (cash at risk) is put by the developer, while the debt (money given against some form of security) is provided by a financial institution, or more commonly by a pool of institutions.
There are obviously exceptions to this rule, that is wind farms developed only with cash coming from the books of the company investing in the project. Nevertheless, these are exception and what is common is to have most the budget (up to 70%) provided by a financial institution such as a bank.
The lenders will be obviously interested in being sure that the financial model behind the project is solid.
Therefore, they will ask for a due diligence to identify, quantify and (if possible) mitigate technical risks.
In general, the lender will check what he considers appropriate.
Normally 3 macro categories are checked:

Financial due diligence, including for instance

  • Hypothesis
  • Budgets
  • Financial models

Legal due diligence, including items such as

  • Land lease
  • PPA
  • Contracts (e.g. TSA) & subcontracts

Technical due diligence

There is obviously an overlap between the various categories – for instance, some items are not purely “technical” or “legal”.
The technical due diligence should investigate in detail several key points.
A short, non-exhaustive list would include at least the following items:

  • Site suitability (wind resources, turbulence, data solidity)
  • Choice of WTG model (track record and match with the wind resource, power curve, certification, etc.)
  • Archeological y environmental constrains (impact on flora and fauna, such as birds and bats)
  • Access to the area (road survey and works outside the wind farm)
  • Geotechnical survey (ground risk)
  • Noise study (a big problem in inhabited areas)
  • Shadow flickering & visual impact
  • Grid connection
  • Electrical losses (are they calculated correctly?)
  • Projects for the BoP (foundations, MV, substation, etc.)
  • Congruence of the time schedule of the project
  • Interface between subcontractors
  • Allocation of risk

Disclaimers you shouldn’t accept in a BOP/EPC turnkey contract

Having the pleasure of studying dozens of subcontractors offers each month I’ve already seen a huge number of disclaimers.

Some of them are reasonable, some of them can be removed (basically, giving a price tag to the subcontractor risk excluded by the disclaimer) but some are “deal breakers”.

Which are the disclaimers that I warmly suggest not to include in your turnkey contract?

Here you have my personal “top 3” list.

Disclaimers on the quantities when a project is available

Basically, the message here is “Give me the contract. Later we’ll discuss.”

It unloads a huge risk on your side (be sure that the quantities will increase, or when they decrease you want get savings).

Also, it’s against the philosophy of a real turnkey.

Finally, it means that they haven’t studied the project, otherwise they would know with a reasonable approximation the quantities.

Disclaimers on the percentage of rock when a geotechnical survey is available

What we’ve got here is a subcontractor that wants to win easily. Even in cases when there is geotechnical information (trial pits, boreholes, etc.) they want to reserve the right to increase the price if the percentage of rock that they have estimated is wrong.

Don’t accept this one if you’re providing enough information.

Disclaimers on the presence of quarry & landfills

I hate this too. Not only for the possible discussions about alleged extra costs: the problem here is that this disclaimers means that the subcontractor hasn’t studied enough the project and has no idea about where he may buy the material, or unload the earth he don’t need.

FIDIC contracts in EPC Wind Farms

I’ve recently had the pleasure to be exposed recently to the FIDIC contracts structure. Therefore I want to share with you my impression regarding the possibility of using this type of contract in wind farm EPC tenders.

The first FIDIC contract was released in the fifties. After half a century, the FIDIC contract family is expanding over the years to match the necessity of the market.

As you probably are aware, the different types of contracts are commonly referred to with different colors (red, green, yellow, etc.) from their cover. For instance “red” is for construction (of projects designed by the Employer), and “green” is for small work (maybe less than 500.000 USD).

The three types more appropriate to my particular sector would be the red, yellow or silver book.

Although there is obviously much more, I will resume the main characteristics of each of these 3 contracts type in the following table. I’ve not included the other books because they are not applicable to the wind farm sector.

ParameterREDYELLOWSILVER
DesignEmployerContractorContractor carries the risks
Design ApprovalEngineer may approve changes or ask for variationsEngineer approves or rejects before executionsN.A.
ProposalUnit PricesLump-sum PriceLump-sum Price
Payment SchedulesMeasured quantitiesPayment percentagesPayment Calendar / Payment percentages
EngineerYesYes"Employer's representative"
Risk DistributionEmployer carries design risksMore DistributedContractor carries the risks

So, which contract type makes sense in a wind farm EPC?

Let’s start to the easiest contract to discard: the silver book.

This typology of contract would be a full EPC where almost the full risk is suffered by the contractor. There is no engineering available, therefore quantities are estimated and risk such as subsoil quality must be included in the contractor price.

Obviously, this made the contract not operative for projects such as tunneling, wind farms or other “high geotechnical risk” activity.

Theoretically, it is possible to include in foundation price this risk. We even have done it in the past, for clients not willing (or not able) to pay even for a preliminary geotechnical survey. But the price of a piled foundation can be 2 times the price of a standard, shallow foundation. Therefore numbers become huge quickly, and this approach kills the majority of the projects.

Also, the client is not really willing to pay for something that it might never get (that is, major civil works). This basically eliminates the possibility to use the silver book, a contract that makes sense in situation where both party knows that little deviations are to be expected (maybe some type of plant).

These leave us with the yellow and red books.

In the red, engineering is made by Employer and payments are made on the basis of the real quantities executed. Employer carries the risk for contract amount increases: as you might guess, this point is not particularly welcome by banks or by companies such as Vestas.

In the yellow, Employer prepares only the «Employer’s Requirements», including Draft layout, Operational Parameters, Technical Specifications and Financial Proposal.

Tenderers submit their technical proposals together with their financial proposals, including at least methodology, basic design and drawings, bill of and similar supporting documents.

So maybe you think that finally we’ve found of dream contract, the FIDIC yellow book.

Well, no. The problem is that contractors are unwilling to give a real closed price: basically, construction companies don’t have an engineer department big enough to properly follow each tender and give a good price. Being a really specialized business, often you ask price to good local companies with no wind experience.

This lead to misunderstandings, unreasonably low or high prices and (even worst) discussion during execution, when you already have a closed price with your client and accept a reclamation of the subcontractor would go against contract margin.

Wind Farms construction contracts

Wind farms can generally be broken down into 2 separate areas of construction:

  • Turbines: supply, installation and commissioning of wind turbines and towers
  • Balance of Plant (BoP) works: everything else needed except the turbines (foundations, substations, cabling, etc.)

Several option are available to the developers:

BoP contracts types

The first option is that the wind farm Special Purpose Vehicle signs separate contracts for BoP and Supply and Installation:

If two or more separate contracts are signed, the interface risk is taken by developer.

Warranties are backed by the balance sheet of each contractor, clearly only for the works undertaken. In exchange for this risk taken by the developer, substantial savings are possible and a broader range of participant to the tender is possible.

Moreover, the project management will be more complicated and sometimes it is difficult to attribute the source of a delay or to define de interface between obligations.

Another option is an EPC structure:

In this case, we will have a fixed price and fixed delivery date, with no interface risk and a single point of contact for the developer.

On the downside, the price will increase as the wrapping entity will add his margin for taking the risk. Moreover, they are more complex and time consuming with an heavy legal cost.

The third option is an unincorporated joint venture:

In this case the subcontractors will delivery a project without the requirement to form a separate legal entity. There is a single contract between the wind farm developer and the consortium of suppliers.

This structure has the same advantage of the EPC (fixed price and delivery date, reduced interface risk) but additionally there is a greater security thanks to the exposure to balance sheets of all the company in the consortium.

Disadvantages: increased price, heavy documentation costs and complex coordination work.